Securities Law Alert
In This Edition:• Eighth Circuit: Affirms Dismissal of Derivative Action After Applying the Delaware Supreme Court’s
Recently Revised Demand Futility Test
• Fourth Circuit: Affirms Dismissal of Class Action Alleging That Data Protection and Privacy
Statements Were False or Misleading• Southern District of New York: Denies Dismissal of Claims Concerning the Length of a Company’s
Sales Cycle• Southern District of New York: Dismisses Putative Class Action Against Drug Company After
Applying Matrixx Materiality Standard
April 2022

Eighth Circuit: Affirms
Dismissal of Derivative Action
After Applying the Delaware
Supreme Court’s Recently
Revised Demand Futility Test
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Simpson Thacher & Bartlett LLPOn April 7, 2022, the Eighth Circuit affirmed
a district court’s dismissal, on the grounds offailure to plead demand futility, of a derivative
action alleging that a pre-merger proxystatement contained false and misleadingstatements in violation of Section 14(a) of
the Exchange Act. Carpenters’ Pension Fundof Illinois v. Neidorff, 2022 WL 1039671(8th Cir. 2022) (Shepherd, J.). The court
held that plaintiffs failed to plead a material
misrepresentation or omission and therefore
failed to plead facts demonstrating that atleast half of the board faced a substantial
likelihood of liability on the Section 14(a)claim. The court thus affirmed the district
court’s dismissal based on plaintiffs’ failure toallege that demand would have been futile.

A few months after merging with a target
company, the corporation disclosed anincrease in reserves for the target’s increased
liabilities. A stock drop followed. Plaintiffs
alleged five derivative claims1 against certainof the corporation’s former and then-current
directors and officers. As to the claim alleging
a violation of Section 14(a), plaintiffs allegedthat from the time the proxy statement wasissued until the closing date, the corporation’s
directors and officers concealed theirknowledge of the target’s various financial
and business problems.
Defendants moved to dismiss on the grounds
that plaintiffs failed to plead demand futility.
The district court granted defendants’ motion
and dismissed the case with prejudice.

1. The five claims were: (1) violation of Section 14(a) of the
Exchange Act; (2) breach of fiduciary duties of good faith, fairdealing, loyalty, and due care; (3) breach of fiduciary duty ofloyalty, good faith, and candor in connection with securities
law violations; (4) insider trading; and (5) unjust enrichment.
Below, we focus exclusively on the court’s reasoning
concerning plaintiffs’ Section 14(a) claim.

Delaware’s Demand Futility Test
Before reaching the merits, the court notedthat it must first determine the proper
framework for assessing demand futility.
Because the nominal defendant was a
Delaware corporation, the court applied
Delaware law and the demand futility test
articulated last year by the Delaware Supreme
Court in UFCW Union & Participating Food
Indus. Emps. Tri-State Pension Fund v.
Zuckerberg, 262 A.3d 1034 (Del. 2021)(Tri-State).2 After reviewing Tri-State’s
three-part test, the court focused exclusively
on the second Tri-State question, i.e., whether
at least half of the board (here, five of the nine
directors) faced a substantial likelihood of
liability as to any of plaintiffs’ claims.3

Demand Not Excused Because
Plaintiffs Failed to Plead a Material
Misrepresentation or Omission
The court concluded that plaintiffs failed toplead particularized facts demonstrating thatat least half of the directors faced a substantial
likelihood of liability on the Section 14(a)claim because plaintiffs failed to plead facts
showing that the proxy statement contained amaterial misrepresentation or omission. The
court pointed out that the proxy statement
used bold type to warn stockholders of “theuncertainties inherent in the unaudited
financial projections” and cautioned them“not to place undue, if any, reliance on such
unaudited financial projections.” The court
found that this cautionary language related
directly to the allegedly misleading pro forma
analyses and therefore rendered the allegedomissions immaterial as a matter of law.

