DealLawyers.com Blog

In Sohovich v. Avalara, (9th Cir.; 3/25) the 9th Circuit reversed a district court decision and allowed a plaintiff to move forward with allegations that disclosures in a target’s merger proxy concerning ISS’s favorable recommendation of the transaction violated Rule 14a-9. Here’s an excerpt from a Goodwin newsletter article on the decision:

In an unpublished, non-precedential decision, the Ninth Circuit largely affirmed the lower court’s dismissal, agreeing that many of Avalara’s statements leading up to the purchase were inactionable puffery and neither objectively false nor misleading. But the Ninth Circuit disagreed with the District Court’s holding that the plaintiff failed to “adequately plead the objective falsity or misleading nature” of certain of Avalara’s statements and reversed the dismissal of the plaintiff’s claims that were predicated upon theories that the company (a) misled the public by claiming that a report from a proxy advisory firm recommended the sale, while omitting various warnings about the sale in the same report, and (b) omitted inorganic growth from its projections in the proxy statement.

First, the Ninth Circuit noted that, crediting the plaintiff’s allegations as true, it was plausible that Avalara might have downplayed concerns about the acquisition that the proxy advisory firm, Institutional Shareholder Services (ISS), expressed in its report. The Ninth Circuit noted that the fact that “some of the [ISS] report’s unfavorable excerpts” were made public in an SEC filing by a third-party did not relieve Avalara’s obligation not to make false or misleading statements about the report. And, although it was true that the report recommended the sale, reducing it to simple approval could still be misleading without the context provided by the doubts also included in the report.

The memo says that the case is a reminder that efforts to gloss over or ignore negative aspects of third-party statements excerpted in proxy materials can be construed as involving material omissions, and that companies should be cautious when excerpting those materials and consider whether their selective excerpts might be construed as misrepresenting the third party’s overall message.

– John Jenkins