IN RE GTX, INC. SHAREHOLDERS LITIGATION

Background

Lead Plaintiffs Nabil Barakat and Michael Cooper sued GTx, Inc. and its pre-merger Board of Directors on behalf of themselves and pre-merger GTx common-stock holders. They asserted claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 arising from GTx’s merger with Oncternal Therapeutics, Inc.

The complaint alleged that GTx’s proxy statement misled shareholders about the ownership percentage they would retain in the combined company and did not adequately disclose the effect of outstanding stock options and warrants. The proxy initially described GTx shareholders as retaining approximately 25% of the combined company, while the final transaction described them as retaining approximately 22.5%. The proxy also stated that the ownership estimates excluded options and warrants and could be adjusted based on the companies’ cash levels and other factors.

Rule 12(b)(6) standard

Defendants moved to dismiss under Rule 12(b)(6), which permits dismissal when a complaint does not allege enough facts to state a legally plausible claim. For this motion, the court treated the complaint’s factual allegations as true and considered the proxy and other documents referenced in the complaint or filed with the Securities and Exchange Commission.

Section 14(a) claim

Section 14(a) regulates misleading proxy solicitations. The court held that Plaintiffs did not adequately allege a material misrepresentation or omission. The proxy repeatedly disclosed that its exchange-ratio calculations excluded outstanding options and warrants, warned that exercising them could further dilute GTx shareholders, and provided information that allowed shareholders to estimate the potential dilution. The court concluded that the proxy’s disclosures were adequate and that Plaintiffs were not entitled to the exact calculation made by GTx’s financial adviser.

The court also held that Plaintiffs did not adequately allege loss causation—the required connection between the alleged disclosure problem and an economic loss. Plaintiffs relied on benefit-of-the-bargain damages and argued that the merger undervalued GTx. The court found those theories speculative. In particular, Plaintiffs did not allege that a better transaction was available or that shareholders would have received more shares if they had rejected the merger. The court therefore granted Defendants’ motion to dismiss the Section 14(a) claim.

Section 20(a) claim

Section 20(a) imposes potential control-person liability when a defendant controls someone who committed an underlying securities violation. Because the court dismissed the Section 14(a) claim, it held that Plaintiffs had no underlying securities violation to support the Section 20(a) claim. The court therefore granted Defendants’ motion to dismiss that claim as well.

Leave to amend and disposition

Defendants asked the court to dismiss the complaint with prejudice, which would have barred refiling the claims in an amended complaint. Plaintiffs opposed that request and sought permission to amend. The court denied Defendants’ request to dismiss the complaint with prejudice. Although Plaintiffs had not identified what new allegations would make their claims viable, the court allowed them to file a motion for leave to amend within 21 days of the order, by July 14, 2020.

The court’s final disposition was to grant Defendants’ motion to dismiss the complaint and deny Defendants’ request to dismiss it with prejudice.