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Plaintiff,
Case No. 11-CV-00732-M (BL)
v.
Defendants.
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TABLE OF CONTENTS
Page
INTRODUCTION ...........................................................................................................................1
ARGUMENT...................................................................................................................................6
CONCLUSION..............................................................................................................................24
i
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TABLE OF AUTHORITIES
Page
Cases
7547 Corp. v. Parker & Parsley Dev. Partners, L.P.,
38 F.3d 211 (5th Cir. 1994)....................................................................................................... 18
Abrams v. Baker Hughes, Inc.,
292 F.3d 424 (5th Cir. 2002)............................................................................................... 16, 22
Advanced Res. Int’l., Inc. v. Tri-Star Petroleum Co.,
4 F.3d 327 (4th Cir. 1993)......................................................................................................... 17
Amalgamated Clothing & Textile Workers Union v. J.P. Stevens & Co.,
475 F. Supp. 328 (S.D.N.Y. 1979) ...................................................................................... 12, 14
Ashcroft v. Iqbal,
129 S. Ct. 1937 (2009) ................................................................................................................ 6
Ballan v. Winfred Am. Educ. Corp.,
720 F. Supp 241 (E.D.N.Y. 1989)....................................................................................... 14, 15
Beebe v. Pac. Realty Trust,
578 F. Supp. 1128 (D. Or. 1984)................................................................................................. 9
Bell Atl. Corp. v. Twombly,
550 U.S. 544 (2007) .................................................................................................................... 6
Blue Chip Stamps v. Manor Drug Stores,
421 U.S. 723 (1975) .................................................................................................................. 17
Bolger v. First State Fin. Servs.,
759 F. Supp. 182 (D.N.J. 1991) ................................................................................................ 21
Bruce H. Tuchman et al. v. DSC Commc’ns Corp. et al.,
14 F.3d 1061 (5th Cir. 1994)..................................................................................................... 22
Brunig v. Clark,
560 F.3d 292 (5th Cir. 2009)....................................................................................................... 7
City of Clinton, Ark. v. Pilgrim’s Pride Corp.,
632 F.3d 148 (5th Cir. 2010)....................................................................................................... 6
Copperweld Corp. v. Imetal,
403 F. Supp. 579 (W.D. Pa. 1975) .............................................................................................. 9
Davis v. Davis,
526 F.2d 1286 (5th Cir. 1976)................................................................................................... 17
Diceon Elecs., Inc. v. Calvary Partners, L.P.,
772 F. Supp. 859 (D. Del. 1991) ............................................................................................... 19
Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp.,
565 F.3d 200 (5th Cir. 2009)................................................................................................. 7, 21
ii
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TABLE OF AUTHORITIES
(continued)
Page
DAL:798618.1
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TABLE OF AUTHORITIES
(continued)
Page
Statutes
Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b)(2) ....................................... 22, 23
Securities Exchange Act § 10(b), 15 U.S.C. 78j(b) ............................................................... passim
Securities Exchange Act § 14(a), 15 U.S.C. 78n(a)............................................................... passim
Securities Exchange Act § 20, 15 U.S.C. § 78t ........................................................................ 6, 23
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TABLE OF AUTHORITIES
(continued)
Page
Rules
Fed. R. Civ. P. 09(b) ............................................................................................................... 22, 23
Fed. R. Civ. P. 12(b)(1)........................................................................................................... 6, 7, 8
Fed. R. Civ. P. 12(b)(6)........................................................................................................... 3, 6, 8
Regulations
Rule 10b-5 of the Securities and Exchange Act of 1934, 17 C.F.R § 240.10b-5 .................. passim
Rule 14a-9 of the Securities and Exchange Act of 1934, 17 C.F.R § 240.14a-9.............. 1, 2, 7, 11
Other Authorities
United States Constitution, Article III ............................................................................................ 7
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INTRODUCTION
Tenet and CHS — healthcare companies with medical staffs comprising thousands of
doctors — are engaged in a vigorous proxy campaign to determine the future Board of Directors
of Tenet. In a misguided effort to score points in this contest for corporate control, Tenet has
filed this lawsuit attacking the ethics and professional judgment of 15,000 attending physicians,
Tenet launches this assault by twisting and bending the federal securities laws beyond
recognition. Tenet tests our judicial system by wielding Rule 14a-9 and Rule 10b-5 as swords to
attack and injure a business rival, and not as shields to protect investors. Defendants move —
before Tenet has even served its summons and complaint — because the complaint is facially
This lawsuit is only the latest maneuver in the scorched-earth campaign that Tenet’s
Board and management are waging against CHS and Tenet’s own shareholders. Last November,
CHS made an offer to Tenet’s Board to buy all the outstanding shares of Tenet. Tenet’s Board
flatly rejected the offer without engaging in any negotiation with CHS. Tenet’s Board then
adopted a “poison pill” with extreme conditions, and it delayed until November 2011 Tenet’s
annual shareholder meeting, which historically had been held each May. This served to postpone
any shareholder vote and extended by half a year the term of its current Board. Now it has filed
this lawsuit asking for injunctive and declaratory relief that is extraordinary and unnecessary.
