Securities Law Alert

In This Edition:• Eighth Circuit: Descriptions Such as “Unmatched Quality” Are Inactionable Puffery• Ninth Circuit: (1) PSLRA’s Safe Harbor Does Not Protect Non-Forward-Looking Representations
Included in a Forward-Looking Statement, and (2) Cautionary Language Must Specifically Address
the Possible Inaccuracy of Such Non-Forward-Looking Representations• Delaware Supreme Court: (1) Deal Price “Will Often Be” the Best Evidence of Fair Value in anArm’s-Length Transaction Following a “Robust” Sale Process, and (2) There Is No Basis for a“Private Equity Carve Out” to Reliance on the Merger Price• Southern District of New York: A Company Has No Duty to Disclose a Dispute with a Significant
Customer Until the Customer Terminates the Relationship

Eighth Circuit: Descriptions
Such as “Unmatched Quality”
Are Inactionable Puffery“2017 Litigation
Department of theYear (Finance)”– New York Law Journal

On July 25, 2017, the Eighth Circuit held thatstatements touting a product’s “unmatched
speed, reliability, quality and connectivity”
were too “vague and nonverifiable” toconstitute actionable misstatements. In re
Stratasys Ltd. S’holder Sec. Litig., 2017 WL
3139438 (8th Cir. 2017) (Benton, J.).
The Eighth Circuit explained that“[n]o reasonable investor would rely on
soft, puffing statements—which encompass
optimistic rhetoric and promotional phrases
used to champion the company but [are]devoid of any substantive information.”
The court further stated that “[o]ptimistic
statements are not actionable if they cannot
be supported by objective data or [are not]otherwise subject to verification by proof.”
Applying these standards, the court held thestatements in question were “such obvious
hyperbole that no reasonable investor would
rely upon them.”
The Eighth Circuit rejected plaintiffs’
contention that the statements at issue

Simpson Thacher & Bartlett LLP

August 2017

were “material” because they were madein connection with “a highly anticipatedproduct launch” and “in the context of[the company’s] SEC filings.” The court
found the statements too “indeterminate” tobe “plausibly understood as a description ofhistorical fact.”
In so holding, the Eighth Circuit distinguishedthe Supreme Court’s decision in Virginia
Bankshares v. Sandberg, 501 U.S. 1083
(1991). There, the Court deemed potentiallyactionable a representation by a bank’s
directors that the purpose of a planned
merger was “to achieve a ‘high’ value, which[the directors] elsewhere described as a ‘fair’price.” Virginia Bankshares, 501 U.S. 1083.
The Virginia Bankshares Court stated that“such conclusory terms in a commercial
context are reasonably understood to rest
on a factual basis,” and held the directors’
statement could give rise to liability under
the securities laws even though it “did not
express a reason in dollars and cents.” The
Eighth Circuit found the Virginia Bankshares“holding does not preclude statements, likethe ones here, from being so vague” as to beinactionable. Stratasys, 2017 WL 3139438.

Ninth Circuit: (1) PSLRA’s
Safe Harbor Does Not Protect
Non-Forward-Looking
Representations Included in a
Forward-Looking Statement,and (2) Cautionary Language
Must Specifically Address
the Possible Inaccuracy ofSuch Non-Forward-Looking
Representations
On July 28, 2017, the Ninth Circuit held that“a defendant may not transform non-forwardlooking statements into forward-looking
statements that are protected by the safe
harbor provisions of the” Private Securities
Litigation Reform Act (“PSLRA”) “by
combining non-forward-looking statements
about past or current facts with forwardlooking statements about projected revenues
and earnings.” In re Quality Sys. Sec.
Litig., 2017 WL 3203558 (9th Cir. 2017)(Fletcher, J.).

