On July 24, 2023, the United States Court of Appeals for the Fourth Circuit affirmed the dismissal of claims under Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934 against a biopharmaceutical company (the “Company”) and certain of its officers and directors. San Antonio Fire & Police Pension Fund v. Syneos Health Inc., 2023 WL 4688178 (4th Cir. 2023). Plaintiffs alleged that the Company misled investors about its projected growth following its merger with another company. The Fourth Circuit held that plaintiffs failed to adequately allege scienter, and that they also failed to allege that the alleged misstatements were material, stating that “not every financial disappointment is actionable under federal law.”
The Company specialized in assisting biopharmaceutical companies conduct clinical trials as part of the Food and Drug Administration’s approval process. In 2018, the Company merged with a private company that provided commercialization services for approved drugs. Plaintiffs alleged that the Company misled investors when it described its projected post-merger growth in its press release, earnings calls, and proxy materials because they did not disclose that the counterparty to the merger had not executed several significant sales contracts that would drive that growth. The district court held that plaintiffs failed to prove scienter, and that the Company had provided sufficient disclaimers as to not make any misrepresentations material. Reviewing the district court order de novo, the Fourth Circuit affirmed.
With respect to plaintiffs’ Section 10(b) claim, the Court rejected plaintiffs’ argument that defendants must have known about the importance of the sales contract to the commercial business based on the due diligence conducted prior to the merger. To adequately allege scienter, plaintiffs’ allegations must support a strong inference of both that defendants knew that the sales contract information was relevant, and also that they omitted that information with the intent to mislead plaintiffs, or at least with a reckless disregard for the risk that leaving out the information would render the projections misleading. The existence of due diligence meetings alone, however, was insufficient to make such a showing. First, the Court noted that plaintiffs’ allegations were, at most, that defendants should have known about the status and significance of the sales contracts of the commercial business, and thus were negligent in not learning these facts in the due diligence process. But plaintiffs must plead, at a minimum, recklessness. Second, even if the Court were to assume knowledge, plaintiffs still failed to allege the intent (or reckless to a risk) to mislead investors where the due diligence meetings took place in May, and there were still seven months left to sign the sales contracts during the year.
With respect to plaintiffs’ Section 14(a) claim, the Court held that because the Company included specific warnings in their proxy materials tailored to address the exact complaints that plaintiffs brought, any omission about the Company’s lack of sales contracts was immaterial. Specifically, the Court found that the proxy materials contained specific statements related to plaintiffs’ alleged misrepresentations including that “assumptions underlying their projections were uncertain and potentially flawed,” and that the post-merger growth projections were based on “‘pipeline discussions’ with customers rather than finalized deals,” as well as other specific warnings about the risk and competition of the commercialization services business. Accordingly, the Court concluded that the Company’s inclusion of cautionary language in the proxy materials negated plaintiffs’ arguments that these omissions were material.
Finally, having affirmed dismissal of the Section 10(b) claims, the Court dismissed plaintiffs’ control-person liability claims under Section 20(a). Accordingly, the Second Circuit affirmed the district court’s decision.
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San Antonio Fire & Police Pension Fund v. Syneos Health Inc.
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