The simple fact is that there is nothing to enjoin, and Tenet is overreaching in an effort to
influence the pending proxy contest. The legally and factually baseless allegations in the
complaint prove only that Tenet’s Board and management are pursuing their personal agendas
1
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Any thin reed that Tenet imagined it might have had under the federal securities
laws snapped on April 18, 2011, when CHS announced its all-cash offer as consideration for
Tenet shares. The only tenuous connection to the securities laws identified in the complaint is
allegedly the CHS stock portion of CHS’s original and now superseded offer. Now that the
stock component has been eliminated, so has Tenet’s pretext for alleging a securities law
Tenet’s complaint has further fatal flaws. Tenet is not seeking to compel CHS to disclose
facts, but instead is attempting to compel CHS to confess some sort of culpability, which is
illogical and without basis under the securities laws. In addition, the alleged misstatements and
omissions concern judgment calls by the roughly 15,000 physicians practicing at CHS hospitals,
which is not material to the proxy contest concerning the election of Tenet’s directors.
Furthermore, Tenet lacks standing to bring a claim for injunctive relief under Rules 10b-5
or 14a-9 because such a remedy may not be sought by corporations on behalf of their
shareholders on the facts presented here. Lastly, Tenet’s claim under Section 10(b) must be
In sum, this lawsuit hijacks the federal securities laws to serve the ulterior motives of
Tenet’s Board and management. The complaint is improper, without substance on its face, and
must be dismissed.1
1
Discovery in this case is stayed while this dispositive motion is pending. 15 U.S.C. § 78u-4(b)(3)(B); In re Enron
Corp. Securities, 535 F.3d 325, 337 (5th Cir. 2008). Defendants respectfully request that the stay remain in
place because Plaintiff cannot satisfy its burden of showing cause for lifting the stay. Furthermore, discovery
would be expensive, burdensome and, given the fatal flaws in the complaint, unnecessary.
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Community Health Systems, Inc. (“CHS”) is a publicly traded company which, through
its subsidiaries, owns and operates more than 130 hospitals in 29 states, providing a broad range
of healthcare services to its patients.2 (Compl. ¶ 33.) Wayne T. Smith has been the Chairman
and Chief Executive Officer of CHS since 1997. (Id. ¶ 34.) W. Larry Cash is a member of the
Board of Directors of CHS and has been the Chief Financial Officer of CHS since 1997. (Id.
¶ 35.) Tenet Healthcare Corporation (“Tenet”) is a healthcare services company with operations
On November 12, 2010, CHS made an offer to Tenet’s President and Chief Executive
Officer, Trevor Fetter, and the Tenet Board of Directors to acquire all of the outstanding shares
of Tenet for $6.00 per share — $5.00 in cash and $1.00 in CHS stock. (Id. ¶¶ 2, 115; Appendix
003-028.) On December 6, 2010, Tenet flatly rejected CHS’s offer without engaging in any
negotiation with CHS and two days later sent a letter to CHS purporting to explain why it had
done so. (Compl. ¶ 116; Appendix 029-038.)3 In the letter, despite including five pages of
objections to the offer, Tenet never mentioned as a basis for rejecting the offer any of the
allegations that now underlie the complaint about CHS’s admissions or billing practices or the
impact those practices might have on CHS’s financial condition. (Appendix 029-038.)
On December 9, 2010, CHS announced in a press release the offer it had made to acquire
Tenet’s outstanding shares for $6.00 per share ($5.00 in cash and $1.00 in CHS stock).
2
CHS strenuously denies the allegations in the complaint, but for purposes of a motion to dismiss the court must
assume that they are truthful. At the appropriate time, CHS will defend itself against these baseless allegations.
3
In deciding a motion to dismiss, a court may take judicial notice of matters of public record, including public
filings made with the Securities and Exchange Commission. See Lovelace v. Software Spectrum, Inc., 78 F.3d
1015, 1018 (5th Cir. 1996) (allowing courts to take judicial notice of the contents of documents filed with the
SEC); see also Norris v. Hearst Trust, 500 F.3d 454, 461 n. 9 (5th Cir. 2007) (“[I]t is clearly proper in deciding
a 12(b)(6) motion to take judicial notice of matters of public record.”).
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(Appendix 003-028.) The offer price represented a premium of 40% to Tenet’s closing stock
price on the last trading day prior to the announcement of the offer. (Appendix 003-028.) In its
press release, CHS explained several of the financial and strategic reasons why it believed the
CHS believes the complementary fit of the two companies, the geographic
proximity of their facilities, and the ability to enhance the operating efficiencies
and best practices of a combined organization would enable it to provide even
higher quality care for patients and broader and more effective services to the
communities it serves.
(Appendix 003-028.)
That same day, Tenet announced in a press release that it had rejected the offer.
(Appendix 029-038.) Again, Tenet did not identify any of the allegations in the complaint
concerning CHS’s admissions or billing practices as reasons for rejecting the offer. (Appendix
029-038.)
On December 20, 2010, CHS issued a press release announcing its intention to nominate
a full slate of directors for election at Tenet’s 2011 annual shareholder meeting:
It is unfortunate that Tenet’s Board of Directors has rejected our proposal and
refused to sit down with us to discuss our premium offer. We believe Tenet
shareholders would be best served by a Board focused on maximizing shareholder
value, and we intend to propose directors who will look out for the interests of
Tenet shareholders.
(Appendix 052-057.)
On January 7, 2011, Tenet’s Board announced that it had adopted a shareholder rights
plan, or “poison pill,” with an aggressive and unwarranted 4.9% trigger that was “intended to act
stock without the approval of [Tenet’s] Board.” (Appendix 058-166.) At the same time, Tenet’s
Board announced that it had amended Tenet’s bylaws to remove the requirement that the annual
meeting be held no later than 210 days after the close of each fiscal year, which would have
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required Tenet to hold its annual meeting by July 29, 2011.4 (Id.) After amending that
restriction, Tenet’s Board moved the 2011 annual meeting to November 3, 2011 — i.e., Tenet
will hold its annual meeting 18 months after its previous annual meeting. (Id.)
