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Southern District Of New York Dismisses With Prejudice Claims Against Pharmaceutical Company Alleging Material Misstatements And Omissions In A Proxy Statement
01/09/2024On December 28, 2023, Judge Jed S. Rakoff of the United States District Court for the Southern District of New York dismissed a putative class action alleging that a biopharmaceutical company (the “Company”) and certain of its officers and directors violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and Rule 14a-9 based on alleged misstatements in a proxy statement (the “Proxy”) filed in connection with the acquisition of the Company by its controlling shareholder. Zappia v. Movant Scis. Ltd., No. 23-cv-8097 (JSR) (S.D.N.Y. Dec. 28, 2023). Plaintiff alleged that the law firm engaged by the Company’s special committee (the “Special Committee”) to consider the acquisition had a conflict of interest and that this rendered the Proxy misleading. The Court held that the complaint failed to allege the existence of a conflict or a misrepresentation.
The Company, which develops drugs to treat hormone-sensitive conditions, was acquired by its majority shareholder (the “Acquiring Company”), which in turn is a wholly owned subsidiary of a Japanese pharmaceutical company. Plaintiff alleged that the Proxy misrepresented that the law firm hired to represent the Special Committee had an “absence of conflicts” and was “independent.” According to plaintiff, the Acquiring Company and its parent pharmaceutical company were part of “network[] of Japanese businesses connected by cross-shareholdings and informal business relations, which typically feature[s] a member bank that lends funds to other companies in the [network].” Plaintiff claimed there was a conflict because the law firm represented companies and the member bank in that “network.”
The Court held that plaintiff failed to adequately allege there was a conflict of interest. First, while plaintiff alleged that the law firm represented certain affiliates of the Acquiring Company, there were no allegations that the law firm ever represented the Acquiring Company itself or its corporate parent. Under Second Circuit case law, corporate “affiliates should not be considered a single entity for conflicts purposes based solely on the fact that one entity is a wholly owned subsidiary of the other, at least when the subsidiary is not otherwise operationally integrated with the parent company.” The entities at issue were even further removed because some of the entities had “just a few percent ownership” in a majority owner of the Acquiring Company’s corporate grandparent and there were no plausible allegations that any of the entities were “operationally integrated” with the Acquiring Company in any meaningful way. Second, the Court found that plaintiff’s own allegations belied its claim of a conflict because the complaint detailed the negotiation process through which the Special Committee, advised by the law firm, increased the Acquiring Company’s bid from an initial offer of $22.75 per share to $27 per share. Third, the complaint’s factual allegations rendered implausible the inference that the law firm’s conflict was the reason that the Special Committee did not solicit bids from other potential acquirers. The Proxy stated that the Special Committee did not reach out to other potential bidders because, among other reasons, the Acquiring Company, as the Company’s majority shareholder, would be unwilling to support a sale to a third party. The Court noted that plaintiff’s dismissal of this reason and others was “speculative.”
Next, the Court held that a reasonable investor would not have found the Proxy to be misleading in light of all the other information available at the time. The complaint did not allege, for example, that the law firm’s representation of the Acquiring Company’s corporate affiliates was “kept secret or unknown to the public at the time of the proxy statement.” To the contrary, plaintiff knew of the other representations “because it was reasonably available to the public.”
Finally, the Court held that the complaint failed to allege any plausible facts supporting a claim of negligence under Rule 14a-9 and relied only on a “threadbare recital” of the elements of the claim. The Court also rejected plaintiff’s request to infer negligence from the absence of an express statement in the Proxy that the Special Committee inquired into the law firm’s conflict of interest, in contrast to a statement of such consideration with respect to another law firm. The Court held that plaintiff’s suggested inference was implausible and that “applying ‘judicial experience and common sense,’ . . . [the complaint] fail[ed] to show anything more than a remote, theoretical possibility that the special committee acted negligently rather than accidentally or reasonably.”
This was plaintiff’s second complaint. Because the Court found that plaintiff could not identify any additional facts to include in another amended complaint, the complaint was dismissed with prejudice.