If a Statement of Current Facts
Includes Predictions or Projections,the PSLRA’s Safe Harbor Only
Applies to the Forward-Looking
Aspects of That Statement
The PSLRA’s safe harbor provides that “adefendant will not be liable for a false or
misleading statement if it is forward-looking
and either is accompanied by cautionary
language or is made without actual knowledge
that it is false or misleading.”1
The Ninth Circuit explained that it has “notpreviously addressed … the status of mixed
statements under the PSLRA.” However,the court noted that “[t]he First, Second,Third, Fifth, and Seventh Circuits have allconcluded that where defendants makemixed statements containing non-forwardlooking statements as well as forward-looking
statements, the non-forward-looking
statements are not protected by the safe
harbor of the PSLRA.”
1. The Ninth Circuit noted that this issue arose in Police
Retirement System of St. Louis v. Intuitive Surgical, 759 F.3d
1051 (9th Cir. 2014). However, the Intuitive Surgical court
did not reach the question of the applicability of the PSLRA’s
safe harbor to “mixed statements” because the court found thestatements at issue were forward-looking when “examined as awhole.”The Ninth Circuit stated that it “agree[d] withthese circuits.” The court explained that “[t]hemere fact that a statement contains somereference to a projection of future events
cannot sensibly bring the statement within
the safe harbor if the allegation of falsehood
relates to non-forward-looking aspects ofthe statement.” Id. (quoting In re Stone &Webster Sec. Litig., 414 F.3d 187 (1st Cir.
2005)).
The Ninth Circuit found the First Circuit’s
decision in Stone & Webster offered a“useful example of an unprotected false or
misleading non-forward-looking statement
embedded in a mixed statement.” The First
Circuit considered the applicability of the
PSLRA’s safe harbor to representations
that the company “has on hand and hasaccess to sufficient sources of funds tomeet its anticipated operating, dividendand capital expenditure needs.” The court
found “the alleged falsehood” was “not thatthe [c]ompany was understating its future
cash needs,” but rather, “in the fact thatthe statement claimed that the [c]ompany
had access to ample cash at a time whenthe [c]ompany was suffering a dire cash
shortage.” Stone & Webster, 414 F.3d 187.
The First Circuit held “the safe harbor of the
PSLRA does not confer a carte blanche to lie
in such representations of current fact.”

Cautionary Language for a “Mixed
Statement” Must Specifically
Address the Possibility That the
Non-Forward-Looking Portion of
the Statement May Be False
The Ninth Circuit determined that in order“[f]or cautionary language accompanying aforward-looking portion of a mixed statement
to be adequate under the PSLRA, that
language must accurately convey appropriate,
meaningful information about not only theforward-looking statement but also the nonforward-looking statement.” The court foundthat “[w]here … forward-looking statements
are accompanied by non-forward-looking
statements,” the possibility “that the nonforward-looking statements are, or may be,
untrue is clearly an ‘important factor’ of whichinvestors should be made aware.”
The Ninth Circuit underscored that “[i]f thenon-forward-looking statement is materiallyfalse or misleading, it is likely that no
cautionary language—short of an outright2

admission of the false or misleading nature of
the non-forward-looking statement—wouldbe ‘sufficiently meaningful’ to qualify thestatement for the safe harbor.”

Delaware Supreme Court:(1) Deal Price “Will Often
Be” the Best Evidence of Fair
Value in an Arm’s-Length
Transaction Following a“Robust” Sale Process, and(2) There Is No Basis for a“Private Equity Carve Out” toReliance on the Merger Price
On August 1, 2017, the Delaware Supreme
Court stated that “the sale value resulting
from a robust market check will often be themost reliable evidence of fair value, and that
second-guessing the value arrived upon by
the collective views of many sophisticatedparties with a real stake in the matter ishazardous.” DFC Global Corp. v. Muirfield
Value Partners, 2017 WL 3261190 (Del. 2017)(Strine, C.J.). However, the court did not
adopt a presumption that the sale price is thebest evidence of fair value “in certain cases
involving arm’s-length mergers” because it
found that 8 Del. C. § 262(h),2 the Delaware
appraisal statute, vests the Chancery Court
with discretion to determine fair value “in thefirst instance.”
Significantly, the Delaware Supreme Court
rejected two arguments frequently used
to challenge reliance on the merger price.
First, the court held that market forces
can adequately account for regulatory risk.
Second, the court found no basis for a“private equity carve out” to deference to thedeal price.

2. Delaware’s appraisal statute provides in relevant part as follows:[T]he Court shall determine the fair value of the shares
exclusive of any element of value arising from theaccomplishment or expectation of the merger orconsolidation, together with interest, if any, to be paid
upon the amount determined to be the fair value. In
determining such fair value, the Court shall take into
account all relevant factors.