On January 14, 2011, CHS issued a press release announcing ten director candidates and
four alternate candidates that CHS intends to nominate for the ten-member Board at Tenet’s
2011 annual meeting. (Compl. ¶ 122; Appendix 167-175.) CHS also provided a summary of the
work and education experience of each of these highly qualified independent candidates.
(Appendix 167-175.) As explained in the press release, none of these candidates has a pre-
existing relationship with CHS, nor do any of the nominees have any voting agreement with
CHS or any obligation to support any proposed acquisition of Tenet. (Id.) Rather, if elected as
Tenet directors, the ten candidates would owe fiduciary duties to Tenet shareholders. (Appendix
167-175.)
On April 11, 2011, Plaintiff filed this lawsuit against CHS and Messrs. Smith and Cash.
While Plaintiff claims that CHS has violated the federal securities laws, when reading the
complaint one is hard-pressed to determine how the securities laws are more than tangentially
implicated by Plaintiff’s allegations, which center on how 15,000 attending physicians decide
whether to admit, and how to treat, patients at CHS hospitals. (Appendix 186-224.) As the
complaint alleges, “at the center of this litigation is an issue that hospitals and medical staff deal
with every day: how a patient is appropriately treated at a hospital, and to the extent that patient
is covered by Medicare, how that treatment should be billed to Medicare.” (Compl. ¶ 7.)
Plaintiff then attempts to cast these professional misconduct allegations as securities law
violations by claiming that failing to disclose this alleged conduct constitutes material
4
Since 2004, Tenet has held its annual meeting in May of each year. (Appendix 039-051.)
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misrepresentations and omissions in proxy solicitation materials and in other public filings and
public statements. (Compl. ¶¶ 182-204.) In addition, Plaintiff alleges that Messrs. Smith and
Cash acted as controlling persons of CHS and as such are liable under Section 20(a) of the
Following the filing of the complaint, on April 18, 2011, CHS announced that it had
changed its offer from its initial cash-and-stock offer to an all-cash offer. (Appendix 176-182.)
Because Plaintiff lacks standing and has failed to state a claim, Defendants now move to
dismiss the complaint under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6).
ARGUMENT
Although Defendants dispute virtually all the factual allegations in the complaint, for
purposes of this motion CHS recognizes that “well-pleaded facts are viewed in the light most
favorable to the plaintiff” in deciding a motion to dismiss. City of Clinton, Ark. v. Pilgrim’s
Pride Corp., 632 F.3d 148, 152 (5th Cir. 2010). Nevertheless, a plaintiff “must allege facts that
support the elements of the cause of action,” and a court will not accept as true “threadbare
recitals of the elements of a cause of action, supported by mere conclusory statements.” Id. at
To withstand a motion to dismiss under Rule 12(b)(6), the allegations in the complaint
must meet the standard of “plausibility.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 564 (2007);
Iqbal, 129 S. Ct. at 1949. A claim is plausible “when the plaintiff pleads factual content that
allows the court to draw the reasonable inference that the defendant is liable for the misconduct
alleged.” Iqbal, 129 S. Ct. at 1949 (citation omitted). Plausibility requires “more than a sheer
possibility that a defendant has acted unlawfully.” Id. Rather, factual allegations “must be
enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555.
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Under Article III of the U.S. Constitution and Rule 12(b)(1), a court must dismiss a
complaint for lack of subject-matter jurisdiction if the plaintiff does not have standing to bring
the claims asserted. See In re United Operating, LLC, 540 F.3d 351, 354 (5th Cir. 2008). A
party has standing to sue only if it can prove that it has suffered an injury that is (i) concrete and
particularized and (ii) actual or imminent. Little v. KPMG LLP, 575 F.3d 533, 540 (5th Cir.
2009) (citations omitted). In addition, a party must show that a causal connection exists between
the injury and conduct complained of and that it is likely, as opposed to merely speculative, that
To state a claim under Section 14(a) and Rule 14a-9 of the Securities Exchange Act, a
plaintiff must show that (1) defendants misrepresented or omitted a material fact in proxy
solicitation materials; (2) defendants acted at least negligently in distributing the proxy materials;
and (3) the false or misleading proxy statement was an essential link in causing the corporate
action. Hulliung v. Bolen, 548 F. Supp. 2d 336, 339 (N.D. Tex. 2008) (internal citations
omitted).
Under Section 10(b) and Rule 10b-5 of the Securities Exchange Act, a plaintiff must
allege, in connection with purchase or sale of securities, “(1) a misstatement or an omission (2)
of a material fact (3) made with scienter (4) on which the plaintiffs relied (5) that proximately
caused the plaintiff’s injury.” Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp.,
565 F.3d 200, 207 (5th Cir. 2009) (citing R2 Invs. LDC v. Phillips, 401 F.3d 638, 641 (5th Cir.
2005); Smallwood v. Pearl Brewing Co., 489 F.2d 579, 605 (5th Cir. 1974)); see also Brunig v.
Measured by these standards, the allegations are insufficient to show that Tenet has
standing to sue or has stated a claim upon which relief may be granted. Accordingly, for the
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reasons discussed below, Defendants ask the Court to dismiss the complaint under Rule 12(b)(6)
and 12(b)(1).
