On September 30, 2024, Judge Lynn Adelman of the United States District Court for the Eastern District of Wisconsin granted a motion to dismiss a putative securities class action asserting claims under Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 14a-9, against a retail department store chain (the "Company") and certain of its officers and board members ("Individual Defendants" and, collectively, "Defendants"). Thomas Frame v. Kohl's Corp., No. 22-CV-1016 (E.D. Wis. Sept. 30, 2024). Plaintiff alleged that Defendants made materially misleading statements and omissions in order to stave off a hostile takeover by an activist investment firm. The Court held that plaintiff failed to identify a single actionable misstatement or omission and, therefore, dismissed the action without prejudice.
In January 2022, an activist investor in the Company allegedly proposed a slate of directors to compete for election against the Company's sitting board of directors at the shareholder meeting in approximately April 2022. If elected, these nominees allegedly promised to curb the Company's executive compensation packages. Plaintiff alleged that, in order to defeat the proposal, Defendants: (1) falsely attributed the Company's financial success in 2021 to Defendants' "strategic plan" when Defendants knew that unrelated macroeconomic factors—namely the return to in-person shopping following administration of the COVID-19 vaccine and increased retail spending from the issuance of stimulus checks—were real reason for this trend; (2) made false statements about the potential sale of the Company; and (3) misled investors and the public to believe that the Company's Q1 2022 financial results were positive. Defendants moved to dismiss primarily on the basis that plaintiff failed to plausibly allege falsity. The Court agreed.
The Court first addressed plaintiff's claim that Defendants allegedly misattributed the Company's financial success in 2021 to Defendants' strategic plan. The Court found it to be significant that plaintiff primarily relied on allegations about the Company's performance during the subsequent year, including the Company's poor financial results and the Company's purported mismanagement of supply-chain issues in Q1 2022 to demonstrate the strategic plan did not contribute to the success achieved in 2021. The Court concluded that it could not plausibly infer that Defendants' statements about the strategic plan were false when made in 2021 based on these retrospective allegations; these allegations indicated only that the statements were incorrect in hindsight, which, the Court held, is insufficient to state a claim under the Exchange Act.
In the alternative, the Court also held that plaintiff failed to allege scienter because all of Defendants' statements about the strategic plan preceded the activist investor's nomination of director candidates. Furthermore, the Court concluded that plaintiff failed to allege loss causation because the complaint did not identify any corrective disclosure.
The Court next turned to plaintiff's claim that Defendants made false and misleading statements regarding the potential sale of the Company. In support of this variant of plaintiff's claims, plaintiff alleged that several news outlets reported on January 20 and 21, 2022, that the Company had received several bids, revealing that Defendants' denial of a potential sale of the Company in a January 18, 2022 press release was false. But the Court found that none of the complaint's factual content or the news articles, themselves, supported an inference that the Company received the reported bids before its January 18, 2022 press release and, thus, that the press release was false when published. Furthermore, plaintiff alleged that Defendants falsely stated that they had rejected a bid for sale in February 2022 because it undervalued the Company's potential for future growth and cash flow generation, when, in reality, the rejected bids allegedly exceeded the Company's value. However, the Court concluded that Defendants' statements about the Company's valuation and potential for growth were inactionable statements of opinion.
Finally, the Court addressed plaintiff's claim that Defendants' misled investors and the public that the Company's Q1 2022 results were positive, when they were later revealed by quarterly reporting to be disappointing. In particular, plaintiff averred that Defendants had an obligation to make ongoing disclosures throughout the quarter because Defendants had painted a rosy picture of the Company's financial performance throughout 2021. Hence, plaintiff asserted that Defendants' silence amounted to an actionable omission. The Court refused to endorse this theory, finding Defendants had no obligation to provide updates on a financial quarter in progress, before the quarter end. Furthermore, the Court determined that Defendants' statements throughout Q1 2022 about the Company's "bright future" and "ability" to combat general macroeconomic challenges constituted mere corporate puffery and, therefore, could not form the basis of an Exchange Act violation.
Finding that plaintiff failed to allege a predicate violation, the Court dismissed plaintiff's Section 20(a) claims. The dismissal was without prejudice and the Court granted plaintiff leave to amend.
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