Fourth Circuit: Affirms
Dismissal of Class Action
Alleging That Data Protection
and Privacy Statements Were
False or Misleading
On April 21, 2022, the Fourth Circuit affirmed
a district court’s dismissal of a putative
securities fraud class action against a hotel
chain company and certain of its officers anddirectors alleging that the company’s failure
to disclose vulnerabilities in the IT systemsof another hotel chain with which it merged
rendered various of its public statements false
or misleading in violation of Section 10(b).
In re Marriott Int’l, 2022 WL 1178526 (4thCir. 2022) (Heytens, J.). The court held thatplaintiff failed to adequately allege that anyof the company’s statements were false or
misleading when made.
In 2016, the company merged withanother hotel chain and subsumed all of its
operations, including its computer systems,
reservation software and databases. In
2018, the company learned of a substantial
data breach related to the subsumed
guest reservation database. Subsequently,
plaintiff commenced an action alleging thatthe company’s failure to disclose severe
vulnerabilities in the subsumed IT systems
rendered 73 different public statements false

2. Please click here to read our discussion of the Delaware
Supreme Court’s decision in Tri-State.
3. The Tri-State demand futility test consists of three questions
to be analyzed on a director-by-director basis: “(i) whether the
director received a material personal benefit from the alleged
misconduct that is the subject of the litigation demand; (ii)whether the director faces a substantial likelihood of liability
on any of the claims that would be the subject of the litigation
demand; and (iii) whether the director lacks independence
from someone who received a material personal benefit
from the alleged misconduct that would be the subject of thelitigation demand or who would face a substantial likelihoodof liability on any of the claims that are the subject of thelitigation demand.” Demand is excused as futile if the answer
to any of the three questions is “yes” for at least half of themembers of the demand board. The court did not analyze
the first or third question beyond noting that there was noappellate issue requiring resolution.

2

or misleading. The district court granted thecompany’s motion to dismiss with prejudice,concluding that plaintiff did not adequately
allege a false or misleading statement oromission, a strong inference of scienter or losscausation. Plaintiff appealed, narrowing its
challenge to 18 statements.
On appeal, the Fourth Circuit pointed out that“[n]ot all material omissions are actionable.”
Citing Phillips v. LCI Int’l, 190 F.3d 609(4th Cir. 1999), the court explained that “anomission is actionable only if—absent the fact
omitted—a reasonable investor, exercising
due care, would gather a false impression
from a statement, which would influence aninvestment decision.”
Plaintiff’s first set of challenged statements
concerned the importance of data protection
to the company’s business. Plaintiff
challenged the company’s public statementsthat “the integrity and protection of customer,
employee, and company data is critical to us
as we use such data for business decisions
and to maintain operational efficiency.”
Plaintiff claimed that by failing to disclosethe “vulnerable state” of the subsumed IT
systems, the company’s statements createda misleading impression that the company
was securing and protecting the acquired
customer data.
The Fourth Circuit disagreed, noting thatplaintiff’s “whole theory of the case turns
on those statements being true—i.e., thatdata integrity is critically important to [thecompany] and its investors.” The court
explained that “[r]eiterating this basic

truth is neither misleading nor creates
the false impression [plaintiff] suggests.”
The court agreed with the district courtthat the company’s statements on theimportance of data protection “made no
characterization at all with respect to thequality of its cybersecurity, only that [thecompany] considered it important.” The
Fourth Circuit also stated that a reasonable
reader could not have understood thecompany to be overrepresenting its dataprotection because the same SEC submissionthat contained the challenged statements
also disclosed key risks. For example, thecompany repeatedly warned that its systems
may not satisfy the “information, security,and privacy requirements” imposed by laws
and regulations and warned of information
system breaches.
The court also determined that plaintiff’s
arguments concerning privacy statements4 oncompany websites failed for similar reasons.
The court held that plaintiff’s allegations,even if true, did not demonstrate that thechallenged privacy statements were false
or misleading. The court pointed out thatplaintiff conceded that the company devoted
resources and sought to strengthen the
security of the subsumed systems. The court
also stated that no reasonable investor could
have been misled by the privacy statements asthey were accompanied by sweeping caveats.