Tenet’s claims under Section 14(a) and 10(b) are premised entirely on the CHS stock
component of CHS’s original offer to buy Tenet. (See, e.g., Compl. ¶ 5.) Because CHS is now
offering Tenet shareholders 100% cash in exchange for their shares, Tenet fails to state a claim
for violation of the federal securities laws and the complaint must be dismissed in its entirety.
Tenet’s claims are now essentially meaningless because CHS’s offer no longer includes
any stock. The allegation that the proxy materials contain misstatements and omit material
information is predicated on the fact that CHS’s original offer included CHS stock. Because
CHS is now offering shareholders all cash, Tenet’s allegations regarding the ethics and
Tenet’s directors.
Tenet argues that CHS’s admissions and billing practices are important to Tenet’s
shareholders because they have caused CHS’s current stock price to be “artificially inflated,”
which affects the value of CHS’s offer. (Compl. ¶ 133.) In addition, Tenet claims that the
patient admission policies and billing practices of CHS affiliates are important to Tenet
CHS’s ability to implement the unsustainable [admissions policies] and avoid prosecution.” (Id.
at ¶ 137.) And Tenet speculates that the merged corporation would be subject to “undisclosed
financial risk” (id. at ¶ 132), and that it “may well be subject to liability and damages of well
over $1 billion for its practices ….” (Id. at ¶ 4.) Yet Tenet shareholders would only have become
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exposed to this hypothetical “financial risk” upon receiving compensation in the form of CHS
shares. Now that the offer to purchase Tenet is all cash, CHS’s post-merger financial risk and
liabilities are irrelevant to Tenet shareholders, and any alleged misstatements or omissions in the
A case from the District Court of Oregon is instructive. See Beebe v. Pac. Realty
Trust, 578 F. Supp. 1128, 1148 (D. Or. 1984). In Beebe, the shareholders of a corporation were
presented with an all-cash offer for their shares. Under the merger plan, all shareholders would
be bound by the vote and either all or no shares would be sold. The court concluded that “[i]n
this all-cash offer, shareholders would have no further involvement with [the bidder] regardless
of the outcome of the vote. Thus, omissions regarding [the bidder’s] past acquisition practices
would not be material.” Id. A similar conclusion was reached by the court in Copperweld Corp.
v. Imetal, 403 F. Supp. 579, 600 (W.D. Pa. 1975). In that case, the plaintiffs sued under Section
14(e) of the Securities Exchange Act, alleging that the company making a tender offer had
omitted material information about its financial condition. Id. The court held that it was “quite
evident … that the statutory scheme does not require financials to be provided in a case where
Just like in those cases, Tenet’s shareholders here stand to receive cash as compensation
in the proposed merger (should it be accepted by the Tenet Board and approved by the
shareholders), which renders the proper valuation of CHS stock irrelevant to Tenet shareholders.
Thus, the allegations in the complaint are insufficient to support a claim that a reasonable Tenet
shareholder would consider the judgment calls of physicians important in deciding how to vote
for the Tenet Board in the proxy contest. For this reason, Counts I and II of the complaint must
be dismissed.
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Tenet’s lone claim under Section 10(b) is moot now that CHS’s offer is all cash. Tenet’s
Section 10(b) claim is premised on the fact that CHS’s price for Tenet included CHS stock,
which purportedly had been artificially inflated on account of certain non-disclosures. (Compl.
¶ 200; see also Compl. ¶ 201 (“Tenet and its shareholders have relied upon, and will continue to
rely upon, the artificially inflated market price of CHS stock when determining whether to vote
to elect a slate of directors at Tenet’s next annual meeting, which slate of directors would vote to
approve a transaction by which CHS would acquire Tenet and Tenet’s shareholders would
CHS will now pay all cash, with no CHS stock component for Tenet’s shares. Therefore,
the relief sought by Tenet — corrective disclosures regarding the value of CHS’s stock — has no
if Tenet shareholders elect the new, independent nominees in November after all
the bad things Tenet has said about CHS and its doctors; and
if the newly elected Tenet directors approve an all-cash offer from CHS;
then why would those same Tenet shareholders care one iota about doctor
Where, as here, “no order of the court can affect the rights of the parties with regard to the
requested relief,” the claims must be dismissed as moot. Harris v. City of Houston, 151 F.3d
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Tenet’s claims must be dismissed for the additional and independent reason that the
disclosures Tenet is seeking to compel CHS to make are not of “facts,” but rather of its own self-
To state a claim under Rule 14a-9, a plaintiff must adequately allege that material facts
were misstated or omitted from the proxy solicitation materials. And yet at its core, what Tenet
alleges CHS failed to disclose are not facts at all; they are just Tenet’s litigation theory. Guesses
about what financial impact and potential liability may occur in the future are not facts, and Rule
14a-9 does not require companies to disclose such information or confess to speculative and
uncharged misconduct. In our system, Defendants have a right to trials before we convict and
sentence.
Tenet claims that CHS must disclose the contents of hospital admission policies, its
patient admission rate and observation rate, and how its admissions practices compare to those of
its competitors. Tenet concedes, however, that much or all of that information is already
publicly available. For example, Tenet alleges that CHS policy governing the decision to admit
patients is contained in the Blue Book, which Tenet alleges is publicly available. (Compl. ¶ 10
(“CHS … patient admission criteria called the Blue Book … is publicly available ….”)
(emphasis added).) Lastly, Tenet asserts that statistics regarding CHS hospital admissions and
comparison statistics for non-CHS hospitals are also publicly available. (See id. n. 5 (“The
observation data set forth in this complaint were compiled through Avalere’s analysis, which,
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In fact, Tenet states in footnote 2 of the complaint that “[t]he information set forth in this
complaint is based on public information relating to Medicare patients alone.” (See Compl. n.
