(CN) – British software firm Micro Focus International overstated the benefits of a proposed merger with Hewlett Packard spinoff HPE Software, shareholders claim in a federal class action.
Lead plaintiff John Ribeiro sued Micro Focus International and eleven of its current and former officers and directors in U.S. District Court for the Southern District of New York.
Micro Focus, based in Newbury, Berkshire, United Kingdom, operates through two segments – one that deals with host connectivity, access, security, development, information technology operations management tools, collaboration and networking, and another that provides and supports enterprise-grade linux and open source solutions, according to the lawsuit.
In September 2016, Micro Focus announced a proposed merger with HPE Software, claiming it would give shareholders a $400 million return of value prior to completion, according to the lawsuit. Micro Focus shareholders voted the following May to approve the merger, the lawsuit says.
In August 2017, three months after the vote, Micro Focus filed a registration statement and prospectus with the Securities and Exchange Commission that shareholders claim were inaccurate.
“The registration statement was negligently prepared and, as a result, contained untrue statements of material facts or omitted to state the facts necessary to make the statements not misleading, and was not prepared in accordance with the rules and regulations governing its preparation,” the complaint states.
While the SEC filing documents touted Micro Focus’ success in retaining senior management, sales force and other key staff, it left out other key points, the class claims.
“The registration statement did not, however, disclose the pre-existing significant disruption to customer accounts and loss of HPE’s customers base as a result of HPE’s separation from HP,” the complaint states.“The registration statement discussed the material risks to the company ‘if’ it fails to maintain its key personnel and sales force employees; however, the registration statement neglected to disclose that a large number of sales employees had already been laid off, quit, or changed roles, resulting in a decreasing sales capacity."
The class contends that the filings did not fully disclose operational weaknesses in HPE’s position and that Micro Focus failed in its due diligence.
The plunging financial and operational results began to show with Micro Focus’ Jan. 18, 2018 SEC updates and fully emerged with a trading update and management change form the company filed on March 19, according to the lawsuit. CFO Mike Phillips switched positions to become the Director of Mergers and Acquisitions and CEO Christopher Hsu abruptly quit, only six and a half months after joining the company, according to the lawsuit. On the next trading day after the March 19 announcement, shares dropped 54 percent in value from when the merger closed, the lawsuit says.
Shareholders seek class certification, compensatory and punitive damages, costs, litigation expenses, attorneys’ fees and a jury trial. The class is represented by Meagan A. Farmer and Mark C. Gardy of Gardy & Notis in New York and by Jeffrey C. Block and Jacob A. Walker of Block & Leviton in Boston.
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