On October 19, 2021, Chief Justice Richard Seeborg of the United States District Court for the Northern District of California reduced claims in putative securities class action asserting claims under Securities Exchange Act of 1934 against a pharmaceutical company and some of its officers. Sheet Metal Works Nat’l Pension Fund v. Bayer AG, n ° 20-cv-4737, sheet op. (ND Cal. October 19, 2021), ECF # 90. The plaintiffs alleged that the company had made false statements regarding its acquisition of Monsanto. The Court ruled that the plaintiffs adequately allege misrepresentation and scienter in respect of only some of the contested statements, and further found that the plaintiffs adequately allege the causation of the losses for those statements.
The complainants alleged three categories of inaccuracies: statements regarding the company’s due diligence in acquiring Monsanto; statements about the safety of a particular chemical ingredient used in Monsanto’s Roundup herbicide; and certain legal risks associated with the herbicide, which various product liability lawsuits have subsequently claimed to be carcinogenic.
The Court first assessed whether each category of statement was sufficiently presumed to be false. Regarding the due diligence statements, the complaint alleged that the CEO of the company said that the company had “confirmed as part of due diligence” the “significant potential for sales and cost synergies” of the company. agreement and that Target employees “had done their utmost to provide us with transparency, data and visibility on the most critical issues we had. Identifier. to 5. The CEO went on to say before the deal was made that “[t]The acquisition is just as attractive today as we estimated 2 years ago[,]”And that” internal [target company] documents [were] sometimes cited out of context ”in product liability lawsuits. Identifier. The complainants alleged that these statements were misleading because the company “had not reviewed any [target company] documents and had accepted for cash [the target company’s] characterization of its litigation risks. Identifier. On this basis, the Court concluded that the impugned statements could have given reasonable investors the impression that the company had been more diligent than it had in fact. Identifier. to 5-6.
Regarding the claims about the chemical ingredient, the complainants alleged that the company misrepresented the fact that 800 studies had confirmed that the ingredient did not cause cancer, when in fact the “vast majority” of those. studies did not address the problem. Identifier. at 6-7. The court ruled that the plaintiffs had not pleaded facts establishing that most of the studies did not address carcinogenicity, and that the company’s claims that the 800 studies were “not limited to carcinogenicity”. was not an admission that they were unrelated to the issue. Identifier. to 7. The Court also explained that although the complainants alleged that some of the studies were cited in a report by the International Agency for Research on Cancer finding that the ingredient was a probable cause of cancer, the complainants did not not identified which studies were included. Identifier. And while the plaintiffs argued that 629 of the 800 studies were carried out by the target company itself, the court stressed that none of the contested statements concerned the “origins or impartiality” of the studies. Identifier.
The Court, however, ruled that a statement by a business executive that the underlying chemical ingredient was “no different in terms of carcinogenicity” from the herbicide formulation in the target company’s product was sufficiently presumed false, based on the complainants’ claim that the target company was aware that the wording was “possibly more dangerous than the ingredient”. Identifier. at 6-7.
With respect to the statements regarding the risk of litigation losses, the Court rejected the complainants’ argument that the company had violated the accounting guidelines by failing to report and reserve potential losses resulting from a litigation concerning the litigation. chemical ingredient. Identifier. to 7-8. The Court explained that International Accounting Standard 37 required an enterprise to recognize litigation risks when an “economic outflow” was “probable” and a “reliable estimate could be made”. The Court found that the plaintiffs had not alleged facts demonstrating that a reliable estimate could have been made until a comprehensive settlement was proposed for the herbicide. Identifier. at 8.
The court then assessed whether the actionable statements had been made with the required scientist. The Court ruled that the complaint did not precisely indicate facts giving rise to a strong inference from scienter concerning the claims concerning the safety of the chemical ingredient and concerning the consideration of the risk of losses in dispute. Identifier. to 10. With respect to the due diligence allegations, however, the Court determined that the plaintiffs had sufficiently inferred that the defendants “knew that their statements were misleading or were deliberately reckless of the possibility”, on the basis of allegations that the CEO had “a history of reckless due diligence”, that he was focused on acquiring the target company before becoming CEO, and that the company had an opportunity to review the documents of the target company before the merger closes. Identifier. at 9-10. The court further rejected the defendants’ argument that it was “not plausible” that they “would choose to mislead investors about the risks of the acquisition rather than make an informed judgment about them”. The Court concluded that this argument was “balanced by the range of negative opinions about the acquisition at the time of the transaction, not just in hindsight” and therefore that the defendants would have proceeded with the merger while being aware of the ” significant risks ”and“ assure investors that they themselves had fully assessed these risks ”. Identifier.
In addition, the Court assessed whether the plaintiffs had correctly alleged the causation of the losses on the basis of six alleged corrective disclosures. The Court determined that an alleged corrective disclosure, a report which allegedly “gathered for the first time several critical facts suggesting that [the acquired company’s] the exposure in the… litigation was greater than what the defendants claimed, ”did not in fact constitute corrective disclosure because other news outlets had previously reported on the same documents. Identifier. at 11-12. However, the Court found that the remaining corrective allegations, concerning the unfavorable results of the litigation and the developments of the settlements, were sufficiently raised. Identifier. at 12-13. While the defendants argued that these events did not constitute “factual findings” that could serve as corrective disclosure, the court explained that they nonetheless constituted “new information for investors” in that they disclosed the ” serious risk of litigation ”from the company and suggested that the links between the target company’s product and cancer – which the target had denied – were not simply“ unproven and untested claims ”. Identifier.
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