Rubinstein et al v. Gonzalez et al

Filing 37

MEMORANDUM OPINION AND ORDER Signed by the Honorable Robert M. Dow, Jr. on 3/29/2016. Mailed notice(cdh, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
MURRAY RUBINSTEIN, JEFFREY F.
ST. CLAIR, WILLIAM MCWADE,
HARJOT DEV and VIKAS SHAH,
individually and on behalf of all others
similarly situated,
Plaintiffs,
v.
RICHARD GONZALEZ and ABBVIE
INC.,
Defendants.

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Case No. 14-cv-9465
Judge Robert M. Dow, Jr.

MEMORANDUM OPINION AND ORDER
Plaintiffs Murray Rubinstein, Jeffrey F. St. Clair, William McWade, Harjot Dev and
Vikas Shah (collectively, “Plaintiffs”) filed this class action lawsuit against Defendants Richard
Gonzalez (“Gonzalez”) and AbbVie, Inc. (“AbbVie”) (collectively, “Defendants”) for alleged
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Act”). See 15
U.S.C. §§ 78j(b) and 78t. Before the Court is Defendants’ motion to dismiss [26]. For the
reasons stated below, Defendant’s motion [26] is granted and Plaintiffs’ complaint is dismissed
without prejudice. Plaintiffs are given until May 2, 2016 to file an amended complaint.
I.

Background
For purposes of Defendants’ motions to dismiss, the Court assumes as true all well-pled

allegations set forth in Plaintiff’s amended complaint. See Killingsworth v. HSBC Bank Nevada,
N.A., 507 F.3d 614, 618 (7th Cir. 2007). In addition, the Court takes judicial notice of the
documents referred to and quoted in the complaint, which Defendants attach to their motion to
dismiss. See Geinosky v. City of Chicago, 675 F.3d 743, 745 n.1 (7th Cir. 2012); Wright v.

Associated Ins. Companies Inc., 29 F.3d 1244, 1248 (7th Cir. 1994) (“[D]ocuments attached to a
motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff’s
complaint and are central to his claim. Such documents may be considered by a district court in
ruling on the motion to dismiss.”).
AbbVie is a biopharmaceutical company with its principal executive offices in Chicago,
Illinois. On June 20, 2014, AbbVie publicly confirmed media reports that it had approached
another biopharmaceutical company, Shire (which is not a party to this lawsuit), with an initial
proposal for a merger. Shire has its principal executive offices in Dublin, Ireland and its
securities are traded on the NASDAQ under the symbol “SHPG.” In its announcement, AbbVie
explained that it had until July 18, 2014 to announce a firm offer or a decision to abandon talks
with Shire. (In their response to the motion to dismiss, Plaintiffs refer to this announcement as
alleged misstatement/omission 1. See [33] at 15-16 n.4.)
On June 25, 2014, AbbVie issued a press release (alleged misstatement/omission 2)
announcing that the AbbVie Board of Directors believed that the Shire merger had “compelling
strategic rationale for all shareholders.” [1] at 4. The rationale included:


Combination to accelerate growth of both companies through multiple
catalysts – AbbVie believes a merger of AbbVie and Shire would potentially
accelerate growth and profitability by leveraging AbbVie’s capabilities and
infrastructure to make Shire’s pipeline and products more successful than its
standalone prospects. AbbVie believes that this merger would result in
incremental sustainable leadership positions within high value market segments of
significant unmet need, including: immunology, rare diseases, neuroscience,
metabolic diseases and liver disease (HCV), as well as multiple emerging
oncology programs.



Strong complementary fit across existing platforms is better than standalone
capabilities – AbbVie believes that Shire’s platform has a strong complementary
fit with AbbVie’s existing specialty focus, including physician access
relationships, regulatory and market access capabilities, and patient-centric focus.
AbbVie’s existing expertise and development capabilities across areas such as GI,
neuroscience, rare oncology indications, combined with AbbVie’s resources and
2

scale, could develop global franchises from Shire’s platform and utilize M&A to
supplement organic growth.


Leverage AbbVie’s substantial and well-established global infrastructure –
AbbVie believes that Shire could achieve immediate broader geographic
penetration and scale by leveraging AbbVie’s existing, well-established global
infrastructure across more than 170 countries, including our existing commercial,
regulatory and medical affairs, and market access in key emerging markets. A
combination would provide Shire with the desired scale and infrastructure along
with:
A diversified portfolio of leading marketed products;
Stronger growth platforms with the potential for further development; and
A complementary specialty focus combined with global pharma capabilities.



Broader and deeper pipeline of attractive development programs – By
leveraging AbbVie’s established R&D infrastructure and expertise, AbbVie
believes the combination would enhance innovation and end-to-end R&D
capabilities, generating:
A best-in-class product development platform, with near-term new product
launches in liver disease (HCV), neuroscience, immunology, oncology, rare
diseases, ophthalmology, and renal; and
Expertise and infrastructure, including regulatory, health economics and outcomes
research, and market access to expand product indications to meet patient needs.
AbbVie’s track record of product optimization is evidenced by its growth of the
Humira® franchise through increased penetration in existing indications,
geographic expansion, and approvals for new indications.



Substantial combined financial capacity – The enhanced financial profile of
New AbbVie would offer greater strategic and financial flexibility, enabling:
The opportunity to maximize Shire’s rare disease and neuroscience franchises
including resources to fully globalize Shire’s planned launches;
The potential for strengthened sustainability of top-tier EPS growth, attractive
free cash flow and enhanced return of capital policy; and
A world-class business development group to drive continued portfolio expansion
with access to cash and financial wherewithal not available on a standalone basis.

