Rubinstein et al v. Gonzalez et al

Filing 53

MEMORANDUM OPINION AND ORDER Signed by the Honorable Robert M. Dow, Jr. on 3/10/2017. 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 Dawn Bradley, Murray Rubinstein, Harjot Dev, and Vikas Shah (collectively,
“Plaintiffs”) bring 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 Plaintiff’s amended complaint [42]. For
the reasons stated below, Defendant’s motion [42] is denied. This case is set for further status
hearing on March 29, 2017 at 9:00 a.m.
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 Cincinnati Life Ins. Co. v. Beyrer,
722 F.3d 939, 946 (7th Cir. 2013). In addition, the Court may consider the documents referred to
and quoted in the amended complaint, some of which Defendants attach to their memorandum in
support of the motion to dismiss. See [44-1] through [44-3]; see also 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.
On June 25, 2014, AbbVie issued a press release announcing that the AbbVie Board of
Directors believed that the Shire merger had “compelling strategic rationale for all shareholders.”
[38] at 9. The press release listed five rationales, none of which mentioned the tax benefits that
AbbVie might enjoy by structuring the transaction as a corporate inversion. See id. at 8-9. A
corporate inversion is a transaction in which a U.S.-based multinational entity restructures so that
the U.S. parent is replaced by a foreign parent, in order to avoid paying U.S. taxes. See id. at 19.
According to the amended complaint, this omission was made and other strategic rationales were
listed “to avoid the negative stigma associated with tax inversion in the then (and now) current
political climate, and to conceal the fact that the inversion was so important to the Combination
that it would not proceed if the controversial tax benefits were lost.” Id. at 10. The amended
complaint further asserts that investors had no reason to doubt that the proposed merger was
strategic, “[g]iven that AbbVie was highly dependent on its Humira patent, a drug that accounted
for 66% of its sales, and that patent was set to expire in 2016.” Id.

2

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.” [38] at 9.
AbbVie provided seven strategic reasons for the merger: (1) “Larger and more diversified
biopharmaceutical company with multiple leading franchises”; (2) “Adds 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.” [38] at 11 (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. 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 (1) the AbbVie Board
withdrew or modified its recommendation of the merger; and (2) either (a) AbbVie stockholders
voted and did not adopt the merger agreement at a stockholder meeting following the Board’s
change in recommendation, or (b) no stockholder meeting took place with 60 days after the
Board’s change in recommendation. [38] at 12. However, if the stockholders rejected the
combination without the Board changing its recommendation, then the Cooperation Agreement
only required AbbVie to reimburse Shire for its actual costs in an amount no less than $500

3

million or more than $545 million. Id. at 12-13. The Cooperation Agreement required AbbVie
to pay the termination fee to Shire within 7 days of the event causing the breakup. The
Cooperation Agreement “did not contain any provision to allow AbbVie to terminate the contract
in the event of a tax law change despite the fact that other such provisions had been included in
similar transactions.” Id. at 13.
Also on July 18, 2014, AbbVie and Gonzalez hosted a telephonic conference with
investors.

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.” [38] at 14 (emphasis by Plaintiffs). 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. at 14. 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 15. A call participant from Credit Suisse then asked a follow-up question
about the “discussions in Washington around inversions.” Id. 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

4

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 16 (emphasis by
Plaintiff).
According to the amended complaint, Gonzalez’s statement that the tax benefit was not
the primary rationale for the Combination was false and misleading, as demonstrated by
subsequent events described below. The amended complaint further asserts that Gonzalez’s
statement that he was “limited in what we can say” about whether AbbVie would break up the
deal if it were not able to change its domicile for taxing purposes was “not enough to provide
him a safe harbor,” because “[g]iven his voluntary comments regarding the impact of the tax
inversion, he had a duty to then speak the whole truth about the significance of the tax
implications on the Combination.” [38] at 16.
On August 5, 2014, the Treasury Department announced that it was “reviewing a broad
range of authorities for possible administrative actions to limit inversions as well as approaches
that could meaningfully reduce the tax benefits after inversions took place.” [38] at 17.
On August 21, 2014, AbbVie Private Limited issued the Form S-4 for the proposed
transaction, signed by Gonzalez.1 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

1

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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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
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
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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.
[38] at 17-19 (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 [38] at 19. 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. According
to the Amended Complaint, the Notice “made investors doubt whether the Combination would
go forward,” and “Shire’s share price dropped 6% to a low of $247.98” by the following day.
[38] at 19.
On September 29, 2014, AbbVie and Gonzalez issued a statement to Shire’s employees,
which AbbVie also filed with the SEC. Gonzalez stated that 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.” [38] at 20. 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. at 20-21.

