On April 20, 2021, the United States Court of Appeals for the Ninth Circuit affirmed the dismissal of a putative securities class action against an information technology security company (the “Company”), its chief executive officer, and Board of Directors (the “Directors”), alleging that a proxy statement issued in connection with a sale of the Company violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 14a-9.  Golub v. Gigamon Inc., No. 19-16975 (9th Cir. Apr. 20, 2021).  In a unanimous decision, the Ninth Circuit, joining the Fourth Circuit (Paradise Wire & Cable Defined Benefit Pension Plan v. Weil, 918 F.3d 312 (4th Cir. 2019)), held that the standard articulated in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 575 U.S. 175 (2015) governing whether a plaintiff has sufficiently alleged the falsity of a statement of opinion under Section 11 of the Securities Act of 1933 (the “Securities Act”), also applies to claims under Section 14(a) of the Exchange Act and Rule 14a-9, and affirmed the district court’s dismissal of the complaint for failure to allege falsity.  The Court further explained its application of the Omnicare standard to Section 14(a) in an accompanying summary opinion.      

Plaintiff claimed that the Company’s Board did not actually believe that the financial projections included in the proxy were accurate.  In connection with its proposed sale, the Company prepared three sets of projections for the Board:  Case A (higher projected performance), Case B (base level expectation), and Case C (lower projected performance).  The Board initially instructed the Company’s financial advisor to focus on Case B in evaluating the acquiror’s offer.  However, after two consecutive quarters of declining revenues, the Board determined that the valuation ranges for the Company based on Case B could no longer be relied upon.  The Company then updated its Case C projections to account for the recent two quarters and a revised outlook for the subsequent quarter, which management stated it believed reflected “the most likely standalone financial forecast of [the Company’s] business.”  The updated Case C was shared with the acquiring company as well as the Company’s financial advisor for its fairness opinion and included in the proxy statement.  Plaintiff alleged that these lower projections were deliberately included and that information regarding Case B and partial performance for the then-current quarter that showed a more positive trend were omitted, to mislead and secure shareholder support for the sale at what plaintiff alleged was an undervalued price.   

Under Omnicare, there are three ways in which a statement of opinion may nonetheless involve a representation of material fact that, if that representation is false or misleading, could be actionable:  (i) the statement of opinion explicitly affirms that the speaker actually holds the stated belief; (ii) sentences that begin with opinion words like “I believe” contain embedded statements of fact; or (iii) a reasonable investor may depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion.  According to the Ninth Circuit, the first two ways in which an opinion statement can involve an actionable representation of fact are consistent with the Supreme Court’s holding in Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1087 (1991), which dealt specifically with claims under Section 14(a).  However, there was an open question as to whether the third way, i.e., claims based on alleged omissions regarding the basis for an opinion, applied to Section 14(a) claims.   

The Ninth Circuit held that Omnicare applies in its entirety to Section 14(a) claims.  In reaching this holding, it noted it previously extended Omnicare standard to Section 10(b) claims because both it and Section 11 contain an “identical limitation of liability to ‘untrue statement[s]’ and omissions of ‘fact.’”  Because Section 14(a) also “contains a virtually identical limitation on liability,” the Court held that “Omnicare’s elucidation of what ‘facts’ a statement of opinion may convey and the possibility and manner of proving those ‘facts’ false or misleading through an omission theory applies to the Rule 14a-9 context.”    

Applying Omnicare, the Court first held that plaintiff failed to allege a misrepresentation.  Although the allegations could be viewed as consistent with plaintiff’s theory that the Board held positive views of the Company’s future but conveyed the opposite impression in the proxy statement, the allegations were just as consistent with the Company “having received two consecutive quarters of disappointing and unexpected results, which affected the directors’ views of the company’s present value and long-term success.”  Plaintiff, however, was required to plead “something more . . . , such as facts tending to exclude the possibility that the alternative explanation is true.”  The Court also held that plaintiff failed to allege any facts to show that any embedded statements of fact regarding the Company’s then-current financial performance were false.   

Applying Omnicare, the Court first held that plaintiff failed to allege a misrepresentation.  Although the allegations could be viewed as consistent with plaintiff’s theory that the Board held positive views of the Company’s future but conveyed the opposite impression in the proxy statement, the allegations were just as consistent with the Company “having received two consecutive quarters of disappointing and unexpected results, which affected the directors’ views of the company’s present value and long-term success.”  Plaintiff, however, was required to plead “something more . . . , such as facts tending to exclude the possibility that the alternative explanation is true.”  The Court also held that plaintiff failed to allege any facts to show that any embedded statements of fact regarding the Company’s then-current financial performance were false.