On March 19, 2020, the District Court for the District of Delaware dismissed merger litigation against Lionbridge Technologies, Inc., its former directors and officers, and buyer H.I.G. Capital L.L.C. in Laborers’ Local #231 Pension Fund v. Cowan et al. by granting defendants’ summary judgment motion in full. Plaintiffs, a class of former shareholders of Lionbridge, alleged violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, including that the proxy statement used to gain stockholder approval of the merger contained false statements and omissions. Goodwin represented the individual defendants. This decision highlights the dual importance of strong disclosures, including appropriate disclaimers, in public company filings surrounding public M&A transactions, and the importance of developing a factual record that shuts down securities class action plaintiffs’ reflexive claims of improper motive and corporate wrongdoing.
In 2016, Lionbridge formed a special committee comprised of three independent directors to consider the Company’s sale. On December 12, 2016, Lionbridge announced that it had reached an agreement, subject to stockholder approval, for Lionbridge to merge into an HIG subsidiary in exchange for $5.75 cash per share. After the announcement, Lionbridge embarked on a forty-five day go-shop process to confirm that there was no superior offer. Although Lionbridge engaged with twenty-seven additional buyers, no offers were made. Lionbridge then solicited votes through its January 2017 proxy statement, in which it stated that the Board unanimously recommended that stockholders vote in favor of the merger and that the Board considered the fairness opinion of the Company’s financial advisor, Union Square, a “positive reason” for the transaction.
Plaintiffs brought claims based on various statements, many of which were dismissed earlier in the litigation. However, the court’s initial ruling allowed a narrow claim to survive: whether the proxy statement’s claim that Union Square’s opinion as to the fairness of the merger was a “positive reason” in the eyes of the Board to vote for the merger was actionable under the federal securities laws. After a lengthy discovery process, including ten depositions of former directors and officers, the court found significant that “the Lionbridge directors uniformly testified that they believed the Union Square opinion was a positive reason supporting their decision.”
The court also agreed with defendants’ arguments that the proxy statement language was neither false nor misleading, rejecting plaintiffs’ contention it omitted a material fact that the financial projections on which Union Square relied did not account for future acquisitions. Rather, the court found the disclosure language unambiguous: “the Proxy disclosed that any future acquisitions (anticipated or not) were not considered in making the [financial projections] on which Union Square relied in forming its fairness opinion.” The court then granted judgment for all defendants that this language and the facts developed could not support a claim that the omission of acquisitions, in light of the unambiguous disclosure that they were omitted, was materially misleading.
The court had also denied plaintiffs’ earlier motion to file a further amended complaint on the basis of futility. Plaintiffs’ had moved to add claims that the projections relied on by Union Square were substantively misleading. In denying leave, the court interpreted and applied precedent from the Third Circuit Court of Appeals concerning these disclosures. The proxy statement disclosed explicitly that the projections were included “solely” to provide stockholders with the same information Lionbridge’s directors and financial advisors reviewed. The court explained: “the only relevant statement of fact about the projections is that the projections were made available to the special committee, Lionbridge' s board of directors, and Union Square.” The court then held that, because the proxy statement projections were the same projections the Board and financial advisor reviewed, there was no false or misleading statement.
DELAWARE SUPREME COURT REVERSES COURT OF CHANCERY DECISION INVALIDATING FEDERAL FORUM PROVISIONS
On March 18, 2020 the Delaware Supreme Court upheld the validity of charter provisions requiring claims under the Securities Act of 1933 be brought in federal court in Salzberg et al. v. Sciabacucchi under Section 102(b)(1) of the Delaware General Corporation Law. In Salzberg, Blue Apron Holdings, Inc., Roku, Inc., and Stitch Fix, Inc. each adopted federal forum provisions in their corporate charters, selecting federal district courts as the exclusive forum for any 1933 Act claims brought by shareholders, prior to their 2017 public offerings. The appellee bought shares in each company in their respective public offerings and then sought a declaratory judgment in the Court of Chancery that federal forum provisions are invalid. In December 2018, the Court of Chancery agreed, holding federal forum provisions invalid on the grounds that the constitutive documents of a Delaware corporation cannot bind a plaintiff to a forum when the claim does not involve rights or relationships established under Delaware law. The Court of Chancery’s decision came in the wake of Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), which held that claims under the 1933 Act could be brought in either state or federal court, but could not be removed to federal court if initially filed in state court.
