Dickerson v. Macmillan

Background

UserTesting went public in November 2021. Its board later considered and approved a proposed acquisition by Thoma Bravo. Brenna Dickerson sued Andy MacMillan, UserTesting, and other defendants on behalf of herself and a proposed class. Her amended complaint alleged that the merger proxy statement contained eight materially false, misleading, or incomplete statements concerning UserTesting’s financial forecasts, Morgan Stanley’s fairness opinion, and the proposed merger.

The claims arose under Section 14(a) of the Securities Exchange Act, which addresses misleading proxy solicitations, and Section 20(a), which can impose control-person liability when there is an underlying securities-law violation. The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not adequately state a legal claim. The defendants also sought to seal portions of the complaint and briefing and several exhibits.

Sealing and judicial notice

The court found compelling reasons to seal information containing sensitive, nonpublic financial and business information from UserTesting’s board materials and financial-advisor presentations. It granted the motions to partially seal the amended complaint, the motion to dismiss, the opposition, and related materials as reflected in redacted versions. It also granted the motions to file certain exhibits and specified financial materials fully under seal.

The court took judicial notice of nine exhibits, including UserTesting proxy materials, Securities and Exchange Commission filings, and documents referenced in the complaint. Judicial notice allowed the court to recognize the documents, but the court did not treat disputed factual assertions in those documents as true when they conflicted with the amended complaint.

Section 14(a) claim

The court treated Dickerson’s Section 14(a) theory as sounding in fraud because she alleged that UserTesting’s management lowered its projections to obtain shareholder approval of the Thoma Bravo transaction rather than based on good-faith judgments about the company’s financial outlook. The Private Securities Litigation Reform Act, or PSLRA, and Federal Rule of Civil Procedure 9(b) therefore required particularized allegations about the alleged misleading statements and facts supporting the required state of mind.

The court held that statements two, three, five, six, seven, and eight were forward-looking statements or omissions about future projections and were protected by the PSLRA safe harbor. The proxy identified the projections as forward-looking, described risks and uncertainties that could cause actual results to differ, and cautioned shareholders not to place undue reliance on the projections. The court therefore dismissed the claims based on those statements.

The court separately held that statements three and four were opinions. To challenge an opinion, a plaintiff had to allege both that the speaker did not actually hold the stated belief and that the belief was objectively untrue. The court found that Dickerson did not allege facts showing that the defendants did not believe the October Forecast was reasonably prepared or that they did not believe Morgan Stanley’s fairness opinion supported the merger. The court dismissed the claims based on statements three and four.

The court found that statement one, concerning anticipated third-quarter revenue and calculated billings, was sufficiently alleged to be false or misleading. According to the complaint, calculated billings were lower than expected, but the court found that Dickerson adequately alleged a problem with the statement’s reference to revenue. The court also rejected the argument that shareholders could not have been misled merely because third-quarter results had been publicly reported elsewhere.

Despite that conclusion about statement one, the court dismissed the Section 14(a) claim because Dickerson failed to plead particularized facts establishing the required state of mind for each individual defendant. The court stated that Section 14(a) requires negligence rather than the higher intent standard used for some securities-fraud claims, and it noted that Dickerson did not respond to the defendants’ state-of-mind argument. The dismissal was with leave to amend.

Section 20(a) claim

A Section 20(a) claim requires an underlying federal securities-law violation and the defendant’s actual power or control over the primary violator. Because the court dismissed the Section 14(a) claim, it also dismissed the Section 20(a) claim with leave to amend.

Disposition

Judge Araceli Martinez-Olguin granted the defendants’ motion to dismiss the complaint with leave to amend. The court also granted the administrative motions to seal, with some materials partially sealed and specified exhibits fully sealed. Any amended complaint had to be filed by September 26, 2024. The order stated that no additional claims or parties could be added without court permission or the defendants’ agreement.