Karri v. Oclaro Inc.

Background

This securities class action concerns Oclaro’s acquisition by Lumentum Holdings, Inc. SaiSravan Karri sued on behalf of former public stockholders of Oclaro under Section 14(a) and Section 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 14a-9. He alleged that Oclaro’s board solicited shareholder approval through a proxy statement containing materially false or misleading statements and omissions.

Karri challenged three categories of statements: Oclaro’s January and February financial projections; statements that those projections were reasonably prepared and reflected management’s best estimates and good-faith judgments; and valuation figures that Oclaro’s financial adviser, Jefferies LLC, calculated using the February projections. He also alleged that the proxy statement misleadingly omitted financial forecasts that Lumentum had provided to Jefferies.

Legal standards

To survive a motion to dismiss for failure to state a claim, a complaint must allege enough facts to make the claim plausible. Securities-fraud allegations also must be pleaded with particularity under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. The court accepted the complaint’s well-pleaded allegations as true for purposes of the motion and drew reasonable inferences in Karri’s favor, but it did not accept conclusory allegations or unreasonable inferences.

Section 14(a) and Rule 14a-9 prohibit proxy solicitations containing materially false or misleading statements or omissions. A plaintiff must generally allege a material misrepresentation or omission, injury, and that the proxy statement was an essential link in the transaction. The court also discussed the statutory safe harbor for certain forward-looking statements accompanied by meaningful cautionary language.

Rulings on the challenged disclosures

The court granted the motion to dismiss as to the January and February projections themselves. Karri acknowledged that the projections were forward-looking statements. The court concluded that they were identified as forward-looking and accompanied by considerable cautionary language, bringing them within the statutory safe harbor.

The court treated statements about how the projections were prepared and the judgments underlying them differently. Those statements concerned the preparation and basis of the projections rather than future events, so the safe harbor did not apply. The court concluded that Karri plausibly alleged that the statements concerning the February projections were objectively and subjectively false. The allegations included the timing of a second downward revision, management’s publicly optimistic statements, favorable financial commentary, and Oclaro’s later performance. The court denied the motion to dismiss as to the representations about the February projections.

The court granted the motion to dismiss as to the representations about the January projections. The court noted that the January projections were prepared before Lumentum’s initial offer, were not provided to Jefferies for its fairness opinion, and appeared to account for new financial results and another year of estimates.

The court denied the motion to dismiss as to the valuation figures calculated from the February projections. It concluded that the figures were presented as support for Jefferies’ conclusion that the merger consideration was fair and therefore constituted statements about existing facts, not forward-looking statements. Because the valuation analysis relied on the allegedly misleading February projections, Karri plausibly alleged that the valuation figures made the proxy statement materially misleading.

The court dismissed the omission claim concerning Lumentum’s forecasts. Karri did not plead with particularity how omitting those forecasts made the proxy statement materially misleading. The complaint did not allege that the forecasts independently distorted the analysis by overvaluing Lumentum or that shareholders could have discovered Oclaro’s alleged undervaluation by reviewing them. The court also noted that Lumentum’s Securities and Exchange Commission filings were incorporated by reference into the proxy statement, while the complaint did not identify information in the forecasts that was unavailable in those filings.

Section 20(a) claim and disposition

The defendants’ challenge to the Section 20(a) claim was based entirely on their argument that Karri could not establish a primary violation under Section 14(a) and Rule 14a-9. The opinion text states that, because Karri adequately alleged Section 14(a) and Rule 14a-9 violations, the defendants’ motion to dismiss reached this claim, but the supplied excerpt does not include the remainder of that sentence or an explicit disposition of the Section 20(a) claim.

The order states that defendants’ motion to dismiss was granted and denied in part. For the dismissed claims, Karri could file a second amended complaint by October 30, 2020, consistent with the order. The court stated that no new claims or parties could be added without prior consent.