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Houser v. CenturyLink, Inc.

2022 COA 37. No. 20CA1052. Securities—Merger—Material Misstatements—Material Omissions—Controlling Persons—Leave to Amend Complaint.

March 31, 2022

CenturyLink, Inc. and Level 3 Communications, Inc. issued a press release announcing they had signed an agreement to merge. The companies filed a joint preliminary proxy statement/prospectus in a registration statement with the Securities and Exchange Commission (SEC). The SEC subsequently declared the final registration statement (the Registration Statement), which incorporated the joint proxy statement/prospectus (the Prospectus), effective. The companies’ respective shareholders voted to approve the merger, and the merger closed. Plaintiff filed this putative class action against CenturyLink and certain of its officers and directors (collectively, defendants) alleging violations of the Securities Act of 1933 (Act). The complaint asserted claims under (1) section 11, based on alleged material misstatements and omissions in the Registration Statement; (2) section 12(a)(2), based on alleged material misstatements and omissions in the Prospectus; and (3) section 15, against the officers and directors, based on their status as “control persons” who are liable for the company’s section 11 and section 12(a)(2) violations. The district court granted defendants’ motion to dismiss the complaint under Rule 12(b)(5) and denied plaintiff’s motion for leave to amend the complaint.

On appeal, plaintiff argued that the district court erred in dismissing the complaint. A plaintiff pleading a claim under sections 11 or 12(a)(2) must identify a material misstatement or omission. A statement is material only if a reasonable investor would consider it important in determining whether to buy or sell stock. Regarding an omission, a plaintiff must allege that securities laws required the omitted material fact to be included or that its absence rendered statements in the registration statement or prospectus misleading. As to the alleged omissions, the complaint failed to sufficiently allege that CenturyLink was aware of the existence or extent of the alleged improper practices and the potential repercussions to require it to have disclosed a potentially negative effect on its revenues. Further, CenturyLink disclosed the risks of customer caution, employee instability, and increased capital expenditures. Plaintiff’s allegations about alleged misstatements were similarly not well-pleaded. Therefore, the district court did not err.

Plaintiff also contended that the district court erred by denying his motion for leave to amend the complaint because an amendment wouldn’t be futile. Here, an amendment wouldn’t be futile because after plaintiff filed his complaint, many additional relevant facts came to light that relate to the cramming theory alleged in the complaint, and defendants’ knowledge of the nature and extent of those practices and its consequences when the Offering Documents became effective.

The order dismissing plaintiff’s claims was affirmed. The denial of plaintiff’s motion for leave to amend as it pertains to the omissions claim based on the cramming theory was reversed and the case was remanded for further proceedings. The order denying plaintiff’s motion for leave to amend was otherwise affirmed.

Official Colorado Court of Appeals proceedings can be found at the Colorado Court of Appeals website.

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