A federal judge in Colorado has granted preliminary approval of a $27 million settlement in a securities lawsuit brought against InnovAge Holding Corp. by Cohen Milstein on behalf of its clients the El Paso Firemen & Policemen’s Pension Fund, the San Antonio Fire & Police Pension Fund, and the Indiana Public Retirement System.

The settlement would end three years of hard-fought litigation against multiple defendants: InnovAge, a healthcare provider specializing in senior care; certain of its former executives; private equity firms— Apax Partners and Welsh, Carson, Anderson & Stowe—who owned controlling stakes in InnovAge; and underwriters of InnovAge’s initial public offering.

Lead Plaintiffs alleged that Defendants made false and misleading statements regarding InnovAge’s regulatory compliance, the quality of its care model, and the viability of its growth strategy. Government audits uncovered significant compliance violations, including woefully understaffed care centers. The sanctions that followed, including an enrollment freeze, hindered InnovAge’s ability to grow and caused the stock price to plummet, according to Lead Plaintiffs’ complaint.

“When private equity pushes for profits in the healthcare space, it raises risks for patients and shareholders alike,” said Molly Bowen, a partner on Cohen Milstein’s InnovAge team. “By fighting for and obtaining this excellent result, our clients showed how engaged pension funds can hold public companies accountable for fraud and benefit their fellow investors.”

The three Lead Plaintiffs and Lead Counsel Cohen Milstein conducted extensive discovery and motions practice that provided ample evidence about the strengths and risks of the case. Lead Plaintiffs investigated, drafted, and filed a detailed amended complaint and defeated, in large part, Defendants’ repeated motions to dismiss. They engaged in substantial fact discovery, including exchange of document requests and interrogatories, production of hundreds of thousands of pages of documents, serving subpoenas on third parties, and conducting Rule 30(b)(6) depositions of the Lead Plaintiffs and their three investment managers—a total of eight individuals representing six different entities. Lead Plaintiffs also successfully moved for class certification, supported by an expert report on market efficiency and damages.

The $27 million settlement is a class-wide recovery that exceeds the typical recovery in securities class actions, particularly for a case where most damages stem from claims arising under a company’s statements in connection with an initial public offering.

The result is even more remarkable considering the particular challenges presented by InnovAge’s precarious financial state. In virtually all cases, extending litigation for years—through additional dispositive motions, trial, and appeals—carries a risk that the class might recover less (or even nothing). Here, InnovAge’s limited insurance and a significant decline in its stock price during the litigation heightened that risk. During the litigation, InnovAge’s stock price fell from around $6.50 per share to as low as $2.75 per share, raising a risk that the company would have difficulty funding a settlement.

On June 17, 2025, US District Judge William J. Martinez granted preliminary approval of the settlement in the case, which is captioned El Paso Firemen & Policemen’s Pension Fund v. InnovAge Holding Corp. (21-cv-02270-WJM-SBP (D. Colo.).

In the coming months, Cohen Milstein will work with the court-approved claims administrator to oversee the process of disseminating notice of the settlement. Impacted investors can find more information at https://www.strategicclaims.net/innovage/. Judge Martinez scheduled a final approval hearing for November 26, 2025.

The Summer 2025 issue of the Shareholder Advocate, our quarterly securities litigation and investor protection newsletter, features articles on:

  • Managing corporate risk in the AI boom
  • UFC fighters’ $375 million antitrust settlement
  • The role of an amicus brief in the Supreme Court’s to dismiss an appellate review of class certification as improvidently granted
  • Initial approval of investors’ $27 million settlement with InnovAge
  • An interview with Fiduciary Focus columnist Suzanne Dugan on her new role as president of the National Association of Public Pension Attorneys

For shareholders seeking to police corporate misconduct, the right to assert derivative claims— to sue on behalf of a corporation against officers, directors, and third parties whose actions have harmed the company—is a critical corporate governance tool.

Derivative litigation empowers shareholders to enforce compliance with fiduciary duties and ensure managerial accountability. A stockholder can assert such derivative claims either by filing a derivative complaint on the company’s behalf or by making a demand that the Board of Directors (Board) investigate and, if warranted, initiate a derivative action against the alleged wrongdoers. In either situation, the Board may appoint a Special Litigation Committee (SLC) which often becomes a central player in the investigation, any pending derivative litigation, and possible resolution of these claims.

