IN THIS ISSUE
Delaware Court of Chancery Awards Attorneys’ Fees After Gilead’s “Glaringly Egregious” Litigation Conduct; S.D.N.Y Grants Plaintiffs’ Partial Summary Judgment in Securities Class Action Against Perrigo; SPAC Investors Launch Putative Class Action Against Stable Road Over Alleged Misrepresentations Regarding Space Tech; S.D.N.Y Dismisses Putative Securities Class Action Over Related-Party Transactions.
DELAWARE COURT OF CHANCERY AWARDS ATTORNEYS’ FEES AFTER GILEAD’S “GLARINGLY EGREGIOUS” LITIGATION CONDUCT
On July 22, 2021, in Ramirez et al. v. Gilead Sciences, Inc., Chancellor Kathaleen McCormick awarded stockholder plaintiffs nearly $1.8 million dollars in attorneys’ fees and expenses in litigation brought against Gilead Sciences, Inc. following the company’s denial of stockholders’ requests under Delaware General Corporation Law Section 220 to inspect company books and records. “Although there is a fine line between glaringly egregious conduct and an aggressive litigation position, Gilead crossed the line in this case,” Chancellor McCormick wrote in her six-page letter opinion on the topic.
The information requests had arisen after multiple different lawsuits alleged, among other things, that Gilead used licensing agreements with rivals in an effort to slow down generic competition with its breakthrough HIV prevention drugs. In late 2019 and early 2020, several stockholders filed books and records demands to investigate possible wrongdoing. Gilead refused to provide any documents, forcing plaintiffs to file suit to enforce their statutory rights. Gilead continued to decline the stockholders’ inspection requests, arguing that they had not met the requirements to investigate wrongdoing.
About eight months ago, then-Vice Chancellor McCormick ruled in favor of the stockholders, calling out the California-based company’s “abusive litigation tactics” and granting plaintiffs leave to file a motion for fees, including attorneys’ fees. Although Delaware courts follow the American Rule, in which each party pays its own fees, the court stated that fees may be shifted when a party engages in “bad faith” as determined under the “glaring egregiousness” standard. According to the Chancellor’s subsequent order, “Gilead took a series of positions during litigation that, when viewed collectively, were glaringly egregious.” Gilead, among other things, made various misrepresentations of the record, took unnecessarily aggressive discovery positions and pursued a number of arguments the Chancellor found objectionable, including that plaintiffs had not met the “credible basis requirement” to investigate wrongdoing, ignoring not only the fact that the requirement imposes the “lowest possible burden of proof” but that plaintiffs had “ample support for their proposition.”
S.D.N.Y GRANTS PLAINTIFFS’ PARTIAL SUMMARY JUDGMENT IN SECURITIES CLASS ACTION AGAINST PERRIGO
Through two orders issued July 13 and 15, in In re Perrigo Company PLC Securities Litigation, Judge Cote of the U.S. District Court for the Southern District of New York partially granted plaintiffs’ partial motion for summary judgment in a securities class action brought against Perrigo Company PLC, and two of its executives, while simultaneously denying defendants’ cross-motion. The court held that Perrigo failed to disclose a $1.9 billion Irish tax bill to investors, amounting to a material omission under federal securities laws.
This case stems from Perrigo’s 2013 purchase of the Irish-based company Elan Corporation PLC, through which Perrigo was able to establish its tax domicile in Ireland. Prior to the acquisition, Elan had sold its interest in a multiple sclerosis drug and treated the over $6 billion in proceeds in its Irish tax returns as “trading income,” subject to a 12.5% tax rate. Beginning in 2016, the Irish Office of Revenue Commissioners (“the Commissioners”) audited Elan’s 2012 and 2013 tax calculations for this transaction and informed Perrigo that the Commissioners disagreed with the company’s approach, sending a letter indicating its belief that the transaction should have been taxed at 33%, resulting in an additional tax of $1.9 billion. Perrigo disclosed the findings of the audit in its November 8, 2018 Form 10-Q, but noted that the amount of liability could not presently be calculated. Plaintiffs, holders of Perrigo shares during the relevant period, filed suit alleging that the defendants had violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
On summary judgment, the plaintiffs first argued that defendants’ failure to quantify their tax liability in Perrigo’s Form 10-Q constituted a misleading statement. The court agreed, holding that pursuant to Accounting Standards Codification 450 the defendants were required to recognize a loss contingency if either: (1) the loss was probable and the amount could be reasonably estimated or (2) there was a reasonable possibility that the loss may have been incurred. As a result, the court concluded that Perrigo was required to disclose the $1.9 billion liability because the likelihood of the loss was more than remote given that the Commissioners notified Perrigo that it was reviewing the tax treatment, commencing a formal audit and had provided an analysis of their findings. The court further held Perrigo’s statement in its Form 10-Q that it could not quantify the possible liability was misleading given that the Commissioners had already calculated the $1.9 billion liability.
In considering whether a potential $1.9 billion tax liability was material, the court rejected defendants’ contention that materiality was a question of fact that could not be addressed at summary judgment. Rather, the court agreed with plaintiffs, that such a potential tax liability was material, noting that it amounted to 40% of Perrigo’s total revenue in 2018, and that Perrigo had conceded materiality. Ultimately, the court concluded that reasonable minds could not differ as to whether $1.9 billion was a material number.
Finally, the parties raised additional arguments regarding loss causation and scienter. The court held that both of these issues were questions of fact to be resolved by a jury.
