Securities Snapshot
April 6, 2021

Massachusetts Superior Court BLS Finds No Duty To Disclose Alleged Preliminary Merger Discussions

Massachusetts Superior Court BLS Finds No Duty to Disclose Alleged Preliminary Merger Discussions, Northern District of California Declines to Dismiss Oracle Fraud Class Action Suit, SCOTUS Hears Oral Argument in Goldman Sachs Class Certification Fight, Delaware Supreme Court Affirms Dismissal of Derivative Action Against Metlife.

On March 22, 2021, in Athru Group Holdings LLC v. SHYFT Analytics, Inc., et al., Judge Kenneth W. Salinger of the Business Litigation Session (BLS) of the Massachusetts Superior Court dismissed plaintiff Athru Group Holdings, LLC’s complaint in its entirety. The complaint alleged breach of fiduciary duties, fraud, breach of contract, and a violation of G.L. c. 93A against SHYFT Analytics Inc., Medidata Solutions Inc. and eleven other entity and individual defendants stemming from the 2018 merger between Medidata and SHYFT. The court’s dismissal decision rested on the court’s conclusion that there was no duty to disclose alleged preliminary discussions or negotiations of the merger of SHYFT and Medidata.

According to the complaint, Athru initially owned one-fifth of SHYFT and subsequently sold its stake for $0.75 per share to eleven of the defendants, including Medidata, pursuant to a stock purchase agreement. Six months later, Medidata paid $2.95 per share to buy all the capital stock and vested stock options of SHYFT that it did not already own. Athru contended that it would not have sold its stake in SHYFT if it had known of Medidata’s purported interest in purchasing SHYFT and/or that SHYFT was willing to be acquired.

With respect to Athru’s breach of fiduciary duty claims against two SHYFT directors, the court held that these claims failed because, among other reasons, the complaint did not adequately allege that either defendant had a fiduciary duty to disclose information related to Medidata’s purported preliminary interest in acquiring SHYFT, or SHYFT’s alleged acquisition interest, at the time that Athru sold its SHYFT shares. Given that SHYFT was a Delaware corporation, the court found that this issue was governed by Delaware law. The court explained that although a director’s duties of care and loyalty may require the director to disclose information in certain instances, there was no duty to disclose where purported discussions surrounding the merger were preliminary and the parties had not yet agreed to any material terms (such as price and structure of the transaction).

With respect to Athru’s fraud and misrepresentation claims, the court disagreed with Arthu’s primary contention that defendants who were parties to the stock purchase agreement committed fraud by failing to disclose the fact — allegedly “basic to” Athru’s agreement — of alleged interest in merging SHYFT into Medidata. The court distinguished “basic facts” that go to the essence of an agreement with those that may be important or material, finding that plaintiff failed to meet the requisite burden of establishing that the supposedly concealed “merger interest” facts were the former as opposed to the latter. Further, the court noted that, in this case, Athru had actually assumed the risk that SHYFT could be acquired after it sold its shares, as the stock purchase agreement expressly contemplated a future acquisition of SHYFT. Given its dismissal of the underlying fraud claims, the court also disposed of Athru’s Chapter 93A claim, which was “wholly derivative” of this tort claim. Finally, with respect to Athru’s breach of contract claims regarding a provision of the stock purchase agreement related to “future contingent considerations,” and, an alleged lack of contractually required access to information relevant to Athru’s calculations of the future contingent consideration, the court held that Athru could not bypass the agreement’s mandatory dispute resolution procedure that required either party challenging this provision to present the dispute to an accounting firm for resolution. Goodwin represented Medidata in connection with this successful motion to dismiss.

Northern District of California Declines to Dismiss Oracle Fraud Class Action Suit

On March 23, 2021, the Northern District of California granted in part and denied in part defendants’ motion to dismiss in City of Sunrise Firefighters’ Pension Fund, et al. v. Oracle Corp., et al. The court concluded that plaintiff adequately alleged a narrow omission-based theory of securities fraud against Oracle Corporation as a result of misleading statements surrounding the company’s declining revenues of its cloud services. However, the court dismissed with prejudice claims stemming from the same statements against two of the company’s executives.

In 2018, investors brought action in the Northern District of California against Oracle, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as Sections 20(a) and 20A against certain executives. The complaint alleged that Oracle’s revenues from sales of its cloud-related products and services were driven by “threats and extortive tactics” that “concealed the lack of real demand.” After Oracle disclosed that its cloud revenue growth was stagnant, analysts allegedly began to connect the company’s poor financial performance to its improper sales tactics, which plaintiffs claimed caused the company’s stock to decline by nearly 10%. An amended complaint was subsequently filed by an investor that sought to represent all investors who purchased the company’s stock between March 15, 2017 and June 19, 2018. Defendants moved to dismiss the suit in its entirety and the court agreed, concluding that the amended complaint did not adequately allege a motive to commit fraud, although it allowed plaintiff an opportunity to amend the complaint further to address the lack of specificity.

In February 2020, lead plaintiff Union Asset Management Holding, AG filed a second amended class action complaint (SAC) alleging that the company made fifty false and misleading statements about its declining growth in cloud sales. In moving to dismiss the SAC in its entirety, defendants argued that the alleged statements were either not false or misleading, or non-actionable. Although the court concluded that a number of statements made by Oracle describing its cloud product and services, as well the market’s potential growth rate, were protected under the PSLRA’s Safe Harbor provision because they were forward-looking and accompanied by meaningful cautionary disclosures, the court otherwise rejected defendants’ arguments. The court concluded that plaintiff “adequately pled a narrow omission-based theory of fraud” and that “[a]lthough some of the surviving statements pose a close call, the [c]ourt opts to allow them to proceed and be reviewed with the benefit of a more developed record.” 