No Presumption in Favor of
the Deal Price Applies inArm’s-Length Mergers
The Delaware Supreme Court rejected thecompany’s contention that the court “should
establish, by judicial gloss, a presumptionthat in certain cases involving arm’s-length
mergers, the price of the transaction giving
rise to appraisal rights is the best estimateof fair value.” The court determined thatsuch a presumption “has no basis in thestatutory text [of 8 Del. C. § 262(h)], which
gives the Court of Chancery … the discretionto ‘determine the fair value of the shares’ bytaking into account ‘all relevant factors.’”
In reaching its decision, the Delaware
Supreme Court “adhere[d] to [its] priorruling in” Golden Telecom v. Global GT LP,
11 A.3d 214 (Del. 2010). There, the court
expressly declined to “adopt a standard
requiring conclusive or, in the alternative,
presumptive deference to the merger price inan appraisal proceeding.” Golden Telecom,
11 A.3d 214. The Golden Telecom court
found “Section 262(h) unambiguously calls
upon the Court of Chancery to perform an
independent evaluation of ‘fair value’ at thetime of a transaction.” The court reasoned
that “[r]equiring the Court of Chancery todefer—conclusively or presumptively—to themerger price, even in the face of a pristine,
unchallenged transactional process, would
contravene” the statutory language and“inappropriately shift the responsibility todetermine ‘fair value’ from the court to theprivate parties.”

Economic Realities Suggest That theDeal Price from a “Robust” Sales
Process Will Generally Provide theBest Evidence of Fair Value
The DFC Global court made it clear that its“refusal to craft a statutory presumption
in favor of the deal price when certain
conditions pertain does not in any way signal”
its disagreement with the economic principles
underlying such a presumption. The court
stated that it had “little quibble with theeconomic argument that the price of a merger
that results from a robust market check,against the back drop of a rich informationbase and a welcoming environment
for potential buyers, is probative of thecompany’s fair value.”

8 Del. C. § 262(h).
3The Delaware Supreme Court explainedthat “[m]arket prices are typically viewed[as] superior to other valuation techniques
because, unlike … a single person’s
discounted cash flow model, the market
price should distill the collective judgment of
the many based on all the publicly available
information about a given company and thevalue of its shares.” The court found that
“real world transaction prices can be the mostprobative evidence of fair value even throughappraisal’s particular lens,” which requiresconsideration of the petitioner’s “pro rata
share of the appraised company’s value asa ‘going concern.’” The court underscoredthat “the purpose of an appraisal is not tomake sure that the petitioners get the highest
conceivable value that might have beenprocured had every domino fallen out of thecompany’s way.” Rather, the court stated that“fair value is just that, ‘fair.’”

The Delaware Supreme Court explainedthat “all disciplined buyers, both strategic
and financial, have internal rates of returnthat they expect in exchange for taking on
the large risk of a merger, or for that matter,
any sizeable investment of its capital.” Thecourt found the fact “[t]hat a buyer focuseson hitting its internal rate of return has norational connection to whether the price it
pays as a result of a competitive process is afair one.”Market Forces Adequately Take Into
Account Regulatory Uncertainty
In the case before it, the Delaware Supreme
Court found the Chancery Court had erredin finding the deal price “unreliable” because
the company’s “future performance [was]dependent upon the outcome of regulatory
actions.” The Delaware Supreme Court
explained that publicly-traded companies ina broad range of industries “are subject toclose regulation, the development of which
can affect their future cash flows.” The court
stated that “[p]recisely because of that reality,
the market’s assessment of [a company’s]
future cash flows necessarily takes regulatory
risk into account as it does with all the otherreasonable uncertain factors that affect acompany’s future.”

There Is No Basis for a “Private
Equity Carve Out” to Deference tothe Deal Price in Appraisal Actions
The Delaware Supreme Court held theChancery Court had further erred byconcluding that it could “not give dispositive
weight to the deal price because theprevailing buyer” was a private equity firmthat “required a specific rate of return on its
transaction.” The court found no basis in the“economic literature” or the record for theimposition of a “‘private equity carve out’ … inwhich the deal price resulting in a transaction
won by a private equity buyer is not a reliableindication of fair value.”

