Costanzo v. DXC Technology Company

Background

The plaintiffs brought a proposed class action alleging violations of Sections 11 and 15 of the Securities Act of 1933. Their claims concerned a registration statement and prospectus issued for the April 2017 merger that formed DXC Technology Company from Computer Sciences Corporation and Hewlett Packard Enterprise’s Enterprise Services division.

The registration statement said DXC expected approximately $1 billion in cost cuts during the first year after the merger. The plaintiffs alleged that DXC’s chief executive, J. Michael Lawrie, had an internal goal of cutting $2.7 billion during that same period. They claimed that pursuing this larger goal caused overly rapid and deep workforce reductions, harmed DXC’s ability to provide information-technology services, and eventually contributed to a stock-price decline.

The Third Amended Complaint added allegations from confidential witnesses. One witness described the $2.7 billion goal as real, concrete, and tied to executive bonuses and performance measurements. Other witnesses described negative effects from workforce reductions. The plaintiffs did not allege, however, that DXC actually reached the $2.7 billion goal or that its first-year cuts exceeded the publicly disclosed $1 billion expectation.

Section 11 Claim

Section 11 generally provides a claim when a registration statement contains a material misstatement or omission that would mislead a reasonable investor. The court accepted, for purposes of the motion, that the plaintiffs adequately alleged that the $2.7 billion internal goal existed when the registration statement was issued.

The court nevertheless held that the new allegations did not cure the central pleading defect. A serious internal goal was not the same as a public expectation, and the plaintiffs had not shown that DXC’s actual results differed from its public expectation of $1 billion in first-year cuts. The court concluded that the existence of a larger internal goal, without allegations that DXC achieved or was on pace to achieve it, did not make the $1 billion disclosure false or misleading.

The court also held that the challenged statements about cost reductions were forward-looking statements protected by the Private Securities Litigation Reform Act’s safe harbor. The registration statement contained meaningful warnings about workforce optimization, layoffs, customer complaints, and related risks. The court further found that the defendants’ knowledge of the $2.7 billion goal did not defeat the safe-harbor protection because the plaintiffs had not adequately alleged that the goal made the $1 billion expectation false or misleading.

The court rejected the plaintiffs’ arguments concerning statements about synergies, a turnaround plan, and hiring practices. It held that the allegations did not show that defendants disbelieved their stated opinions, that supporting facts were false, or that the omitted internal goal undermined the basis for those opinions. The court also held that the “turn-around plan” language was vague corporate optimism, or non-actionable puffery, rather than a verifiable factual representation.

The court rejected the challenge to DXC’s risk disclosures because the plaintiffs did not show that the risks associated with the $2.7 billion goal had already materialized when the registration statement was issued. The disclosures about workforce optimization and possible customer-service problems accurately described the situation alleged in the complaint.

Items 303 and 503 Claims

The court also dismissed the claims based on Items 303 and 503 of Securities and Exchange Commission Regulation S-K. Item 303 concerns known trends or uncertainties expected to materially affect a company’s results, while Item 503 concerns significant risk factors in an offering document.

The court held that the plaintiffs had not plausibly alleged that the $2.7 billion goal was a known trend or a reasonably likely event requiring disclosure. The plaintiffs also had not shown that the goal created a risk factor that DXC was required to disclose, because they did not allege that DXC reached or approached the goal.

Section 15 Claim and Disposition

The plaintiffs’ Section 15 claim depended on their stating a Section 11 claim. Because the court found the Section 11 claim inadequately pleaded, it also found the Section 15 claim inadequately pleaded.

Judge Beth Labson Freeman granted the defendants’ motion to dismiss. The court dismissed the Third Amended Complaint without leave to amend, explaining that this was the third dismissal and that the plaintiffs had repeatedly failed to cure the deficiencies through amendment.