In reversing the Court of Chancery, the Delaware Supreme Court pointed to Section 102(b)(1) of the DGCL as expressly authorizing federal forum provisions. The court held that Section 102(b)(1) authorizes two types of provisions – “any provision for the management of the business and for the conduct of the affairs of the corporation,” and “any provision creating, defining, limiting, and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders,….if such provisions are not contrary to the laws of this State.” The Delaware Supreme Court also found that such provisions are valid as a matter of Delaware public policy, as prior precedent instructs that “Section 102(b)(1) bars only charter provisions that would achieve a result forbidden by settled rules of public policy,” because stockholder-approved charter amendments should be respected as a matter of public policy and because the DGCL allows businesses “immense freedom” to adopt terms most appropriate for their governance and organization. In so holding, it dismissed appellees’ argument that 2015 amendments to the DGCL as having impacted Section 102(b)(1) and it characterized the Court of Chancery’s analysis as having improperly restricted the scope of Section 102(b)(1) in a departure from the Delaware Supreme Court’s precedent.
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CENTRAL DISTRICT DENIES CERTIFICATION IN SECURITIES CLASS ACTION AGAINST FAT BRANDS IPO ALLEGING OMISSION OF BANKRUPTCY FILINGS
On March 13, 2020, the Central District of California denied class certification in connection with a public offering in Vignola v. FAT Brands, Inc., on the basis that the predominance requirement was not met as to whether class members had knowledge of certain bankruptcy filings and the delisting of FAT Brands’ parent group.
Plaintiffs’ sought class certification for all purchasers of FAT Brands securities through its October 23, 2017 initial public offering on the basis that defendants and its underwriters had omitted the 2009 bankruptcy of a related entity, Fatburger, and subsequent delisting its parent entity, Fog Cutter Capital Group. Defendants contended that the bankruptcy and delisting were widely reported and known throughout the period leading up to FAT Brands’ IPO and that as a result knowledge was an individualized issue.
In siding with the defendants, the court contrasted the underlying allegations with the more common situation in which the alleged misstatements or omissions relate to the IPO company’s internal financial data or other non-public information where lack of knowledge for the proposed class can be easily established. The court noted plaintiffs had not offered a viable method of testing knowledge on a class-wide basis. The court was unpersuaded by plaintiffs’ proposed methods of identifying a representative sample of class members, basic interrogatories, surveys, or sampling because of the likelihood that defendants would need to depose purchasers.
Ultimately, the court stated that it is plaintiffs’ burden and that they had failed to demonstrate common issues predominate.
DISTRICT COURT GRANTS PARTIAL MOTION TO DISMISS 10(B) AND 20(A) CLAIMS AGAINST QUALCOMM INVOLVING COMMITTEE ON FOREIGN INVESTMENT
On March 10, 2020, the Southern District of California granted Qualcomm’s motion to dismiss in part and denied it in part in Camp v. Qualcomm, Inc. The plaintiffs brought claims, on behalf of a class who bought Qualcomm stock between January 31, 2018 and March 12, 2018, under Sections 10(b) and 20(a) of the Securities Act for alleged misstatements and omissions by Qualcomm related to its potential acquisition by Singapore chipmaker Broadcom.
Plaintiffs alleged defendants’ made material omissions and misstatements related to its failure to disclose that it had filed a secret, voluntary request with the Committee on Foreign Investment in the United States to investigate Broadcom and whether a transaction between the two entities would threaten to impair national security. CFIUS reviews transactions, typically through a joint notice by both companies, over the course of thirty days, forty-five days if it decides to investigate, and then makes recommendations to the President concerning the transaction. The President then has fifteen days to act on the recommendation. Defendants filed their voluntary request on January 29, 2018, after several months of Broadcom’s efforts to engage in a takeover of Qualcomm. Plaintiffs alleged that the failure to disclose the CFIUS request was a material omission. Plaintiffs also alleged that defendants repeated statements that it was ready and prepared to negotiate a deal with Broadcom were materially misleading in light of the CFIUS request and the “real risk” that CFIUS could stop any such deal.
The court rejected plaintiffs’ arguments as to a number of defendants’ allegedly misleading statements made after January 31, 2018 because, under Ninth Circuit precedent, statements are not actionable under 10(b) where made after the plaintiff purchased the relevant stock.