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. at 21. 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. at 21.
7

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.” [38] at 22.
On October 15, 2014, AbbVie’s Board withdrew its recommendation that stockholders
vote in favor of the combination, and issued a press release stating:
AbbVie and its Board of Directors made this determination following a detailed
consideration of the impact of the U.S. Department of Treasury’s unilateral
changes to the tax rules, as issued on September 22, 2014. The breadth and scope
of the changes, including the unexpected nature of the exercise of administrative
authority to impact longstanding tax principles, and to target specifically a subset
of companies that would be treated differently than either other inverted
companies or foreign domiciled entities, introduced an unacceptable level of
uncertainty to the transaction. Additionally, the changes eliminated certain of the
financial benefits of the transaction, most notably the ability to access current and
future global cash flows in a tax efficient manner as originally contemplated in
the transaction. This fundamentally changed the implied value of Shire to AbbVie
in a significant manner.
[38] at 22-23.
On October 15, 2014, 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.”

[38] at 26 (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. The Chicago Tribune also reported on October 16, 2014
that AbbVie’s announcement “came as a surprise to investors and analysts because Gonzalez and
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other executives had expressed support for the deal a week after the Treasury Department
unveiled the new rules Sept. 22.” Id.
On October 20, 2014, AbbVie issued a press release stating that AbbVie and Shire were
terminating the merger. See [38] at 23. 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.” Id. 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.
Gonzalez also 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. [38] at 24. According
to the amended complaint, AbbVie and Gonzales delayed this “ultimate announcement for as
long as possible to avoid paying the hefty termination fee,” which “had to be paid within 7 days
of the termination of the Combination,” so that AbbVie could “retain those funds and interest
thereon.” [38] at 27.

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On October 22, 2014, a columnist for Fortune wrote an article 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. [38] at 25
(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
“freed from having to pretend that [the proposed merger] wasn’t about the taxes.” Id.
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 that it had approached Shire)
through October 14, 2014 (when Gonzalez announced that the Board was reconsidering its
decision to approve the merger). The complaint alleged that seven statements made by AbbVie
and Gonzalez—which all allegedly downplayed the importance of the tax inversion to the
proposed merger—were false and misleading and violated Section 10(b) of the Act and Rule
10b-5. The complaint also alleged that Gonzalez also violated Section 20(a) of the Act.
Defendants filed a motion to dismiss the complaint for failure to state a claim [25], which
the Court granted.

See [37].

The Court determined that although Plaintiffs alleged facts

sufficient to support a reasonable belief that Gonzalez’s September 29, 2014 letter to Shire
employees was false or misleading at the time made, Plaintiffs’ scienter allegations were not
cogent or compelling under the Private Securities Litigation Reform Act’s heightened pleading
standards for Section 10(b) claims. The Court explained that the complaint did not allege facts
constituting strong circumstantial evidence of conscious misbehavior or recklessness because the
timing of Gonzales’ letter alone was not strong evidence that Gonzalez knew as of September 29,
2014 that AbbVie was going to reconsider or call off the deal. In addition, the Court determined

10

that Plaintiffs’ Section 20(b) claim must be dismissed because Plaintiffs failed to plead a primary
violation of the securities laws. Id. at 24.
The Court granted Plaintiffs leave to file an amended complaint, which they did on May
2, 2016 [38].

Currently before the Court is Defendants’ motion to dismiss the amended

complaint for failure to state a claim [42].
II.

Analysis
Plaintiffs allege in their amended 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 Section 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)); see also Halliburton Co. v. Erica P. John
Fund, Inc., 134 S. Ct. 2398, 2407 (2014).

