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Owens v. Massey

United States District Court, E.D. Arkansas, Western Division

March 16, 2018

JAMES OWENS, individually and on behalf of all others similar situated; and EDWARD HURLIMAN, individually and on behalf of all others similarly situated PLAINTIFFS



         This action concerns the pending merger of two Arkansas banks. James Owens and Edward Hurliman are shareholders of Bear State Financial, Inc. (“Bear State”), a bank holding company whose primary subsidiary is Bear State Bank. Owens and Hurliman, individually and on behalf of a class of persons holding common stock of Bear State, assert claims against Bear State's officers and directors and its parent company, Bear State Financial Holdings, LLC, for breach of fiduciary duty pursuant to Ark. Code Ann. § 4-27-830, § 4-27-842, and Arkansas common law in connection with a pending merger with Arvest Bank. The plaintiffs commenced this action in the Circuit Court of Pulaski County, Arkansas. After the plaintiffs filed an amended complaint, the defendants removed the action to this Court asserting federal subject matter jurisdiction under 28 U.S.C. §§ 1331, 1332(a), 1441, and 1446. Owens and Hurliman have filed a motion to remand. For reasons that will explained, the motion is granted.


         The amended complaint alleges that the defendants breached their statutory and common law fiduciary duties in connection with a proposed merger of Bear State and Arvest Bank via the purchase of Bear State's outstanding stock. To move forward with this merger, Bear State required the approval of a majority of its shareholders.

         Owens and Hurliman allege that the defendants unfairly deprived shareholders of the true value of their investment in Bear State through a fundamentally flawed sales process. Specifically, they allege that in March of 2017, Randy Dennis of DD&F Consulting Group, Inc., approached Richard Massey, Chairman of Bear State Board of Directors, and proposed selling Bear State to Arvest. At Massey's request, Dennis then spoke with Arvest's Chairman of the Board about a potential transaction between Arvest and Bear State. From April to June of 2017, Arvest and Bear State exchanged information relevant to the proposed transaction. Massey informed the board of Bear State about the proposed transaction on June 26, 2017. On July 5, 2017, representatives of Bear State informed financial institutions that Bear State was interested in a potential transaction and gave those financial institutions until July 21, 2017, to express their interest.

         On July 20, 2017, “Company A” submitted a proposal to purchase Bear State with stock rather than cash. To protect the parties from fluctuations in Company A's stock price, Company A proposed an agreement that would adjust the ratio of Company A's stock to be paid if the worth of Company A's stock rose or fell. At the high end, the potential imputed value of Company A's offer was for $10.95 per share of Bear State's stock, which was $0.42 higher than Arvest's final offer. At a board meeting in July 2017, certain defendants expressed concern about the liquidity of Company A's shares. Dennis asked Company A to modify its proposal to include cash consideration and provide certain defendants with seats on the combined company's board. Company A did not commit to meeting these demands, so Bear State ceased negotiations with Company A. Owens and Hurliman allege that the defendants disseminated proxy statements on October 6, 2017, that failed to disclose material information about the proposed merger between Bear State and Arvest. Specifically, the proxy statements allegedly omitted or misrepresented cash flow and reconciliation projections, comparable transaction multipliers, the assumptions behind the discount rate used in financial analyses, and other material information.

         Owens and Hurliman request a declaration that the action is maintainable as a class action and ask to be appointed class representatives. They seek an injunction preventing the merger between Bear State and Arvest until Bear State implements a process that “provid[es] the best possible terms for shareholders” and discloses the material information omitted from the proxy statement, a rescission of the Merger Agreement between Bear State and Arvest, and if the merger is completed, damages incurred by shareholders as a result of the merger.


         The defendants argue that this Court has federal question jurisdiction because the alleged misrepresentations in Bear State's proxy statements raise substantial questions of federal securities law and that the injunction defendants seek is only available under federal law. Document #19 at 12-18. Owens and Hurliman, however, maintain that nowhere in the amended complaint are there any references to federal laws or regulations and that their claims arise under the statutes and common law of Arkansas. Document #14 at 11-16. The defendants also assert that this Court has diversity of citizenship jurisdiction. Document #1 at 1. Owens and Hurliman argue that the forum-defendant rule prevents diversity jurisdiction in this matter. Document #15 at 24.

         A. Federal Question Jurisdiction

         The Constitution grants federal courts jurisdiction over cases “arising under” federal law. U.S. Const. Art. III, § 2. Congress executed that general grant by giving federal district courts “original jurisdiction of all civil actions arising under the Constitution, laws or treaties of the United States.” 28 U.S.C. § 1331. The “well-pleaded complaint” rule provides that to remove a civil action, a federal question must be presented on the face of the plaintiff's complaint at the time the notice of removal is filed. Caterpillar Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987) (citation omitted); 14B Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 3722 (4th ed.). “The [well-pleaded complaint] rule makes the plaintiff the master of the claim; he or she may avoid federal jurisdiction by exclusive reliance on state law.” Caterpillar Inc., 482 U.S. at 392; see Merrell Dow Pharmaceuticals, Inc. v. Thompson, 478 U.S. 804, 809 n.6, 106 S.Ct. 3229, 92 L.Ed.2d 650 (1986) (“Jurisdiction may not be sustained on a theory that the plaintiff has not advanced”). As the Supreme Court has explained:

[W]hether a case is one arising under the Constitution or a law or treaty of the United States, in the sense of the jurisdictional statute[, ] . . . must be determined from what necessarily appears in the plaintiff's statement of his own claim in the bill or declaration, unaided by anything alleged in anticipation of avoidance of defenses which it is thought the defendant may interpose.

Aetna Health Inc. v. Davila, 542 U.S. 200, 207, 124 S.Ct. 2488, 159 L.Ed.2d 312 (2004) (internal quotation omitted). Exceptions to the well-pleaded complaint rule exist, and those exceptions fall into two categories: first, if federal law completely preempts the state law upon which the plaintiffs' claim is based, a federal court may have federal question jurisdiction; and second, if determination of the relevant state law depends on resolution of a substantial, disputed federal question, the district court may have federal question jurisdiction. Hiegle v. Morgan Keegan & Co., Inc., No. 4:09CV00817 GTE, 2009 WL 4067240, at *3 (E.D. Ark. Nov. 20, 2009).

         The defendants assert both of these exceptions in their notice of removal. First, they argue that claims “based on disclosures made in a proxy statement” are governed exclusively by federal law under Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n et seq. . . .” Document #1 at ¶2. They insist that, “even where the plaintiffs assert only state law claims, ” a district court has federal subject-matter jurisdiction if the complaint alleges that a proxy statement contains misleading statements or material omissions. Id. at ΒΆ12. These contentions amount to an argument that the Exchange Act completely preempts state-law claims related to proxy ...

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