Eighth Circuit Reverses Dismissal Of Securities Class Action Resulting From Merger, Finding Question of Materiality Of Alleged Misstatements And Omissions In Proxy Statement Could Not Be Resolved As A Matter Of Law
On March 1, 2019, the United States Court of Appeals for the Eighth Circuit reversed the dismissal of a class action arising from the merger of a biotechnical company (“Biotech Company”) and a cancer-diagnostics company (“Diagnostics Company”) against the Biotech Company, its former president, and the company that was formed by the merger (“Post-Merger Company”). Campbell v. Transgenomic, Inc., No. 18-2198, 2019 WL 983676 (8th Cir. Mar. 1, 2019). Plaintiffs, former shareholders of the Biotech Company, allege that defendants violated Sections 14(a) and 20(a) of the Securities Exchange Act (“Exchange Act”), and Rule 14a-9 promulgated thereunder, by providing a materially false and misleading proxy statement to shareholders that failed to accurately convey the value of the Diagnostics Company. Judge John M. Gerrard of the United States District Court for the District of Nebraska dismissed the case and held that the alleged misstatements and omissions were immaterial as a matter of law. Plaintiffs appealed and the Eighth Circuit reversed the judgment, holding that whether the alleged misstatements and omissions were material was a question for the trier of fact.
The Eighth Circuit first considered the allegations that omissions in the proxy statement were materially misleading. Plaintiffs alleged that the proxy statement failed to provide the Diagnostics Company’s projected net income and loss as well as certain expenses that could have allowed investors to independently calculate the net income and loss. The District Court found that the alleged omissions were not materially misleading because there was no obligation to disclose all financial figures, and the information already provided was done so “honestly.” The Eighth Circuit disagreed, noting that net income and loss can be particularly valuable information for investors and that the omission of this information here may have cast the Diagnostics Company “in a false light that was materially misleading.” Furthermore, the disclosure of the omitted figures could have “significantly altered the total mix” of information available to shareholders. The Court held that the question of the alleged omissions’ materiality was improperly resolved as a matter of law.
The Eighth Circuit also considered the allegations that certain statements in the proxy statement were materially misleading. Plaintiffs alleged that defendants ambiguously labeled a revenue table in a way that caused investors to believe it was in reference to the Diagnostics Company’s revenue, thus suggesting an inflated value. Defendants argued that a reasonable investor would be able to infer that the table referred to the Post-Merger Company based on context and references to other financial data in the proxy statement. The Eighth Circuit held that whether the allegedly ambiguous labeling was materially misleading could not be determined as a matter of law and would have to be addressed by a trier of fact.
Having found that plaintiffs adequately pleaded a primary violation under Section 14(a) of the Exchange Act, the Eighth Circuit held that plaintiffs’ allegations under Section 20(a) against the former president of the Diagnostics Company were also sufficient, and reversed the dismissal of that claim.