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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.”
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); see
also Van Noppen v. InnerWorkings, Inc., 136 F. Supp. 3d 922, 952 (N.D. Ill. 2015). 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’ amended 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 once again fail to allege sufficient facts to support two of the elements of
their Section 10(b) and Rule 10b-5 claim: (1) a misrepresentation of material fact; and (2)
scienter. Defendants also argue, once again, 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
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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
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, 136 F. Supp. 3d at 927. 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. § 78u-4(b)(3)(A).
In evaluating Defendants’ motion to dismiss, the Court must accept all factual allegations
in the complaint as true. Van Noppen, 136 F. Supp. 3d at 945-46. 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

13

required to “state with particularity all facts on which that belief is formed.” Id. § 78u-4(b)(1).2
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)).
In their amended complaint, Plaintiffs identify the following three statements as
misleading or containing omissions of material fact:
1.

Gonzales’ July 18, 2014 comments on an investor call, that “AbbVie
would “not be doing [the merger] if it was just for the tax impact,” that
“[t]ax is clearly a benefit, but it’s not the primary rationale for this,” and
that “[t]his is an additional benefit that we have”;

2.

AbbVie’s August 21, 2014 S-4 tax filings identifying ten “strategic
benefits” of the merger, including “the potential realization of tax and
operational synergies by New AbbVie as a result of the Combination”;
and

3.

Gonzalez’s September 29, 2014 thank-you letter to Shire employees
stating that he is “more energized than ever about our two companies
coming together” and “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.”

See [45] at 9-11. Plaintiffs assert that these statements “downplay the tax inversion aspect of the
Combination * * * despite the primary importance of the inversion to the Combination.” [38] at
8.

2

Plaintiffs’ amended complaint states that all allegations are based on information and belief except
allegations specifically pertaining to Plaintiffs. [38] at 1.

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The Court concludes that Plaintiffs have not alleged facts that are “sufficient to support a
reasonable belief” that statements 1 or 2 were false misleading, but have met their burden with
regard to statement 3.
As to statement 1, Plaintiffs argue that its false and misleading nature can be inferred
from AbbVie’s decision, following the Treasury Notice, to terminate the transaction and pay the
break-up fee. Plaintiffs emphasize that the sole reason AbbVie provided, or has ever provided,
for calling off the transaction was that the Treasury Notice “destroy[ed] [its] financial benefits.”
[45] at 12-13. They argue that this fact “make[s] it more than ‘plausible’ that defendants’
statements were false and misleading in that the tax inversion was actually the central rationale
for the Combination all along.” Id. at 13. The Court disagrees and concludes that these facts are
insufficient to “support a reasonable belief as to the misleading nature of the statement or
omission’” under the PLRA’s heightened pleading standard. Constr. Workers Pension Fund,
114 F. Supp. 3d at 651. Plaintiffs do not address the Court’s prior analysis of this issue. As the
Court explained, the total value of the deal was $54 billion. [38] at 6. The break-up fee was
$1.64 billion, or approximately 3% of the total value. Id. at 12. 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”3—
reason for the deal. As the Court previously concluded, “[s]aying a benefit is not the ‘primary
rationale’ is not the same as saying it is immaterial or unimportant.” [37-2] at 17.
Further, Plaintiffs’ argument that statement 1 was misleading ignores the context of in
which Gonzalez made it. Gonzalez recognized the tax issue was important when he explained
3

Merriam-Webster Dictionary, http://www.merriam-webster.com/dictionary/primary (last accessed Mar.
9, 2017).

