Enzo Biochem, Inc. v. Harbert Discovery Fund, LP

Background

Enzo Biochem, Inc. brought a claim under Section 14(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 14a-9. Enzo alleged that Harbert Discovery Fund, LP; Harbert Discovery Co-Investment Fund I, LP; Harbert Fund Advisors, Inc.; Harbert Management Corp.; and Kenan Lucas issued materially false or misleading proxy solicitations during a contest to elect Fabian Blank and Peter J. Clemens IV to Enzo’s board.

The challenged materials described the nominees as independent, qualified, and able to improve Enzo’s business. Enzo alleged that these statements were misleading because the nominees lacked relevant industry knowledge, had not sufficiently studied Enzo before the election, and later communicated with Harbert about Enzo’s internal affairs. Enzo also alleged that Harbert failed to disclose a plan to take control of the board and force a sale of the company.

Enzo’s requested relief included an injunction against future violations, corrective disclosures concerning past proxy materials, damages for expenses incurred during the proxy contest, and attorneys’ fees and costs. Harbert moved to dismiss under Federal Rules of Civil Procedure 12(b)(1), which addresses subject-matter jurisdiction, and 12(b)(6), which addresses whether a complaint states a legally sufficient claim.

Jurisdictional Issues

The court did not resolve Harbert’s mootness arguments at the motion-to-dismiss stage. Harbert argued that Enzo’s requests for prospective and corrective injunctive relief were moot because Harbert no longer intended to nominate directors soon, the proxy contest had ended, and the Harbert nominees had resigned. The court concluded that resolving those arguments required factual determinations closely connected to the merits, including Harbert’s future intentions and the possible remedial effect of corrective disclosures. The court deferred the mootness issue until the parties had an opportunity to develop and present relevant evidence.

The court rejected Harbert’s argument that Enzo lacked constitutional standing to seek monetary damages under Section 14(a) and Rule 14a-9. It held that an issuer such as Enzo has an implied right to sue for monetary damages under Section 14(a). The court reasoned that this result was consistent with the statute’s purpose of protecting fair corporate voting, fit with existing Supreme Court and Second Circuit precedent, and did not raise the policy concerns identified in later Supreme Court precedent.

Pleading Standards

The court held that the Private Securities Litigation Reform Act required Enzo to identify the allegedly misleading statements and explain why they were misleading, but that the Act’s separate requirement to plead a strong inference of a particular state of mind did not apply. The court explained that a Section 14(a) claim may be based on negligence, and negligence is not a particular state of mind under that provision.

The court also held that Federal Rule of Civil Procedure 9(b), which requires fraud allegations to be stated with particularity, applied because Enzo’s factual allegations were anchored in alleged fraudulent conduct. The court therefore evaluated the complaint under both the applicable securities-law pleading requirements and Rule 9(b).

Claims Based on Proxy Statements

The court held that Enzo plausibly alleged both loss causation and transaction causation. Enzo alleged that it spent company resources responding to an allegedly illegitimate proxy contest and that Harbert’s solicitations were an essential link in the election of the Harbert nominees. The court concluded that these allegations sufficiently connected the proxy materials to Enzo’s claimed injury and the nominees’ election.

The court allowed the claims concerning three categories of statements to proceed past the motion-to-dismiss stage:

1. Independence statements. Enzo plausibly alleged that statements describing the nominees as independent of Harbert and free of conflicts would have mattered to a reasonable shareholder. The court found that Enzo’s allegations about the nominees’ communications with Harbert and their alleged concern for Harbert’s interests raised factual issues that could not be resolved on a motion to dismiss.

2. Qualification statements. Enzo plausibly alleged that statements describing the nominees as highly qualified, already familiar with Enzo’s challenges, and able to improve the company were misleading. The court rejected Harbert’s arguments that the statements were accurate descriptions of the nominees’ prior experience or merely opinions. It explained that an opinion can support liability if the speaker did not actually hold the stated belief.

3. Future-plan statements. The court rejected Harbert’s argument that statements about improving Enzo’s strategic plan, addressing costs, and developing partnerships were merely vague promotional claims. Because the statements were repeated in multiple proxy materials and were not obviously unimportant to a reasonable shareholder, the court held that they could not be dismissed as immaterial at this stage.

Alleged Omission

The court dismissed Enzo’s separate claim that Harbert violated Section 14(a) by failing to disclose its alleged plan to take control of the board and force a sale of Enzo. The court held that an undisclosed motive, standing alone, is not an actionable misrepresentation or omission under Section 14(a). Enzo therefore could not impose liability based solely on Harbert’s alleged undisclosed motive.

Disposition

The court granted in part and denied in part Harbert’s motion to dismiss. The claims based on the independence, qualification, and future-plan statements were not dismissed, while the claim based on the alleged undisclosed motive was dismissed. The court deferred the mootness issue and scheduled an in-person conference to discuss next steps.