To properly function, the SLC must be comprised of independent Board members. Once formed, the SLC should conduct a thorough investigation involving a review of internal documents, witness interviews, and consultations with independent counsel or experts, then produce a report of its findings and recommendations. The SLC’s ultimate recommendation may provide grounds for rejecting the claims, settling the action, or continuing to prosecute the lawsuit. If the SLC report recommends dismissal, shareholder plaintiffs have the right to obtain discovery as to the independence of the SLC and the basis for its findings.

Recently, Cohen Milstein has represented shareholder plaintiffs in several proceedings that illustrate the interplay between an SLC and a shareholder derivative litigation. In a pending stockholder derivative action involving Abbott Laboratories, plaintiffs allege a breach of fiduciary duties concerning the contamination of infant formula. An SLC appointed by Abbott’s Board to investigate plaintiffs’ claims moved to stay the case until it had finished its investigation. In partially denying the SLC’s motion, the Court held that plaintiffs were entitled to discovery of the same documents provided to the SLC to prepare its report. The Court noted that “[T]his discovery is necessary to prevent a special litigation committee from cherry-picking the facts highlighted in their report.” Armed with the discovery they obtain through the ruling, shareholders will have the right to challenge the SLC’s independence and conclusions if the SLC report seeks dismissal of the pending derivative litigation.

Similarly, Cohen Milstein recently filed a derivative action against officers and directors of Pegasystems Inc. related to a $2 billion judgment against the company for violating a competitor’s trade secrets. After several shareholders made demands on the company to investigate the board and management, it appointed an SLC, which rejected bringing claims against the alleged wrongdoers. In response, shareholders filed derivative litigation challenging the SLC’s report and independence.

In a different context, Cohen Milstein, on behalf of a shareholder client, recently sent a demand to a company’s board to investigate and commence derivative litigation against a third party who was culpable for participating with the company’s CFO in securities fraud. After an SLC investigation into potential claims, the board agreed to accept the demand and initiated litigation against the third party, which eventually settled for a substantial amount.

In sum, SLCs are a significant aspect of shareholder derivative litigation. They must be genuinely independent, procedurally thorough, and substantively fair. Shareholders, through the courts, must rigorously evaluate these attributes to ensure the integrity of the process and the protection of the corporation’s and shareholders’ interests.

In a major victory for shareholders, Cohen Milstein has reached a $38 million settlement in the Bayer Securities Litigation, a complex and hard-fought class action brought under the Securities Exchange Act of 1934. 

The settlement, which is currently awaiting court approval, will provide a financial recovery for damaged investors who purchased Bayer American Depositary Receipts (ADRs) between May 23, 2016, and March 19, 2019. 

The settlement follows nearly five years of intensive litigation and reflects the tireless efforts of Cohen Milstein’s team to hold Bayer accountable on behalf of a class of Bayer ADR investors. The firm is proud to have achieved this meaningful recovery in a case marked by challenging legal and factual issues. 

Background and Allegations 

This case, filed on July 15, 2020, in the U.S. District Court for the Northern District of California, stems from Bayer’s high-profile and controversial acquisition of Monsanto. In their Amended Complaint, plaintiffs allege that Bayer, along with its CEO, the chairman of its Supervisory Board, and several other senior executives, made false and misleading statements concerning the company’s due diligence on Monsanto—particularly regarding the risks associated with mass tort litigation alleging that Roundup, Monsanto’s flagship glyphosate-based herbicide, causes non-Hodgkin’s lymphoma. 

A Long and Hard-Fought Case 

This litigation was exceptionally contentious. It began with two full rounds of motion to dismiss briefing. In response to the Amended Complaint, defendants sought to dismiss all claims, challenging the adequacy of plaintiffs’ allegations under the heightened pleading standards of the Private Securities Litigation Reform Act (PSLRA). On October 19, 2021, the Court denied defendants’ motion in part, finding that plaintiffs had stated a claim with respect to Bayer’s statements about its merger due diligence—but dismissed claims relating to alleged misstatements about Roundup’s safety and Bayer’s financial disclosures.  