2) (emphasis added).) Because Tenet already possesses all of the relevant facts underlying
CHS’s admissions policies and practices, Tenet can only be asking the Court to order CHS to
disclose the untested and unproven conclusions Tenet has drawn from those facts. According to
Tenet, CHS must accuse itself of maintaining an admission policy and billing practices that
perpetrate an unscrupulous and illegal fraud upon the “federal government, numerous state
governments, private insurances companies, and patients” (Compl. ¶ 1) by obtaining “higher and
unwarranted payments.” (Compl. ¶ 3.) Simply put, that is not what Congress intended to be the
Another federal court analyzed a similar allegation in Amalgamated Clothing & Textile
Workers Union v. J.P. Stevens & Co., 475 F. Supp. 328 (S.D.N.Y. 1979) (vacated as moot).
There the plaintiff alleged that Section 14(a) requires a corporation to disclose, in connection
with the election of directors, an alleged corporate policy to violate the federal labor laws. In
rejecting that claim, the court held that “the proxy rules cannot be reasonably construed to
require such self-accusation of illegal intentions.” Id. at 331. This makes sense. As the court in
intentions “would make a silly, unworkable rule. It would not promote increased disclosure, but
would serve only to support vexatious litigation and abusive discovery.” Id. at 332.
Tenet also alleges that as a result of its admission policies, CHS “may well be subject to
liability and damages.” (Compl. ¶ 4.) But it fails to identify any actual or even threatened
litigation that CHS had an obligation to disclose in connection with the proxy contest. Instead,
Tenet asserts that CHS will have to disclose liability that may arise in the future as a result of the
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speculative conclusions that Tenet and its paid consultants have drawn after analyzing publicly
available information about the judgments reached by attending physicians at CHS hospitals.
For example, Tenet speculates that “the likelihood of CHS’s practices surviving undetected for
several more months is remote” because “the Department of Justice and Medicare auditors have
devoted increased attention to investigating, auditing, and prosecuting hospitals that are
improperly billing outpatient observation care as inpatient admissions.” (Compl. ¶ 26.) This is a
curious claim. Tenet makes dramatic allegations that will attract regulators and subpoenas and
then concludes that CHS must now disclose that it will be found liable in all such investigations.
Conjecture does not remotely satisfy the pleading requirements of Twombly. As the Third
Circuit has stated, “[w]ide authority establishes that … the mere possibility of litigation is not” a
material fact requiring disclosure under Section 14(a). Gen. Elec. by Levit v. Cathcart, 980 F.2d
927, 935-36 (3d Cir. 1992); see also Prettner v. Aston, 339 F. Supp. 273, 287 (D. Del. 1972)
(After disclosure of “pending or threatened legal proceeding … [a]ny statement at that point
regarding the possibility of other proceedings would have been wholly speculative and was not
required.”)
Further, as Tenet acknowledges, CHS has disclosed in SEC filings the fact that two
governmental agencies have requested documents related to the admission criteria and billing
practices of CHS’s affiliates. (Compl. ¶ 114.) In addition, on April 15, 2011, CHS disclosed
that it received a third document subpoena related to this subject. (Appendix 183-185.) CHS has
no obligation or ability to predict the outcome of these inquiries. Nor does it have a duty to
accuse itself of wrongdoing it has not been charged with, because “the outcome of [these] legal
proceedings is inevitably uncertain.” Ballan v. Winfred Am. Educ. Corp., 720 F. Supp 241, 248
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(E.D.N.Y. 1989) (holding that defendant that had disclosed inquiries from a government agency
In sum, the SEC’s proxy disclosure rules only require the disclosure of material facts —
not another party’s characterization of those facts or conjecture about what liability may result in
the future. Thus, Tenet’s attempt to compel CHS to confess guilt to uncharged misconduct or “to
accuse itself of … illegal policies” should be rejected, and Counts I and II must be dismissed.
GAF Corp. v. Heyman, 724 F.2d 727, 739 (2d Cir. 1983), quoting Amalgamated, 475 F. Supp. at
331-32.
The essence of Tenet’s Section 10(b) and Rule 10b-5 claim is that CHS must disclose “its
[alleged] practice of systematically admitting, rather that observing, patients in CHS hospitals for
financial, rather than clinical, purposes” — a practice that Tenet asserts “served to overstate
[CHS’s] growth statistics, revenues, and profits, and has created a substantial undisclosed
financial and legal liability.” (Compl. ¶ 1.)5 Fatal to Tenet’s claim, however, is that what Tenet
asks CHS to disclose is not a “fact” under federal securities law, but rather the vigorously
disputed litigation theory Tenet trots out here. Tenet is a corporate rival, and its unproven and
unsubstantiated view is based on its analysis and that of its paid and anonymous consultants (the
lone exception being Avalaire, which offers no definite conclusion). Just as CHS is not
obligated to disclose Tenet’s theories under Section 14(a), CHS is likewise not obligated to make
5
See also, e.g., Compl. at ¶ 6 (“Tenet … brings this action to compel CHS to disclose fully its admissions practices
and the financial and legal risks inherent in them.”).
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It is well settled that a Rule 10b-5 claim must allege a misstatement or omission “of a
material fact.” Hundahl v. United Benefit Life Ins. Co., 465 F. Supp. 1349, 1357, 1364-66 (N.D.
