Southern District Of New York Dismisses Putative Class Action Against Recreational Vehicle Manufacturer For Failure To Adequately Allege Material Misrepresentations
On July 20, 2020, Judge Denise Cote of the United States District Court for the Southern District of New York dismissed with prejudice a putative class action asserting claims under the Securities Exchange Act of 1934 against a manufacturer of recreational vehicles and certain of its executives. In re Textron, Inc. Sec. Litig., No. 19-CV-7881 (DLC), 2020 WL 4059179 (S.D.N.Y. July 20, 2020). Plaintiff generally alleged the company made misleading statements suggesting that it was successfully integrating an acquired company when in fact it allegedly was struggling to do so. Id. at *3. The Court held that none of the alleged misstatements were materially false or misleading.
The Court observed that plaintiff’s claims were based on four categories of alleged misstatements: (1) the target company’s inventory; (2) the target company’s anticipated performance; (3) the target company’s integration into the acquiring company; and (4) the value of goodwill and other intangible assets of the acquiring company’s own specialized vehicles business line. See id. at *10. The Court then explained why each of these categories of misstatements was not actionable. With respect to statements about the target company’s inventory, plaintiff alleged that the company made misleading statements suggesting that it was clearing out the target company’s inventory of older vehicles, when in fact the number of vehicles of older model years (2015 through 2017) at dealerships had not materially changed over the period in question. Id. The Court observed that this argument failed because it assumed that the model years 2015 through 2017 were interchangeable, and a statement that the company was clearing “older” inventory might still be true if, for example, the 2015 and 2016 model years were being sold even as the company pushed 2017 inventory out to dealers. Id. at *11.
With respect to statements about the target company’s anticipated performance—namely, that the acquisition would be accretive in 2018, that the company was “seeing profit improvement” at the target company, and that the company “would continue to expect to see incremental margins … improving as the year goes on”—the Court explained that these were forward-looking statements which were not actionable because plaintiff failed to allege that they were false when made. Id. The Court also noted that these statements were accompanied by meaningful cautionary language, and that certain of these statements were non-actionable statements of opinion by the company’s executives, as they were prefaced with the phrase “I think.” Id.
With respect to challenged statements that the target company’s integration was “successful” and that a particular restructuring plan was “substantially completed,” the Court held that these statements were not materially misleading. Id. at *12. While plaintiff argued that the first statement suggested that the integration was substantially complete, the Court observed that on the same call the company indicated that the integration “continues” and there was “obviously still work to do in finishing the integration.” Id. The Court also rejected plaintiff’s allegation that the company’s statement that a restructuring plan was “substantially completed” was misleading because there was allegedly work to be done to reduce redundant departments and unsold inventory. The Court noted this specific statement appeared in a note to the company’s financial statements about “Special Charges,” and in context meant that the company had spent the majority of the funds it had allocated for the integration project, for which plaintiff alleged no facts to the contrary. Id.
Finally, the Court addressed plaintiff’s allegations that the company’s characterization that a decline in profit was “not something like an impairment of goodwill or intangible” was misleading because the company stated in a filing one week later that it was “reasonably possible that an impairment loss of certain long-lived assets could be recognized,” and the company did ultimately recognize an impairment. Id. *7-8. Read in context, the Court held, the challenged statement related to the company’s accounting practices and was “not a guarantee that the poor third-quarter results … would not result in an impairment to goodwill.” Id. at *12. The Court concluded that plaintiff failed to plead facts suggesting that the company’s failure to make a disclosure a week sooner regarding the potential risk of an impairment amounted to a fraudulent statement. Id. at *13.