A&O Shearman | Securities Litigation Blog | Western District Of Washington Grants Motion To Dismiss Proposed Class Action Against Software Company And Its Board Of Directors
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  • Western District Of Washington Grants Motion To Dismiss Proposed Class Action Against Software Company And Its Board Of Directors


    On March 1, 2024, Judge Marsha J. Pechman of the United States District Court for the Western District of Washington dismissed with prejudice a putative shareholders’ class action against a software company (the “Company”) and its Board of Directors (“Board”), alleging violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). Sohovich v. Avalara, Inc., No. C22-1580 MJP (W.D. Wash. Mar. 1, 2024). Plaintiff alleged that the Company and its Board misled investors to vote to approve its $8.4 billion sale—priced at $93.50 per share—allegedly by deflating its financial projections and misrepresenting the Company’s performance and outlook in the proxy statement (“Proxy”). The Court found that plaintiff failed to adequately plead the falsity of any one of the four misstatements and dismissed it with prejudice. 

    The Company, a leading provider of cloud-based tax compliance software, grew at a rapid rate from 2015 through 2021, in large part due to its ability to acquire other similar companies and, therefore, expand its client base. According to the complaint, in approximately April 2022, a decline in stock price allegedly attracted interest from private equity firms looking to buy the Company. In response, the Company began a sale process in April 2022 pursuant to which it prepared financial projections that the Board approved. In August 2022, the Board approved a merger agreement priced at $93.50 per share. The Proxy circulated to Company shareholders in advance of the vote on the sale allegedly contained four misstatements to entice shareholders to vote to approve the sale. Specifically, plaintiff claimed that the Proxy (i) validated financial projections that allegedly were understated, (ii) allegedly misstated that the Company’s revenues fell below “management’s expectations” when they aligned with “public guidance,” (iii) allegedly conveyed that weaknesses and challenges—namely the loss of a key partner and changing market conditions—that the Company and Board had previously downplayed, beleaguered the Company, and (iv) allegedly misrepresented a shareholder services firm approval of the sale. 

    The Court granted the motion to dismiss with prejudice concluding that plaintiff failed to allege a plausible Section 14(a) claim and that additional amendments would be futile. First, the Court found that plaintiff’s allegation that the Company’s financial projections omitted projected revenues from future acquisitions failed to render those projections objectively false because the Company had no planned acquisitions at the time and did not consider such inorganic growth in preparing similar forecasts in the past. Second, the Court opined that it could at once be true that the Company’s Q2 2022 results fell below “management’s expectations,” as stated in the Proxy, and that those results also were within range of management’s “public guidance.” Because plaintiff did not allege that “management’s expectations” are interchangeable with management’s “public guidance,” the Court found plaintiff failed to plead that the Proxy’s statements about the Company’s Q2 2022 results were objectively false. Third, the Court found that plaintiff failed to identify any numerically-specific prior statements that conflicted with the Proxy’s statements about the Company’s weaknesses and risks, including with respect to the loss of one of the Company’s key partners and deteriorating market conditions. Lastly, the Court held that the Company and Board had not misled shareholders to believe a particular shareholder services firm recommended without reservation the Company’s sale by cherry picking only the positive portions of the somewhat critical report in the Schedule 14A filed with the SEC. The Court found significant that the firm’s report in its entirety—including the portions thereof criticizing the deal and qualifying the firm’s support as cautionary—was available publicly and thus part of the “total mix of information available” to investors.

    The Court also dismissed the Section 20(a) claims because plaintiff did not adequately allege a single predicate violation of Section 14(a). 

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