Sheet Metal Workers National Pension Fund v. Bayer Aktiengesellschaft

Background

The plaintiffs, pension funds, brought claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The claims concern alleged misrepresentations by Bayer and its executives about Bayer’s due diligence in acquiring Monsanto. The court noted that an additional theory involving Bayer’s statements about accounting for legal risks related to Roundup litigation had not been adequately pleaded and was no longer part of the case.

The plaintiffs collectively purchased nearly 600,000 Bayer American Depositary Receipts, or ADRs. An ADR is a certificate issued by a United States depositary institution that represents a beneficial interest in shares of a non-United States company. Bayer ADRs traded in the over-the-counter market. The plaintiffs sought certification of a damages class covering all persons or entities that purchased or otherwise acquired Bayer’s publicly traded ADRs from May 23, 2016, through July 6, 2020, inclusive.

The proposed class excluded the defendants; members of the individual defendants’ immediate families; Bayer subsidiaries and affiliates, including specified employee retirement and benefit plans and their participants or beneficiaries; Bayer directors and officers during the class period and their immediate families; and the legal representatives, heirs, successors, and assigns of excluded parties. The plaintiffs also sought appointment as class representatives and appointment of Cohen Milstein Sellers & Toll PLLC as class counsel.

Domestic-Transaction Analysis

For securities not listed on a national exchange, the Securities Exchange Act applies only to domestic transactions. The court applied the Ninth Circuit’s test for determining whether a transaction was domestic. Under that test, a plaintiff may show that the buyer incurred an irrevocable obligation to take and pay for the security in the United States, that the seller incurred an irrevocable obligation in the United States to deliver it, or that title to the security passed in the United States. The court held that any one of these showings is sufficient.

More than 80 percent of the transactions involved existing ADRs and were executed like transactions in other domestic securities. The remaining transactions involved newly issued ADRs. For those transactions, broker-dealers bought Bayer shares on the Frankfurt Stock Exchange, deposited the shares with The Bank of New York Mellon, received newly issued ADRs, and transferred the ADRs into the plaintiffs’ custody.

Defendants argued that the plaintiffs incurred their irrevocable obligation when their brokers bought the underlying Bayer shares in Germany. The court held that, even accepting that argument, the plaintiffs showed that The Bank of New York Mellon incurred an obligation in the United States to deliver the ADRs and that title to the ADRs transferred in the United States. The court therefore concluded that the plaintiffs’ transactions were domestic and did not create an extraterritoriality problem for class certification.

Rule 23 Requirements

Federal Rule of Civil Procedure 23 requires a proposed class to satisfy four requirements: enough members that individual lawsuits would be impractical, common legal or factual questions, representative claims typical of the class, and representatives and counsel able to protect the class’s interests. The court found all four requirements satisfied.

The parties did not dispute that the class was sufficiently numerous; the trading volume suggested thousands of class members, including at least 178 institutional investors that owned Bayer ADRs during the class period. Common questions included whether defendants violated the Securities Exchange Act, whether their statements omitted material information, and whether they knew or recklessly disregarded that the statements were false or misleading.

The court found the plaintiffs’ claims typical because they arose from the same alleged misconduct and legal theories as the absent class members’ claims. It also found the plaintiffs and proposed class counsel adequate because the plaintiffs purchased Bayer ADRs and had a sufficient stake in resolving the case, while counsel had significant experience handling similar actions.

For the requirements specific to damages classes, the court found that common questions predominated over individual ones. It rejected defendants’ arguments that the plaintiffs lacked a common method for determining which transactions were domestic, calculating damages, or showing an efficient market. The court said individualized questions, including some damages inquiries or possible domesticity defenses for particular class members, did not prevent certification at this stage.

The court also found that the plaintiffs could use the fraud-on-the-market presumption of reliance for the entire class period. Although Bayer ADR prices diverged from the prices of Bayer’s ordinary shares for part of June 2018, the court attributed the discrepancy to a cash distribution for ADR holders rather than a failure of investors to respond to market information. Considering the relevant market-efficiency factors as a whole, the court found the ADR market efficient during the class period.

Finally, the court found that a class action was the superior method for resolving the dispute because the claims were numerous and complex, consolidated litigation would promote efficiency, and the likely size of individual recoveries made separate lawsuits impractical.

Ruling

The court granted the plaintiffs’ motion for class certification and certified the defined class of Bayer ADR purchasers. It appointed the plaintiffs as class representatives and Cohen Milstein Sellers & Toll PLLC as class counsel. The court also denied defendants’ motion for leave to file a supplemental report from their expert concerning evidence in the plaintiffs’ reply report. The court stated that a separate order would address related administrative motions to file materials under seal.