On June 22, 2020, a Seventh Circuit panel of three judges affirmed a district court ruling dismissing securities fraud claims against a biopharmaceutical company (the "Company") and one of its officers in connection with a Dutch auction tender offer the Company made to repurchase certain of the Company's outstanding shares. Walleye Trading LLC v. AbbVie Inc., et al., No. 19-3063 (7th Cir. June 22, 2020). Plaintiff, a shareholder of the Company, alleged that the Company violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 (the "Exchange Act") when the Company announced preliminary results of the tender offer and subsequently announced corrected results later that same day after trading closed. Plaintiff also alleged that one of the Company's officers violated section 20(a) of the Exchange Act. The District Court dismissed the complaint for failure to state a claim and the Seventh Circuit affirmed.
Plaintiff brought this action in connection with the Company's tender offer to repurchase up to $7.5 billion of its outstanding shares. The tender offer was conducted through a Dutch auction, which ran from May 1, 2018 through May 29, 2018. The Company hired a third party (the "Receiving Company") to receive all offers in connection with the auction. Prior to the market opening on May 30, 2018, the Company, based on information provided to it by the Receiving Company, announced the preliminary result that it would purchase 71.4 million of its shares for $105 per share, totaling $7.5 billion when accounting for fees and expenses. As a result, the Company's stock, which previously closed around $100 per share, closed that day at $103 per share. However, about one hour after the close of trading, the Company announced that it had received corrected numbers from the Receiving Company, and that it actually would purchase 72.8 million of its shares for $103 per share. The Company's share price dropped to $99 per share the next day. Plaintiff brought claims under Sections 10(b), 14(e) and 20(a) of the Exchange Act, all of which were dismissed by the trial court in the Northern District of Illinois.
The Seventh Circuit first considered plaintiff's Section 10(b) claim. At the outset, the Court characterized the claim as "perplexing," as "[i]t has not pleaded that [the Company] made any statement that is false or misleading, let alone made a statement with the required mental state." In connection with whether plaintiff adequately had pled a false or misleading statement, the Court stressed that the Company's initial announcement stated that the number of shares to be purchased, as well as the purchase price for those shares, were "subject to change." Accordingly, the Court found that an announcement explicitly stated to be subject to change cannot become "misleading or false when it is indeed changed." Rather, the Court held that the Company did in fact accurately report the Receiving Company's preliminary numbers.
The Court next considered and rejected plaintiff's two arguments as to why the Company acted with scienter in purportedly reporting the inaccurate numbers: (1) that the Company's executives failed to perform "grammar school arithmetic" to verify the Receiving Company's numbers; and (2) that the length of time it took the Company to issue the correction supports an inference of scienter because, before issuing the correcting statement, the Company "must have known the initial statement was incorrect." With respect to the first argument, in addition to noting that the math required was not as simple as plaintiff contended, the Court held that "neither statute nor any regulation requires an issuer to verify someone else's data before reporting them." With respect to the second argument, the Court noted that the Company accurately reported the Receiving Company's preliminary numbers, and that since the Receiving Company must have provided the Company with the corrected numbers, those numbers would take time for the Company "to check and recheck" before releasing. According to the Court, "[n]either the statute or any rule requires this to be done in seconds or minutes rather than hours." Finally, the Court flatly rejected plaintiff's argument that the Company violated Section 10(b) because it failed in its duty to correct the initial statement, emphasizing that "[t]he Company did correct the initial statement[, and] [t]hat correction led to this suit!"
Having disposed of the Section 10(b) claim, the Court turned to the Section 14(e) claim. The Court first noted that while "'[t]his provision was expressly directed at the conduct of a broad range of persons," the "[b]road substantive scope does not imply that any particular person has a right of action." The Court continued that the SEC has the authority to sue, "and private persons who can show that they relied on false or misleading statements in documents filed with the Commission can recover damages." Turning to plaintiff's claim, the Court held that plaintiff did not allege that the Company's statements were filed with the SEC or that plaintiff had relied on them. According to the Court, plaintiff merely "assume[d] that §14(e) gives it a private right of action to collect damages for press releases issued after a tender offer closes," but that "the end of the tender offer placed [plaintiff] outside of the zone of interests protected by §14." The Court further found that by May 30, 2018, when the Company announced the preliminary and updated results of the Dutch auction, there was no longer any way for shareholders to participate in it, and therefore "an investor cannot use §14(e) to challenge a statement made after a tender offer has closed." The Court therefore affirmed the District Court's dismissal of the Section 14(e) claim.
Originally published 30 June 2020.
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