IN RE TEXTRON, INC. SECURITIES LITIGATION

Background

Investors in Textron Inc. brought a proposed securities class action against Textron, CEO Scott Donnelly, and CFO Frank Connor. The lead plaintiff alleged that the defendants made misleading statements about Textron’s acquisition and integration of Arctic Cat Inc., which manufactured all-terrain vehicles, recreational off-highway vehicles, and snowmobiles. The alleged misstatements concerned Textron’s progress in clearing Arctic Cat’s older dealer inventory, integrating Arctic Cat into Textron’s Specialized Vehicles business, and making the acquisition profitable during 2018. The lead plaintiff also challenged a statement about goodwill and intangible assets.

The lead plaintiff asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, as well as a control-person claim under Section 20(a) against Donnelly and Connor. The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a legal claim. The court accepted the complaint’s factual allegations as true for purposes of the motion and drew reasonable inferences in the lead plaintiff’s favor.

Legal Standard

A securities-fraud complaint must satisfy heightened pleading requirements under the Private Securities Litigation Reform Act and Rule 9(b). To proceed under Rule 10b-5, a plaintiff must plausibly allege a material misrepresentation or omission, a wrongful state of mind, a connection to buying or selling a security, reliance, economic loss, and loss causation. The defendants did not challenge the allegations concerning the connection to securities transactions, reliance, economic loss, or loss causation. The court therefore focused on whether the defendants made a material misrepresentation or omission.

A statement is material if a reasonable investor would consider it important in deciding whether to buy or sell stock. The statement must also be misleading in context. General corporate optimism, sometimes called puffery, is ordinarily not actionable because reasonable investors do not rely on vague positive statements. The court also considered the statutory safe harbor for certain forward-looking statements, which can protect projections and future expectations when specified conditions are met.

Analysis

Arctic Cat Inventory

The lead plaintiff challenged statements that dealers had cleared older inventory and that there had been significant reductions in aged inventory. The confidential informants cited by the lead plaintiff reportedly observed or described continued quantities of 2015–2017 vehicles at dealerships. The court held that the allegations did not show a contradiction. Selling 2015 and 2016 vehicles while sending 2017 vehicles to dealers could still support statements that older inventory had been cleared or reduced. The court therefore found no adequately pleaded material misrepresentation about inventory.

Arctic Cat Performance

The lead plaintiff challenged the January 31, 2018 expectation that the acquisition would be profitable during 2018 and Donnelly’s July 18 statements about profit improvement, improving margins, and positive market data. The court treated the January and July expectations as forward-looking statements. It held that the complaint did not adequately allege that the speakers knew those statements were false when made. It also held that risk disclosures in Textron’s Securities and Exchange Commission filings addressed the possibility that an acquired business would not meet profit projections, so the statutory safe harbor protected those projections.

The court treated Donnelly’s July statements about profit improvement and positive market data as opinions because they were introduced with language such as “I think.” The lead plaintiff did not plead sufficient facts showing that those opinions failed to align with information in Donnelly’s possession when he made them. The court also rejected the argument that Donnelly’s stock sales, standing alone, showed that he disbelieved the statements.

Arctic Cat Integration

The lead plaintiff challenged Donnelly’s statement that Textron had successfully integrated Arctic Cat and a statement in Textron’s 2017 annual report that the Arctic Cat restructuring plan was substantially completed. The court read Donnelly’s statement in the context of the entire earnings call, which also said that the integration continued and that work remained. It concluded that the confidential informants’ descriptions of integration problems did not make the overall presentation misleading.

The court also concluded that “substantially completed,” as used in the financial statement note, referred to the restructuring’s financial charges and the fact that most allocated funds had been spent. The lead plaintiff did not plead facts suggesting that this representation was inaccurate. The court noted that the same statement was repeated in later quarterly reports but found no pleaded facts that changed the result.

Goodwill and Intangible Assets

The lead plaintiff argued that Donnelly misled investors on October 18, 2018, when he said that the quarter’s costs were not an impairment of goodwill or intangible assets. The court interpreted that response in context as explaining that discounting-program costs were not being treated as one-time costs like a goodwill impairment. It was not a guarantee that the Specialized Vehicles business would never later experience an impairment. Textron disclosed one week later that an impairment loss could reasonably be recognized in the fourth quarter, and the lead plaintiff did not plead facts showing that Donnelly’s earlier response was fraudulent.

Disposition

The court concluded that the lead plaintiff had not adequately pleaded any actionable misrepresentation. Because that deficiency resolved the Rule 10b-5 allegations, the court did not reach the defendants’ separate argument that the complaint failed to adequately allege a wrongful state of mind. Judge Denise Cote granted the defendants’ March 6, 2020 motion to dismiss and directed the Clerk of Court to close the case.