Sheet Metal Workers National Pension Fund v. Bayer Aktiengesellschaft

Background

This proposed class action concerns Bayer’s acquisition of Monsanto. The plaintiffs alleged that Bayer and individual defendants made false or misleading statements over approximately four years about three subjects: Bayer’s due diligence before acquiring Monsanto, the safety of glyphosate—the active ingredient in Roundup—and Bayer’s accounting for legal risks connected to Roundup litigation. The complaint asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5.

Bayer offered to acquire Monsanto in May 2016, signed a merger agreement in September 2016, and completed the acquisition in June 2018. After the acquisition, lawsuits alleging that glyphosate causes cancer resulted in verdicts against Monsanto. Bayer later announced a proposed global settlement of current and future Roundup claims for up to $10.9 billion. The plaintiffs alleged that Bayer’s American deposit receipts declined in price after developments concerning the litigation and settlement.

The defendants moved to dismiss for failure to adequately plead falsity, scienter, and loss causation. Scienter means an intent to deceive, manipulate, or defraud, or deliberate recklessness about the truth. Loss causation means a causal connection between an alleged misstatement and the plaintiff’s loss.

Court’s analysis

The court held that the plaintiffs adequately pleaded falsity and scienter concerning Bayer’s statements about its due diligence. The plaintiffs alleged that Bayer said it had confirmed the acquisition’s potential and had received transparency and information about critical questions, while Bayer allegedly had not reviewed internal Monsanto documents and had accepted Monsanto’s description of its litigation risks. The court concluded that these allegations described more than poor management; they plausibly alleged that investors were misled about the extent of Bayer’s diligence.

The court also held that the plaintiffs adequately pleaded a material misstatement concerning the difference between glyphosate and the Roundup formulation. The complaint alleged that Monsanto had considered Roundup potentially more dangerous than glyphosate, while a Bayer executive stated that there was no difference. The court further found that the complaint adequately alleged scienter for the due-diligence and glyphosate-versus-Roundup statements, based on the allegations considered together, including the defendants’ alleged motive and access to information about the risks.

The plaintiffs did not adequately plead falsity concerning statements about 800 studies said to confirm glyphosate’s safety. The court found that the complaint did not identify specific studies included in that group that supported the International Agency for Research on Cancer’s conclusion that glyphosate was probably carcinogenic, and that the allegation that 629 studies were conducted by Monsanto did not itself establish falsity. The plaintiffs also did not adequately plead scienter for these statements.

The plaintiffs likewise did not adequately plead that Bayer’s accounting for possible Roundup litigation losses was false. The court explained that it was unclear whether a reliable estimate of the litigation liability could have been made before the proposed global settlement, and the complaint did not adequately show that Bayer was required to record a liability without such an estimate. Because falsity was not adequately alleged, scienter was also not adequately alleged for the accounting theory.

On loss causation, the court held that the plaintiffs adequately pleaded that certain developments disclosed information about Bayer’s exposure to Roundup-related litigation. The court treated the Johnson and Hardeman trial verdicts, the denial of Monsanto’s request for a new trial in Johnson, Bayer’s announcement of the proposed $10.9 billion settlement, and the presiding judge’s indication that the settlement might not be approved as adequately pleaded corrective disclosures. A corrective disclosure is an event that reveals the alleged fraud to the market and causes losses. The court ruled that a CBS news report was not adequately pleaded as a corrective disclosure because the information it reported had already been publicly reported elsewhere.

Disposition

The court denied the defendants’ motion to dismiss. Although not all alleged misstatements satisfied the pleading standards for falsity or scienter, the plaintiffs adequately stated a claim under Section 10(b). Because the plaintiffs adequately pleaded an underlying Exchange Act violation, the court also denied the motion to dismiss the Section 20(a) claims. The court stated that certain theories under the Section 10(b) claim were not viable and were foreclosed unless and until the plaintiffs successfully amended the complaint.

The court also granted the plaintiffs’ request to substitute two exhibits and consider them in deciding the motion to dismiss.