Plaintiffs then, with the Court’s permission, filed a Second Amended Complaint, and defendants again moved to dismiss. On May 18, 2022, the Court reaffirmed its prior ruling by upholding the sufficiency of the due diligence-related claims. 

Class Certification and Discovery 

The litigation advanced into a vigorously contested class certification and discovery phase. Central to this stage were novel and complex questions about whether plaintiffs’ and the Class’s purchases were essentially foreign transactions outside the scope of U.S. securities laws. To address these issues, plaintiffs issued dozens of subpoenas to financial institutions and market participants, seeking evidence that transactions in Bayer’s ADRs occurred domestically. Plaintiffs also worked closely with Professor Joshua Mitts, PhD, of Columbia Law School, who provided valuable expert analysis and insights into the mechanics and structure of the ADR transactions at issue.  

In May 2023, the Court granted class certification, appointing the lead plaintiffs as class representatives and Cohen Milstein as Class Counsel. Notably, the Court ruled in plaintiffs’ favor on the extraterritoriality issue. Plaintiffs successfully refuted defendants’ arguments that jurisdictional concerns undermined class typicality or predominance, securing a landmark decision affirming the rights of ADR purchasers on the over-the-counter market—and particularly those of sponsored ADRs like Bayer’s.  

Merits discovery was expansive and complex, spanning multiple continents and legal systems. It included international depositions, voluminous document production, and expert analysis from eight experts who addressed far-ranging issues of ADR market mechanics, merger due diligence practices, economic and behavioral incentives under the merger agreement, loss causation, and damages. The process also entailed court resolution of several privilege and evidentiary disputes. Further, plaintiffs were required to initiate proceedings under the Hague Convention to obtain the testimony of Bayer’s former general counsel in Germany—a process that demanded significant coordination with German counsel and judicial oversight from both U.S. and German courts. 

Settlement Process and Outcome 

Settlement discussions began in the second half of 2024, when the parties agreed to engage in private mediation to resolve the case. After a brief pause during which the parties unsuccessfully attempted to resolve the case, litigation and expert discovery resumed. Ultimately, after two full-day mediation sessions held months apart, the parties reached an agreement to settle the case for $38 million in cash.  

This substantial settlement represents a strong outcome for investors, offering a meaningful recovery while avoiding the additional time, risk, and expense associated with continued litigation, trial, and potential appeals. After years of contested motion practice, extensive international discovery, and complex legal challenges—including novel questions about the rights of ADR holders and merger related disclosures—this resolution ensures accountability and provides closure for investors harmed by Bayer’s alleged misleading statements. 

Looking Ahead 

The Bayer settlement brings closure to an important case that addressed critical questions about the adequacy and transparency of disclosures concerning due diligence in high-profile corporate mergers. The litigation also reaffirms that investors who purchase ADRs on the over-the-counter market have enforceable rights under U.S. securities laws. 

As home to 2.2 million legal entities, including two-thirds of all Fortune 500 companies, Delaware earns more than a third of its annual state budget from corporate fees, some $2.2 billion a year.

In that context, it’s unsurprising that high-profile corporate departures would prompt attention among lawmakers. When those same elected officials hurriedly amended the state’s foundational business law to address corporate complaints, however, it was anything but business as usual.

The rush to rewrite portions of Delaware General Corporation Law (DGCL) broke longstanding precedent and undermined a legal feature essential to the state’s historic appeal to businesses—its reliance on the venerable and experienced Delaware Court of Chancery to interpret the DGCL gradually over time. To add drama, Senate Bill 21 (SB21) was written, in part, by the law firm that represented Elon Musk before the Delaware Chancellor who invalidated his $56 million pay package at Tesla, triggering the company’s reincorporation in Texas. Tesla is perhaps the highest-profile company to leave Delaware. The departing companies, primarily majority shareholder-controlled companies, claim that a series of recent decisions in favor of minority shareholders has made Delaware less friendly to business and will encourage more litigation.