Tex. 1979) (emphasis added) (finding there can be no liability under 10b-5 “merely for failing to
draw certain negative conclusions or make derogatory predictions”); Ballan, 720 F. Supp. at 248
(“Rule 10b-5 speaks of omissions to state a ‘material fact’ necessary to make the statements
made not ‘misleading.’ Thus, it is only ‘facts’ that an issuer of securities and its officers must
disclose.”). Id. So long as material facts have been disclosed or are already known in the
marketplace, a securities issuer has no obligation to characterize those facts with “pejorative
nouns and adjectives” or “to verbalize all adverse inferences expressly.” Klamberg v. Roth, 473
F. Supp. 544, 551-52 (S.D.N.Y. 1979) (citations omitted). This legal doctrine is no less true with
465 F. Supp. at 1365 (10b-5 allegations that “would require management to [negatively] label its
decisions” are “not cognizable under federal law”), or to speculation regarding the plausibility or
likelihood of future liabilities. Ballan, 720 F. Supp. at 249 (finding 10b-5 does not require “a
company’s management to confess guilt to uncharged crimes, or ‘to accuse itself of antisocial or
and cited throughout the complaint. CHS has no obligation to confess falsely to alleged fraud or
other wrongdoing simply because Tenet has accused it of such conduct in the complaint. See id.
(noting that requiring the type of disclosures requested by Plaintiff would “not promote increased
disclosure, but would serve only to support vexatious litigation and abusive discovery.”) (citation
omitted).
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Tenet’s Rule 10b-5 claim fares no better when the allegations are characterized as
misstatements rather than omissions of fact. CHS has affirmatively represented to Tenet and the
public that a CHS-Tenet merger would “benefit patients by ‘improv[ing the] quality of care’ and
benefit payers and employers by providing ‘cost-efficient’ healthcare services.” (Compl. ¶ 2.)
Further, CHS has claimed there is “‘significant synergy potential’ in its proposed acquisition of
Tenet.” (Id.) But these generalized positive statements are simply not actionable as a matter of
law under federal securities law. See Rosenzweig v. Azurix Corp., et al., 332 F.3d 854, 869 (5th
Cir. 2003) (“The generalized, positive statements about the company’s competitive strengths,
experienced management, and future prospects are not actionable because they are immaterial,”
and “are certainly not specific enough to perpetrate a fraud on the market.”) (quoting Raab v.
Gen. Physics Corp., 4 F.3d 286, 290 (4th Cir. 1993)); see also Abrams v. Baker Hughes, Inc.,
292 F.3d 424, 433 (5th Cir. 2002) (“[A]s long as public statements are reasonably consistent with
reasonably available data, corporate officials need not present an overly gloomy or cautious
regarding the potential benefits of a CHS-Tenet merger are not the sort of definitive statements
that could reasonably mislead the public and, thus, are not actionable under the federal securities
law.
A. Tenet Does Not Have Standing to Seek Injunctive Relief Under Section 10(b).
degree and in kind from that which accompanies litigation in general,” the U.S. Supreme Court
held that only a purchaser or seller of securities has standing to bring a private damages action
under Section 10(b) of the Exchange Act. Blue Chip Stamps v. Manor Drug Stores, 421 U.S.
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723, 739-50 (1975). The major policy concern underlying this rule is that, in the securities
context, complaints that are very unlikely to succeed on the merits may still have significant
settlement value to plaintiffs. Id. While some courts have applied the same standing
requirements in private actions for injunctive relief, the Fifth Circuit has recognized narrow and
First, the Fifth Circuit recognizes that government entities, such as the SEC, need not be
purchasers or sellers to enjoin parties from violating the securities laws. See, e.g., SEC v. Gann,
565 F.3d 932 (5th Cir. 2009). Obviously, this exception does not apply to Tenet, a private
corporation. Second, the Fifth Circuit also recognizes that corporations have standing to sue to
prevent manipulative schemes by majority shareholders to artificially depress stock prices. See
Davis v. Davis, 526 F.2d 1286, 1290 (5th Cir. 1976); Hundahl, 465 F. Supp. at 1359. Again, this
exception does not apply since CHS is not the majority shareholder of Tenet and Tenet has not
Furthermore, in the situations where it has been specifically addressed, courts have held
that it is inappropriate for a target corporation to bring an action on behalf of its shareholders for
injunctive relief under Section 10(b) against an acquiring entity. See, e.g., John Labatt Ltd. v.
Onex Corp, 890 F. Supp. 235, 247 (S.D.N.Y. 1995). The rationale of allowing a corporation
vicarious standing to sue for injunctions — “an additional means of disinterested protection of
the market place and of the stockholders’ best interests” — is absent where self-interested
management of a target corporation attempt to prevent a merger. GAF Corp. v. Milstein, 324 F.
6
Other Circuits, including the Fourth Circuit in the leading case Advanced Res. Int’l., Inc. v. Tri-Star Petroleum Co.,
4 F.3d 327, 332-33 (4th Cir. 1993), have recognized a third exception to Blue Chip’s standing requirements, in
cases where a party claims it would have bought or sold securities but for the deceptive practices. While the
Fifth Circuit has not addressed the standing of a potential investor or shareholder who would have bought or
sold but for the actions of the defendants, this cannot apply to Tenet itself and, therefore cannot serve as a basis
for standing here.
