Defense Motion to Dismiss Securities Fraud Class Action Granted because Defendants had no Duty to Disclose Merger Discussions Prior before Definitive Merger Agreement Reached and because Anonymous Source Insufficient to Satisfy Heightened Pleading Requirements of PSLRA (Private Securities Litigation Reform Act) New York Federal Court Holds
Plaintiffs filed a class action against Bioenvision and certain officers and directors, and Perseus-Soros Biopharmaceutical Fund (Bioenvision’s largest pre-merger shareholder) alleging violations of federal securities laws; the class action complaint alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, against Perseus-Soros under section 13(d) of the Exchange Act, and against the individual defendants and Perseus-Soros under section 20(a). Vladimir v. Bioenvision Inc., ___ F.Supp.2d ___, 2009 WL 857552, *1 (S.D.N.Y. March 31, 2009). According to the allegations underlying the class action, “defendants artificially deflated the value of Bioenvision’s stock by issuing and by failing to correct or update statements that contained material misrepresentations and omissions as to Bioenvision’s plan to enter into a merger with Genzyme.” Id. Defense attorneys moved to dismiss the class action on the grounds that the allegations in the class action complaint failed to meet the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA). Id. Defendants further argued that “they had no duty to disclose the merger discussions until May 29, 2007, the date when the merger was announced publicly.” Id. Plaintiffs countered that defendants’ failure to disclose the plan to sell Bioenvision to Genzyme had the practical effect of artificially suppressing Bioenvision’s stock price, causing damage to plaintiffs because they sold their stock before the merger was officially announced (at which time the stock price skyrocketed). Id., at 4. Essentially, the “false and misleading” statements consisted of disclosing that its “primary focus” was the development of cancer treatments when its real focus was to find a merger partner. Id., at *5. The district court granted the defense motion and dismissed the class action complaint.
Cutting to the heart of the federal court’s analysis, the district court held that under Second Circuit authority “‘a corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact.’” Vladimir, at *7 (citation omitted). Put simply, “[t]here is no specific duty to disclose merger negotiations under SEC rules until they become definitive agreements.” Id. (citations omitted). And since there was no duty to disclose, defendants’ silence could not be deemed misleading. Id. (citation omitted). Plaintiffs argued that the parties had reached a “definitive agreement” to merge in January 2007, thus creating the duty to disclose. Id. But as this allegation was supported only by an anonymous source, it failed to satisfy the PSLRA’s heightened pleading requirements. Id., at *7-*8. Further, as the federal court observed, “Under plaintiffs’ proposed rule, any public company that publicly described its core business or strategy – which is to say, every public company – would be required to disclose potential or actual merger negotiations. Statements that do not raise the subject of mergers, even tangentially, cannot impose a duty to disclose all material information concerning merger discussions.” Id., at *10. The district court ultimately concluded that the allegations in the class action complaint did not plead fraud with particularity as required by Rule 9(b), and in any event do not support a duty to disclose. Id., at *12. Accordingly, the court granted the motion to dismiss by the Bioenvision defendants. Id., at *13.
With respect to the class action claims against Perseus-Soros, the district court noted that a private right of action does not exist under Section 13(d), but that a violation of that statute can be the predicate for a Rule 10b-5 claim. Vladimir, at *13. The court again found that plaintiffs’ claims “improperly rely upon an anonymous source for the key allegation that an undefined secret agreement was formed between Perseus-Soros and Bioenvision.” Id., at *14. Moreover, “plaintiffs have alleged little more than that individuals on the Bioenvision board who may have been controlled by Perseus-Soros encouraged the other directors to take a step that could lead to a merger with Genzyme.” Id., at *17. And as to the Section 20(a) claims, plaintiffs’ failure to adequately allege any other violation of the Exchange Act meant that the class action could not state a claim for control person liability. See Vladimir, at *19. Accordingly, the district court granted the defense motion to dismiss the class action complaint, but did so without prejudice. Id.