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Northern District Of California Grants Motion To Dismiss With Prejudice Securities Act Claims Against Technology Company, Holding Plaintiffs Failed To Adequately Plead Misleading Disclosures In Company’s Registration Statement Related To Merger
12/21/2021On December 14, 2021, Judge Beth Labson Freeman of the Northern District of California granted a motion to dismiss claims brought under Sections 11 and 15 of the Securities Act of 1933 (“the Securities Act”) against a technology company (“the Company”), its controlling shareholder, and several of the Company’s and the controlling shareholder’s officers and directors. Costanzo v. DXC Tech. Co., N.D. Cal., No. 19-cv-05794 (Dec. 14, 2021). Plaintiffs alleged defendants made false and misleading statements, in the Company’s prospectus and registration statement (the “Registration Statement”), regarding expected budget cuts in light of an alleged internal goal at the Company to cut more than double the disclosed amount. The Court granted defendants’ motion to dismiss plaintiffs’ Third Amended Complaint (“TAC”) without leave to amend, holding that plaintiffs’ addition of allegations of purported statements by confidential witnesses were insufficient to overcome the deficiencies in their pleadings.
Plaintiffs alleged the Company, formed in 2017 following the merger of two technology companies (the “Merger”), filed a Registration Statement in connection with the Merger that contained false and misleading statements regarding the Company’s “workforce optimization plan.” Plaintiffs alleged defendants publicly disclosed that they “expected cost cuts of approximately $1 billion during the first year following the Merger,” even though there were internal plans to cut $2.7 billion during the first year. To address pleading deficiencies found by the Court in plaintiffs’ prior complaints, plaintiffs added allegations in their TAC based on purported statements by confidential witnesses to bolster their allegation that the Company in fact had a firm $2.7 billion cost-cutting goal for the first year following the merger. Specifically, one confidential witness allegedly indicated that a high-level company executive “expected” managers to meet the $2.7 billion budget cut goal for the first year following the merger and that it was “not merely aspirational.” The confidential witness purportedly stated that the budget cut goal was discussed with top executives at regular executive committee meetings and that the goal was tied to executive bonuses. Plaintiffs further alleged that two additional confidential witnesses purportedly stated that the $2.7 billion budget goal resulted in negative consequences for the Company and reduced the workforce “too fast and too much,” leading to issues with customer satisfaction.
The Court first considered the sufficiency of plaintiffs’ additional allegations regarding the $2.7 billion cost cutting goal, noting that plaintiffs only addressed one deficiency—their failure to adequately allege the $2.7 billion goal was more than aspirational. The Court observed that despite including additional allegations based on purported statements from confidential witnesses, plaintiffs failed to address “one of the main deficiencies” in failing to plead “that [the Company] was ever on target to cut more than [the stated] $1 billion in the first year.” In failing to adequately allege facts showing that the $2.7 billion budget cut target was the “real” target, plaintiffs could not demonstrate that the $2.7 billion was anything more than a “business decision without any consequence to the investors.” According to the Court, it “remain[ed] skeptical that an aggressive internal cost-cutting goal—even a ‘serious,’ ‘real,’ or ‘concrete’ one—is sufficient on its own to state a claim that a more modest publicly disclosed cost-cutting expectation was false or misleading,” as a “goal is not the same as an expectation.” The Court added that a “company can have an ambitious internal target and disclose publicly that it expects to meet a more modest target without misleading investors,” recognizing that this is “an important tool in [a company’s] motivational arsenal.”
The Court further rejected plaintiffs’ argument that because Section 11 of the Securities Act imposed a strict liability standard on an issuer, it did not matter whether the Company “actually cut more than the disclosed $1 billion, because the existence of the $2.7 billion goal was enough to render the $1 billion figure misleading on its own.” The Court disagreed, finding that “the size of [the Company’s] cost cuts was significant because it showed that [the Company’s] publicly disclosed cost-cutting expectations were accurate—not false or misleading,” and noted that plaintiffs had not supported their “seemingly novel theory of liability” with case law. Plaintiffs further argued that purported statements by one confidential witness were sufficient to support their claims that defendants’ other statements in the Registration Statement concerning the importance of the size and scale of the Company’s workforce were false or misleading given the Company’s intentions to cut its workforce. The Court likewise disagreed, holding that “[a]bsent factual allegations that [the Company] cut more than it said it would,” plaintiffs failed to adequately plead these claims. Accordingly, although the Court found that plaintiffs adequately pled that the $2.7 billion target was in existence at the time of the Registration Statement, the Court held that plaintiffs failed “to adequately allege that [the existence of this goal] rendered false or misleading any statements in the Registration Statement given the lack of facts supporting [the Company’s] achievement of that goal, or failure to meet its publicly disclosed expectations.”
The Court further agreed with defendants that certain alleged misstatements, such as the Company’s stated expectation that it “will produce first-year synergies of approximately $1.0 billion post-close,” were protected forward-looking statements under PSLRA’s Safe Harbor. The Court also agreed with defendants that statements in the Registration Statement regarding “synergies,” a “turnaround plan,” and hiring practices were non-actionable opinion statements, emphasizing that the $2.7 billion goal was “not the same as an expectation” and further that it is “implausible that investors would have come to the conclusion that the Company “did not have an aggressive internal cost-cutting goal.”
The Court further found that plaintiffs had not alleged that the Company had a business strategy in place to “massively reduce” key personnel beyond the disclosed $1 billion in cuts, and that plaintiffs only alleged a $2.7 billion cost cutting goal that was never met, which was “insufficient on its own to render the challenged risk disclosures false or misleading.” The Court also agreed with defendants that statements concerning the turnaround plan were non-actionable puffery, stating that it was “not convinced that the ‘turn-around plan’ statement [was] now magically capable of objective verification because of new allegations in the Third Amended Complaint.”
Plaintiffs also alleged violations of Items 303 and 503(c) of SEC Regulation S-K. The Court, however, found that plaintiffs did not plausibly allege that the $2.7 billion cost cutting goal was a known “trend” considering plaintiffs did not allege that defendants met that goal, and that the “mere existence of an internal goal” does not make it “reasonably likely” that it will be achieved.
Having found that plaintiffs failed to state a claim under Section 11, the Court also held that plaintiffs’ Section 15 claim similarly failed.