15

that American companies need access to global cash flows and are at a disadvantage to foreign
competitors. [38] at 14. But, when specifically asked, Gonzalez refused to take any position on
whether AbbVie would call off the transaction if the applicable tax rules changed. Id. at 16.
Plaintiffs assert in the amended complaint that Gonzalez’s statement that he was “limited in what
we can say” about whether AbbVie would pay the breakup fee if the tax rules changed “is not
enough to provide him a safe harbor,” because his “voluntary comments regarding the impact of
the tax inversion”—and specifically his comment that “[w]e would not be doing it if it was just
for the tax impact”—created a “duty to then speak the whole truth about the significance of the
tax implications.” Id. However, saying that AbbVie “would not be doing [the deal] if it was just
for the tax impact” is simply not the same thing as telling investors that the “deal would happen
with or without the tax benefits.” Id. AbbVie provided at least ten rationale for the transaction,
any one of which might have been important enough for AbbVie to call off the deal if it
evaporated, but nonetheless might not have been the most important reason for entering into the
deal in the first place. In short, the Court cannot conclude that investors would be led to believe
that the deal would go through regardless of changes to the tax rules, when Gonzales refused to
opine on that issue when directly asked.
In addition, other allegations in the amended complaint undermine Plaintiffs’ argument
that the tax benefit, standing alone, was the primary rationale for the deal. The amended
complaint acknowledges that the other “strategic rationales were valid and projected to provide
the Company, coincidentally, with much needed diversification to assist in its long term growth
plans.” [38] at 3 (emphasis added). For example, Shire was “an attractive strategic partner for
Abbvie” because “Abbvie’s Humira patent, which accounted for 66% of its sales, was set to
expire in 2016, and Shire was “more diversified and ha[d] seen its sales double between 2007

16

and 2013.” Id. at 33. If AbbVie was doing the deal just for the tax impact, then it could have
chosen to merge with any company domiciled in a country with more favorable tax treatment.
Instead, as Plaintiffs acknowledge, AbbVie chose a company that would allow AbbVie to
diversify its business to enhance its prospects for long-term growth.
In statement 2, Defendants identified various benefits, including tax benefits, that they
hoped to realize through the proposed merger. According to the amended complaint, statement 2
“misled investors to believe that the tax benefits were not the only (or even primary) reason for
the Combination.” [38] at 19. As with statement 1, this allegation is not a plausible basis of
imposing liability in light of the amended complaint’s recognition that the other “strategic
rationales were valid and projected to provide the Company, coincidentally, with much needed
diversification to assist in its long term growth plans.” [38] at 3 (emphasis added). Plaintiffs
argue that AbbVie nonetheless had a duty to “disclose that if the Treasury was successful
AbbVie would (or even that they might) withdraw from the Combination,” because Treasury had
announced two weeks earlier that it was “planning to limit tax inversion transaction.” [45] at 10.
But since statement 2 does not rank the importance of the transaction’s benefits, or state or imply
which benefits would be important enough to justify paying the breakup fee if they evaporated,
Defendants did not have a duty to disclose what it would or might do if Treasury eventually
followed through on its announcement. As the Supreme Court has recognized, “[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; 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

17

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 turns to statement 3, 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,” and contemplated a
“very busy few months ahead as we work on our integration planning.” [45] at 11. The Court
previously found that the facts alleged in support of this statement were 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. [372] at 18. The Court finds no reason to reconsider its prior decision on statement 3, and proceeds
to analyze the sufficiency of the amended complaint’s scienter allegations.
C.

Scienter

“To establish liability under [Section] 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 defraud.’” Tellabs, 551 U.S. at 319 (quoting Ernst & Ernst v. Hochfelder, 425

18

U.S. 185, 193-94 & n.12 (1976)); see also Gandhi v. Sitara Capital Mgmt., LLC, 721 F.3d 865,
870 (7th Cir. 2013). 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); see also S.E.C. v. Ferrone, 163 F. Supp. 3d
549, 568 (N.D. Ill. 2016).4

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 a 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

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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4(b)(2) (emphasis added). To determine if a plaintiff has complied with this obligation, the
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. As it did previously, the Court’s analysis of the scienter element 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. After reviewing the
amended complaint and the parties’ arguments, the Court concludes that Plaintiffs’ allegations
are sufficient to give rise to a strong inference that Gonzales’ September 29, 2014 letter was sent
with a reckless disregard of the truth, but not with the intent to deceive, manipulate, or defraud.
Therefore, Plaintiff’s claim, to the extent it is based on Gonzales’ September 29, 2014 letter, will
be allowed to proceed.
The Court will first address Plaintiffs’ new scienter allegation which it did not find
persuasive. The Amended Complaint alleges that Gonzales’s September 29 statement was made
intentionally “in an attempt to stave off an immediate $1.64 billion termination fee” and retain
the interest on those funds for as long as possible. [38] at 21. This allegation does not support a

