Court Dismisses Class Action Against Biopharmaceutical Company for Failing to Disclose Progress of Competitor; Second Circuit Affirms Dismissal of Putative Class Action Against Allergan; Eleventh Circuit Affirms That “Toxic” Lender Qualified as a “Dealer” Under the Exchange Act Due to High-Volume Trading; Delaware Court of Chancery Invalidates Governance Rights in Stockholder Agreement

Court Dismisses Class Action Against Biopharmaceutical Company for Failing to Disclose Progress of Competitor

On February 5, 2024, the US District Court for the Southern District of New York dismissed  a putative class action against Molecular Partners AG (Molecular Partners), a biopharmaceutical company developing a cancer treatment, finding that none of the disclosures touting its licensing agreement with Amgen in its IPO registration statement were misleading.

About a year later, Amgen terminated a licensing agreement with Molecular Partners for the development of a cancer treatment, and Molecular Partners’ stock price dropped. The plaintiff then sued Molecular Partners and its officers and directors. The complaint alleged that Defendants misled investors, in violation of Sections 11 and 15 of the Securities Act of 1933, by discussing the partnership with Amgen in its registration statement while omitting that certain patents were nearing expiration and that a competitor’s drug trials were further along. Plaintiff claimed that the omitted information rendered its agreement with Amgen less valuable to Amgen, and therefore it was “in jeopardy.”

In dismissing the plaintiff’s claims, the court reviewed each of the challenged statements and determined that the alleged omissions did not render any of the statements misleading. First, the court held that certain opinion statements were not actionable, because they did not imply facts that could be proven false — namely, they did imply facts about the risk that the agreement with Amgen would be terminated — especially given that the defendants disclosed that the agreement could be terminated “in its entirety” at Amgen’s “convenience[.]” Likewise, the court found that “whether read in isolation or in context,” these opinions implied nothing about the success of trials with Amgen relative to the success of trials by its competitor and, therefore, could not be a basis for liability.

Next, the court rejected the plaintiff’s argument that statements regarding the terms of the Amgen agreement were misleading, including statements about planned trials and that the agreement could be terminated at Amgen’s convenience, by failing to mention that the agreement was in jeopardy. The court reasoned that “the complaint fails to plausibly allege that the Amgen agreement was in fact in jeopardy at the time the registration statement became effective[,]” highlighting that Amgen did not terminate the agreement for a year after the IPO, and the complaint does not allege that Amgen terminated the agreement because of the competitor’s trials. The court also held that those statements could be misleading only if there was something unique about the threat from the competitor that was not captured by the registration statement’s warning that Molecular Partners “face[s] significant competition” — something the plaintiff failed to allege. Finally, the court analyzed each of the allegedly misleading forward-looking statements and for similar reasons found they were not misleading, in addition to the fact that they were accompanied by specific cautionary language warnings.

This case serves as helpful precedent for the notion that a company is not required “to speculate” about remote possibilities and their impacts to avoid liability. Moreover, this is another case in which specific and targeted risk disclosures insulated a company from liability.

Second Circuit Affirms Dismissal of Putative Class Action Against Allergan

On February 20, 2024, the Second Circuit affirmed the district court’s grant of summary judgment in favor of Allergan PLC and its executives, holding that a class of investor-plaintiffs attempting to hold Allergan liable for alleged misstatements related to its textured breast implant devices failed to show any such statements were misleading.

The plaintiffs brought claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the Exchange Act), and Rule 10b-5 thereunder, challenging Allergan’s failure to disclose that its textured breast implant devices were associated with higher rates of a rare cancer — anaplastic large cell lymphoma (ALCL) — as compared to textured devices produced by other manufacturers.

The plaintiffs challenged three statements, one from Allergan’s Form 10-K that referenced certain safety studies “suggest[ing] a possible association between [ALCL] and breast implants, as well as negative reports” issued by European regulators about an unaffiliated implant manufacturer; another from a press release regarding the safety profile of its smooth and textured devices; and a third from a statement by Allergan published as part of a news article stating that ALCL “ha[d] been reported in patients with textured implants from all manufacturers.” The court held that these statements were literally true, and not actionable as half-truths, because reasonable investors would not have been misled by these statements into thinking that Allergan’s textured products were not more closely associated with ALCL than the textured products of other manufacturers. In analyzing the statements, the court pointed to context such as the fact that the news article “acknowledged [that] the scientific community[]” had a “limited understanding” as to whether ALCL could be “tied to” devices from any “specific manufacturer[].” The Second Circuit also found that Allergan could not be liable under a “pure omission” theory because Allergan had no independent duty to disclose facts or opinions regarding the association between its textured breast implant products and ALCL.

