Securities Snapshot
February 24, 2021

Rhode Island Federal Court Dismisses Securities Class Action Against Cvs Arising From Statements Made After Omnicare Acquisition

Rhode Island Federal Court Dismisses Securities Class Action Against CVS Arising From Statements Made After Omnicare Acquisition; SEC Division of Corporation Finance Suggests Companies Issue Additional Disclosures When Raising Capital During Periods of Market Volatility; Ohio Federal Court Declines to Dismiss Derivative Suit Against Cardinal Health Directors Stemming From Alleged Mismanagement During Opioid Crisis; California Federal Court Strikes Volkswagen’s “Unclean Hands” Defense in SEC Enforcement Action; Delaware Court of Chancery Holds Buyer Waived Right to Post-Closing Adjustment by Failing to Timely Deliver Closing Statement.

On February 11, 2021, in City of Miami Fire Fighters’ and Police Officers’ Retirement Trust, et al. v. CVS Health Corporation, et al., Judge Mary S. McElroy of the United States District Court for the District of Rhode Island dismissed a putative securities class action lawsuit filed by stockholders of CVS Health Corporation (“CVS”) alleging that CVS misled investors about long-term care (“LTC”) pharmacy struggles following a 2015 merger with Omnicare, Inc. (“Omnicare”).

Plaintiffs alleged that CVS and its executives made false and misleading statements in the company’s financial reports, conference calls, and press releases in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, to hide the fact that CVS’s LTC business was struggling due to alleged mismanagement of Omnicare. Specifically, plaintiffs alleged that CVS failed to disclose that its financial condition was deteriorating and made misleading statements concerning its performance and the success of its operations, its customer losses, and its goodwill assessments for its LTC business. Plaintiffs alleged that CVS was motivated to mislead investors because it wanted to ensure the success of a contemplated future acquisition of Aetna, Inc.  

The court found that CVS’s statements and omissions were not actionable and granted defendants’ motion to dismiss in full. The court found CVS’s statements regarding its performance and operations, such as those characterizing CVS as a “leader” and describing the success of the acquisition, to be non-actionable puffery, opinion, and forward-looking statements. Similarly, the court ruled that CVS’s statements and alleged omissions concerning its customer retention were not misleading, because those statements were not quantified or specific, and did not imply that CVS’s customer base was growing. Finally, the court held that CVS’s goodwill assessments for its LTC business were non-actionable statements of opinion. Plaintiffs alleged that the statements were actionable despite being opinion-based under the Supreme Court’s decision in Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 575 U.S. 175 (2015), because they omitted material underlying facts. The court disagreed, holding that plaintiffs failed to adequately plead that defendants knew of facts rendering CVS’s goodwill assessment misleading, and that, in any event, CVS disclosed the challenges to its LTC business that ultimately led to a goodwill impairment, so any omission did not render the assessments materially misleading.

In dismissing the action, the court also denied plaintiffs’ request for leave to further amend the complaint.  


On February 8, 2021, the staff of the SEC’s Division of Corporation Finance issued guidance and a sample letter to companies regarding the need for robust disclosures in connection with offerings during periods of high market and stock volatility. The staff noted that securities offerings during periods with recent stock run-ups, high short interest or reported short squeezes, or reports of atypical retail investor interest present significant risks, to both issuers and investors. The staff emphasized that a company seeking to raise capital in such volatile circumstances should make specific, tailored disclosures concerning market events and conditions, the company’s circumstances, and potential risks to investors. Such disclosures are necessary to comply with disclosure obligations under the federal securities laws and to ensure investors can make informed investment decisions.

The staff also appended a sample letter containing comments that the Division of Corporation Finance might issue to companies seeking to raise capital in the midst of market and price volatility, and urged companies to take its sample comments into consideration when preparing and issuing offering disclosures. This recent guidance underscores the need for companies to take particular care during periods of volatility. 


On February 8, 2021, in In Re: Cardinal Health, Inc. Derivative Litigation, Judge Sarah D. Morrison of the U.S. District Court for the Southern District of Ohio denied a motion to dismiss filed by current and former directors of Cardinal Health Inc. (“Cardinal”), one of the largest pharmaceutical distributors in the country, in a derivative lawsuit brought by stockholders of Cardinal. Plaintiffs’ complaint alleges that members of Cardinal’s board of directors breached their fiduciary duties by passively managing the company despite alleged “red flags” concerning the company’s controls against the diversion of controlled substances beginning as early as 2007, and by failing to properly oversee the company and protect it from liability resulting from the opioid crisis.  

In seeking dismissal, defendants highlighted that plaintiffs had not made a pre-suit demand, and argued that the complaint failed to adequately plead that such a demand would have been futile. Much like Delaware law, under Ohio law a stockholder must either make a pre-suit demand or plead facts showing that demand is excused, including on grounds of futility (e.g., where a majority of the company’s directors face a “substantial likelihood of liability” from the claims). Under Ohio law, a director can be liable for breach of fiduciary duty in a failure of oversight case if a plaintiff shows that the director ignored “red flags” that were actually brought to his or her attention—a standard comparable to the Delaware case law flowing from In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996). Defendants argued that the complaint failed to allege that any of the individual defendants had actual knowledge of any “red flags” or stood to gain anything by engaging in the alleged wrongdoing. 

