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(Article from Securities Law Alert, October/November 2019) 

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On September 24, 2019, the Western District of Kentucky dismissed a securities fraud action alleging that financial projections that assumed no future acquisitions by the company rendered a proxy statement misleading, in violation of Section 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9 promulgated thereunder. Laborers’ Local #231 Pension Fund v. PharMerica Corp., 2019 WL 4645583 (W.D. Ky. Sept. 24, 2019) (Jennings, J.).[1] The court rejected plaintiffs’ contention that the financial projections and other statements in the proxy statement “would cause an investor to believe that the [c]ompany’s future business plan only included organic growth” and not growth through acquisitions. The court emphasized that the proxy statement “contains an express disclaimer that warns stockholders not to make assumptions . . . based on the [p]rojections,” as well as “statements explicitly stating that future acquisition remains part of the [c]ompany’s growth plans.” The court determined that “no reasonable stockholder would construe” the statements at issue concerning the financial projections “to imply that [the company’s] growth plan only contemplated organic growth,” because the proxy statement “all but explicitly told the stockholder not to make such an inference.”

The court found Laborers’ Local #231 Pension Fund v. Cowan, 300 F. Supp. 3d 597 (D. Del. 2018), instructive. There, plaintiff “claimed that financial forecasts in the proxy statement . . . were misleading because those forecasts failed to accurately portray [the company’s] acquisition strategy.” PharMerica, 2019 WL 4645583 (discussing Cowan). But the proxy statement specifically “cautioned” stockholders “not to place undue, if any, reliance on the forecasts. The Cowan court found that the proxy’s disclaimer effectively prevented the financial forecasts from affirmatively misleading stockholders about [the company’s] future actions, including potential future acquisitions.”

As in Cowan, the financial projections at issue in the proxy statement in PharMerica did not account for future acquisitions. The proxy statement included a disclaimer specifically warning that “the projections are not to be relied on as indicative of future events,” and the company’s “SEC filings and other public statements explicitly state[ed] that the [c]ompany’s plans included future acquisition.” Given this “context,” the court found that it would be “unreasonable” for stockholders to conclude, based on the financial projections, that the company’s “growth plan at the time of the merger only included organic growth.”

The court also found that the financial projections could not be  “materially false” for assuming no future acquisitions, because the projections “on their face unambiguously disclose that assumption to stockholders.” The court further found that the financial projections could not be rendered misleading because they relied on what plaintiffs characterized as an “incorrect” assumption. The court explained that “assumptions and inputs in financial forecasts are immaterial, and therefore not misstatements under Section 14(a), when disclosed, because once disclosed the stockholder[s] [are] free to determine for themselves whether such assumptions and inputs are appropriate.” The court concluded that plaintiffs failed to state a claim under Section 14(a) and Rule 14a-9.