On November 4, 2020, Chief Judge Leonard P. Stark of the U.S. District Court for the District of Delaware granted with prejudice a motion to dismiss filed by Davis Polk on behalf of defendants Uniti Group Inc., certain current and former officers, and one of its subsidiaries, in connection with a securities action brought by SLF Holdings, LLC.
The complaint asserted claims against defendants under federal and Alabama securities laws, as well as common law fraud and conspiracy claims, in connection with Uniti’s 2017 purchase of Southern Light, LLC from SLF, in exchange for cash and Uniti equity equivalents. SLF’s complaint alleged that defendants improperly failed to disclose to SLF the risk that Uniti’s 2015 spin-off from Windstream Holdings, Inc. violated the debt covenants of a Windstream subsidiary and the purported risk that the master lease between Uniti and Windstream could be recharacterized in a Windstream bankruptcy as a financing arrangement rather than a true lease. The lawsuit was prompted by a decision in 2019 by a New York federal court finding a violation of those debt covenants in connection with a lawsuit filed against Windstream by a hedge fund after the Southern Light transaction had already closed. Following the 2019 decision, Windstream, which is Uniti’s largest customer, filed for bankruptcy, causing Uniti’s share price to fall.
Although SLF originally filed the complaint in Alabama federal court, Davis Polk successfully moved to transfer the case to Delaware pursuant to a mandatory forum selection clause in the Southern Light purchase agreement. In granting defendants’ motion to dismiss, Chief Judge Stark agreed with defendants’ arguments that SLF had failed to adequately plead multiple elements of its Exchange Act and Alabama Securities Act claims, including failing to plead an actionable misstatement or omission, scienter, reliance and loss causation. In particular, the Court concluded that: (1) defendants had adequately disclosed the risks regarding the spinoff and Master Lease in their public filings and had no duty to disclose alleged, unmaterialized risks; (2) SLF did not allege that defendants knew that Master Lease violated Windstream’s indenture or that defendants had any intent to deceive SLF; (3) SLF did not reasonably rely on defendants’ representations because it had ample opportunity to detect any purported fraud and SLF disclaimed reliance on any representations not made in the purchase agreement; and (4) SLF could not plead loss causation because it failed to allege that defendants disclosed any new information to the market at the time its stock price fell. Because SLF did not plead an actionable misstatement or omission, the Court dismissed its fraud and conspiracy claims. Although SLF requested that the Court grant it leave to amend its complaint if the Court granted defendants’ motion to dismiss, the Court denied the request because it found that any amendment would be futile.
The Davis Polk litigation team includes partners Edmund Polubinski III and Brian M. Burnovski (who argued the motion) and associates Nikolaus Williams and Daniel S. Magy. Counsel Daniel J. Schwartz and associates Brandon C. Bias, Chui-Lai Cheung and Michelle C. Musielewicz also assisted with the briefing. All members of the Davis Polk team are based in the New York Office.