4. For example, one company website stated that the company“seeks to use reasonable organizational, technical andadministrative measures to protect” personal data, but
noted that “no data transmission or storage system can be
guaranteed to be 100% secure.”3Southern District of New
York: Denies Dismissal of
Claims Concerning the Lengthof a Company’s Sales Cycle
On February 25, 2022, the Southern Districtof New York denied a motion to dismiss aclaim under Section 11 of the Securities Act
against a company and certain of its officers
and directors alleging that the company’s IPO
registration statement included materiallymisleading misstatements concerning thelength of the company’s sales cycle. In re
Tufin Software Techs. Sec. Litig., 2022 WL
596861 (S.D.N.Y. 2022) (Woods, J.).5 The
court held that plaintiff sufficiently allegedthat defendants’ statements were false andmaterially misleading.
Following its IPO, the company reported
lower revenue and profit than prior guidance,
citing an inability to close a number oftransactions as one reason for the results.
The company’s share price fell 24% following
these disclosures. After various lawsuits
were consolidated, plaintiff alleged one
cause of action against the company and theindividual defendants for violating Section
11 of the Securities Act.6 Plaintiff alleged that
defendants’ statements that the company’s“sales cycle usually lasts several months fromproof of concept to purchase order, and isoften longer for larger transactions” were false
and materially misleading. The company andthe individual defendants moved to dismiss.

Plaintiff Sufficiently Alleged
That Defendants’ Statements as
to the Length of the Company’s
Sales Cycle Were False andMaterially Misleading
The court concluded that plaintiff
sufficiently pleaded that defendants’ sales
cycle statements were false and materiallymisleading. As to falsity, the court noted thatthree confidential witnesses stated that thesales cycle was not usually several months,
5. The court granted the motion to dismiss as to the other bases
for the Section 11 claim concerning the company’s salesforce
training practices and customer education.
6. Section 11 of the Securities Act provides for potential liability
where “any part of the registration statement, when such part
became effective, contains an untrue statement of a material
fact or omitted to state a material fact required to be statedtherein or necessary to make the statements therein not
misleading.”

but could take at least two years to closeand “was typically at least a year,” and thata six-month deal was only achievable withluck. The court reasoned that if a six-monthdeal was only achievable with luck, then thestatement that the sales cycle “usually” took
only several months may have been false.

Defendants argued that there was no
falsity because the registration statement
adequately disclosed the length of the sales
cycle by stating: “our sales cycle usually lasts
several months from proof of concept topurchase order, and is often longer for larger
transactions”; that the company’s transactions
were “often even longer than several months,
less predictable, and more resource-intensive
for larger transactions”; and that “our sales
cycle is long and unpredictable.”
The court stated that the term “usually”
suggests that, more often than not, the sales
cycle lasted only several months. The court
explained that stating that a sales cycle was“often” longer would not, as a matter oflaw, preclude a reasonable investor frominterpreting the statement to mean that thesales cycle usually lasted only several months
instead of one to two years. Similarly, thecourt stated that the disclosure that the sales
process is long and unpredictable “fails to
sufficiently counteract [the] statement thatthe sales cycle ‘usually’ lasts several months.”
The court pointed out that the terms “long”
and “unpredictable” did not denote a specificamount of time and defendants did notprovide “any compelling reason to suggestthat a reasonable investor would interpretthat statement to mean that the sales cycle infact took one or two years.”
4

Southern District of New
York: Dismisses Putative Class
Action Against Drug Company
After Applying Matrixx
Materiality Standard
On March 21, 2022, the Southern Districtof New York dismissed a putative securities
fraud class action alleging that a drug
company and certain of its executives failed todisclose information concerning the safety of
its only drug. Rice v. Intercept Pharms., 2022
WL 837114 (S.D.N.Y. 2022) (Liman, J.). The
court stated that under Matrixx Initiatives
v. Siracusano, 563 U.S. 27 (2011), the mere
existence of reports of serious adverse events
does not significantly alter the “total mix” ofinformation available to investors. The court
then determined that, unlike in Matrixx, thecomplaint did not contain any allegations
constituting the “something more” that would
significantly alter the total mix of information.

