Southern District of New York Allows Certain Investor Claims Against UiPath to Survive Dismissal

In this issue 

• Southern District of New York Allows Certain Investor Claims Against UiPath to Survive Dismissal
• Delaware Supreme Court Affirms the Court of Chancery’s Dismissal of Derivative Claims Based on Demand Futility
• District Court for the District of Columbia Denies Class Certification in “Meme Stock” Decision
• District of Minnesota District Court Dismisses Investor Suit Against Target Based on Alleged Inventory Mismanagement

Southern District of New York Allows Certain Investor Claims Against UiPath to Survive Dismissal

On November 4, 2024, the US District Court for the Southern District of New York granted in part and denied in part a motion to dismiss a securities class action against UiPath, Inc., a company that provides robotic process automation (RPA) software to its customers; its CEO and board chair; and its CFO, alleging violations of Sections 11 and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 in connection with UiPath’s IPO.

The plaintiff alleged that the defendants misled investors in four ways: 1) by using the annualized renewal run rate metric (ARR) to suggest that UiPath’s financial outlook was stronger than it actually was; 2) improperly touting the success of UiPath’s model for acquiring new customers and expanding their use of UiPath products; 3) understating the competitive threats UiPath faced in the RPA market, especially from Microsoft; and 4) describing certain risks as hypothetical when they had already materialized. The court found that the plaintiff failed to successfully allege that any of the statements falling under categories one, two, or four were materially misleading when viewed in the context of other publicly available information. For example, UiPath specifically warned against using ARR to predict future revenue; nothing in the operative complaint undermined statements about UiPath’s business model because it failed to quantify the extent to which customers purportedly reduced or stopped business with UiPath; and the challenged risk disclosures were not purely hypothetical statements.

However, the court found two statements in the third category made during the Q&A portion of an earnings call downplaying competitive threats from Microsoft were actionable. In reaching this conclusion, the court relied on allegations that two confidential witnesses — an executive and a salesperson at UiPath before and during the class period — asserted that UiPath was competing for and losing customers to Microsoft, and that customers brought up Microsoft’s robots in about half of their sales calls. The court held that, based on these allegations, the plaintiff sufficiently pled that statements that UiPath did “not see [Microsoft] a lot” and “even when we do, our win rate has no difference, compared to where they are not playing,” were misleading. The court rejected UiPath’s assertions that these were vague statements of corporate optimism, finding instead that they were statements of fact. Moreover, the court did not believe that a risk disclosure warning of potential negative impacts if UiPath failed to compete effectively and listing Microsoft as a competitor were sufficiently specific to render the statements, in context, not misleading. The court also found confidential witness statements that the officer who made the challenged statements instructed engineers at UiPath to assist in “responding to Microsoft,” and that UiPath changed its marketing strategy to respond to Microsoft sufficient to allege scienter.

Turning to the Securities Act claims, the court concluded that the plaintiff lacked standing because she did not plead that she purchased her shares pursuant to UiPath’s Registration Statement. It further held that the claims were time-barred and tolling did not extend the operative one-year statute of limitations.

This case reveals that executives should thoroughly vet all facts before providing new ones beyond the prepared remarks during the Q&A portion of earnings calls; such statements may provide plaintiffs with an easier path to surviving dismissal. 

Delaware Supreme Court Affirms the Court of Chancery’s Dismissal of Derivative Claims Based on Demand Futility

In a recent decision, the Delaware Supreme Court summarily affirmed the Delaware Court of Chancery’s dismissal of a derivative lawsuit alleging breach of fiduciary duty, insider trading, unjust enrichment, and other claims arising out of nCino Inc.’s acquisition of SimpleNexus, LLC, relying entirely on the Chancery Court’s December 28, 2023, holding that the plaintiff failed to plead demand futility.

Insight Venture Partners LLC was a majority owner in nCino until the company’s IPO, at which point it was permitted to appoint its cofounder to serve on nCino’s board of directors. After that, Insight held between 32% and 38% of the company’s outstanding shares. After the IPO, nCino’s board approved nCino’s acquisition of SimpleNexus, a company in which Insight held a 62% stake, for $933.6 million. Insight’s board representative did not attend any of the board meetings about this transaction and was not part of the board vote to approve the deal. As part of the acquisition, Insight entered into a lock-up agreement that restricted it from selling two-thirds of its nCino stock following closing. After the announcement of the deal, nCino’s stock price dropped by nearly 30%.

