Costanzo v. DXC Technology Company

Background

This proposed class action arose from the registration statement issued for the April 2017 merger that created DXC Technology Company. The plaintiffs alleged that the registration statement promoted more than $1 billion in first-year cost savings from “workforce optimization” without disclosing that DXC planned much larger and faster workforce cuts. They claimed those cuts harmed customer satisfaction, employee retention, contract performance, and future revenue.

The plaintiffs brought a claim under Section 11 of the Securities Act against all defendants and a Section 15 claim against HPE and DXC’s individual defendants. They also alleged that the registration statement violated disclosure requirements concerning known trends and uncertainties and risk factors under Items 303 and 503 of SEC Regulation S-K. Their factual allegations were based primarily on a complaint filed by former DXC executive Stephen J. Hilton in a separate employment case.

Court’s analysis

The court treated the defendants’ motion as a motion to dismiss for failure to state a legally sufficient claim. At that stage, the court accepted well-pleaded factual allegations as true but did not accept conclusory allegations or unreasonable inferences. The court took judicial notice of the registration statement and other identified public documents, but not of the truth of factual assertions in those documents.

The court accepted, for purposes of the motion, that an internal DXC goal to cut $2.7 billion existed when the registration statement was issued. But it concluded that the plaintiffs had not adequately alleged that the goal was anything more than aspirational, that DXC intended to achieve it during the first year, or that DXC actually achieved it. The court therefore found that the alleged internal goal, without additional facts, did not show that the registration statement was materially false or misleading.

The court also concluded that the challenged statements about expected cost savings were forward-looking financial statements protected by the Public Securities Litigation Reform Act’s safe-harbor rules. The registration statement contained warnings that expected synergies might not be achieved, that the company might have difficulty attracting and retaining employees, and that losing personnel could impair contract performance and harm financial results. The court found those warnings meaningful rather than boilerplate.

The court rejected some of the defendants’ arguments that the statements were merely non-actionable “puffery,” meaning vague corporate optimism that cannot be objectively verified. It found that the statement tying expected synergies to approximately $1 billion in cost savings was not puffery, and that the statements about hiring and retaining employees were risk disclosures rather than optimistic promises. However, it found that the statement that DXC’s turnaround plan would align costs with revenue and improve sales execution was non-actionable puffery. The court also found that the statement about the combined company’s size and scale was more than puffery because it was tied to measurable employee headcount.

The court separately found that the plaintiffs had not adequately pleaded that the registration statement violated Items 303 or 503. Because Section 15 requires an underlying primary securities-law violation, the failure to adequately plead a Section 11 violation also defeated the Section 15 claim.

Disposition

The court granted defendants’ motion to dismiss the amended complaint with leave to amend. The order required any amended complaint to be filed within 60 days. Judge Beth Labson Freeman did not enter a final merits judgment on the allegations; the ruling addressed whether the amended complaint adequately stated the claims.