The Second Circuit’s opinion serves as a welcome reminder that lack of specificity in company statements, standing alone, will not render such statements misleading and also serves as an example of courts applying the “reasonable investor” standard rigorously.

Eleventh Circuit Affirms That “Toxic” Lender Qualified as a “Dealer” Under the Exchange Act Due to High-Volume Trading

On February 14, 2024, the Eleventh Circuit affirmed in part and reversed in part a grant of summary judgment, ordering Ibrahim Almagarby to, among other things, disgorge all profits and permanently prohibiting him from participation in penny-stock offerings. This “penny-stock bar” prohibits both lawful and unlawful conduct.

The case arises from a Securities and Exchange Commission (SEC) enforcement action that alleged that the defendant had acted as an unregistered dealer in violation of Section 15(a) of the Exchange Act in connection with the following practices, which has been referred to as “toxic financing”: (1) buying debt instruments from microcap companies; (2) converting that debt into common stock; and (3) selling that stock rapidly. The district court held that Almagarby was a “dealer” required to register under the Exchange Act. The Eleventh Circuit unanimously affirmed most of the district court’s opinion, finding that Almagarby was a “dealer” based on the kind and amount of his transaction activity. In reaching this conclusion, the court observed that Almagarby — unlike traders or private investors, which are not required to register — acquired the shares of microcap companies by converting debt at a discount and then immediately resold the shares for a profit without doing much (if any) research, with no longer-term views on the value of his holdings and with no interest in taking on price risk. Additionally, over a three-year period, Almagarby received 167 stock deposits totaling around 8.5 billion shares of stock, made at least 962 individual sales totaling more than 7.6 billion shares, and made more than $885,000 in net profits. The court did, however, note that it was not suggesting that every professional investor who buys and sells securities in high volumes is a “dealer” under the Exchange Act.

The court also reversed the portion of the district court’s opinion barring Almagarby from participating in penny-stock offerings. In a 2-1 opinion, the majority determined that the district court had abused its discretion in imposing the bar. In overturning the bar, the court noted, among other things, Almagarby’s lack of scienter, the sincerity of his assurances against future violations (i.e., he had not already shown an unlikeliness to comply with the law in the future), and the fact that his violations were more “technical” in nature.

The majority’s ruling provides a road map for defendants arguing against the imposition of penny-stock bars as well as other, prospective relief available in SEC enforcement actions, such as conduct-based injunctions against lawful activities and officer and director bars.

Delaware Court of Chancery Invalidates Governance Rights in Stockholder Agreement

On February 23, 2024, the Delaware Court of Chancery held that certain control provisions in a stockholder agreement were facially invalid under Delaware’s General Corporation Law (DGCL) Section 141(a) providing that “the business and affairs of every corporation…shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation” because they were not in the company’s certificate of incorporation.

This case centers on a stockholder agreement (the Stockholder Agreement) that provides the founder, CEO, and chairman of Moelis & Co. (the Company), Ken Moelis (Moelis), certain negative covenants, or “blocking rights,” with respect to 18 of the Company’s key decisions, including stock issues, financing, contracts, litigation decisions, dividend payments, and senior officer selections (the Pre-Approval Requirements). It also contained six provisions that gave Moelis the right to determine the size of the Company’s board of directors (the Board) and to select a majority of its members (the Board Composition Provisions).

In deciding a motion for summary judgment, the court found that several of the Board Composition Provisions and all of the Pre-Approval Requirements were facially invalid under Delaware law. It invalidated certain Board Composition Provisions requiring the Board to recommend that shareholders vote for Moelis’s designees, fill a Board vacancy previously occupied by a Moelis designee with a new Moelis designee, and set the size of the Board at no more than 11 directors because they improperly compelled the Board to take action and empowered Moelis to prevent the Board from increasing its size. The court further held that the Pre-Approval Requirements went “too far” by forcing the Board to obtain Moelis’s prior written consent before taking “virtually any meaningful action,” which meant that the Board was “not really a board.” The court addressed the Pre-Approval Requirements together, leaving open the possibility that some of them, standing alone, may be valid.

The court noted several limits on its ruling. First, the invalid provisions may have been valid if they were included in the Company’s certificate of incorporation. Second, the Board could still implement many of the challenged provisions using its blank-check authority to issue Moelis a “golden share” of preferred stock carrying certain voting and director appointment rights. Additionally, because the court applied the DGCL, the decision does not apply to other entity forms, such as LLCs and LPs.

The case will likely affect cases pending in the Chancery Court that involve similar “new wave” stockholder agreements. Also, potential investors seeking to incorporate additional rights in a target’s certificate of incorporation now have stronger incentives for doing so.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.