SPAC INVESTORS LAUNCH PUTATIVE CLASS ACTION AGAINST STABLE ROAD OVER ALLEGED MISREPRESENTATIONS REGARDING SPACE TECH
On July 15, 2021, in Keith Jensen v. Stable Road Acquisition Corp. et al., Keith Jensen, an investor in special purpose acquisition company (“SPAC”) Stable Road Acquisition Company, filed a putative class action against Stable Road, its executives, Stable Road’s sponsor SRC-NI, and Momentus Inc., a private commercial space company that Stable Road sought to acquire. The suit comes on the heels of the U.S. Securities and Exchange Commission enforcement action — announced on July 13, 2021 — against the same parties, as well as Momentus’ founder and former CEO Mikhail Kokorich. Both suits arose out of the proposed de-SPAC transaction between Momentus and Stable Road, publicly announced on October 7, 2020.
Primarily at issue are statements made to Stable Road investors that Momentus had “successfully tested” its propulsion technology in space when, in fact, Momentus’ only in-space test had failed to either achieve its primary mission objectives or to demonstrate the commercial viability of the technology. The SEC also alleged that Momentus and Kokorich misrepresented the extent to which national security concerns involving Kokorich undermined Momentus’ ability to secure governmental licenses essential to its operations. With the exception of Kokorich, all defendants have settled the SEC charges by agreeing to, among other measures, the payment of penalties totaling more than $8 million, the implementation of certain investor protection undertakings, and SRC-NI’s forfeiture of founder’s shares it stood to receive in connection with the de-SPAC transaction. Goodwin previously detailed the SEC’s enforcement action here.
In his class action complaint, lead plaintiff Jensen asserts claims against defendants under Sections 10(b) and 20(b) of the Securities Exchange Act of 1934, premised on allegedly false and misleading statements regarding Momentus’ space technology. The statements made by Stable Road, Momentus, and certain executives in media interviews and SEC filings allegedly failed to disclose that its 2019 test of key technology was conducted on a prototype (1) that was not designed to generate commercially significant amounts of thrust and (2) had failed to meet the company’s own public and internal pre-launch success criteria. In addition, Jensen alleges that defendants failed to timely disclose that the U.S. government considered Kokorich a national security threat, which jeopardized Momentus’ potential to become a successful company. In support, Jensen notes that Stable Road’s stock price fell 19% upon Momentus’ January 25, 2021 announcement that its CEO had resigned “in an effort to expedite the resolution of U.S. government national security and foreign ownership concerns surrounding the Company” before falling another 10% on July 14, 2021 in response to the SEC’s announcement of its enforcement action against the defendants.
Defendants have until August 10, 2021 to respond and/or file an answer to the complaint. This lawsuit, and the related SEC charges, underscores the critical importance for SPACs, their boards of directors, and sponsors of adhering to a thorough and well-documented transaction process, including extensive and careful due diligence, and of robust and transparent disclosures of material risks to limit enforcement and litigation risk and minimize costs associated with these risks.
S.D.N.Y DISMISSES PUTATIVE SECURITIES CLASS ACTION OVER RELATED-PARTY TRANSACTIONS
On July 8, 2021, in Boluka Garment Co., Limited v. Canaan Inc., Judge Oetken of the U.S. District Court for the Southern District of New York dismissed a putative class action brought against cryptocurrency mining software company, Canaan Inc., five of its executives, and various underwriter defendants, finding that the investor plaintiffs’ reliance on losses attributed to a short-seller report was misplaced when the short-seller report did not contain details regarding the plaintiffs’ allegations pertaining to related-party transactions.
This case arises out of Canaan’s ten million share initial public offering in 2019. Canaan, a Cayman Islands company with headquarters in China, is involved in creating bitcoin mining computer hardware. Canaan previously made several attempts to go public in foreign markets, each of which was ultimately unsuccessful following scrutiny from regulators. In November 2019, Canaan successfully went public in the United States. In February 2020, an anonymous short-seller published a report accusing Canaan of various deceptive practices, including a general accusation that Canaan failed to disclose certain related-party transactions, after which the company’s stock dropped by more than 6.8%. Soon thereafter, plaintiffs filed suit on behalf of purchasers of Canaan shares between its IPO date and the date of the short-seller report, alleging that Canaan’s registration statement contained material omissions that violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 15 of the Securities Act of 1933. Defendants moved to dismiss the complaint for failure to state a claim.
In their motion to dismiss, defendants first argued that certain of plaintiffs’ allegations – specifically that Canaan had failed to disclose that one of its shareholders was also a senior executive, as well as that a company owned by two Canaan directors had purchased Canaan products – were not revealed in the 2020 published report and, therefore, plaintiffs had failed to allege that the report caused the drop in stock price. The court agreed, reasoning that “general accusations” contained in the report, such as “fraudulent US-listed Chinese companies” were not sufficient to plead loss causation as required by Section 10(b). The court similarly dismissed the Section 11 claims regarding this conduct under the negative causation doctrine, finding that it was apparent from the complaint that the losses did not result from the alleged omission or misrepresentation.
Defendants next argued that plaintiffs’ final allegation – that Canaan had failed to disclose that an executive’s company had announced its intention to purchase and distribute Canaan equipment – was not a material omission. The court analyzed the likelihood that the business deal would proceed as well as the size of the deal in light of the company’s total activity and held that, as the agreement was non-binding and the magnitude was ambiguous, the omission was not material.
Finally, because the court dismissed the claims for primary liability, the court likewise dismissed the claims for alleged control person liability under Sections 10(b) and 15. The court indicated that plaintiffs could file a motion requesting leave to file an amended complaint within a month outlining the proposed changes for the court’s consideration.