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In Vargas v. Citrix Systems, (SD Fla. 2/24), a case arising out of the 2022 acquisition of Citrix Systems, a Florida federal court refused to dismiss allegations that a merger proxy contained misleading omissions due to the target’s failure to provide updated information addressing continuing improvement in a key sales metric between signing and closing.

It’s probably worth spending a little time on the background of this case in order to understand the plaintiff’s claim.  In early 2021, Citrix began shifting its business from a perpetual licensing model for software installed on a customer’s computer to a cloud-based, “Software as a Service” model under which it charged recurring subscription fees for access to software hosted remotely.  It developed a metric known as SaaS Annual Recurring Revenue (“SaaS ARR”) to monitor this shifting business model, and reported accelerating growth in this metric in its quarterly earnings reports for the first three quarters of fiscal 2021.

While the company disclosed the accelerating growth rate for the first quarter of 2021 in supplemental proxy materials, it did not provide disclosure in those materials concerning the continuing improvement in SaasARR for subsequent quarters. The plaintiffs alleged, among other things, that Citrix’s failure to provide updated information about this metric in its proxy materials subsequent to the first quarter of fiscal 2021 represented a material omission in the proxy materials in violation of Rule 14a-9.

The defendants argued that this information was previously disclosed and, in any event, was not material. The Court disagreed, noting that the company’s projections included in the proxy statement reflected other, negative trends concerning Citrix’s operations:

Plaintiffs have sufficiently established that the omission is material, alleging that the metric is—as described by [Citrix’s CEO]—best aligned with the company’s business transition and strategy. Am. Compl. Further, “[b]y voluntarily revealing one fact about its operations, a duty arises for the corporation to disclose such other facts, if any, as are necessary to ensure that what was revealed is not so incomplete as to mislead.” FindWhat, 658 F.3d at 1305. Thus, by disclosing negative factors regarding quarterly results, Defendants were obligated to similarly disclose material positive trends as well. FindWhat, 658 F.3d at 1305 (explaining “a defendant may not deal in half-truths”); see also In re Jan. 2021 Short Squeeze Trading Litig., 620 F. Supp. 3d 1231, 1263 (S.D. Fla. 2022) (noting that “halftruths” are literally true statements that create a materially misleading impression).

Defendants argue that prior positive characterizations in the quarterly earnings letters and calls constitute immaterial puffery. However, the statements regarding SaaS ARR growth in Q2 and Q3 2021 were numerically specific and verifiable. Mogensen, 15 F. Supp. 3d at 1211 (puffery consists of “generalized, non-verifiable, vaguely optimistic statements.”). And the Eleventh Circuit has determined that allegedly misleading statements like those here—such as describing sales metrics as “impressive” and indicating “solid green numbers”—are material in nature. Luczak v. Nat’l Beverage Corp., 812 F. App’x 915, 925 (11th Cir. 2020) (citing Carvelli, 934 F.3d at 1319).

The Court observed that the plaintiff’s complaint alleged that Citrix described SaaS ARR as the “best” metric and indicator of the business’s trajectory and concluded that the plaintiffs had adequately alleged that information about the second and third quarter SaaS ARR growth were material.

– John Jenkins