[1] at 4-6 (emphasis added).
Also on June 25, 2014, AbbVie issued a presentation titled “AbbVie’s proposed
combination with Shire: creating immediate and long-term value for all shareholders” (alleged
misstatement/omission 3). AbbVie provided seven strategic reasons for the merger: (1) “Larger
and more diversified biopharmaceutical company with multiple leading franchises”; (2) “Adds

3

leading franchises within specialty therapeutic areas, including rare disease and neuroscience”;
(3) “Broad and deep pipeline of diverse development programs and enhanced R&D capabilities”;
(4) “Global resources and experienced teams positioned to continue to deliver strong shareholder
returns to both AbbVie and Shire shareholders”; (5) “Transaction expected to achieve a
competitive tax structure and provide New AbbVie with enhanced access to its global cash
flows”; (6) “Transaction expected to be accretive to adjusted EPS in the first year following
completion, and will increase to more than $1.00 per share by 2020”; and (7) Significant
financial capacity for future acquisitions, investment and opportunity for enhanced shareholder
distributions and value creation.” [1] at 7 (emphasis added).
On July 18, 2014, AbbVie disclosed that its Board had agreed to terms for the merger,
which was valued at approximately $54 billion. [1] at 7. AbbVie also disclosed that, in
connection with the merger, AbbVie Ventures, LLC had entered into a Cooperation Agreement
with Shire, which would require AbbVie to pay a termination fee of $1.64 billion if the deal was
not consummated. Id. at 7-8. AbbVie also issued another presentation to investors (alleged
misstatement/omission 4), which listed the same seven factors in favor of the merger as the
June 25, 2014 presentation.
AbbVie and Gonzalez also hosted a telephonic conference with investors on July 18,
2014 (alleged misstatement/omission 5). On the call, Gonzalez explained that AbbVie and
Shire intended “to incorporate the merged business in Jersey,” Channel Islands and to domicile it
“in the UK for tax purposes.” [27-2] at 20. Gonzalez also took questions concerning tax
inversions. A call participant from JPMorgan stated that “there has been a lot of noise coming
out of Washington recently on the topic of inversion” and asked Gonzalez to “talk a little bit
about how you thought about that risk as you considered the Shire deal and potentially re-

4

domiciling the Company into the UK.” Id. at 22. Gonzalez told investors that the “transaction
has significant, both strategic and financial, rationale,” and while “[t]ax is clearly a benefit, * * *
it’s not the primary rationale for this.” Id. (emphasis added). Gonzalez also noted that, from his
point of view, the “debate” over inversions “would be more appropriately shifted toward tax
reform and making companies more competitive in the global economy that we operate in,”
because “[c]ompanies like ours need access to our global cash flows to be able to make
investments all around the world, but specifically to be able to make investments in the United
States.” Id. Gonzalez further stated that AbbVie was “at a disadvantage versus many of [its]
foreign competitors” and opined that this is the “debate that we should be having around
inversion and all aspects of the US tax code.” Id. at 22-23. A call participant from Credit Suisse
then asked a follow-up question about the “discussions in Washington around inversions.” Id. at
23. He stated: “There is obviously the breakup fee you guys mentioned around this deal. I’m
just trying to understand kind of how important the ex-US domiciling for tax purposes is to this
deal and if something were to come up where retroactively you are not able to actually change
your domicile outside the US, is that something where the breakup fee would not restrict you
from then going ahead and breaking up this deal and not going forward?”

Id. Gonzalez

responded that he was “somewhat limited in what we can say,” but continued: “this is a
transaction that we believe has excellent strategic fit and has compelling financial impact well
beyond the tax impact. We would not be doing it if it was just for the tax impact. This is an
additional benefit that we have. We have looked carefully at that aspect of it and we believe it is
executable at a high level.” Id. at 23-24 (emphasis added).1

1

The complaint alleges that this investor call occurred on July 21, 2014. [1] at 8-9. However, the
language quoted in the complaint comes from the transcript of a call that occurred on July 18, 2014. [272] at 22-24. Defendants attached a copy of the transcript to their motion to dismiss. See Id. at 17
(showing “event date” of July 18, 2014).

5

On August 21, 2014, AbbVie Private Limited issued the Form S-4 for the proposed
transaction (alleged misstatement/omission 6).2

The Form S-4 listed ten benefits of the

transaction:


the creation of a global market leader with unique characteristics and a
compelling investment thesis by combining two companies with leadership
positions in specialty pharmaceuticals;



the opportunity to leverage AbbVie’s capabilities and infrastructure to make
Shire’s pipeline and products more successful than its stand-alone prospects;



the incremental sustainable leadership positions New AbbVie would be expected
to have within high value market segments of significant unmet need, including
immunology, rare diseases, neuroscience, metabolic diseases and liver disease
(HCV), as well as multiple emerging oncology programs;



the strong complementary fit of Shire’s platform with AbbVie’s existing specialty
focus, including physician access relationships, regulatory and market access
capabilities, and patient-centric focus and the potential to develop global
franchises from Shire’s platform with AbbVie’s existing expertise and
development capabilities across areas such as gastrointestinal medicine,
neuroscience, and rare oncology indications, combined with AbbVie’s resources
and scale;



the potential realization of tax and operational synergies by New AbbVie as a
result of the Combination;



the immediate broader geographic penetration and scale of Shire as a result of the
Combination, by leveraging AbbVie’s existing, well-established global
infrastructure across more than 170 countries, including commercial, regulatory
and medical affairs, and market access in key emerging markets;



the enhancement of innovation and end-to-end R&D capabilities by leveraging
AbbVie’s established R&D infrastructure and expertise, which the AbbVie Board
expects will generate:
o a best-in-class product development platform, with near-term new product
launches in liver disease (HCV), neuroscience, immunology, oncology,
rare diseases, ophthalmology, and renal; and

2

Form S-4 is a form filed with the SEC relating to a business combination or exchange offer. This filing
contains details relating to share distribution, amounts, terms, and other information relating to any
merger or exchange offers.