Gov. Matt Meyer signed SB21 into law March 25 after it sailed through both houses of the state legislature with bipartisan approval despite a vigorous campaign by shareholder advocates, institutional investors, academics, consumer groups, and plaintiffs’ attorneys to stop its passage. The new law narrows the DGCL’s definition of a “controlling stockholder,” makes it easier to avoid shareholder examination of potentially conflicted transactions, and makes it harder to show that directors are beholden to controlling stockholders or management.

These changes significantly weaken minority shareholders’ ability to challenge mergers, acquisitions, and other corporate deals they believe unduly benefit controlling stockholders, like Musk and Meta’s Mark Zuckerberg, who exercise effective control over corporate votes due to the sheer size of their holdings, coupled with dual class voting structures that give their shares more weight.

The day after news broke that Meta was considering its own “DExit,” Gov. Meyer held a meeting with legislators and lawyers who represented Meta, Tesla, and others in Delaware court to discuss the “corporate franchise”—a discussion that led to SB21, which Gov. Meyer called a “course correction” that would balance power between stockholders and corporate boards. By having a group of corporate lawyers and legislators draft SB21 behind the scenes, lawmakers bypassed Delaware’s normal process for amending the DGCL, which involves recommendation by the Council of the Corporate Law Section of the Delaware Bar Association. The departure from precedent, perhaps as much as the contents of the law itself, raises concerns that Delaware’s corporate law has become politicized in a way that may undermine stability, rather than backers’ state goal of promoting it.

In the conversation that follows, Cohen Milstein Partner Molly J. Bowen discusses the implications of SB21’s passage for institutional investors with the Shareholder Advocate’s Richard Lorant.

Richard Lorant: If you followed the coverage over SB21 closely and accepted the arguments of investor groups and plaintiffs’ law firms, you’d be forgiven for thinking passage of this bill signals the end of the world as we know it in terms of shareholder rights in Delaware. Now that it has become law, how important are the changes and how much will they weaken shareholder oversight of companies?

Molly Bowen: It’s essential to separate the question of how SB21 came to be, from how it changes the DGCL. The reason SB21 is so significant is because it represented a major departure from the usual process by which Delaware law is made, which traditionally has allowed the Delaware judiciary, the national experts in corporate law, to slowly elaborate the law—to decide what it means and to respond to changing dynamics in the stock market and corporate governance. For decades, this process of corporate law developing through judicial review process has fostered stability and predictability and is an important part of what makes the state attractive to so many corporations and shareholders.

In the case of SB21, the legislature, responding to advocacy from some large corporations, made a very quick intervention to overturn decades of Delaware Supreme Court and Chancery Court precedent, principally related to controlling shareholder transactions. Academics have identified dozens of cases that they believe will no longer be good law after SB21.

So, the way this all happened has been extremely unsettling in terms of our expectations going forward for the development of the law in Delaware. It remains to be seen whether there will be new interventions like this from the legislature every time there is a major judicial opinion or trend that is not favored by the major corporations headquartered in Delaware. The process piece, in other words, is a big deal.

In terms of the impact of the law itself, remember that SB21 largely focuses on the rules governing corporate transactions—mergers, acquisitions, going-private deals, things like that. In that area, it has dramatically scaled back the checks on corporate transactions and the safeguards in place to prevent undue influence from a controlling shareholder. That is very significant for investors because those are deals that change the future of the company for better or worse. So, giving more deference to a board that is not independent and making these huge decisions is concerning.

But SB21 did not touch a major area of the law that is important to our firm and many of the funds that we work with, which is the whole area of corporate law devoted to directors’ fiduciary duties of care, loyalty, and oversight and their obligation to ensure that their company follows the law and doesn’t do things that bring disrepute to the company. Consequently, the bulk of shareholder derivative litigation that our firm has been involved in over the past decade—cases like Nikola, Alphabet, FirstEnergy, and Abbott—the major issues in those cases are unaffected by SB21.

SB21 did impose some limited restrictions on investors’ rights to access a company’s books and records, which are obviously important building blocks when you investigate cases. But candidly, the reality is that process has always been somewhat limited. And one of the ways in which our firm, I think, has really distinguished itself is in the strength of our investigations: our ability to develop cases by speaking to former employees, working with experts, doing intense factual research beyond the corporate books and records. So, we’ll continue to do that and build impactful cases regardless of what happens with Delaware law.

