Walgreens can’t dodge shareholder suit over failed Rite Aid merger, judge rules
The Legal Intelligencer
Overconfident statements that Walgreens officials made as the Illinois company’s proposed merger with Rite Aid began to show signs of crumbling possibly misled shareholders, a federal judge has ruled in declining to dismiss a shareholder class-action suit against the pharmacy company.
U.S. District Judge John Jones of the Middle District of Pennsylvania recently denied Walgreens’ motion to dismiss Hering v. Rite Aid. The lawsuit was filed over allegedly false and misleading statements that both drugstore operators made to shareholders while the two companies attempted to work out a merger.
Although Judge Jones’ ruling keeps Walgreens in the case for now, his decision also granted a similar motion that Rite Aid, based in Camp Hill, Pa., had filed seeking to be let out of the case.
Regarding the Rite Aid defendants, Judge Jones found that statements made by company officials were immune from liability under the “safe harbor” provision of the Private Securities Litigation Reform Act, which does not allow companies to be sued for broad, forwardlooking statements about revenue and performance that are based on solid information.
Many of the contested statements Walgreens made fell under that immunity as well, Judge Jones said.
However, statements that company officials made as late as October 2016 that questioned media reports about the faltering merger and instead expressed confidence the deal would close were potentially misleading, Judge Jones said.
Judge Jones noted the closing date of the merger, which did not happen, had already been pushed back three months at that point. He also noted company officials indicated to shareholders that they had nonpublic information on which to base their optimism.
“The Walgreens defendants ventured into actionable territory when they openly contradicted news reports of regulatory trouble alluding to their non-public ‘inside’ knowledge of the [Federal Trade Commission’s] review. Plaintiff alleges that Walgreens, by the time of the statements, had ample reason to understand that the merger was in trouble,” Judge Jones said.
“Indeed,once the FTC raisedconcerns and the originalterms of the merger neededto be revised, one wouldexpect Walgreens defendants to soften their aggressively confident stance. Instead,the Walgreens defendantsseemed to double-down anddisputed reports that the transactionmay falter.”
Judge Jones noted that in order to succeed with their claims, the plaintiffs would need to show they either knew the statements were potentially misleading, or made the statements recklessly. Given how close the statements came to an earlier revision of the merger agreement and the ultimate decision to terminate the merger, the statements showed “a strong inference at least of recklessness,” Judge Jones said.
“There may be plausible alternative explanations, but at this early stage, we find that plaintiff has pled sufficient facts to strongly infer that Walgreens was at least reckless in making statements that would mislead a reasonable investor about the level of regulatory risk,” Judge Jones said.
Kaufman, Coren & Ress attorney Deborah Gross, who is representing the plaintiffs; Cliff Gardner of Skadden, Arps, Slate, Meagher & Flom; and Kristen Seeger of Sidley Austin, who is representing Walgreens, each did not return a call for comment last week.