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o expertise and infrastructure, including regulatory, health economics and
outcomes research, and market access to expand product indications to
meet patient needs;


the combined financial strength and R&D experience of New AbbVie;



the Combination’s expected accretion to AbbVie’s adjusted earnings per share in
the first year following completion, growing to above $1.00 per share by 2020,
with material ongoing financial and operating benefits;



the opportunity for New AbbVie to have an enhanced financial profile and greater
strategic and financial flexibility as compared to AbbVie and Shire on a
standalone basis, which would provide:
o the opportunity to maximize Shire’s rare disease and neuroscience
franchises including resources to fully globalize Shire’s planned launches;
o the potential for strengthened sustainability of top-tier EPS growth,
attractive available cash flow and enhanced return of capital policy; and
o the basis for a world-class business development group to drive continued
portfolio expansion and utilize M&A to supplement organic growth with
access to cash and financial resources not available on a standalone basis.

[1] at 10-11 (emphasis added).
On September 22, 2014, the U.S. Treasury Department issued a notice (“Notice”) that it
would be taking steps to curb the practice of corporate inversions. See [27-2] at 3-78 (copy of
Notice). A corporate inversion is a transaction in which a U.S. based multinational restructures
so that the U.S. parent is replaced by a foreign parent, in order to avoid paying U.S. taxes. See
[1] at 11.

The Treasury Department stated that the Notice “eliminates certain techniques

inverted companies currently use to access the overseas earnings of foreign subsidiaries of the
U.S. company that inverts without paying U.S. tax” and would apply “to deals closed today or
after today.” Id.
On September 29, 2014, AbbVie and Gonzalez issued a statement to Shire’s employees,
which AbbVie also filed with the SEC (alleged misstatement/omission 7). Gonzalez stated that

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he was “more energized than ever about our two companies coming together, especially because
I can already see many shared traits and values in the people at AbbVie and Shire.” [1] at 12.
Gonzalez explained that, “[w]hen we first considered Shire joining together with AbbVie it was
because we saw the opportunity to lead and grown in important therapeutic areas” and also
“because we saw a complementary pipeline that would be positioned to enhance innovation.” Id.
Gonzalez stated that he was “more confident than ever about the potential of our combined
organizations now that I’ve had a chance to meet with many of you.” Id. He told Shire
employees, “[w]e have a very busy few months ahead as we work on integration planning.” Id.
Gonzalez concluded that he “look[ed] forward to working with [Shire employees] much more
closely in the near future.” Id.
On October 14, 2014, Gonzalez announced that AbbVie’s Board would be reconsidering
its recommendation to shareholders to adopt the merger agreement.

Gonzalez stated that

“AbbVie’s Board will consider, among other things, the impact of the U.S. Department of
Treasury’s proposed unilateral changes to the tax regulations announced on September 22, 2014,
including the impact to the fundamental financial benefits of the transaction.” [1] at 13.
On October 15, 2014, two columnists from Bloomberg published an article stating that
“AbbVie’s move surprised investors after the drug company had said the deal was driven mostly
by strategic, not tax, reasons.”

[1] at 15 (quoting Oliver Stanley and Cynthia Koons,

BLOOMBERG, “AbbVie’s Threat on Shire Deal is Latest Tax Rule Fallout” (Oct. 15, 2014)).
They quoted an analyst from Credit Suisse who stated, “AbbVie’s management’s credibility may
now be called into question given the non-inversion benefits they touted when initially selling
the deal and the fact that their limited public comments since the Treasury Notice was released
have stressed the merits of getting the deal done.” Id. at 16.

8

On October 20, 2014, AbbVie issued a press release stating that it had decided to
terminate the merger with Shire. See [1] at 12-13. See also [27-2] at 80-83 (copy of press
release). AbbVie was required to pay the $1.64 billion break-up fee. According to the press
release, AbbVie’s decision “was based upon its assessment of the September 22, 2014 notice
issued by the U.S. Department of Treasury, which re-interpreted longstanding tax principles in a
uniquely selective manner designed specifically to destroy the financial benefits of these types of
transactions.” [27-2] at 80 (emphasis added). AbbVie further stated that the Notice “introduced
an unacceptable level of risk and uncertainty, given the magnitude of the proposed changes and
the stated intention of the Department of Treasury to continue to revise tax principles to further
impact such transactions.” Id. AbbVie explained that after thoroughly reviewing the Notice and
obtaining advice from external tax, legal, and financial advisors, its “executive management
team ultimately concluded that the transaction was no longer in the best interests of stockholders
at the agreed upon valuation, and the Board fully supported that conclusion.” Id. (emphasis
added). Gonzalez publicly commented on the termination of the transaction. He stated, among
other things, that “[t]he unprecedented unilateral action by the U.S. Department of Treasury may
have destroyed the value of this transaction, but it does not resolve” the need for comprehensive
tax reforms to stimulate investment in the U.S. economy. Id. (emphasis added).
On October 22, 2014, a columnist for Fortune wrote a column stating that AbbVie had
“kill[ed] its $54 billion buyout of Shire” and “come[] clean about its original intentions,” which
the columnist posited to be the tax benefits gained from the corporate inversion. [1] at 15
(quoting Dan Primack, FORTUNE, “AbbVie Finally Admits it was Trying to Dodge U.S.
Taxes” (Oct. 22, 2014)). The columnist opined that due to the Treasury Notice, Gonzalez was
“free from having to pretend that [the proposed merger] wasn’t about the taxes.” Id.