Richard: Returning to the process, the way the legislature acted, you’re saying there’s a risk that Delaware will effectively abandon the evolutionary approach that has served the state so well and have the legislature step in every time Delaware-based corporations feel the pendulum has swung too far in favor of shareholders.

Molly: Yes, absolutely. I don’t think it’s controversial to say that that is what happened in this case. There are documents showing meetings between the governor and large corporations that had left or threatened to leave Delaware, which led directly to this legislation being written and proposed. In that context, it’s fair to ask whether this process will repeat itself or was this event so cataclysmic that the legislature will take a step back. Another late-breaking twist is that shareholders have recently filed a case attacking SB21’s constitutionality. Obviously, that will take time to resolve while the law remains in effect which adds another layer of uncertainty to the state of Delaware corporate law.

Richard: Is it true that while the forces behind SB21 were driven by a perceived need to stop corporations from de-incorporating and cutting into the $2 billion a year the state collects in franchise fees, the law’s fast-tracked passage could conceivably have the opposite effect?

Molly: Yes, that is a possible consequence. The publicly stated motivation behind SB21 was to keep corporations in Delaware, to preserve Delaware as the leading state for incorporation, and to protect the franchise as the economic driver of the state. But because SB21 deviated from a time-honored process for making law and how far it went to favor controlling stockholders, it may lead some corporations to look elsewhere for a stable legal home.

But before we get ahead of ourselves, where do they reincorporate? Texas is making huge investments in business courts to woo companies. Same with Nevada. It remains to be seen whether there is a somewhat more balanced jurisdiction that emerges to provide a new option or if any company will want to go there, but the landscape for that kind of analysis has certainly changed because of SB21.

Finally, with Delaware now revealing the influence politics can have in the development of corporate law, investors may be more supportive of companies that want to reincorporate elsewhere. Indeed, the head of the International Corporate Governance Network said weakened protections for minority shareholders could “undermine the attractiveness of Delaware incorporated companies for investors.”

Richard: That seems like as good a place as any to stop. Thanks, Molly.

Molly: You’re welcome.

The Spring 2025 issue of the Shareholder Advocate, our quarterly securities litigation and investor protection newsletter, features:

  • Carol V. Gilden and Benjamin F. Jackson on the Bayer securities litigation settlement
  • Molly J. Bowen and Richard E. Lorant on changes to the Delaware General Corporation Law
  • Richard A. Speirs on Special Litigation Committees in shareholder derivative litigation
  • Daniel S. Sommers on the Private Securities Litigation Reform Act
  • Suzanne M. Dugan’s interview with Andrew Roth, CEO of Colorado Public Employees’ Retirement Association

Download the issue (PDF).

The U.S. District Court for the District of Colorado has granted class certification in a lawsuit brought by the El Paso Firemen & Policemen’s Pension Fund, the San Antonio Fire & Police Pension Fund, and the Indiana Public Retirement System (Plaintiffs).

The securities fraud suit names InnovAge Holding Corp., several of its executives and board members, two private equity firms that allegedly controlled the company, and 11 underwriters who facilitated the company’s initial public offering in March 2021 (IPO) as Defendants. This decision by Judge William J. Martínez marks an important milestone in the case.

Background

InnovAge, a healthcare provider specializing in senior care through the federal Program of All-Inclusive Care for the Elderly (PACE), went public in the spring of 2021. Plaintiffs allege that the push to go public was driven by two private equity firms—Apax Partners and Welsh, Carson, Anderson & Stowe—who owned controlling stakes in InnovAge and had been instrumental in the InnovAge’s controversial decision to convert from a nonprofit to a for-profit company in the years prior to the IPO.

Plaintiffs allege that InnovAge made false and misleading statements regarding the company’s regulatory compliance, the quality of its care model, and the viability of its growth strategy. The claims focus heavily on InnovAge’s compliance with regulatory standards, a critical requirement in the highly regulated PACE industry. Plaintiffs assert that the company misrepresented its adherence to these standards, concealing issues later revealed by government audits. According to the lawsuit, these audits uncovered significant compliance violations, including woefully understaffed care centers, that ultimately resulted in sanctions that hindered InnovAge’s ability to accept new participants, negatively impacting its stock value.