 The court disagreed. It held that the complaint alleged sufficient facts—with the help of pre-suit information plaintiffs obtained from the company under Ohio’s books and records statute—supporting an inference that the individual defendants had actual knowledge of “red flags” related to Controlled Substances Act compliance. For example, the complaint highlighted at least 53 instances in which the board or one of its committees met to discuss, or were informed of, important information concerning compliance risks or other issues attendant to Cardinal’s distribution of opioids. Plaintiffs contend Cardinal’s Board failed to heed these warning signs and continued to permit the Company to make sales of opioids to retailers without ensuring compliance with federal laws and regulations, which ultimately made the Company the target of more than 1,000 lawsuits alleging knowing participation in the opioid epidemic. 


In response to defendants’ arguments that plaintiffs failed to allege that defendants had a motive to violate their fiduciary duties, the court noted that motive is not a requirement in a failure of oversight case, but merely one possible component of a properly pleaded complaint. The court also held that plaintiffs’ allegations against defendants as a group were sufficient, as the complaint was supported by Cardinal’s books and records and, read holistically, provided sufficient notice as to which individual defendants were on notice of “red flags,” and when. Finally, the court held that it could not infer, at the pleading stage, that defendants responded appropriately to the red flags, observing that the “evidence may bear out that the Individual Defendants acted in accordance with their fiduciary duties, but all reasonable inferences must be drawn in favor of plaintiffs at this stage in the litigation.”


On February 4, 2021, in United States Securities and Exchange Commission v. Volkswagen Aktiengesellschaft et al., Judge Charles R. Breyer of the U.S. District Court for the Northern District of California granted the SEC’s motion to strike Volkswagen’s (“VW”) “unclean hands” affirmative defense, as asserted in VW’s amended answer. 

Filed in March 2019, the SEC’s civil enforcement action involves securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Section 17(a)(2) of the Securities Act of 1933. The complaint alleges that VW and its former CEO violated the federal securities laws by selling corporate bonds and asset-backed securities without disclosing that VW was engaged in a fraudulent scheme to sell diesel-powered vehicles with “defeat devices,” designed to evade emissions test procedures. Specifically, the SEC alleges that, prior to VW’s conduct becoming publicly known in September 2015, VW sold over $8 billion in bonds without disclosing the existence of the “defeat devices,” or U.S. regulatory investigations into VW’s conduct, or the scope of the Company’s legal exposure. 

VW filed an amended answer, in which it asserted an “unclean hands” defense predicated primarily upon the SEC’s failure to bring suit until March 2019, despite its much earlier knowledge of the conduct at issue and the voluminous litigation that flowed from it. VW asserted that this delay was unreasonable and prejudicial, including because the delay inflated VW’s potential pre-judgment interest exposure. 

The SEC moved to strike the “unclean hands” defense, arguing that VW failed to meet the “high bar” necessary to demonstrate that the SEC engaged in egregious misconduct prior to filing the lawsuit. The SEC also argued that VW had suffered no prejudice due to its delay, and countered that it would suffer prejudice if forced to litigate VW’s unclean hands defense. 


The court granted the SEC’s motion to strike. Assuming, without deciding, that a private party defendant may assert an unclean hands defense in an SEC enforcement action, the court held that undue delay, without more, is insufficient to establish unclean hands. The court further held that the company’s allegations that the SEC “acted wrongfully, willfully, in bad faith, [and] with gross negligence” were mere legal conclusions devoid of required factual support.


On February 1, 2021, in Schillinger Genetics, Inc. v. Benson Hill Seeds, Inc., Vice Chancellor Zurn of the Delaware Court of Chancery ruled that a buyer in a private M&A transaction had breached the parties’ Asset Purchase Agreement (“APA”) by failing to deliver a required closing statement as part of the purchase price adjustment process until months after the statement was due. The court determined that the buyer waived the right to a post-closing adjustment in its favor as a result of the breach. 

Schillinger Genetics, Inc. (“Schillinger”)—the seller—is an Iowa corporation that previously engaged in soybean research and breeding. Benson Hill Seeds, Inc. (“Benson Hill”)—the buyer—is a Delaware-incorporated “crop improvement company.” The parties’ dispute arose out of a transaction through which Benson Hill acquired substantially all of Schillinger’s assets in exchange for $14,000,000, subject to certain adjustments. The post-closing adjustment process contemplated that Schillinger would provide an “estimated closing statement” containing estimates of its accounts payable at closing, and Benson Hill would provide its own closing statement within 90 days of closing. Under the agreement, Schillinger was afforded 20 days after receipt of the closing statement to submit a notice of dispute should it disagree with Benson Hill’s calculations. Benson Hill failed to submit its closing statement until two months after the deadline, and after repeated inquiries from Schillinger. The APA specified that if Schillinger did not submit a dispute notice within 20 days after receiving the closing statement, Schillinger would be deemed to have accepted Benson Hill’s closing statement, but the APA was silent about the consequences if Benson Hill were to miss the closing statement deadline. The court held that the appropriate remedy for Benson Hill’s delay was the forfeiture of its right to a post-closing adjustment, reasoning that to hold otherwise would reward Benson Hill’s breach.


Morgan Mordecai

Viktors Dindzans
John Barker