9

On November 25, 2014, Plaintiffs filed suit against AbbVie and Gonzalez on behalf of all
persons who purchased or otherwise acquired Shire ADS or purchased call options or sold put
options during the period June 20, 2014 (when AbbVie disclosed it had approached Shire)
through October 14, 2014 (when Gonzalez announced the Board was reconsidering its decision
to approve the merger). [1] at 18-19.
II.

Analysis
Plaintiffs allege in their complaint that AbbVie and Gonzalez violated Section 10(b) of

the Act and Rule 10b-5 and that Gonzalez also violated Section 20(a) of the Act. Section 10(b)
of the Act makes it unlawful for any person to “use or employ, in connection with the purchase
or sale of any security * * * any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the Commission may prescribe as necessary or
appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b). “Rule
10b–5 forbids a company or an individual ‘to make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading.’” Makor Issues & Rights, Ltd. v.
Tellabs Inc., 513 F.3d 702, 704 (7th Cir. 2008) (quoting 17 C.F.R. § 240.10b–5(b)). “The
elements of a private securities fraud claim based on violations of § 10(b) and Rule 10b–5 are:
‘(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection
between the misrepresentation or omission and the purchase or sale of a security; (4) reliance
upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.’” Erica P.
John Fund, Inc. v. Halliburton Co., 563 U.S. 804, 131 S. Ct. 2179, 2184 (2011) (quoting Matrixx
Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37 (2011)).
Section 20(a) of the Act “provides a basis for holding individuals liable for acts of
securities fraud if they control other individuals or businesses that violate the securities laws.”
10

Plumbers & Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Allscripts-Misys
Healthcare Sols., Inc., 778 F. Supp. 2d 858, 886 (N.D. Ill. 2011) (quoting 15 U.S.C. § 78t).
Thus, “to state a claim under § 20(a), a plaintiff must first adequately plead a primary violation
of securities laws.” Pugh v. Tribune Co., 521 F.3d 686, 693 (7th Cir. 2008).
Defendants move to dismiss Plaintiffs’ complaint pursuant to Rules 12(b)(6) and 9(b) of
the Federal Rules of Civil Procedure and 15 U.S.C. § 78u-4(b)(3)(a). Defendants argue that
Plaintiffs fail to allege sufficient facts to support three of the elements of their Section 10(b) and
Rule 10b-5 claim: (1) a misrepresentation of material fact; (2) scienter; and (3) loss causation.
Defendants also argue that Plaintiffs’ Section 20(a) claim should be dismissed because Plaintiffs
have failed to state a primary violation of the securities laws.
A.

Legal Standards

“In an ordinary civil action, the Federal Rules of Civil Procedure require only ‘a short
and plain statement of the claim showing that the pleader is entitled to relief.’” Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007) (quoting Fed. R. Civ. P. 8(a)(2)).
“Although the rule encourages brevity, the complaint must say enough to give the defendant ‘fair
notice of what the plaintiff’s claim is and the grounds upon which it rests.’” Id. (quoting Dura
Pharm., Inc. v. Broudo, 544 U.S. 336, 346 (2005)). A complaint that does not comply with Rule
8(a) is subject to dismissal under Rule 12(b)(6), which tests the sufficiency of the complaint. See
Fed. R. Civ. P. 12(b)(6); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007).
Prior to the enactment of the Private Securities Litigation Reform Act of 1995
(“PSLRA”), “the sufficiency of a complaint for securities fraud was governed not by Rule 8, but
by the heightened pleading standard set forth in Rule 9(b).” Tellabs, 551 U.S. at 319. Under
Rule 9(b), a party alleging fraud or mistake “must state with particularity the circumstances

11

constituting fraud or mistake,” but “intent, knowledge, and other conditions of a person’s mind
may be alleged generally.” Fed. R. Civ. P. 9(b).
The PSLRA “raise[d] the pleading standard for securities fraud claims beyond the
requirements of even Rule 9(b).” Van Noppen v. InnerWorkings, Inc., -- F. Supp. 3d --, 2015
WL 5770138, at *1 (N.D. Ill. Sept. 30, 2015). These heightened pleading standards, which are
discussed in detail below, apply to the “misrepresentation of material fact” and “scienter”
elements of Section 10(b) and Rule 10b-5 claims. See generally Tellabs, 551 U.S. at 320. The
Court is required to grant a motion to dismiss if these standards are not met. 15 U.S.C. § 78u4(b)(3)(A).
In evaluating Defendants’ motion to dismiss, the Court must accept all factual allegations
in the complaint as true. Van Noppen, 2015 WL 5770138 at *17. The Court must also “draw all
reasonable inferences in favor of the plaintiff,” except when it is evaluating the scienter element.
See Makor, 513 F.3d at 705. The standard that applies to the scienter element is discussed
below.
B.

Material Misrepresentations or Omissions

The PSLRA requires that in any action where “the plaintiff alleges that the defendant (A)
made an untrue statement of a material fact; or (B) omitted to state a material fact necessary in
order to make the statements made, in light of the circumstances in which they were made, not
misleading,” the complaint must “specify each statement alleged to have been misleading” and
“the reason or reasons why the statement is misleading.” 15 U.S.C. § 78u-4(b)(1)(A), (B). In a
case where, as here, the allegations are based on information and belief, the plaintiff is also
required to “state with particularity all facts on which that belief is formed.” Id. § 78u-4(b)(1).3

3

Plaintiffs’ complaint states that all allegations are based on information and belief except allegations
specifically pertaining to Plaintiffs. [1] at 1.