Class Certification Decision

In its decision certifying Plaintiffs’ proposed shareholder class, the Court rejected Defendants’ two arguments opposing class certification.

First, the Court found that Plaintiffs satisfied the predominance requirement for class certification, rejecting Defendants’ argument that Plaintiffs did not comply with the Supreme Court’s decision in Comcast Corp. v. Behrend, which held that antitrust plaintiffs had failed to provide a damages methodology that aligned with their theory of liability. Defendants argued that Plaintiffs’ damages model failed to disentangle the effects of actionable misrepresentations from other factors affecting InnovAge’s stock price. Plaintiffs responded that Defendants were attempting to stretch the logic of Comcast beyond the specific, limited context in which it was originally applied. Judge Martínez sided with Plaintiffs, citing well-established precedent that Plaintiffs’ proposed “out-of-pocket” event study methodology is widely accepted in securities fraud cases. Judge Martínez also reasoned that, even if there were any shortcomings in the damages model, they would affect all class members uniformly and thus would not preclude class certification. The Court ultimately found that common issues, including the alleged misrepresentations and their impact on InnovAge’s stock price, predominated over any individual questions.

The “Comcast argument” Defendants raised is one that plaintiffs in securities class actions regularly encounter at the class certification stage, despite its being routinely rejected by courts. Just two months ago, attorneys at Cohen Milstein overcame a nearly identical argument when a district court in South Carolina granted a motion for class certification against Deloitte. This argument has become so common that, in briefing motions for class certification, Cohen Milstein attorneys have begun filing a list of district court opinions rejecting Comcast arguments, which they did here, listing 90 such instances.

Judge Martínez also found that Plaintiffs satisfied the requirement under Rule 23 of the Federal Rules of Civil Procedure that named plaintiffs in class actions are “adequate” representatives. In doing so, Judge Martinez noted that Plaintiffs were “sophisticated institutional investors who manage billions in assets,” who had “thus far capably demonstrated their understanding of this action by testifying as to the occurrence of key events; the cause of their alleged losses; and the causes and effects of Defendants’ alleged conduct.” (internal citations omitted).

Implications & Next Steps

Class certification is a key step in securities litigation and enables the Plaintiffs to serve as representatives of the class of InnovAge investors. Being certified to proceed as a class, rather than on an individual basis, increases bargaining power in the litigation and streamlines discovery and motions practice.

The story of InnovAge—that is, the story of a non-profit healthcare company converted into a publicly traded, for-profit corporation controlled by private equity firms—is emblematic of a broader trend of private equity firms’ involvement in the healthcare industry. As this lawsuit illustrates, that involvement often comes with a pursuit of cost-cutting and profit maximizing that can have serious repercussions not only for patients, but ultimately for other investors backing the healthcare companies.

Discovery in the matter is under way.

For further details, refer to the Court’s official order dated January 9, 2025.

The Winter 2025 issue of the Shareholder Advocate, our quarterly securities litigation and investor protection newsletter, features:

Download the issue (PDF).

Because of their unique structure as blank check companies, and their use as financing vehicles to take private companies public (referred to as a “de-SPAC” transaction), many unsuccessful SPAC mergers have since been challenged by stockholders in various types of securities litigation.

SPAC related securities cases generally have taken two forms—each designed to compensate different groups of investors. On one hand, many cases are brought as securities fraud class actions on behalf of open-market purchasers in the post-merger company after disclosure of negative financial news. These cases follow the typical pattern for securities fraud cases. On the other hand, the Delaware courts have found that in many of these ultimately unsuccessful transactions, SPAC insiders and controllers acted disloyally by recommending an unfair transaction to the pre-merger SPAC stockholders while obtaining out[1]sized financial benefits for themselves. These claims have been referred to as MultiPlan claims after the first case decided under Delaware law.