First, the lower court rejected the plaintiff’s argument that demand was futile because nCino’s directors faced a substantial likelihood of liability for approving the transaction in bad faith. The Court of Chancery engaged in a detailed analysis into the merits of the breach of fiduciary duty claim and the mechanics of the board’s process to reject this argument. The court noted that the board met multiple times during negotiations and spoke with SimpleNexus’s management as part of the due diligence process. Further, nCino’s management had negotiated the cash portion of the deal down from 50% to 20% and obtained a lock-up agreement with Insight, showing that the directors did not disregard their duties by taking an “ostrich-like” approach to the transaction and instead were actively engaged in the process. In light of these facts, the court found it would be unreasonable to infer the directors acted in bad faith.

Second, the lower court rejected the plaintiff’s contention that each director owed their current and future directorship to Insight and thus lacked independence. The court explained that Insight’s power to appoint and elect directors as a controller, without more, is insufficient under Delaware law to render the directors beholden to Insight.

Finally, the lower court addressed the plaintiff’s specific allegations that each director lacked independence due to ties to Insight. The court found that the plaintiff failed to plead with particularity that nCino’s CEO lacked independence because he was dependent on his CEO salary. The plaintiff also failed to allege that another director, an investment banker at Piper Sandler, was beholden to Insight (a firm client) because the plaintiff did not allege that Insight’s business was so important to the director as to establish a lack of independence. The court found that allegations regarding a director who served as a consultant to nCino failed to establish that his compensation was either material or attributable to Insight. The fact that the same director served on the boards of two other Insight portfolio companies likewise did not rebut the presumption of his independence. The court reached the same conclusion regarding allegations against another director who also served on other Insight portfolio company boards, and the court rejected the allegation that his director compensation undercut independence because there was no allegation that Insight had the power to remove him from the board.

This decision shines further light on the extent of the allegations necessary to succeed in a bad faith argument for demand futility. It also provides helpful precedent that practitioners can look to when countering arguments asserting lack of director independence in the M&A context. 

District Court for the District of Columbia Denies Class Certification in “Meme Stock” Decision

As a matter of apparent first impression, on March 6, 2025, the US District Court for the District of Columbia denied reconsideration of a September 27, 2024, order denying certification of a putative class of Bed Bath & Beyond investors alleging violations of the Securities Exchange Act of 1934, on the grounds that unusually high trading volume in Bed Bath & Beyond stock weighed in favor of finding that market was inefficient during the class period.

In March 2022, billionaire Ryan Cohen and his investment firm bought a nearly 10% stake in the struggling home goods retailer. Despite efforts to turn things around, the company continued to announce disappointing results.

By August 2022, 46% of Bed Bath shares were shorted, which drummed up excitement about a potential short squeeze opportunity among the “meme stock” community — retail investors using social media platforms to share research and generate buzz around certain stocks. Then on August 12, in response to a negative article about the company, Cohen posted on Twitter (now X) a “smiling moon emoji,” which meme stock investors interpreted as a “rallying cry to buy Bed Bath stock.” On August 16, the stock’s price peaked at $26.60 per share, up from $10.65 per share on August 11. This run was cut short on August 18, however, when it became public that Cohen and his investment firm RC Ventures sold their entire position (earning Cohen a profit of $68 million). By August 23, the stock was slashed almost in half, trading at $8.78 per share.

Investors filed a putative securities class action against the company, its CEO, Cohen, and his firm, challenging the “moon emoji” post and certain SEC filings and asserting claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5; and Sections 9(a), 9(f), and 20A of the Exchange Act. The court dismissed claims against the CEO and stayed claims against the company, but the claims against Cohen and his firm survived a motion to dismiss and were allowed to proceed.

Shortly thereafter, the lead plaintiff sought to certify a class of investors in Bed Bath stock and long call options who acquired the securities between August 12 and 18, 2022, which the court denied on the ground that questions of law or fact did not predominate, noting that the lead plaintiff’s arguments “r[a]n the gamut from forfeited to recycled” and were improper for a motion for reconsideration. On reconsideration, the court reaffirmed its decision not to allow the lead plaintiff to invoke the presumption established by Basic, Inc. v. Levinson, 485 U.S. 224 (1988), that individual questions of reliance would “swamp common ones” because expert testimony established that Bed Bath stock did not trade in an efficient market. It also rejected the lead plaintiff’s new argument that Section 20A allegations do not require an underlying showing of reliance, noting this argument was forfeited because the plaintiff could have made this argument earlier but elected not to do so, and it is wrong nonetheless.