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In determining whether a statement is misleading, the Court “consider[s] the context in which the
statement was made” and “must determine ‘whether the facts alleged are sufficient to support a
reasonable belief as to the misleading nature of the statement or omission.’” Constr. Workers
Pension Fund-Lake Cty. & Vicinity v. Navistar Int’l Corp., 114 F. Supp. 3d 633, 651 (N.D. Ill.
2015) (quoting Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 596 (7th Cir. 2006),
vacated and remanded, 551 U.S. 308 (2007)); see also Van Noppen, 2015 WL 5770138 at *5.
Defendants argue that the complaint should be dismissed because it fails to specify each
statement or omission alleged to have been misleading and the reason or reasons why. Plaintiffs
respond that the complaint identifies the following seven misleading statements or omissions of
material fact:
1.

AbbVie’s June 20, 2014 announcement that it had approached Shire about
a business combination ([27-1] at 20-23);

2.

AbbVie’s June 25, 2014 press release listing five “compelling strategic
rationale for all shareholders” for the proposed merger with Shire,
including “[s]ubstantial combined financial capacity” and “[a] world-class
business development group to drive continued portfolio expansion with
access to cash and financial wherewithal not available on a standalone
basis” ([27-1] at 25-38);

3.

AbbVie’s June 25, 2014 presentation listing seven strategic rationale for
the merger, including “achiev[ing] a competitive tax structure and
provid[ing] New AbbVie with enhanced access to its global cash flows”
([27-1] at 40-79);

4.

AbbVie’s July 18, 2014 presentation listing the same seven strategic
rationale as the June 25, 2014 presentation ([27-2] at 2-15);

5.

AbbVie’s and Gonzalez’s July 18, 2014 investor call, on which Gonzalez
said AbbVie would “not be doing [the merger] if it was just for the tax
impact” and that “[t]ax is clearly a benefit, but it’s not the primary
rationale for this” ([27-2] at 17-31);

6.

AbbVie’s August 21, 2014 S-4 tax filings describing the strategic reasons
for the merger, including “the potential realization of tax and operational

13

synergies by New AbbVie as a result of the Combination” ([27-1] at 318); and
7.

Gonzalez’s September 29, 2014 thank-you letter to Shire employees
stating that he is “more confident than ever about the potential of our
combined organizations” and that “[w]e have a very busy few months
ahead as we work on integration planning” ([27-2] at 33-35).

[33] at 15 & n.4. Plaintiffs assert that these seven statements or omissions “emphasiz[ed] the
purported strategic benefits of the merger” and “downplay[ed] or den[ied] the tax inversion.” Id.
at 18.

These statements or omissions were “false and misleading,” according to Plaintiffs,

“because the tax inversion was the make-or-break reason for the merger.” Id.
The Court concludes that Plaintiffs have not alleged facts that are “sufficient to support a
reasonable belief” that statements 1, 2, 3, 4, 5, or 6 were misleading, but have met their burden
with regard to statement 7. Constr. Workers Pension Fund, 114 F. Supp. 3d at 651.
Statement 1 confirmed press speculation that AbbVie had approached Shire with a
merger proposal. Plaintiffs do not identify anything in Statement 1 that is untrue. Nor do
Plaintiffs allege facts showing that Defendants omitted to state a material fact necessary to make
Statement 1 not misleading. Statement 1 does not explain why the parties were considering a
merger and does not contain any information from which an investor might infer that the tax
benefits were a make-or-break reason for the contemplated merger. See [27-1] at 20. Therefore,
Defendant was under no duty to disclose that the tax benefits were (according to Plaintiffs) the
make-or-break reason for the transaction. “Mere silence about even material information is not
fraudulent absent a duty to speak.” Stransky v. Cummins Engine Co., 51 F.3d 1329, 1331 (7th
Cir. 1995).
In statements 2, 3, 4 and 6, Defendants identified various benefits, including tax benefits,
that they hoped to realize through the proposed merger. Plaintiffs have not pled facts indicating
that statements 2, 3, 4 or 6 are false. For instance, they do not allege that Defendants simply
14

made up the non-tax rationales for the transaction. Instead, Plaintiffs state in their response brief
that they “do not dispute that the Merger may have provided some strategic benefits to AbbVie”
other than tax benefits. [33] at 17 (emphasis added).
Plaintiffs also have not pled facts indicating that statements 2, 3, 4, or 6 contain
actionable omissions. Plaintiffs’ theory of the case assumes that, because Defendants disclosed
the various benefits they hoped to realize from the transaction, Defendants also had a duty to
disclose that Defendants would (or might) call off the transaction and pay the break-up fee if the
tax benefits evaporated. Defendants argue that “[b]ecause the market was not told that the
Merger depended on the tax inversion, * * * investors did not know that completion of the
Merger was dependent on the tax inversion.” [33] at 19. Certainly, this is information that an
investor would likely want to know before deciding to invest in a company that is in the midst of
a merger.

But Section 10(b) and Rule 10(b)(5) only “proscribe[] omissions that render

affirmative statements misleading; thus, incomplete disclosures, or ‘half-truths,’ implicate a duty
to disclose whatever additional information is necessary to rectify the misleading statements.”
Schlifke v. Seafirst Corp., 866 F.2d 935, 944 (7th Cir. 1989). Thus, “[e]ven with respect to
information that a reasonable investor might consider material, companies can control what they
have to disclose under these provisions by controlling what they say to the market.” Matrixx,
563 U.S. at 45.
Here, Plaintiffs have failed to allege facts sufficient to support a reasonable belief that
statements 2, 3, 4, or 6 were misleading by omission such that AbbVie had a duty to disclose that
it might call off the merger if the tax rules changed. In these statements Defendants identified
various benefits—including specifically the tax benefits—that they hoped to realize, without
ranking the benefits or stating which benefits were substantial enough to justify paying the