Recently, Cohen Milstein reached a settlement of MultiPlan-type claims in a SPAC related matter involving the merger of Pivotal Investment Corporation II (“Pivotal II”) and XL Fleet Corp. (“XL Fleet”) now known as Spruce Power. This case and the related settlement highlight the unique and complex nature of these actions and some of the difficulties presented when litigating and settling SPAC cases. See In re XL Fleet (Pivotal) Stockholder Litigation, Consol. C.A. No. 2021-0808-KSJM.

Prior to its merger with Pivotal II, XL Fleet was a privately held company manufacturing electrical vehicles. Like other typical SPAC transactions, XL Fleet became a publicly traded company through a de-SPAC merger with Pivotal II (“Merger”). At the time of the Merger, December 21, 2020, Pivotal II’s stock was priced at $10.00 per share based on a purported valuation of $1 billion. Pivotal II stockholders voted to approve the Merger pursuant to an allegedly materially misleading merger proxy (“Proxy”). Like all other de-SPAC merger transactions, Pivotal II stockholders had the option before the Merger occurred to redeem their Pivotal II shares for $10.00 per share plus interest.

Immediately following the Merger, XL Fleet’s stock began trading well-above $10.00 per share and continued to trade above that price for the next several months. On March 3, 2021, Muddy Waters released a short-sellers report which revealed a number of alleged serious problems in the company’s business and its inflated valuation. Following release of the Muddy Waters’ report, XL Fleet’s stock price dropped below $10.00 and continued to steadily decline over the next year.

Not unexpectedly, shareholders filed each of the two types of securities litigation: federal securities class actions on behalf of open-market purchasers of XL Fleet stock and state breach of fiduciary duty cases challenging the Merger disclosures. Since XL Fleet was incorporated in Delaware, Cohen Milstein undertook a books and records investigation under Delaware law on behalf of a stockholder to investigate the circumstances surrounding the Merger. Following that investigation, the firm filed a complaint in Delaware Chancery Court alleging that the Merger Proxy issued by Pivotal II was materially false and misleading which was a breach of Defendants’ fiduciary duties. The allegations of misrepresentations focused on three areas: (i) the failure to disclose the actual net cash per share available to contribute to the Merger; (ii) Defendants’ failure to conduct due diligence of XL Fleet in connection with the Merger; and (iii) the failure to disclose XL Fleet’s true valuation and the numerous problems affecting its business and operations.

The primary claim under Delaware law related to the Proxy’s alleged misrepresentation that the amount of cash available for the Merger was $10.00 per share when, in fact, the net cash per share available after calculating the dilution and certain expenses left only $7.66 per share available for the Merger. In short, stockholders did not get full value for their shares contributed to the Merger. Claims relating to the failure to properly disclose net cash per share have been upheld in other de-SPAC transaction cases. The Delaware Chancery Court eventually upheld this and the other misrepresentation claims alleged in the complaint.

Unique to the Pivotal II transaction was a separate breach of contract claim based on the Pivotal II’s charter. The charter required Pivotal II to enter into a business combination with a target company (XL Fleet) having a value of no less than 80% of the assets or value of Pivotal II. The required minimum in this case was approximately $180 million. Plaintiffs alleged that the pre-Merger value of XL Fleet, did not meet or exceed Pivotal II’s mandated minimum valuation. Evidence suggested that certain valuations of XL Fleet were well below the minimum value required which would be a breach of Pivotal II’s charter and give rise to a breach of contract claim. That claim was also sustained by the Court.

Following the completion of discovery, the parties reached an agreement to settle the Delaware action for $4.75 million. By that time, the federal securities class action on behalf of open-market purchasers of XL common stock had settled for $19.5 million. Although there may be some overlap between the two cases, the settlements are designed to compensate two separate groups of stockholders for different types of unlawful conduct.

The Delaware action settlement will compensate pre-merger investors in Pivotal II who were misled into voting to approve the Merger due to the issuance of a misleading Proxy. Unlike the class of investors who were harmed by the misleading statements made in connection with open market purchases of XL Fleet stock, stockholders in this case were injured because their decision on whether or not to redeem their shares was impaired by the false and misleading Proxy. Because Pivotal II stockholders did not receive adequate value for the assets contributed to the Merger they were injured. This was a harm unique to this group of stockholders.

