The 11th Circuit ignored the potential application of the Supreme Court’s 2015 decision in Omnicare, and instead reached back to its own precedent dating from 1979, in holding that plaintiffs are foreclosed from bringing a claim that a company misled shareholders about its real motivations for engaging in a stock repurchase program.

In its per curiam unpublished opinion in Henningsen v. ADT Corp. (“ADT”), 2016 WL 4660814 (6th Cir. 2016), the 11th Circuit affirmed the dismissal of Section 10(b) claims against ADT and its CEO, and against Corvex Management LP, and its founder, Keith Meister.

Plaintiffs alleged that Corvex had acquired more than five percent of ADT’s stock in 2012, and that after that point, Meister was outspoken in his criticism of the Company, alleging that its stock was undervalued and urging management to take on more debt so it could repurchase shares, with a goal of increasing ADT’s stock price.

The complaint alleged that Meister threatened to call a shareholder vote to replace the board if the directors did not offer him a board position and agree to take out loans for significant stock buybacks. ADT announced a plan to repurchase $2 billion of its common stock over three years after an initial meeting with Meister. Soon afterward, Meister was given a position on the ADT board, and the Company continued to borrow more money to repurchase more stock, ultimately causing credit rating agencies to downgrade ADT’s credit rating and ADT’s share price to drop. After this downturn, the complaint alleges that Meister pushed for ADT to repurchase more shares on an even more accelerated timeframe, and that the directors acquiesced after Meister promised to leave the board if they agreed with his plan.

In November 2013, ADT announced that it was repurchasing Corvex’s shares and that Meister was resigning from the board. ADT stock price dropped 6% on this news, and dropped another 30% in the following months. Plaintiffs filed suit, claiming that ADT and Corvex had misrepresented various issues and problems at the Company, and that they had misled shareholders by concealing that they had engaged in aggressive share repurchases to appease Meister and Corvex, instead characterizing the repurchase plan as “thoughtful,” “effective,” and “optimal.” Id. at *5.

The district court dismissed most of the claims for failure to sufficiently plead falsity and scienter, and rejected the “motivation” claim because it was barred by 11th Circuit precedent, namely Alabama Farm Bureau Mutual Casualty Co. v. American Fidelity Life Insurance Co., 606 F.2d 602, 610 (5th Cir. 1979). The 11th Circuit affirmed.

In Alabama Farm, the court held that a company does not engage in “deception” under the securities laws by failing to “disclose [its] motives in entering a transaction,” and that Section 10(b) does not require “the disclosure of an individuals’ motives or subjective beliefs.” ADT, 2016 WL 4660814, at *4 (quoting Alabama Farm, 606 F.2d at 610).

In ADT, 11th Circuit found that this precedent foreclosed plaintiffs’ claims that the “ADT Defendants misled investors by having one motive, while offering up another, for participating in an otherwise accurately-disclosed stock repurchase plan.” The court reasoned that information about the Company’s motives was not material as long as the Company had accurately disclosed “material financial or other information concerning the nature, scope, or mechanics of the stock repurchase transaction.” Id. at *4.

The court rejected plaintiffs’ argument that such a bright-line test for materiality is no longer good law after the Supreme Court’s decisions in Basic Inc. v. Levinson, 485 U.S. 224 (1988) and Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309 (2011). Even in light of these Supreme Court decisions expressing concern such bright-line tests might exclude information important to a reasonable shareholder, the court found that “no reasonable shareholder would have considered the alleged omissions” regarding ADT’s true motivations “significant to the decision about whether to trade ADT securities given the other disclosures regarding the stock repurchase program and ADT’s corporate financing.” Id.

Finally, the court declined to give meaningful consideration to plaintiffs’ claims that ADT and its CEO had misled its shareholders by calling the repurchase program “thoughtful,” “effective,” and “optimal,” among other descriptors. The court did not consider the applicability to these claims of the Supreme Court’s decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015), which sets forth the criteria for deciding whether a statement of opinion was false or misleading. Instead, the court relied on pre-Omnicare precedent to dismiss these statements as nonactionable “puffery,” thus sidestepping the question of whether plaintiffs might have adequately alleged that they were false statements of opinion under the Omnicare standard. Id. at *5.