After the FDA approved the company’s drug
to treat a liver disease, there were reportsof two serious adverse events (“SAEs”)7 inpatients using it. The company thereaftersought to have the drug approved to treat
a second liver disease. The company
experienced stock drops following company
disclosures revealing issues the company
faced seeking FDA approval and a publishedarticle indicating that the FDA wasinvestigating whether the drug may causeliver injury. Plaintiffs alleged that defendants
7. Information on SAEs is publicly available through an FDA
database. This can prove challenging to plaintiffs alleging
securities fraud claims based on omissions as generally
an efficient market incorporates all publicly available
information.

violated Section 10(b) of the Exchange Act
by making a variety of statements about the
drug without disclosing the SAEs. Plaintiffs
claimed that this constituted securities fraud
because the undisclosed information wasmaterial to: (i) the safety and continued use of
the drug to treat the first liver disease; and (ii)the regulatory approval of the drug to treat
the second liver disease. Defendants argued
that the omitted SAEs were immaterial as amatter of law.

The Court Analyzes Materiality
Under Matrixx
The court looked to Matrixx for theframework needed to analyze whether
plaintiffs adequately pled that the allegedly
undisclosed SAEs were material. In Matrixx,
plaintiffs alleged that a drug company failed
to disclose reports of a possible link between
its leading product and patients’ loss of theirsense of smell (anosmia). The Supreme
Court stated that the relevant question is“whether a reasonable investor would haveviewed the nondisclosed information as
having significantly altered the total mix
of information made available.” Matrixx,
563 U.S. at 44 (quoting Basic v. Levinson,
485 U.S. 224 (1988)). The Court held that“the mere existence of reports of adverse
events—which says nothing in and of
itself about whether the drug is causing
the adverse events—will not satisfy thisstandard. Something more is needed, but thatsomething more is not limited to statisticalsignificance and can come from the source,
content, and context of the reports.” The
Court concluded that this “something more”
was alleged in Matrixx because the complaint
alleged that the drug company received avariety of information that plausibly indicateda reliable causal link between the drug andpatients’ anosmia. The Court found that this“sufficed to raise a reasonable expectationthat discovery will reveal evidence satisfying
the materiality requirement.”

Plaintiffs Fall Short of Alleging
the “Something More” Needed toSatisfy Matrixx
Applying Matrixx, the court determinedthat plaintiffs failed to adequately allege
that the nondisclosure of the two SAEs wasmaterial because, in contrast to Matrixx,
5

plaintiffs’ allegations did not constitutethe “something more” needed to meet themateriality standard. The court rejected
plaintiffs’ argument based on the risk odds
ratio (“ROR”) scores for each SAE. The ROR
is the metric that gauges the frequency ofadverse events. Plaintiffs alleged that an
ROR score above 1 indicates a higher than
expected reporting rate, and that many in theindustry assume that an ROR score above 2
warrants attention. Plaintiffs further allegedthat an unbiased third party determinedthat the ROR for the SAEs was “staggering
and warranted attention.” As to the first SAE(concerning reported cases of autoimmune
hepatitis) the court found that the complaint
itself undermined the significance of the ROR
score because the ROR score was 1.83, below
the ROR score of 2 that the complaint alleged“warrants attention” and “far below” thescores of 9 and 18 that the complaint called“staggering.” The second SAE (concerning

reported cases of hepatorenal syndrome)
had an ROR score of 5.08. The court noted,
however, that the FDA was aware of halfof those cases when it revised the drug’s
label but chose not to include them on thewarning label.
The court further pointed out that plaintiffs
alleged no facts indicating that the two SAEs
were in any way causally linked to the drug orotherwise material. The court determined thatplaintiffs’ conclusory assertion—that the longterm safety of the drug was material to the
drug’s approval for the second disease—could
not fill this gap. The court noted that plaintiffs
failed to allege anything linking the SAEs inpatients with the first disease to the FDA’s
drug approval considerations or to plausibly
allege that the SAEs had any significanceconcerning the drug’s long-term safety.

This edition of the
Securities Law Alert was edited byPeter E. Kazanoff / + 1-212-455-3525
pkazanoff@stblaw.com
Linton Mann III / +1-212-455-2654
lmann@stblaw.com andSimona G. Strauss / +1-650-251-5203
sstrauss@stblaw.com

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