In litigation involving de-SPAC transactions the parallel nature of Delaware fiduciary litigation and federal securities class actions work in tandem to ensure that different groups of interested stockholders receive compensation for different types of claims. In fact, Delaware courts have come to recognize the separate type of damages investors may suffer when their right to redeem is impaired by a misleading proxy. As Delaware law continues to evolve in the context of de-SPAC mergers, it remains to be seen how the courts will address damages to the pre-merger SPAC stockholders.

On August 7, 2024, the Honorable Sunil R. Harjani of the United States District Court for the Northern District of Illinois denied Abbott’s motion to dismiss, permitting Lead Plaintiffs’ key derivative claims to go forward: a claim for breach of fiduciary duty for failure to oversee the manufacturing and sale of infant formula and a claim for violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5 related to false and misleading statements on those same topics and involving the company’s repurchase of stock at prices inflated by the misleading statements.

Lead Plaintiffs in the case are the International Brotherhood of Teamsters Local No. 710 Pension Fund and Southeastern Pennsylvania Transportation Authority.

Background

Abbott, an Illinois corporation, is one of the primary manufacturers of infant formula products in the U.S., previously producing 40% of all infant formula products consumed in the U.S. It is also the nation’s leading provider of infant formula to low-income families through the U.S. government’s Special Supplemental Nutrition Program for Women, Infants, and Children (“WIC”) program. On February 15, 2022, Abbott closed its Sturgis, Michigan infant formula manufacturing facility due to the FDA’s concerns about contaminated baby formula. Two days later, on February 17, 2022, Abbott announced a “voluntary” recall of infant formula products manufactured at the Sturgis plant. The consequences were devastating. A nationwide shortage of baby formula ensued as the facility remained shut down for several months.

Abbott’s business suffered hundreds of millions in lost sales and profits and costs to remediate the facility and upgrade food safety compliance, risk management systems, and internal controls. The company’s business and reputation were badly tarnished as it came under regulatory, criminal, and Congressional scrutiny. The company is now exposed to numerous lawsuits, including wrongful death, personal injury, and whistleblower actions, as well as consumer and investor class actions.

In addition to their oversight failures, Plaintiffs allege that certain members of Abbott’s leadership violated Section 10(b) of the Securities and Exchange Act of 1934 (“Exchange Act”). Specifically, the complaint alleged that they authorized the company to engage in billions of dollars in stock repurchases while Abbott’s stock was artificially inflated due to false and misleading statements regarding Abbott’s production and manufacture of infant formula products in the US., with certain Defendants benefiting personally from insider stock sales before the truth started to leak out.

Motion to Dismiss Ruling

Recognizing the strength of the complaint, the Court upheld the core claims against Defendants’ motion to dismiss, including the federal violation of Section 10(b) of the Exchange Act and SEC Rule 10b-5, which will allow the case to move forward in federal court. These are the claims that Defendants issued false and misleading statements to shareholders about the company that Defendants knew or recklessly disregarded were false, and which harmed the company by engaging in stock repurchases at inflated prices. The Court also found that the breach of fiduciary duty claim (sometimes referred to as a Caremark claim) for Abbott’s directors was sufficiently plead on the first prong, that the Director Defendants repeatedly failed to implement, monitor, or oversee compliance and safety of manufacturing at the Sturgis plant. Finally, the Court rejected Defendants’ contention that dismissing the suit was in the best interest of the company.

The Court did dismiss certain ancillary claims that do not affect the case’s overall scope or significance.

Defendants have asked the Court to reconsider certain aspects of its ruling; Plaintiffs have opposed that request.

Key Takeaways for Shareholders

Overcoming a motion to dismiss is a key milestone in any lawsuit and particularly so for a shareholder derivative lawsuit given the high burden that plaintiffs must meet. The past few years have seen an increasing focus in state and federal courts on corporate board and executives’ oversight responsibilities, particularly when health and safety is at risk. Long-term shareholders have important rights to protect their investment through investigating and, if warranted, pursuing litigation to ensure that corporate leaders fulfill their fiduciary duties. We look forward to continuing to litigate the Abbott derivative matter to protect Plaintiffs’ long-term investment and hold wrongdoers to account.