City of Hollywood Firefighters Pension Fund v. Atlassian Corporation

Background

The lead plaintiffs, City of Hollywood Firefighters Pension Fund and Oklahoma Firefighters Pension and Retirement Systems, brought a proposed securities class action against Atlassian Corporation, Atlassian Corporation PLC, and three individual officers: Michael Cannon-Brookes, Anu Bharadwaj, and Cameron Deatsch. The plaintiffs asserted claims under Section 10(b) of the Securities Exchange Act and Section 20(a), which concerns control-person liability.

The plaintiffs alleged that the defendants made at least nine false or misleading statements from August 5 through November 3, 2022, about Atlassian’s business and financial outlook. They alleged that Atlassian knew by mid-July 2022 that growth in Free to Paid Conversions and Paid User Expansion was slowing, but did not adequately disclose the slowdown. Atlassian later reported a slowdown in Paid User Expansion, and its stock price fell from $174.17 per share on November 3 to $121.73 per share on November 4, 2022. The plaintiffs alleged that shareholders collectively lost $7 billion.

Judicial notice and incorporated documents

The defendants asked the court to consider nine documents in deciding the motion to dismiss. The court granted in part and denied in part the request for judicial notice and incorporation by reference. It took judicial notice of several publicly filed Securities and Exchange Commission documents, earnings-call transcripts, shareholder letters, and other materials, but limited that notice to what the documents showed the defendants represented to the market. The court declined at that point to take notice of one press release that was not directly mentioned in the complaint and was offered to support the defendants’ position about intent.

Falsity and misleading statements

A private securities-fraud complaint must identify each challenged statement, explain why it was misleading, and plead particular facts supporting the required state of mind. The court evaluated the statements in four groups.

For the four statements made during the August 4, 2022 shareholders’ call, the court held that the plaintiffs did not plausibly plead falsity or misleading content. The call disclosed a slowdown in Free to Paid Conversions. The court concluded that the alleged slowdown in Paid User Expansion began in the second half of the first quarter, after the August 4 statements, so those statements did not contradict what the defendants allegedly knew when they made them. The motion was granted as to those statements, with leave to amend.

For the August 19 annual report, the court held that the plaintiffs did not plausibly allege that the defendants knew of a Paid User Expansion trend when the report was published. The motion was granted on that basis, with leave to amend.

For the three statements Anu Bharadwaj made at the September 14 conference, the court reached a different conclusion on whether the statements were misleading. The court held that the plaintiffs plausibly alleged that the statements omitted important information about a Paid User Expansion slowdown that had begun in mid-August. The defendants had made positive statements about other parts of the business without discussing the slowdown in the part that allegedly represented 90 percent of revenue. The motion was denied on this falsity-and-omission issue.

For the October 4 post-effective amendment to the Form S-8 registration statements, the court held that the plaintiffs did not adequately plead that the incorporated August 19 statements were false or misleading when made. The court also said that any theory based on a failure to update the August 19 statements was not clearly alleged. The motion was granted as to those statements, with leave to amend.

Scienter

“Scienter” is the required state of mind for a securities-fraud claim—here, intent to deceive or deliberate recklessness. Even assuming Bharadwaj knew about the Paid User Expansion slowdown, the court found that the plaintiffs did not adequately allege that she knew, or must have known, that withholding the information would mislead investors.

The court also found that the alleged stock sales by two other defendants did not establish a motive to defraud because the plaintiffs acknowledged that the sales were not dramatically outside those defendants’ prior trading practices. The allegations about Atlassian’s sales model, its monitoring of business metrics, and disclosure obligations under Securities and Exchange Commission rules likewise did not establish the required state of mind. The court found a more persuasive nonfraudulent explanation: that the defendants were attempting to provide open and regular communications during uncertain economic conditions.

Disposition

The court held that the plaintiffs failed to plead scienter and dismissed the complaint with leave to amend. The court’s conclusion states that the motion to dismiss was granted and the complaint was dismissed. The plaintiffs were ordered to file any amended complaint within 21 days. The court also expressly dismissed the Section 20(a) claim with leave to amend because the parties agreed that failure to plead the Section 10(b) claim would also defeat the control-person claim.