Securities Exchange Act Violation – Retrospective Statements

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7^th Circuit Court of Appeals

Case Name: City of Taylor Police and Fire Retirement System v. Zebra Technologies Corporation, et al.,

Case No.: 20-3258

Officials: EASTERBROOK, BRENNAN, and SCUDDER, Circuit Judges.

Focus: Securities Exchange Act Violation – Retrospective Statements

The City of Taylor Police and Fire Retirement System contends that Zebra Technologies Corporation defrauded investors by making bad predictions during a corporate consolidation. Zebra manufactures commercial electronics such as barcode scanners and receipt printers. In 2014 it acquired a division of Motorola Solutions, Inc., that had a similar line of products. Zebra began to integrate Motorola’s assets and operations with its own. Initially Zebra’s executives touted the savings expected from the combination and announced that the process was “progressing as planned.” But consolidation proved more onerous than anticipated, leading to expenditure of an additional $200 million and a decline in Zebra’s share price.

The Retirement System filed this suit under §10(b) of the Securities Exchange Act, 15 U.S.C. §78j(b), and 17 C.F.R. §240.10b-5, seeking to represent a class that purchased Zebra’s stock between November 2014 and November 2015. The Retirement System asserts that Zebra, CEO Anders Gustafsson, and CFO Michael Smiley duped investors by knowingly issuing false statements about the integration of Motorola’s assets with Zebra’s. The district judge dismissed the complaint, finding that the Retirement System failed to state an adequate §10(b) claim and did not satisfy the pleading requirements of the Private Securities Litigation Reform Act. 2020 U.S. Dist. LEXIS 191627 (N.D. Ill. Oct. 16, 2020).

The Retirement System’s complaint identifies a variety of asserted misrepresentations. Some consist of optimistic projections. When the acquisition closed, Zebra predicted that the “synergies” of combining Motorola’s assets with Zebra’s would yield substantial recurring savings. The Retirement System complains that Zebra did not qualify that forecast with the ongoing costs of integration. Later, as consolidation was underway, Zebra projected a gross profit margin of between 45.5 and 46.5 percent for the second quarter of 2015. The actual margin turned out to be 44.2 percent. The complaint also contends that Zebra’s executives knew about issues plaguing integration but told investors that all was well with the process. Most notably, in March 2015, Gustafsson represented that integration was “progressing as planned.”

Retrospective disclosures can and should be precise because corporations generally possess good information about completed operations. The law tolerates greater imprecision from forecasts because predicting the future is an uncertain enterprise. So too is speaking about a developing process, especially when another corporation’s assets are involved. Zebra made retrospective disclosures about the difficulties it encountered (and surmounted) when integrating Motorola’s assets, but none has been challenged. Instead, the Retirement System elected to challenge only statements made before or during integration. The fatal flaw of the Retirement System’s suit is that it seeks to apply rules covering retrospective statements to ongoing developments. Unexpected difficulties that crop up in any corporate consolidation are a business problem, not a securities problem. Because the plaintiff has failed to state a viable claim under the Securities Exchange Act, the district court’s dismissal must be affirmed.

Affirmed

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Derek A Hawkins is Corporate Counsel, at Salesforce.