15

breakup fee. Therefore, Defendants had no duty to rectify these statements by disclosing their
position on whether AbbVie would call off the merger if the tax rules changed. Cf. Schlifke, 866
F.2d at 944-45 (omissions cited by purchasers of limited partnership interests in oil and gas
exploration program in connection with loan documents that were included with partnership
prospectus did not give rise to duty on part of bank to disclose other material facts regarding loan
transaction; contrary to purchasers’ contention, loan documents did not give rise to any
implication that bank believed partnership would be successful); City of Edinburgh Council v.
Pfizer, Inc., 754 F.3d 159, 168-69 (3d Cir. 2014) (statements made during earnings calls to
pharmaceutical manufacturer’s investors, which described phase 2 interim results of
experimental Alzheimer’s drug trial as one factor in the “composite decision” to move to phase
3—but did not disclose known problems with the phase 2 tests— were not false and misleading
in violation of § 10(b), as such statements were consistent with manufacturer’s prior press
release and accurately conveyed that the interim results were one of several factors manufacturer
considered in deciding to initiate phase 3).
The Court next considers Statement 5. On the July 18, 2014 investor call, Gonzalez told
investors that while “[t]ax is clearly a benefit, * * * it’s not the primary rationale” for the merger
and “[w]e would not be doing it if it was just for the tax impact.” [1] at 9. Plaintiffs argue that
the statement’s falsity can be inferred by AbbVie’s decision, following the Treasury Notice, to
terminate the transaction and pay the break-up fee. Other than this, Plaintiffs do not allege any
facts showing that the tax benefits were more important than any of the other rationales
identified in statements 2, 3, 4 or 6. The Court concludes that the facts alleged do not support a
reasonable belief as to the falsity of Gonzalez’s statement that tax was not the primary rationale
for the merger. At most, Plaintiffs’ allegations would permit the Court “‘to infer * * * the mere

16

possibility of misconduct,’” which is insufficient to “show” that the pleader is entitled to relief
under Rule 8(a)(2). Hecker v. Deere & Co., 569 F.3d 708, 711 (7th Cir. 2009 (quoting Ashcroft
v. Iqbal, 556 U.S. 662, 679 (2009); citing Fed. R. Civ. P. 8(a)(2)).
According to the complaint, the total value of the deal was $54 billion. [1] at 7. The
break-up fee was $1.64 billion, or approximately 3% of the total value. Id. at 8. Given this deal
structure, it would be expected that AbbVie’s loss of any benefit worth 3% or more of the total
deal value could cause AbbVie to terminate the deal. But it does not follow that any benefit of
the deal that is worth at least 3% of the transaction value must be the “primary”—i.e. the “most
important”4—reason for the deal.

As Defendants point out, “[s]aying a benefit is not the

‘primary rationale’ is not the same as saying it is immaterial or unimportant.” [27] at 19.
Moreover, Plaintiffs’ argument that Gonzalez’s statement that taxes were not the “primary
reason” for the deal was misleading ignores the context of statement 5. When Gonzalez said that
the tax consequences of the deal were a benefit, but not the “primary rationale” for the deal, he
also stated that the tax issue was important because American companies need access to global
cash flows and are at a disadvantage to foreign competitors. [27-2] at 22. And when Gonzalez
said that “[w]e would not be doing it if it was just for the tax impact,” he also stated that he was
“limited in what we can say” on whether AbbVie would call off the transaction if the tax rules
changed and avoided taking any position on that issue. Id. at 23. Therefore, the Court concludes
that Plaintiffs’ allegations that Defendants terminated the transaction following Treasury’s
Notice and paid the break-up fee are insufficient to support a reasonable belief that Statement 5
was false at the time made or that Statement 5 contained actionable omissions that AbbVie
needed to clarify.
4

Merriam-Webster Dictionary, http://www.merriam-webster.com/dictionary/primary (last accessed Mar.
29, 2015).

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Finally, the Court considers Statement 7, the September 29, 2014 letter that Gonzalez
sent to Shire employees and filed with the SEC a week after Treasury issued its Notice.
Gonzalez stated that he was “more energized than ever about our two companies coming
together” and “more confident than ever about the potential of our combined organizations.”
[27-2] at 33. Gonzalez also stated that “[w]e have a very busy few months ahead as we work on
our integration planning” and that he “look[ed] forward to working with [Shire employees] much
more closely in the near future.” Id. The Court concludes that Plaintiffs have alleged facts that
are sufficient to support a reasonable belief that Gonzalez’s statement was false or misleading at
the time made. The Court cannot, as Defendants urge, conclude based on the pleadings that
Gonzalez’s statements were “mere puffing” or “corporate optimism” that are too immaterial to
be actionable. Plumbers & Pipefitters Local Union, 778 F. Supp. 2d at 871-72. Gonzalez sent
the letter a week after Treasury issued its Notice, at which time Defendants could have known
that the transaction would not result in the tax savings AbbVie had expected and could have been
reconsidering or planning to call off the deal. Gonzalez told Shire workers that they would
continue to work on integration planning over the next few months, and expressed enthusiasm
about the transaction. [1] at 12. Less than a month later, however, AbbVie called off the deal on
the basis that the tax change “destroy[ed]” the financial benefits of the transaction and paid the
$1.64 million break-up fee. [1] at 13. The Court concludes that these facts are sufficient to
support a reasonable belief that AbbVie’s omission of the fact that it was reconsidering the
merger rendered misleading Gonzalez’s statement about the continued planning for the
transaction.
C.

