On October 19, 2021, Chief Judge Richard Seeborg of the United States District Court for the Northern District of California narrowed the claims in a putative securities class action asserting claims under the Securities Exchange Act of 1934 against a pharmaceutical company and certain of its executives. Sheet Metal Works Nat’l Pension Fund v. Bayer AG, No. 20-cv-4737, slip op. (N.D. Cal. Oct. 19, 2021), ECF No. 90. Plaintiffs alleged that the company made misrepresentations relating to its acquisition of Monsanto. The Court held that plaintiffs adequately alleged actionable misrepresentations and scienter with respect to only some of the challenged statements, and further held that plaintiffs adequately alleged loss causation for those statements.
Plaintiffs alleged three categories of misstatements: statements about the company’s due diligence when acquiring Monsanto; statements about the safety of a particular chemical ingredient used in Monsanto’s herbicide Roundup; and certain legal risks associated with the herbicide, which various product liability lawsuits later claimed was carcinogenic.
The Court first assessed whether each category of statement was adequately alleged to be false. With respect to the due diligence statements, the complaint alleged that the company’s CEO stated that the company had “confirmed in due diligence” the deal’s “significant potential for sales and cost synergies” and that the target’s employees “went out of their way to provide us with transparency, data and visibility to the most critical questions we had.” Id. at 5. The CEO went on to say ahead of the deal’s closing that “[t]he acquisition is just as attractive today as we assessed it to be 2 years ago[,]” and that “internal [target company] documents [were] sometimes cited out of context” in product liability lawsuits. Id. Plaintiffs alleged these statements were misleading because the company “had not reviewed any internal [target company] documents and had accepted at face value [the target company’s] characterization of its litigation risks.” Id. On this basis, the Court concluded that the challenged statements could have given reasonable investors the impression that the company had conducted more due diligence than it actually had. Id. at 5-6.
With respect to statements about the chemical ingredient, plaintiffs alleged the company misrepresented that 800 studies confirmed that the ingredient did not cause cancer, when in fact the “vast majority” of those studies did not address the issue. Id. at 6-7. The Court held that plaintiffs had failed to plead facts establishing that most of the studies did not address carcinogenicity, and that the company’s statements that the 800 studies were “not limited to carcinogenicity” was not an admission that they were unrelated to the issue. Id. at 7. The Court also explained that, while plaintiffs alleged that certain of the studies were cited in an International Agency for Research on Cancer report concluding the ingredient was a probable cause of cancer, plaintiffs did not identify which studies were included. Id. And while plaintiffs argued that 629 of the 800 studies were carried out by the target company itself, the Court emphasized that none of the challenged statements related to the “origins or impartiality” of the studies. Id.
The Court held, however, that the statement by a company executive that the underlying chemical ingredient was “no different in terms of carcinogenicity” than the herbicide formulation in the target company’s product was sufficiently alleged to have been false, based on plaintiffs’ allegation that the target company was aware that the formulation was “possibly more dangerous than the ingredient.” Id. at 6-7.
With respect to statements regarding the risk of litigation losses, the Court rejected plaintiffs’ argument that the company violated accounting guidelines by failing to report and reserve for potential litigation losses arising from litigation concerning the chemical ingredient. Id. at 7-8. The Court explained that International Accounting Standard 37 required the company to account for litigation risks when an “economic outflow” was “probable” and a “reliable estimate could be made.” The Court concluded that plaintiffs failed to allege facts showing that a reliable estimate could have been made until a global settlement was proposed regarding the herbicide. Id. at 8.
The Court next assessed whether the potentially actionable statements were made with the requisite scienter. The Court held that the complaint failed to state with particularity facts giving rise to a strong inference of scienter regarding the allegations about the safety of the chemical ingredient and regarding accounting for the risk of litigation losses. Id. at 10. With respect to the due diligence allegations, however, the Court determined that plaintiffs adequately raised an inference that defendants “knew their statements were misleading, or were deliberately reckless to the possibility,” based on allegations that the CEO had “a history of reckless due diligence practices,” that he was focused on acquiring the target company before he became CEO, and that the company had an opportunity to review internal target company documents before the merger closed. Id. at 9-10. The Court further rejected defendants’ argument that it was “not plausible” that they would “choose to fool investors about risks of the acquisition rather than making an informed judgment about them.” The Court concluded that this argument was “undercut by the array of negative opinions on the acquisition at the time of the deal, not just in hindsight” and therefore that defendants were alleged to have proceeded with the merger while being aware of “significant risks” and “assuring investors they had fully assessed those risks themselves.” Id.
In addition, the Court assessed whether plaintiffs had adequately alleged loss causation based on six alleged corrective disclosures. The Court determined that one alleged corrective disclosure, a news report that allegedly “assembled for the first time several critical facts suggesting that [the acquired company’s] exposure in the … litigation was greater than defendants had claimed,” did not actually constitute a corrective disclosure because other news outlets had already reported on the same documents. Id. at 11-12. However, the Court held that the remaining alleged corrective disclosures—concerning adverse litigation outcomes and settlement developments—were adequately alleged. Id. at 12-13. While defendants argued that these events did not constitute “factual findings” that could serve as a corrective disclosure, the Court explained that they nonetheless constituted “new information to investors” in that they disclosed the company’s “serious risk in litigation” and suggested that the links between the target company’s product and cancer—which the target had denied—were not merely “unproven, untested allegations.” Id.
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