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Supp. 1062, 1072-73 (S.D.N.Y.), aff’d in relevant part, 453 F.2d 709, 721-22 (2d Cir. 1971),
cert. denied, 406 U.S. 910 (1972). Where parties are fighting for control and the corporation’s
own interests are not at stake, “no hearing is needed to invoke the therapeutic rule that a conflict
of interest will not be sanctioned by according to the management a standing to sue under Rule
10b-5.” Id. Holding otherwise would provide entrenched management with an improper
weapon with which to thwart legitimate takeover attempts. Labatt, 890 F. Supp. at 247. This is
precisely the situation presented here: Tenet’s management and Board have brought this suit to
protect themselves, not Tenet’s shareholders or market participants generally. Because Tenet has
not suffered and will not suffer any injury as a result of the alleged misstatements or omissions,
Tenet, independent of its shareholders, has sued CHS for alleged violations of Section
14(a). But the Fifth Circuit has interpreted Section 14(a) as only protecting shareholders with
voting rights. 7547 Corp. v. Parker & Parsley Dev. Partners, L.P., 38 F.3d 211, 229-31 (5th Cir.
1994) (“We view section 14(a) as protecting only interest-holders with voting rights.”); Morris v.
Bush, No. 98-CV-2452-G, 1999 WL 417928, at *2 (N.D. Tex. June 22, 1999) (“[T]he defendants
are correct in arguing that § 14(a) of the Exchange Act only protects interest-holders with voting
rights and that a person who is not entitled to vote lacks standing to maintain an action under
§ 14(a) . . . .”). Private causes of action under Section 14(a) are intended to protect the voting
process for stockholders; they are not “intended to open a Pandora’s box by extending [the] right
[to sue] to any person potentially injured by a proxy statement . . . .” 7547 Corp., 38 F.3d at 230
(holding that limited partners without voting rights lacked standing under Section 14(a)). While
the court in Parker did not directly address whether corporations that are not stockholders may
nevertheless bring suit under Section 14(a) if they are the target of an acquisition, cases in other
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jurisdictions have held they may not. See, e.g., Diceon Elecs., Inc. v. Calvary Partners, L.P.,
772 F. Supp. 859, 868-69 (D. Del. 1991) (concluding that a corporation “lacks standing to sue
for damages under § 14(a)”).7 Consequently, Tenet does not have standing to bring any claims
To support its claims under Section 14(a), Tenet alleges that CHS made a number of
statements in its proxy solicitation materials that were false and misleading because they failed to
disclose allegedly improper admission practices. (Compl. ¶¶ 127-181.) But the alleged
misstatements and omissions are only actionable if they are material to the subject of the proxy
contest at issue: here, the election of directors to the Tenet Board. For purposes of Section 14(a),
a fact is material if there is “a substantial likelihood that a reasonable shareholder would consider
it important in deciding how to vote.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449
(1976); see also In re Affiliated Comp. Serv. Derivative Litig., 540 F. Supp. 2d 695, 703 (N.D.
CHS has not made a tender offer to the Tenet shareholders, and Tenet shareholders are
not being asked to vote on a proposed merger with CHS at the annual meeting in November. At
that meeting, Tenet shareholders will vote only on the election of directors to the Tenet Board.
CHS provided a summary of the work and education experience of each of its candidates and
confirmed that the nominees have no pre-existing relationship with CHS and no obligation or
agreement to support the proposed merger with CHS. (Appendix 167-175.) None of the
7
But see Salomon Bros. Mun. Partners Fund, Inc. v. Thornton, 410 F. Supp. 2d 330, 334 (S.D.N.Y. 2006) (stating
that the Second Circuit in Studebaker Corp. v. Gittlin, 360 F.2d 692, 695 (2d Cir. 1966), held that a corporation
could bring suit under Section 14(a)). The court in Thornton, however, noted that Studebaker may no longer be
valid after the Supreme Court’s decision in Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991).
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information relating to the proposed directors is being challenged by Tenet. And there is no
allegation in the complaint, or elsewhere, that any of the proposed Board candidates are anything
other than highly qualified and independent, or that any false statements or omissions have been
election of directors are those that concern nominees themselves. In re Browning-Ferris Indus.,
Inc. S’holder Derivative Litig., 830 F. Supp. 361, 367 (S.D. Tex. 1993) (citing Gen. Electric Co.
by Levit v. Cathcart, 980 F.2d 927, 937 (3d Cir. 1992)). Yet Tenet’s complaint is focused far
away. Indeed, the complaint never identifies or discusses the independent nominees to Tenet’s
Board. Instead, Tenet focuses on judgment calls by physicians, as reflected by suspect data
But a party nominating directors does not have to disclose allegations of wrongdoing
against itself in proxy materials. For example, in In re Browning-Ferris, the court dismissed the
claim that environmental lawsuits and proceedings pending against the nominating corporation
should have been disclosed in proxy solicitations issued in connection with the election of
directors. 830 F. Supp. at 367. The court stated that such disclosures might be relevant if the
allegations involved the director nominees directly. Id. But because there was no allegation of
any relationship between the pending lawsuits or proceedings and the director nominees, the
court held that they were not material omissions under Section 14(a). Id. (citing US v. Matthews,
787 F.2d 38, 48 (2d Cir. 1986)). The Browning-Ferris court relied on General Elec., a Third
Circuit decision holding that information about alleged wrongdoing need only be disclosed if it
involved the nominated directors, not the company putting the directors forward for election.
980 F.2d at 937. Likewise, in Bolger v. First State Fin. Servs., a federal district court held that a
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company has “no duty to disclose to shareholders unsubstantiated allegations” or “legal theories
as to how a given transaction violated the law” in a proxy statement filed in connection with the
election of directors. 759 F. Supp. 182, 194 (D.N.J. 1991) (citations omitted). Thus, the key
issue in proxy materials for the election of directors is the nominees themselves. In re
In sum, CHS has no duty to disclose information about its own business operations or
performance, and Tenet has failed to identify any misstatement or omission relating to the
nominated directors who will be voted on at Tenet’s 2011 annual meeting. As a result, Counts I
To state a valid claim for securities fraud under Section 10(b) and Rule 10b-5, a plaintiff
must allege that any misstatement or omission of material fact was made with scienter.
