Southern District Of New York Grants Pharmaceutical Company’s Motion To Dismiss Putative Class Action Alleging Misrepresentations About Contingent Value Right Securities
On March 1, 2023, Judge Jesse Furman of the United States District Court for the Southern District of New York granted a motion to dismiss a putative class action against a pharmaceutical company (the “Company”) and its executives (the “Individual Defendants”), alleging violations of Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”), Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (“Securities Act”), and SEC Rules 10b-5 and 14a-9. In Re: Bristol-Myers Squibb Co. CVR Securities Litigation, No. 1:21-cv-08255 (S.D.N.Y. Mar. 1, 2023). Plaintiffs alleged that the Company secretly “slow rolled” the Food and Drug Administration (“FDA”) approval process for certain medications and made misrepresentations about its efforts to obtain timely FDA approval. Plaintiffs alleged that the Company did so to avoid having to pay $6.4 billion to the holders of Contingent Value Right securities (“CVRs”), which would expire and be worthless if the drugs were not approved by particular deadlines (the “CVR Deadlines”). The Court dismissed the complaint in its entirety but granted leave for plaintiffs to replead their claims under Section 10(b) and 20(a) of the Exchange Act.
A CVR is a security payable upon the occurrence of a specified future event. According to plaintiffs, the Company’s CVRs were contingent upon approval by the FDA of three drugs, which were under development by the Company’s acquisition target by the CVR Deadlines. Plaintiffs allege that, if the CVR Deadlines were met, the Company would be obligated to pay $6.4 billion to the holders of the CVRs. Plaintiffs further allege that, because one of the three drugs was approved 36 days after the CVR Deadline, the CVRs expired and became worthless. Plaintiffs claim that despite the FDA granting priority review for the drug’s application and setting a target approval date about four-and-a-half months before the drug’s CVR Deadline, the omission of “basic data” from the final report submitted by the Company and eventual discovery of multiple regulatory violations in the Company’s manufacturing facilities, led to delays and ultimately to a missed CVR Deadline and the corresponding loss of value of the CVRs. Plaintiffs allege that the Company violated the securities laws by making misleading statements, both before and after the merger, about the timing of FDA approval, and specifically, the “diligent” efforts the Company would make to meet the CVR Deadlines, the likelihood that the CVR Deadlines would be met, and the purported value of the CVRs.
The Court first addressed plaintiffs’ claims under Section 10(b) of the Exchange Act and Rule 10b-5, dismissing these claims because the complaint failed to state with particularity facts giving rise to a strong inference of scienter. Specifically, the Court held that plaintiffs failed to allege: (i) facts showing that defendants had both motive and opportunity to commit the fraud or (ii) facts constituting strong circumstantial evidence of conscious misbehavior or recklessness. With respect to “motive and opportunity,” the Court held that plaintiffs failed to allege any facts demonstrating that the individual defendants benefitted from the proposed fraud in any “concrete and personal way,” noting that plaintiffs’ only evidence was the size of the alleged fraud, a factor that can only be used to “buttress” other allegations of scienter. The Court found that the absence of evidence that the Individual Defendants attempted to purchase more shares of the Company’s stock during the CVR period tended to undermine plaintiffs’ allegations. The Court also found unpersuasive the argument that scienter could be inferred because the Company chose an “unusual” all-or-nothing payout structure for the CVR or because the Company refused to repurchase CVR shares when it could have done so below the payout price.
The Court similarly found unavailing plaintiffs’ attempt to raise a strong inference of scienter with “circumstantial evidence of conscious misbehavior or recklessness.” Plaintiffs alleged that the Company “made ten missteps during the … approval process, including delays in filing and supplementing information with the FDA and not adequately preparing … manufacturing facilities for their inspections.” The Court, however, held these allegations to be insufficient because plaintiffs did not allege that any of the Individual Defendants knew about the purported missteps or the problems at the manufacturing facilities. The Court added that plaintiffs’ reliance on confidential witnesses (“CWs”) and experts to support their claims was not enough to “get them across the line” because the CWs were not alleged to have interacted with the Individual Defendants about the drug, and the experts could not opine on the state of mind of the Individual Defendants.
Finally, the Court was unpersuaded by plaintiffs’ attempt to raise a strong interference of scienter by claiming that the Individual Defendants knew or should have known about the approval process because getting the three drugs approved was a “core operation of the business.” The Court first noted that whether the “core operations” doctrine still applies in light of the Private Securities Litigation Reform Act (“PSLRA”) is an open question in the Second Circuit, with many courts finding that “[a]t best, core-operations allegations are ‘supplementary’—that is, they are not an independently sufficient means to plead scienter.” In any event, the Court emphasized that “courts have required that the operation in question constitute nearly all of a company’s business before finding scienter.” Because plaintiffs did not allege that approval of the drugs would implicate “nearly all” of the Company’s business, plaintiffs’ reliance on the core operations doctrine failed.
The Court also dismissed plaintiffs’ Securities Act claims, finding that the challenged statements in the Company’s joint proxy statement (“Joint Proxy”) were subject to the safe harbor provisions of the PSLRA that shield forward-looking statements from liability under the Securities Act. The Court noted that the Company’s “statements about FDA approval … are classically forward-looking because they address what [the Company] expect[ed] to occur in the future.” The Court held that the forward-looking statements were also “accompanied by meaningful cautionary language.” Specifically, the cautionary language in the Joint Proxy was “extensive and specific,” “substantive, and tailored to the risks involved.” Indeed, the Court emphasized that the Joint Proxy indicated that the probability of meeting the CVR Deadlines was only 45%—“which is to say that, at their inception, the probability of the CVRs expiring worthless was put at 55%.”
Although plaintiffs’ claims were dismissed, the Court granted leave for plaintiffs to replead their claims under Section 10(b) and 20(a) of the Exchange Act. With respect to plaintiffs’ other claims, the Court’s dismissal was with prejudice because the Court found that amendment was “unlikely to be productive.”