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cogent and compelling inference of scienter, because the event triggering termination of the
merger was the Board’s withdrawal of its recommendation for the transaction, not Gonzales’
statement. Plaintiffs do not identify, and the Court does not see, any way that Gonzales’
statement had any effect on the timing of the Board’s decision to withdraw from the transaction.
The Court finds more persuasive the amended complaint’s allegation that “Gonzalez was
at least severely reckless in making his statements to the market on September 29, 2014 before
the Board had conducted a ‘detailed consideration of the impact’ of the change in the tax laws.”
[38] at 23.

AbbVie’s October 15, 2014 press release announcing that the Board was

withdrawing its recommendation for the merger indicates that AbbVie performed a “detailed
consideration of the impact of Treasury’s rules” following the issuance of the Notice. [33] at 22.
It is more than plausible that AbbVie began its detailed analysis as soon as Treasury issued the
Notice—and that the analysis was ongoing when Gonzales issued his statement on September
29—given AbbVie’s prior statements (including the S-4 filing) recognizing that the tax benefits
were one of the rationale behind the merger. Indeed, given the fast paced nature of merger and
acquisitions, one could expect AbbVie to have given immediate consideration to any legal
changes that would or might impact any of the deal’s strategic rationale—and, in view of the size
of the potential transaction and termination fee, to have devoted considerable resources to the
issue.
Further, according to the Amended Complaint, AbbVie’s lead director acknowledged in
an interview after the merger was terminated that Gonzales sent his September 29, 2014 letter to
“calm Shire employee unrest.” [38] at 28. This suggests that, as of September 29, Gonzales
knew that there were public concerns that the merger would be called off due to the Notice, and
calls into question whether he expressed his support for the merger not because AbbVie was

21

actually still “more energized” or “more confident” about it than ever, [45] at 11, but instead to
appease worried Shire employees. Taken together, these facts satisfy Plaintiffs’ obligation to
include in their complaint strong circumstantial evidence that Gonzales’ September 29 statement
was made with a reckless disregard for the known or obvious danger of misleading buyers into
believing that AbbVie still fully intended to go forward with the merger when, in fact, AbbVie
was in the process of analyzing whether to walk away from the deal in light of the tax rule
changes.

Therefore, the Court denies Defendants’ motion to dismiss Plaintiffs’ Section

10(b)/Rule 10b-5 claim to the extent that it is based on statements made in Gonzales’ September
29, 2014 letter to Shire employees.5
D.

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. Defendants argue that because Plaintiffs’
Section 10(b)/Rule 10b-5 claim is deficient, their derivative Section 20(b) claim must be
dismissed, as well. Since the Court concludes that Plaintiffs have adequately plead a primary
violation of the Act based on Gonzales’ September 29, 2014 letter, the Court must reject
Defendants’ argument and allow the Section 20(b) claim to proceed, as well.

5

The Court finds it unnecessary to address the supplemental authority submitted by Plaintiffs, a decision
of the Cook County Circuit Court denying a motion to dismiss state-law fraud and fraudulent
concealment claims that investors brought against AbbVie based on allegations similar to the ones alleged
by Plaintiffs here. See [49-1] (Order, Elliot Associates, L.P. v. AbbVie Inc., Case No. 16 L 6279 (Cook
Cty. Cir. Ct. Jan. 6, 2017). The elements of common law fraud and fraudulent concealment are different
than the elements of federal securities fraud and not subject to Rule 9(b)’s heightened pleading
requirements, making the two cases difficult to compare. Further, the Circuit Court’s opinion does not
identify specific statements that the court found sufficient to support the fraud claims, except one
statement that Plaintiffs do not identify in their amended complaint: the AbbVie/Shire merger
agreement’s alleged inclusion of “a specific carve out that a lack of government restrictions as to the tax
benefits achieved by the merger would not be a precondition to completing the deal.” [49-1] at 3.

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III.

Conclusion
For the reasons stated above, Defendants’ motion to dismiss [26] is denied. This case is

set for further status hearing on March 29, 2017 at 9:00 a.m.

Dated: March 10, 2017

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

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