The court reaffirmed its prior holding that under normal circumstances, it would consider factors — such as that Bed Bath was a major corporation with significant market capitalization that traded on NASDAQ — to determine that its stock traded in an efficient market. However, in the court’s view, “these were not normal circumstances.” Instead, the court persisted with its finding that “the market for [Bed Bath] securities was so volatile and subject to such unusual market dynamics during the Class Period that it cannot possibly have reflected all public, material information.” Specifically, during the class period, Bed Bath was undergoing a “short squeeze” that resulted in an explosion in volume, which undercut arguments for efficiency. The court believed it was more plausible that the high trading volume was not incorporating the market’s view of the stock and was instead a result of market manipulation pumping up the stock’s price without any regard to value-relevant information.

In denying reconsideration, the court also rejected the lead plaintiff’s regurgitated argument that Cohen failed to meet his burden of showing a lack of price impact necessary to rebut the Basic presumption, focusing on a drop in stock price on August 19 — the day the market learned of Cohen’s wholesale liquidation. The court held that Cohen would need only to show a lack of price impact had the lead plaintiff established the Basic presumption, but because the plaintiff failed to do so, Cohen “never needed to explain away the ‘corrective disclosure.’” The court did acknowledge that, while unusual when seeking class certification, Basic may not be required to show reliance at all where the effect of the corrective disclosure establishes price impact directly. Nonetheless, where — as here — there is credible expert testimony that the purported corrective disclosure was untethered to the alleged misrepresentations or omissions, this will not work.

The underlying decision denying class certification is the first in which a court has denied class certification because “meme stock” activity rendered a market inefficient. But Bed Bath’s reasoning may apply beyond this narrow context, and practitioners should keep it in mind when dealing with the decline of securities during volatile trading periods — i.e., temporary inefficiencies in an otherwise efficient market. 

District of Minnesota District Court Dismisses Investor Suit Against Target Based on Alleged Inventory Mismanagement

On November 15, 2024, the US District Court for the District of Minnesota dismissed, with prejudice, an investor class action against Target Corporation and certain of its executive officers alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

The court rejected the plaintiff’s allegations that various statements about inventory, customer demand, and financials were false or misleading based on Target purportedly preordering large quantities of “hardlines and home goods” (items such as electronics, toys, sporting goods, furniture, kitchenware, and bed and bath supplies), which (according to confidential witnesses) purportedly disregarded data and trends showing that customer demand was shifting away from these goods after the COVID-19 pandemic, resulting in a purported overstock of such inventory. 

The court first determined that the plaintiffs failed to allege that any of the challenged statements were false or misleading because the operative complaint relied on confidential witnesses but failed to plead facts demonstrating the basis for confidential witnesses knowing the alleged omissions. For example, the plaintiffs failed to allege that confidential witness statements were based on personal knowledge of Target’s inventory acquisition processes, and they failed to allege how the confidential witnesses knew that Target was ordering inventory without regard to data and trends on consumer demand. 

The court further held that none of the challenged statements were actionable because the plaintiffs failed to plead falsity and the statements were forward-looking, statements of corporate optimism, or opinion statements. First, the court held that statements warning of potential for lost sales, inventory spoilage, and markdowns were inactionable because the plaintiffs failed to plausibly allege that the defendants knew that lost sales, spoilage or increased inventory markdowns had already occurred when the statements were made; and confidential witness allegations that Target directed increasing markdowns of certain overstocked products could not support an inference that the markdowns would materially harm operations because they said nothing about magnitude or degree. Second, the court held that statements that Target continuously evaluated customers’ mindsets and listened to changing needs of its guests were “quintessential” examples of nonactionable puffery. Third, the court likewise found that statements that Target’s inventory investments were “healthy” or “well-positioned” and the company “felt good” about them were inactionable puffery and clear to a reasonable consumer that they were relative to broader inventory shortages resulting from the COVID-19 pandemic. Fourth, the court found that, even if Target made inventory decisions without regard to consumer demand, that did not render false statements concerning inventory flow (i.e., trying to get inventory to the right place at the right time), and that such statements are vague, optimistic rhetoric that constitutes puffery. Fifth, the court held that statements about Target’s past financial performance were nonactionable because they were reports of past performance that the plaintiffs had not alleged were false. Finally, the court held that statements projecting a “small” increase in markdown rates were inactionable, because the plaintiffs failed to allege that the defendants knew demand would rapidly change and necessitate larger markdowns when the statements were made. 

This case reveals that confidential witness allegations, though powerful in many cases, must still be supported by a basis for that witness’ knowledge. It further demonstrates the broad latitude granted to corporations and their executives to make generic statements of optimis.

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 similar outcomes.