Tribune Media Dodges Securities Suit Over Failed Sinclair Merger

Securities claims by investors who purchased Tribune Media Co. stock on the basis of its proposed merger with Sinclair Broadcasting Group, only to have the merger fall through, were rejected by the Seventh Circuit.

The merger was announced in 2017 but was abandoned in 2018 by Tribune, which claimed Sinclair didn’t comply with its contractual commitment to use it best efforts to satisfy the demands of federal regulators. Nexstar Media Group purchased Tribune in 2019.

In late 2017, while the merger agreement with Sinclair was in place, Tribune’s largest investor Oaktree Capital Management sold some of its shares through Morgan Stanley. After the merger was called off, a group of investors filed a class action in the US District Court for the Northern District of Illinois, claiming Tribune, Oaktree, and Morgan Stanley violated the 1933 Securities Act and the 1934 Securities Exchange Act by not disclosing that Sinclair was playing hardball with regulators, increasing the risk that the merger would be stymied.

The 1933 Act creates liability for making a false statement or material omission to the purchaser of a security, the US Court of Appeals for the Seventh Circuit said.

The plaintiffs’ claim under the 1933 Act fails because the regulators didn’t ask Sinclair to divest some of its stations until Nov. 17, 2017, and Sinclair didn’t reject that demand until Dec. 15, which was two weeks after the plaintiffs said that they purchased shares from Morgan Stanley, the opinion by Judge Frank H. Easterbrook said. The plaintiffs never claimed that Tribune or Morgan Stanley knew that Sinclair was playing hardball with the regulators, the court said.

The plaintiffs claimed that the companies violated the 1934 Act by making false statements about the prospects of the merger. But all of the related materials connected to the proposed merger correctly stated the terms of the deal, including Sinclair’s promise to use its best efforts to win over the regulators, the court said.

The court also rejected the plaintiffs’ argument that Sinclair’s efforts weren’t reasonable. The plaintiffs “surely knew that bluffing in negotiations is normal, and Tribune could not reveal, as if they were facts, beliefs about how far Sinclair would push the regulators” and whether they would call Sinclair’s bluff, the court said.

The complaint also lacks any information about when Tribune learned things in relation to the public comments it made about the merger, “which makes it impossible to see how Tribune could have had fraudulent intent on the dates it made statements,” the court said.

Judges Daniel A. Manion and Michael Y. Scudder Jr. joined the opinion.

Entwistle & Cappucci LLP represented the plaintiffs. Debevoise & Plimpton LLP; Paul, Weiss, Rifkind, Warton & Garrison LLP; Smith, Gambrell & Russell, LLP; Massey & Gail LLP; and Davis, Polk & Wardwell represented the defendants.

The case is Water Island Event-Driven Fund LLC v. Tribune Media Co., 2022 BL 231599, 7th Cir., No. 20-1183, 7/5/22.