The court found plaintiffs had also inadequately pled both scienter and loss causation. As to scienter, the court stated that plaintiffs’ allegations of motive and opportunity were insufficient to establish scienter. Furthermore, the court observed that certain statements made by defendants about the possibility of regulatory scrutiny and involvement of numerous government agencies created the contrary inference that defendants did not think disclosure of the CFIUS concerns was required. As to loss causation, the court rejected plaintiffs’ argument that a mere 4% drop in Qualcomm stock over two days satisfied the loss causation requirement that the “price fell significantly after the truth became known.” The court also noted that the drop in price was more likely related to an intervening event, CFIUS and the President’s action to block any potential deal with Broadcom, than any statements or omissions by Qualcomm.
The court also granted defendants’ motion to dismiss as to plaintiffs’ Section 20(a) claims given the insufficiency as to plaintiffs’ complaint as to Section 10(b).
Importantly, the court denied defendants’ motion to dismiss as to plaintiff’s theory that defendants engaged in a scheme to mislead investors. It held that “[b]y filing the notice [to CFIUS] unilaterally and failing to disclose this action to investors, plaintiffs have adequately pled a theory of a scheme to mislead.” Although defendants dispute that this was anything other than an effort on their part to gain insight as to whether CFIUS clearance would be an issue, the court held this was a factual dispute. In granting the motion in part, and denying in part, the court granted plaintiffs leave to file a second amended complaint.
COURT DISMISSES COMPLAINT AGAINST CLOUD PLATFORM PROVIDER NUTANIX FOR FAILURE TO PLEAD WITH SPECIFICITY
On March 9, 2020, the District Court for the District of Northern California dismissed a securities class action against Nutanix, Inc. for failing to allege any public statements were false or misleading and failing to allege scienter in Scheller v. Nutanix.
Plaintiffs, on behalf of a class of purchasers from November 30, 2017 through May 30, 2019, brought a securities class action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against Nutanix, an enterprise cloud platform provider, and two of its chief officers for false and misleading statements which the court placed into several categories: i) Nutanix’s investments in “lead generation”; ii) potential hiring freezes of sales personnel; iii) Nutanix’s relationship with a key client, Dell, Inc.; iv) declining product quality; and v) and an alleged practice of “pulling in” orders to conceal its declining sales pipeline. In support of its allegations, plaintiffs relied heavily on the statements of several confidential witnesses, including former account and operations managers for Nutanix.
The court rejected many of plaintiffs’ claims as lacking specificity and for failing to allege how the statements were misleading. It also found, in many instances, statements were protected by the safe harbor provisions of the Private Securities Litigation Reform Act or were non-actionable puffery. It specifically noted that, as to the allegations about investments in lead generation, plaintiffs’ allegations were so deficient that they did not define key terms as “lead generation” and “pipeline,” how those terms differ from “sales and marketing,” and what investors would have understood those terms to mean.
In addressing plaintiffs’ claims concerning misrepresentations about a secret hiring freeze, the court looked to the underlying press releases and quarterly filings attached to the complaint, which directly contradicted plaintiffs’ allegations that hiring was not occurring.
As to both the claims regarding Nutanix’s relationship with Dell and Nutanix product quality, the court noted that plaintiffs failed to point to statements explicitly related to either. The court disagreed that Nutanix had misleadingly downplayed the changes to its relationship with Dell because the statements it relied on for this theory related to relationships more broadly with original equipment manufacturers, and not just Dell, and that the statements that did mention Dell “recognized that there was a possibility that Dell would sell its own products[.]” Likewise as to plaintiffs’ claims regarding product quality, the statements plaintiffs put forward as misleading regarding product quality were not even explicitly related to product quality, but rather customer demand and increased customer base.
Finally, the court rejected any allegations of a pull-in scheme, not only for failing to provide specific details but also because the only evidence plaintiffs put forward were the statements of a former employee who was responsible for managing existing customer sales and thus of little weight. The court found plaintiffs’ scienter allegations likewise lacking in specificity. Plaintiffs made no allegations that the individual defendants knew the sales pipeline was drying up or that individual trading was particularly specific. The court’s decision underscores that plaintiffs cannot rely on confidential witnesses alone or cherry-pick from public disclosures to survive a motion to dismiss in lieu of pleading as to how statements were misleading with specificity.