In explaining its decision, the court emphasized that plaintiff’s omission-based theory was not based on a stand-alone duty by defendants to disclose allegedly coercive sales tactics but, rather, was based on statements made by defendants about Oracle’s cloud growth that “affirmatively created an impression of a state of affairs that differ[ed] in a material way from that one that actually exist[ed].” As to claims against two of the company’s executives, the court held that plaintiff’s claims failed because the facts did not demonstrate “fraudulent intent or deliberate recklessness.” The court explained that the allegations against these two executives were based on their knowledge of product defects rather than the sales practices of the company, which the court described as the “heart” of the plaintiff’s theory.

SCOTUS Hears Oral Argument in Goldman Sachs Class Certification Fight

On March 29, 2021, the United States Supreme Court heard oral arguments in Goldman Sachs Grp., Inc. et al., v. Arkansas Teacher Ret. Sys., et al., a case involving a challenge to certification of an investor class. A prior Securities Snapshot discussing the Supreme Court’s grant of certiorari in this case can be found here.

The case arises out of an SEC action against Goldman Sachs for its issuance of certain collateralized debt obligations (CDOs) prior to the subprime mortgage crisis. After the SEC commenced an enforcement action, Goldman’s stock price dropped 13% and investors brought suit. Plaintiffs alleged Goldman violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b) promulgated thereunder by making generic statements in SEC filings regarding its conflict procedures that artificially inflated Goldman’s stock price, resulting in losses after the SEC revealed alleged client conflicts in certain CDOs that Goldman structured and sold before the financial crisis.

Goldman brought this appeal over class certification in this decade-long litigation following a decision from Second Circuit affirming the district court’s rejection of Goldman’s efforts to rebut the presumption of classwide predominance articulated in Basic Inc. v. Levinson, 485 U.S. 224 (1988). Goldman petitioned for certiorari, asking the court to address two questions: first, whether a defendant may rebut the Basic presumption by pointing to the generic nature of the alleged misstatements, even though such evidence is also relevant to the substantive claim element of materiality; and, second, whether a defendant seeking to rebut the Basic presumption has only a burden of production or also the ultimate burden of persuasion.

At oral argument, the Justices noted that the parties had moved “towards the middle” since the Court had initially agreed to hear the case. Goldman no longer argued that generic statements made by the company could never be the basis of a securities fraud action, although it maintained that the Second Circuit erred in refusing to consider the generic nature of the company’s alleged misstatements. The investors seemed to agree that the generality of a statement should be considered in analyzing share price impact but contended the Second Circuit conducted its analysis properly regardless of whether it stated this specifically. The Justice Department (supporting neither party) urged the Court to vacate the Second Circuit’s decision merely to allow the court to clarify whether it considered the generic nature of the alleged misstatements or not during its price impact inquiry.

The Supreme Court case also focuses on whether the Second Circuit erred in finding that Goldman bears the ultimate burden of persuasion, or the duty to convince the court of its position, to sufficiently rebut the Basic presumption by disproving price impact. Goldman insisted that the Federal Rules of Evidence put the burden of persuasion on investors, though both the plaintiffs and the federal government agreed that Supreme Court precedent puts that burden on defendants. The Court is expected to rule on the matter by late June.

Delaware Supreme Court Affirms Dismissal of Derivative Action Against Metlife

On March 22, 2021, in In re Metlife Inc. Derivative Litigation, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s decision to dismiss a suit brought by shareholders of Metlife, Inc. related to the company’s pension annuity business. Plaintiffs alleged that the company’s directors and officers breached their fiduciary duties by failing to adequately oversee the operation of the company’s business, which resulted in millions of dollars in regulatory fines and restitution payments, in addition to a $5 billion loss in market capitalization.

A long-standing component of MetLife’s business was the undertaking of other companies’ fixed-benefit pension obligations that those companies would ultimately owe to their employees upon retirement. This operation was referred to as the “Pension Risk Transfer Business” and historically required MetLife to give notice by letter to employees about the benefits they were entitled to when the employees turned 65 and again when they turned 70. In such circumstances, the letter would be sent to the address provided by the employer. If the employee did not respond, MetLife would presume that the employee was dead and ineligible for benefits. However, many employees were still alive and had, for example, changed addresses. In December 2017, MetLife disclosed that it had identified weaknesses in its notice approach and would improve its ability to contact employees and determine their eligibility. The company also stated that it planned to “strengthen” its reserves in light of the issue, which could be “material to operations.”

Following the announcement, plaintiffs brought a derivative action against the company’s directors and officers, alleging that defendants failed to adopt sufficient procedures to identify employee beneficiaries in violation of their fiduciary duties. Defendants moved to dismiss the complaint under Rule 23.1, arguing that demand should have been made on the board of directors and, regardless, even if demand were excused, plaintiffs failed to state a claim upon which relief can be granted. Vice Chancellor Glasscock dismissed the action in August 2020, finding that the director defendants were protected by the exculpatory clause in MetLife’s corporate charter and that plaintiffs had failed to make specific allegations of non-exculpated bad faith. Likewise, the court rejected plaintiffs’ arguments that the board had disregarded “red flags.” 

After hearing oral argument earlier this month, the Delaware Supreme Court affirmed Vice Chancellor’s decision in a brief order. Specifically, the Delaware Supreme Court agreed that plaintiffs failed to sufficiently allege any non-exculpated bad faith.

Morgan Mordecai
Nicholas Reider

Dylan Schweers