SAN FRANCISCO (CN) — A federal judge on Tuesday dismissed with prejudice a class action claiming educational toymaker Leapfrog’s board of directors misled investors to push through a $72 million merger with VTech.
U.S. District William Orrick III found lead plaintiff Pete Manger failed to identify anything false or misleading in a March 2016 statement recommending the deal to shareholders.
Manger claimed the board misled investors about how soon the company would face a liquidity crisis and lose its ability to borrow money, so it could reject a better offer by L&M Acquisitions of $1.10 per share, rather than the $1 a share offer from VTech.
“Manger’s real complaint – in essence – is that the board was wrong to push the VTech tender offer after the L&M offer came in, and the board should have put the brakes on VTech and at least pursued the L&M offer,” Orrick wrote. “But this case is not about the board making wrong or imprudent business decisions. Manger’s case is about a false or misleading recommendation statement.”
Because Leapfrog had disclosed that sales of its Epic tablet product exceeded projections, failing to mention that in its recommendation statement did not make the document false or misleading, Orrick said.
He also rejected claims that Morgan Stanley, which prepared the recommendation statement, did not disclose its conflict of interest for receiving a $4 million fee, contingent on the merger closing.
Orrick found Morgan Stanley did disclose that a “significant portion” of its $4 million fee was contingent on the closing, giving shareholders sufficient notice to “evaluate the role the fee might have played” in its recommendation.
The VTech merger was completed on April 4, 2016.
Leapfrog attorney Mark Foster said this and Orrick’s previous rulings in the case “underscore there are high pleading standards in federal court for disclosure claims for mergers and tender offers.”
As more merger litigation migrates from state to federal courts, Foster said, this ruling “sends a clear signal to plaintiffs’ bar that merger litigation doesn’t fare any better in federal courts now than they did in state courts.”
“It will help defendants defend against future suits and will be particularly a useful decision in the Northern District of California,” Foster said. “It’s a big boost to Silicon Valley companies, I think, or any that are potential acquisition targets.”
Foster is with Morrison & Foerster in San Francisco.
Class attorney Barbara Ann Rohr, with Faruqi and Faruqi in Los Angeles, declined to comment on the ruling Tuesday.
Leapfrog faces a separate class action, filed in January 2015, accusing it of misleading investors about dwindling prospects for its educational toys.
U.S. District Judge Edward Chen in February dismissed some claims against Leapfrog in that case, but refused to dismiss allegations based on the company’s failure to take a write-off for long-lived asset impairment in the third quarter of 2014.