On October 14, 2020, Judge Alison J. Nathan of the United States District Court for the Southern District of New York dismissed with prejudice a putative class action asserting claims under the Securities Exchange Act of 1934 against a pharmaceutical company, certain of its executives, and investors that participated in a go-private merger with the company. Altimeo Asset Management v. WuXi PharmaTech (Cayman) Inc., No. 19-cv-1654 (AJN), slip op. (S.D.N.Y. Oct. 14, 2020). Plaintiff alleged that the company made misstatements about its long-term plans and future prospects in connection with the going-private transaction. The Court held that plaintiff failed to plausibly allege that the company made a material misrepresentation or omission.
Plaintiff alleged that the company, which had its headquarters in China but initially traded on the New York Stock Exchange, made four categories of misrepresentations in proxy materials filed with the SEC with respect to a proposed going-private merger: (1) statements concerning an intention not to relist or change its corporate structure; (2) statements that there were no viable alternatives to the merger; (3) statements regarding the merger's fairness; and (4) statements concerning the reason for the merger. Id. at 6-8. Plaintiff asserted that falsity was demonstrated when, shortly after the transaction was completed, the company spun off various business units and listed those units as separate companies on the Hong Kong and Shanghai stock exchanges, which allegedly demonstrated that those units held significant market value. Id. at 3-4. Plaintiff claimed that at the time of the going-private transaction, the company and its purchaser had already made plans to enter into these spin-offs, citing the speed with which these spin-offs were completed and media coverage suggesting the company had planned to spin off these business lines. Id. at 4-5.
The Court held that all four categories of alleged misrepresentations depended on an alleged pre-merger plan to relist, but that the Company had, in fact, disclosed both that it could relist elements of the company and that these efforts could result in higher valuations. Id. at 10. In light of these disclosures, the Court determined that this case was “on all fours” with a recent decision by Judge Engelmayer of the Southern District of New York, which we discussed in a previous post, which held that similar claims involving relisted subsidiaries (brought by the same plaintiff against a different company) could only be viable if it was plausible that the company had already adopted, but did not disclose, a concrete plan to relist on a foreign exchange. Id. at 10-11 (citing Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co., No. 19-cv-10067 (PAE), 2020 WL 4734989, at *1 (S.D.N.Y. Aug. 14, 2020)).
The Court held that plaintiff's allegations failed to “describe anything like a concrete plan,” emphasizing that plaintiff pointed to no contemporaneous evidence from the time of the transaction that suggested the company had developed such plans—instead, plaintiff relied primarily on speculation by market analysts and comments made “long after the merger,” as well as on vague statements attributed to a company officer and an unnamed senior manager that the company “will be thinking about” whether to return to Chinese markets and that the company “intended to return to the Chinese A-share market.” Id. at 11. The Court also rejected a quotation attributed to the company's CEO as stating that privatization “was part of a long-term strategy for the then parent company to spin off three separate entities with dedicated focuses,” noting that the quotation appeared in an article 18 months after the merger, did not mention relisting specifically, and lacked details confirming its reliability. Id. at 11-12.
In addition, the Court rejected plaintiff's allegations that company executives engaged in insider trading in violation of Section 20(A) of the Exchange Act, as well as control person allegations under Section 20(a), noting that both depended on an underlying independent violation of the Exchange Act. Id. at 13-14. The Court denied leave to amend, finding that, by declining to amend under the Court's individual rules after receiving the motion to dismiss, plaintiff had waived any right to amend, and that, in any event, amendment would be futile. Id. at 14.
Originally published by Shearman & Sterling, October 2020
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