On July 24, 2023, the United States Court of Appeals for the
Fourth Circuit affirmed the dismissal of claims under Sections
10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934
against a biopharmaceutical company (the "Company") and
certain of its officers and directors. San Antonio Fire &
Police Pension Fund v. Syneos Health Inc., 2023 WL 4688178
(4th Cir. 2023). Plaintiffs alleged that the Company misled
investors about its projected growth following its merger with
another company. The Fourth Circuit held that plaintiffs failed to
adequately allege scienter, and that they also failed to allege
that the alleged misstatements were material, stating that
"not every financial disappointment is actionable under
federal law."
The Company specialized in assisting biopharmaceutical companies
conduct clinical trials as part of the Food and Drug
Administration's approval process. In 2018, the Company merged
with a private company that provided commercialization services for
approved drugs. Plaintiffs alleged that the Company misled
investors when it described its projected post-merger growth in its
press release, earnings calls, and proxy materials because they did
not disclose that the counterparty to the merger had not executed
several significant sales contracts that would drive that growth.
The district court held that plaintiffs failed to prove scienter,
and that the Company had provided sufficient disclaimers as to not
make any misrepresentations material. Reviewing the district court
order de novo, the Fourth Circuit affirmed.
With respect to plaintiffs' Section 10(b) claim, the Court
rejected plaintiffs' argument that defendants must have known
about the importance of the sales contract to the commercial
business based on the due diligence conducted prior to the merger.
To adequately allege scienter, plaintiffs' allegations must
support a strong inference of both that defendants knew that the
sales contract information was relevant, and also that they omitted
that information with the intent to mislead plaintiffs, or at least
with a reckless disregard for the risk that leaving out the
information would render the projections misleading. The existence
of due diligence meetings alone, however, was insufficient to make
such a showing. First, the Court noted that plaintiffs'
allegations were, at most, that defendants should have known about
the status and significance of the sales contracts of the
commercial business, and thus were negligent in not learning these
facts in the due diligence process. But plaintiffs must plead, at a
minimum, recklessness. Second, even if the Court were to assume
knowledge, plaintiffs still failed to allege the intent (or
reckless to a risk) to mislead investors where the due diligence
meetings took place in May, and there were still seven months left
to sign the sales contracts during the year.
With respect to plaintiffs' Section 14(a) claim, the Court held
that because the Company included specific warnings in their proxy
materials tailored to address the exact complaints that plaintiffs
brought, any omission about the Company's lack of sales
contracts was immaterial. Specifically, the Court found that the
proxy materials contained specific statements related to
plaintiffs' alleged misrepresentations including that
"assumptions underlying their projections were uncertain and
potentially flawed," and that the post-merger growth
projections were based on "'pipeline discussions' with
customers rather than finalized deals," as well as other
specific warnings about the risk and competition of the
commercialization services business. Accordingly, the Court
concluded that the Company's inclusion of cautionary language
in the proxy materials negated plaintiffs' arguments that these
omissions were material.
Finally, having affirmed dismissal of the Section 10(b) claims, the
Court dismissed plaintiffs' control-person liability claims
under Section 20(a). Accordingly, the Second Circuit affirmed the
district court's decision.
San Antonio Fire & Police Pension Fund v. Syneos Health Inc.
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