IN RE NATIONAL INSTRUMENTS CORPORATION SECURITIES LITIGATION

Background

Shareholders brought a putative class action against National Instruments Corporation (NI), Chief Executive Officer and President Eric Starkloff, Board Chairman Michael McGrath, and Chief Financial Officer Karen Rapp. The shareholders alleged that NI violated Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 by failing to disclose Emerson Electric Co.’s offers to acquire NI while NI repurchased its own shares. They also asserted control-person liability under Section 20(a) against Starkloff, McGrath, and Rapp.

Emerson made offers to acquire NI beginning in May 2022, including offers of $48 per share. NI rejected those offers, while its Board considered the possibility that Emerson might improve its offer. NI repurchased 3,792,063 shares during 2022, including purchases in August and September. Emerson later made a $53-per-share offer public, and acquired NI in October 2023 for $60 per share.

Claims and Motion to Dismiss

The defendants moved to dismiss the amended complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. The court accepted the complaint’s factual allegations as true for purposes of the motion and drew reasonable inferences for the plaintiffs.

The plaintiffs advanced two theories under Section 10(b) and Rule 10b-5. First, they alleged that NI’s statements reporting stock repurchases and describing acquisition risks were misleading because NI did not disclose Emerson’s offers. Second, they alleged that NI violated the law by repurchasing its own securities without either disclosing the offers or abstaining from trading while possessing material, nonpublic information.

Misrepresentation and Omission Theory

The court dismissed the claims based on statements in NI’s quarterly reports and investor calls that disclosed its stock repurchases. The court held that those statements were accurate summaries of transactions that had already occurred and did not imply that NI had repurchased shares at the highest price available from any market participant. The omission of Emerson’s offers therefore did not make those statements misleading.

The court also rejected the challenge to NI’s general disclosures about risks that could delay or prevent an acquisition. Those disclosures identified possible barriers arising from NI’s corporate documents and Delaware law but did not suggest that no other barriers existed. The plaintiffs did not adequately explain why the disclosures became misleading because NI did not identify Emerson’s offers.

Insider-Trading Theory

The court allowed the insider-trading theory to proceed. Under Section 10(b) and Rule 10b-5, a corporate insider generally must disclose material, nonpublic information before trading or refrain from trading on that information. The court stated that a corporation has the same duty when buying its own shares.

The court found that the amended complaint adequately pleaded materiality. Emerson’s proposed purchase of all NI shares was a major transaction, and Emerson allegedly showed serious interest by making cash offers, stating that it could move quickly, and indicating that it had the funds and ability to complete the acquisition. The complaint also alleged that NI considered the possibility of a higher offer and sought to highlight its financial momentum.

The court also found scienter adequately pleaded. Scienter means the required wrongful state of mind, such as intentional misconduct or extreme recklessness. The court concluded that the allegations plausibly supported an inference that NI continued repurchasing shares in August and September 2022 while aware of a serious acquisition proposal and the possibility that Emerson would return with a higher offer.

Control-Person Liability

The court allowed the Section 20(a) control-person claims against Starkloff and McGrath to proceed in connection with the surviving insider-trading claim. A control-person claim requires, among other things, a primary violation, control over the alleged primary violator, and culpable participation. The court found the allegations sufficient because Starkloff and McGrath were Board members and directly communicated with Emerson about its offers.

The court dismissed all claims against Rapp. The amended complaint did not allege that Rapp was a Board member, communicated with Emerson, or participated in the relevant Board meetings. The statements attributed to her concerning financial guidance, risk disclosures, and share repurchases were not actionable under the court’s ruling.

Disposition

The court granted the defendants’ April 26, 2024 motion to dismiss in part. All claims against Karen Rapp were dismissed. All claims based on a Section 10(b) and Rule 10b-5(b) misrepresentation or omission theory were dismissed. The Section 10(b) and Rule 10b-5 insider-trading claim against NI concerning trading during August and September 2022 survived, as did the related control-person claims against Starkloff and McGrath. The court noted that the dismissal of the misrepresentation theory could affect the proposed class definition, and that the parties would have an opportunity to address whether the class could include only shareholders who sold stock to NI during August and September 2022.