Scienter

“To establish liability under § 10(b) and Rule 10b–5, a private plaintiff must prove that
the defendant acted with scienter, ‘a mental state embracing intent to deceive, manipulate, or
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defraud.’” Tellabs, 551 U.S. at 319 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193-94
& n.12 (1976)). A plaintiff may “demonstrate scienter ‘either (a) by alleging facts to show that
defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that
constitute strong circumstantial evidence of conscious misbehavior or recklessness.’”
Tricontinental Indus. Ltd. v. Anixter, 215 F. Supp. 2d 942, 949 (N.D. Ill. 2002) (quoting Rehm v.
Eagle Fin. Corp., 954 F. Supp. 1246, 1253 (N.D. Ill. 1997)). In the Seventh Circuit, scienter can
also be established by proving that the defendant acted with a “reckless disregard of the truth.”
S.E.C. v. Bauer, 723 F.3d 758, 775 (7th Cir. 2013).5 In the context of omissions, reckless
conduct is “‘a highly unreasonable omission, involving not merely simple, or even inexcusable
negligence, but an extreme departure from the standards of ordinary care, and which presents a
danger of misleading buyers or sellers that is either known to the defendant or is so obvious that
the actor must have been aware of it.’” Sundstrand, 553 F.2d at 1045 (quoting Franke v.
Midwestern Oklahoma Development Authority, 428 F. Supp. 719 (W.D. Okl. 1976)). Thus,
“[t]he question is not merely whether the [defendant] had knowledge of the undisclosed facts;
rather, it is the ‘danger of misleading buyers [that] must be actually known or so obvious that
any reasonable man would be legally bound as knowing.” Schlifke, 866 F.2d at 946 (emphasis in
Sclifke; quoting Sundstrand, 553 F.2d at 1045).
The PSLRA further requires the plaintiff to “state with particularity facts giving rise to a
strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u–
4(b)(2) (emphasis added). To determine if a plaintiff has complied with this obligation, the
5

See also Tellabs, 551 U.S. at 319 & n.3 (declining to decide whether reckless conduct can form the basis
for a § 10(b) claim, but recognizing that “[e]very Court of Appeals that has considered the issue has held
that a plaintiff may meet the scienter requirement by showing that the defendant acted intentionally or
recklessly, though the Circuits differ on the degree of recklessness required”); Sundstrand Corp. v. Sun
Chemical Corp., 553 F.2d 1033, 1044 (7th Cir. 1977) (“[A] reckless omission of material facts upon
which the plaintiff put justifiable reliance in connection with a sale or purchase of securities is actionable
under Section 10(b) as fleshed out by Rule 10b-5.”).

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Court “must consider plausible, nonculpable explanations for the defendant’s conduct, as well as
inferences favoring the plaintiff.” Tellabs, 551 U.S. at 310. “The inference that the defendant
acted with scienter need not be irrefutable, but it must be more than merely ‘reasonable’ or
‘permissible’—it must be cogent and compelling, thus strong in light of other explanations.” Id.
“In making this determination, the court must review ‘all the allegations holistically.’” Matrixx,
563 U.S. at 48 (quoting Tellabs, 551 U.S. at 326). In sum, this Court must ask: “When the
allegations are accepted as true and taken collectively, would a reasonable person deem the
inference of scienter at least as strong as any opposing inference?” Tellabs, 551 U.S. at 326.
Defendants argue that the complaint should be dismissed because Plaintiffs fail to
adequately allege that Defendants acted with scienter when they made their alleged false and
misleading statements. In analyzing scienter, the Court will focus on Gonzalez’s September 29,
2014 letter to Shire employees because that is the only material misrepresentation or omission
that Plaintiffs have adequately pled. The Court concludes that Plaintiffs fail to state with
particularity facts giving rise to a strong inference that Gonzalez acted with scienter when he sent
the September 29, 2014 letter to Shire employees. As explained above, Plaintiffs’ allegations
that AbbVie announced its intent to reconsider the deal just two weeks after Gonzalez wrote his
letter could support an inference that Gonzalez’s statements concerning his continued enthusiasm
for the transaction were false or misleading. The Court concludes, nonetheless, that under the
PLRA’s heightened pleading requirements, the more cogent and compelling inference from
Gonzalez’s letter and the pleadings is that as of September 29, 2014, Gonzalez was still
enthusiastic about the transaction.
The complaint does not allege facts that constitute strong circumstantial evidence of
conscious misbehavior or recklessness. Tricontinental, 215 F. Supp. 2d at 949. While AbbVie

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announced its intent to reconsider the deal a few weeks after Gonzalez sent his letter to Shire
employees, this timing alone is not strong evidence that Gonzalez knew at the time he sent the
letter that AbbVie was going to reconsider or call off the deal. If AbbVie was concerned about
hiding the importance of the tax consequences even after Treasury issued its Notice, then why
would its announcements that it was reconsidering and calling off the deal make clear that the
Notice was the reason? Cf. Davis v. SPSS, Inc., 385 F. Supp. 2d 697, 713-14 (N.D. Ill. 2005)
(investor in corporation providing predictive analytics software and services did not satisfy
scienter requirement through allegations that there were “red flags” in financial statements, as
evidenced by later discovery that statements were incorrect, which were ignored by CEO and
executive vice president, where there was no showing that executives were aware of “red flags”
at time statements were issued).
In addition, the complaint does not allege any facts concerning Defendants’ motive to lie
in order to inflate Shire’s share price. Tricontinental, 215 F. Supp. 2d at 949. While the absence
of a motive allegation is not fatal, “motive can be a relevant consideration” and the “significance
that can be ascribed to an allegation of motive, or lack thereof, depends on the entirety of the
complaint.” Tellabs, 551 U.S. at 325. Cf. Van Noppen, 2015 WL 5770138, at *15 (purchasers
of corporation’s common stock failed to show that CEO made allegedly false and misleading
statements regarding direction of inside sales group’s performance, and corporation’s confidence
about role group would play in long-term business growth, with requisite scienter, where CEO’s
stock sales amounted to low percentage of his stock holdings and there was no evidence that he
made net profit on his sales).
Plaintiffs assert in their brief (but not in their complaint) that Defendants’ motive was to
avoid “invit[ing] unwanted oversight regarding any regulatory approvals for the Merger.” [33] at

