In re Micro Focus International plc. Securities Litigation

Background

Iron Workers’ Local No. 25 Pension Fund sued Micro Focus International and individual Micro Focus board members and executives. The fund alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, Securities and Exchange Commission Rule 10b-5, and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. The allegations concerned Micro Focus’s 2017 merger with HPE Software and statements made before and after the merger.

The fund alleged that problems emerged before and after the merger, including customer and salesperson attrition, reduced sales, overlapping products, and problems with FAST, an internal computer system. It alleged that Micro Focus nevertheless made optimistic statements about the merger’s benefits and failed to disclose adverse trends in customer and salesperson attrition. The complaint relied heavily on statements from former employees. The fund sought relief for itself and other purchasers or acquirers of Micro Focus American Depositary Shares during the alleged class period or in connection with the merger offering.

Defendants moved to dismiss the Second Amended Complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally plausible claim. The court also considered the heightened pleading requirements under the Private Securities Litigation Reform Act and Rule 9(b), which require fraud allegations to identify the allegedly misleading statements, explain why they were misleading, and plead supporting facts with particularity.

Exchange Act Claims

The court dismissed the claims under Section 10(b) and Rule 10b-5 because the fund did not plead an actionable misstatement or omission. A statement must be false when made, and the complaint must explain specifically why it was false. The court also stated that opinions and forward-looking statements are actionable only under circumstances such as when they are objectively false and disbelieved by the speaker, or when they are presented as guarantees or supported by specific false facts.

The court reviewed alleged statements made on multiple dates from September 2016 through July 2019. It concluded that many statements were general corporate optimism, sometimes called “puffery,” that a reasonable investor would not view as material. For other statements, the fund did not plead facts showing that the statements were false when made or that the speakers did not genuinely believe their opinions or projections.

The court separately considered warnings in the merger offering documents about customer attrition, salesperson attrition, and integration risks. It concluded that the former-employee allegations did not adequately show that widespread customer or salesperson attrition had already materialized and was widely known within Micro Focus by August 2017. The court also concluded that the offering documents disclosed integration risks, including risks involving technology platforms, systems, employees, and business disruption.

The court rejected the alleged duty to disclose customer and salesperson attrition trends under Item 303 of Regulation S-K because the fund did not adequately plead that those trends had emerged, or were known, when the relevant registration statement was filed. Because the fund failed to plead an underlying violation, the court also dismissed the Section 20(a) control-person claims.

Securities Act Claims

Sections 11 and 12(a)(2) impose liability for certain material misstatements or omissions in registration statements or prospectuses. The court concluded that the fund’s Section 11 and Section 12(a)(2) allegations sounded in fraud because the complaint repeatedly described the statements as false, misleading, and untrue statements of material fact. The court therefore applied Rule 9(b)’s heightened pleading standard.

Because the Section 11 and Section 12(a)(2) claims relied on the same alleged misstatements and omissions as the Section 10(b) claim, the court held that they failed for the same reasons. The court granted defendants’ motion to dismiss those claims and did not address the defendants’ standing arguments or arguments raised in supplemental memoranda. The court also dismissed the Section 15 control-person claims because the fund did not allege a primary violation by Micro Focus.

Disposition

The court granted defendants’ motion to dismiss. It dismissed the Exchange Act claims, the Sections 11 and 12(a)(2) Securities Act claims, and the related Sections 20(a) and 15 control-person claims. The Clerk of Court was directed to close the case. The opinion does not state that the dismissal was with or without prejudice.