The Chancery Court Must Justify
Its Reasons for Weighting Each
Valuation MetricIn the case before the Delaware Supreme
Court, the Chancery Court had “afford[ed]equal weight to the deal price, its discounted
cash flow model, and its comparable
companies analysis” without explaining thebasis for its approach.
The Delaware Supreme Court recognizedthat when faced with competing valuation
methods, the Chancery Court may be“tempted to … take[ ] every valuation method
put in the record, give[ ] each equal weight,
and then divide[ ] by the number of them.”
However, the Delaware Supreme Court
instructed that the Chancery Court must
“explain its weighting in a manner thatis grounded in the record before it” when“exercis[ing] its considerable discretion” inan appraisal action. The Delaware Supreme
Court observed that “laying down … fixedrules that state how competing approaches
are to be weighted is impossible.” “In somecases, it may be that a single valuation metricis the most reliable evidence of fair value”
while “[i]n other cases, it may be necessary
to consider two or more factors.” The court4

stated that “[w]hat is necessary in any
particular case” is for the Chancery Court
to set forth its rationale for the weight it
accorded to each competing valuation.

Southern District of New York:A Company Has No Duty
to Disclose a Dispute with aSignificant Customer Until
the Customer Terminates theRelationship
On August 1, 2017, the Southern District of
New York held that a company had no duty todisclose a contractual pricing dispute with oneof its largest customers even though it had
publicly described the parties’ relationshipas “very, very, solid.” In re Express Scripts
Holding Co. Sec. Litig., 2017 WL 3278930(S.D.N.Y. 2017) (Ramos, J.). The court founddispositive the absence of any allegation ofa “definitive statement” of the customer’s
intent to terminate the contract during theclass period.
According to the complaint, “the parties had afundamental $15 billion difference of opinion
on the contract; were refusing to negotiatethat gap at all; and repeatedly accused eachother of acting in bad faith.” Twice before theend of the class period, the customer served
the company with formal notifications ofbreach of contract. The customer ultimately
filed suit against the company for breach ofcontract.
Plaintiffs contended that because defendants
chose to discuss the “purported strength”
of the customer relationship and theparties’ “allegedly productive negotiations,”
defendants were then “obligated to speak
fully and truthfully” about all aspects of
those negotiations. The court recognized that“[u]nder certain circumstances, … a company
could have a duty to disclose a breach ofcontract that puts an important, publiclytouted business relationship at great risk.”
Id. (quoting In re Hi-Crush Partners L.P.
Sec. Litig., 2013 WL 6233561 (S.D.N.Y. Dec.
2, 2013)). But “[w]here an outcome is merely
speculative,” as in the instant action, “theduty to disclose does not attach.”allegedly “publicly hyped the importance of
its relationship” with one of its customers
even after that customer had terminatedthe contract. Hi-Crush, 2013 WL 6233561.
The Express Scripts court explained that
“Hi-Crush does not hold that a party has
an obligation to disclose all disputes with amajor customer.” Rather, the Hi-Crush court
found that “the dispute ‘ripened’ as to trigger
a duty to disclose on the date” the customer
notified the company of its terminationof the agreement. Express Scripts, 2017
WL 3278930 (quoting Hi-Crush, 2013
WL 6233561).
The Express Scripts court emphasized thatin the case before it, “the actual contractual
negotiations were ongoing” during theclass period “and no termination right was
exercised.” The court found that there wasno duty to disclose “because no intent oftermination was provided during the [c]lass[p]eriod.” The court also rejected plaintiffs’
contention that the company “shouldhave revised its accounting treatment” ofthe contract at issue. The court found thecomplaint did not “plausibly allege that[the company] did not believe its statements
regarding the useful life of the [c]ontract
for accounting purposes at the time thestatements were made,” as required under theSecond Circuit’s decisions in Fait v. Regions
Financial Corp., 655 F.3d 105 (2d Cir. 2011)
and City of Omaha Civilian Employees’
Retirement System v. CBS Corp., 679 F.3d 64(2d Cir. 2012).

The Securities Law Alertis edited by Paul C. Gluckow
pgluckow@stblaw.com /+1-212-455-2653, Peter E. Kazanoffpkazanoff@stblaw.com /+1-212-4553525 and Jonathan K. Youngwood
jyoungwood@stblaw.com /+1-212-455-3539.

The Express Scripts court distinguished its
prior decision in Hi-Crush. There, a company
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