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19 n.7. But Plaintiffs do not identify any regulatory approvals that were required before the
transaction could close. To the extent that Plaintiffs mean more generally that Defendants
sought to avoid attention from regulators who might change the tax rules, this is not a plausible
motive for Gonzalez’s letter to Shire employees because Treasury had already issued the Notice
by the time that Gonzalez wrote the letter. In short, it is not apparent from the pleadings why
Gonzalez would lie or act with a reckless disregard for the truth by implying that the transaction
was still moving forward if he knew at that time that the Board was going to reconsider its
approval for the transaction. Cf. Higginbotham v. Baxter Int’l, Inc., 495 F.3d 753, 757-58 (7th
Cir. 2007) (investors bringing securities fraud action against parent corporation whose Brazilian
subsidiary had engaged in fraudulent accounting practices failed to state “strong inference” of
scienter on part of parent’s executives by alleging that executives had learned of fraud “in the
May time frame,” but had disclosed it only in late July; knowledge of subsidiary’s fraud would
lead reasonable person to conduct investigation, which parent did during June and July, and
knowledge gained during May could not indicate intent to deceive as to financial statements
issued through early May).
For these reasons, the Court concludes that Plaintiffs have failed to adequately plead
scienter.
D.

Loss Causation

In a private securities fraud action, the plaintiff bears “the burden of proving that the act
or omission of the defendant alleged to violate [the securities laws] caused the loss for which the
plaintiff seeks to recover damages.” 15 U.S.C. § 78u-4. This concept, referred to as “loss
causation,” “requires a plaintiff to show that a misrepresentation that affected the integrity of the
market price also caused a subsequent economic loss.” Erica P. John Fund, 131 S. Ct. at 2186
(emphasis in original). “One way of establishing loss causation,” which Plaintiffs rely on here,
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“is to ‘show both that the defendants’ alleged misrepresentations artificially inflated the price of
the stock and that the value of the stock declined once the market learned of the deception.’”
Wong v. Accretive Health, Inc., 773 F.3d 859, 864 (7th Cir. 2014) (quoting Ray v. Citigroup
Global Markets, Inc., 482 F.3d 991, 995 (7th Cir. 2007)).
Plaintiffs allege that Defendants’ misrepresentations concerning the importance of tax
inversion began on June 20, 2014, when AbbVie disclosed that it had approached Shire, and
ended on October 14, 2014, when Gonzalez announced that the Board was reconsidering its
decision to approve the merger due to, “among other things, the impact of the U.S. Department
of Treasury’s proposed unilateral changes to the tax regulations announced on September 22,
2014, including the impact to the fundamental financial benefits of the transaction.” [1] at 13.
Defendants argue that the complaint should be dismissed because Plaintiffs fail to adequately
allege loss causation.

The Court concludes that Plaintiffs’ loss causation allegations are

sufficient as to Plaintiffs McWade and Shah. The Court also concludes that the relevant period
for examining loss causation is shorter than alleged by Plaintiffs due to Plaintiffs’ inadequate
pleading of material misleading statements/omissions and, therefore, the complaint’s loss
causation allegations are insufficient as to Plaintiffs Rubinstein, St. Clair, and Dev, who did not
buy or sell stock during the relevant period.
The complaint does not support using June 20, 2014 as the date that Defendants began
artificially inflating Shire’s stock price because, as explained above, the only misrepresentation
that Plaintiffs have adequately pled did not occur until September 29, 2014, when Gonzalez
expressed continuing enthusiasm for the merger following the Treasury Notice. The correct
period to examine for purposes of assessing loss causation would begin September 29, 2014 and
end October 14, 2014, when AbbVie announced that the Board was reconsidering the merger due

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to the Treasury Notice—which allegedly revealed that Gonzalez’s expression of enthusiasm on
September 29 was false, assuming that he knew at that time that AbbVie was reconsidering the
transaction. On September 29, 2014, Shire was trading at about $260.00 a share. Between
September 29 and October 14, 2014, the high price was about $263.00 on October 3. The price
fell to about $246.00 by October 14, and fell precipitously following the announcement. Only
Plaintiffs McWade and Shah bought or sold Shire shares between September 29 and October 14.
See [1-1] at 5 (McWade), 7 (Shah). See also id. at 2 (Rubinstein); 3 (St. Clair); 6 (Dev). The
Court concludes based on these facts that Plaintiffs McWade and Shah have adequately pled loss
causation for the period beginning September 29 and ending October 14, 2014, but that Plaintiffs
Rubinstein, St. Clair and Dev have not. Cf. Construction Workers Pension Fund, 114 F. Supp.
3d at 644-45 (shareholders lacked standing to act as named plaintiffs in securities fraud class
action where defendants’ alleged fraudulent statements were made after plaintiffs’ last stock
purchases).
E.

Section 20(b) Claim

“[T]o state a claim under § 20(a), a plaintiff must first adequately plead a primary
violation of securities laws.” Pugh, 521 F.3d at 693. For the reasons explained above, the Court
concludes that Plaintiffs have not adequately pled a primary violation of the Act. Therefore, the
Court also grants Defendants’ motion to dismiss Plaintiffs’ Section 20(a) claim against
Gonzalez.

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III.

Conclusion
For the reasons stated above, Defendants’ motion to dismiss [26] is granted. Plaintiffs

are given until May 2, 2016 to amend their complaint.

Dated: March 29, 2016

_________________________________
Robert M. Dow, Jr.
United States District Judge

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