A securities opinion written by Judge Easterbrook of the U.S. Court of Appeals for the Seventh Circuit is bound to be noteworthy. And his latest effort – City of Taylor Police and Fire Retirement System v. Zebra Technologies Corp., 8 F. 4th 592 (7th Cir. 2021) – does not disappoint.
In City of Taylor, the plaintiffs alleged that Zebra made misstatements in connection with its acquisition of a division of Motorola Solutions. In particular, Zebra predicted that the acquisition would yield substantial recurring savings and was “progressing as planned,” but the costs of the acquisition turned out to be higher than expected. While the consolidation was occurring, Zebra also missed its projected gross profit margin for the second quarter of 2015 by about 1%.
The district court dismissed the complaint. On appeal, the Seventh Circuit had little difficulty affirming the dismissal.
Falsity – The Seventh Circuit found that the plaintiffs had failed to adequately plead the existence of any material misstatements.
(1) Cost-savings estimates – The plaintiffs contended that the estimates were “misleading when not coupled with more information about the ongoing costs of consolidation.” The Seventh Circuit was unimpressed with the attempt to link these items, noting that “[j]ust as stocks and flows differ, the one-time expenses of integration are categorically distinct from recurring savings gained by melding similar businesses.” The court concluded that a “corporation need not couple each piece of good news with disclosure of some tangential difficulty.”
(2) “Progressing as planned” – The district court found that this statement was immaterial corporate puffery. The Seventh Circuit agreed, but also noted that “it could not be called false” because “the consolidation continued throughout the class period,” even if the costs proved higher than expected.
(3) Gross profit margin – The Seventh Circuit found that the “Securities Exchange Act does not demand perfection from forecasts, which are inevitably inaccurate.” A miss on gross profit margin of just over 1% “is a long way from fraud.”
Scienter – The Seventh Circuit found that two competing inferences could be drawn from the alleged facts. In the plaintiffs’ version, Zebra’s management “chose to hoodwink investors into thinking that integration was seamless” when it was actually “costlier and more difficult than anticipated.” Another inference, however, was that Zebra’s management “only had limited information about the inner workings of Motorola” when consolidation began and the difficulties came to light over time and were disclosed. The court found that the second inference was a “better fit” with the facts alleged in the complaint, which included statements during the class period where Zebra warned about increasing costs related to the acquisition.
Moreover, the Seventh Circuit went on to note that the “plausibility of potential inferences depends on context.” While an executive may be “privy to good historical information about the inner workings of her own corporation,” she possesses “only limited information about the internal operations of other corporations.” If companies were required to provide a “complete accounting of difficulties as they emerged during a merger or acquisition,” they might either “guess too high” and drive down their stock price or “guess too low” and be accused of securities fraud. The court concluded that “[s]ecurities law does not force corporations into this sort of no-win circumstance.”
Holding: Dismissal affirmed.
Quote of note: “Retrospective disclosures can and should be precise because corporations generally possess good information about completed operations. The law tolerates greater imprecision from forecasts because predicting the future is an uncertain enterprise. . . . The fatal flaw of the Retirement System’s suit is that it seeks to apply rules covering retrospective statements to ongoing developments. Unexpected difficulties that crop up in any corporate consolidation are a business problem, not a securities problem.”