Flaherty & Crumrine, 565 F.3d at 207. Tenet’s generalized allegations of scienter are
insufficient to withstand a motion to dismiss because Tenet fails to support them with specific
facts that would suggest the alleged misstatements or omissions were made with knowledge of,
or reckless disregard for, the truth. To satisfy the pleading requirement for a Rule 10b-5 claim of
fraud, a plaintiff must allege that a defendant acted with the intent to deceive, manipulate, or
defraud. SEC v. Gann, 565 F.3d 932, 936 (5th Cir. 2009) (citing Nathanson v. Zonagen Inc., 267
F.3d 400, 408 (5th Cir. 2001)). The Fifth Circuit has held that a Rule 10b-5 claim, under Rule
8
This conclusion is further supported by Schedule 14A of Regulation S-K, 17 C.F.R. § 229.10 et seq. Schedule
14A is “persuasive authority” as to the required scope of disclosure in proxy solicitation materials because it
provides the SEC’s expert view of the types of information most likely to be matters of concern to shareholders
in a proxy contest. In re Browning-Ferris Indus., Inc., 830 F. Supp. at 366 (quoting General Elec., 980 F.2d at
937) (internal citations and quotation marks omitted). And nowhere does Schedule 14A say that a party
nominating directors for election must disclose any accusations of wrongdoing that have been leveled against it
or that may be asserted in future litigation.
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9(b), cannot be satisfied with a general averment that defendants possessed fraudulent intent with
respect to any alleged misstatement or omission. Melder v. Morris, 27 F.3d 1097, 1102 (5th Cir.
1994) (citing Bruce H. Tuchman, et al. v. DSC Commc’ns Corp. et al., 14 F.3d 1061, 1068 (5th
Cir. 1994)). Rather, a “plaintiff[] must set forth specific facts supporting an inference of fraud.”
Id.
This requirement is consistent with the Private Securities Litigation Reform Act (the
“PSLRA”), which provides that a plaintiff must state “with particularity facts giving rise to a
strong inference that the defendant acted with the requisite state of mind.” 15 U.S.C. § 78u-
4(b)(2) (emphasis added); see also Nathanson, 267 F.3d at 406-8. Mere allegations of a
defendant’s possible motive and opportunity to commit fraud are, by themselves, insufficient to
satisfy the particularity requirement for alleging scienter under Rule 10b-5. Goldstein v. MCI
WorldCom, 340 F.3d 238, 246 (5th Cir. 2003) (noting that “allegations of motive and
opportunity, without more, will not fulfill the pleading requirements of the PSLRA.”) (quoting
Nathanson, 267 F.3d at 412); Abrams, 292 F.3d at 430 (5th Cir. 2002) (citing Nathanson, 267
F.3d at 410-412); see also Magruder v. Halliburton Co., and Lesar, No. 3:05-CV-1156-M, 2009
WL 854656, at *8 (N.D. Tex. Mar. 31, 2009) (noting that “[c]onclusory allegations of scienter
will not survive”) (citing Plotkin et.al., v. IP Axess Inc., et.al., 407 F.3d 690, 696 (5th Cir. 2005).
Despite this clear legal mandate, Tenet only alleges in conclusory fashion that
“Defendants ... knew or recklessly disregarded that their statements and omissions made to Tenet
and its shareholders were false and misleading.” (Compl. ¶ 200.) Tenet’s only support for this
charge is Defendants’ alleged motive to “inflate the market price of CHS stock in order to make
CHS’s offer price for Tenet (with consideration consisting partially of CHS stock) appear more
valuable to Tenet and its shareholders.” (Id.) So not only has Tenet failed to allege any “specific
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facts supporting an inference of fraud,” Melder, 27 F.3d at 1102 (emphasis in original), it has
“inflate the market price of CHS stock,” Goldstein, 340 F.3d at 246. Tenet’s allegations of
scienter are thus contrary to the plain requirements of Rule 9(b) and the PSLRA, and therefore
are inadequate to sustain a Rule 10b-5 claim. For this additional and independent reason, Count
Section 20(a) of the Securities Exchange Act imposes secondary liability on those who
“control” primary violators of the Act. 15 U.S.C. § 78t(a). It is well established that a plaintiff
cannot state a claim for Section 20(a) control person liability without adequately pleading an
underlying violation of the Exchange Act to serve as its basis. “Control person liability is
secondary only and cannot exist in the absence of a primary violation.” Southland Sec. Corp. v.
INSpire Ins. Solutions, Inc., 365 F.3d 353, 383 (5th Cir. 2004) (citation omitted). Here, because
Tenet’s claims for primary violations were not adequately pleaded, Count IV of the complaint
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CONCLUSION
For the reasons stated above, the Defendants respectfully ask the Court to dismiss the
complaint for lack of subject-matter jurisdiction or, in the alternative, for failure to adequately
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CERTIFICATE OF SERVICE
I hereby certify that on April 19, 2011, I electronically submitted the foregoing document
with the clerk of the court for the U.S. District Court, Northern District of Texas, using the
electronic case files system of the court. The electronic case files system sent a “Notice of
Electronic Filing” to the following individuals who have consented in writing to accept this
Notice as service of this document by Electronic means:
25