[00:00:00] Speaker 02:
So good morning, Your Honors.

[00:00:02] Speaker 02:
My name is Tamar Weinerib from Pomeran's LLP on behalf of the plaintiff appellant here.

[00:00:08] Speaker 02:
And this is a section 14A case and it's about defendant's dissemination of a proxy with misstatements to solicit shareholder approval of a deficient per share merger price for which they agreed to sell Avalara to Vista.

[00:00:23] Speaker 02:
The misstatements, which were designed to convince investors that Avalara faced substantial risk to continuing as a standalone entity, directly contradicted Avalara Senior Executive's public statements on earnings calls and during an analyst day presentation, which conveyed significant optimism backed up by hard data regarding the company's prospects as a standalone entity.

[00:00:47] Speaker 02:
We're here because the district court committed reversible error in granting defendants motion to dismiss the second amended complaint, which I'll refer to today as the SAC.

[00:00:57] Speaker 02:
But we'll start with what the court got right.

[00:00:59] Speaker 02:
Let's jump in with the good.

[00:01:02] Speaker 02:
First, the district court was correct in ruling that the SAC alleged subjective falsity as to defendant McFarland.

[00:01:11] Speaker 02:
The district court was correct in ruling that the PSLRA safe harbor does not apply to any of the misstatements.

[00:01:17] Speaker 02:
And the district court was also correct in ruling that the SAC properly pled materiality and transactional causation.

[00:01:25] Speaker 02:
Now we'll turn to what the district court got wrong.

[00:01:28] Speaker 02:
The district court committed reversible error by drawing inferences and resolving factual disputes in defendant's favor to rule that there was... Sorry for interrupting, but there's one, you're getting to what the district court got wrong.

[00:01:42] Speaker 01:
So there's one allegedly misstating

[00:01:46] Speaker 01:
or misleading proxy statement that I want you to focus on and that's the projections omission of any potential inorganic growth.

[00:01:57] Speaker 01:
The district court analyzed that and said that there's, now I'm looking at the district court's order, as the proxy discloses there were no acquisitions in the near or the long-term horizon because by

[00:02:13] Speaker 01:
Late June, any hopes of acquiring company A had essentially dissipated.

[00:02:19] Speaker 01:
And so the district court did even talk about the quarterly reports and said that those were just quarterly guidances and not a long-term projection.

[00:02:29] Speaker 01:
What's wrong with that analysis?

[00:02:32] Speaker 02:
Thank you, your honor.

[00:02:33] Speaker 02:
So the district court erroneously held that based on flawed premises.

[00:02:39] Speaker 02:
And as you correctly stated, the district court said that

[00:02:43] Speaker 02:
It was justifiable that Avalara did not include inorganic growth in the guide because it states in the proxy that they had determined not to acquire company A and also that it states that the board reviewed potential strategic acquisitions.

[00:02:59] Speaker 02:
But nowhere did the proxy state that Avalara no longer planned to engage in any M&A activity whatsoever.

[00:03:06] Speaker 02:
And in fact, those two statements are somewhat irrelevant to that analysis because we know from the very press release that announced the merger that Avalara did in fact intend to continue pursuing M&A activity.

[00:03:18] Speaker 02:
They set us such also on prior earnings calls and during analyst day, they made clear that M&A was

[00:03:25] Speaker 02:
part of the company's DNA and also a very big part of its business strategy in growing internationally.

[00:03:32] Speaker 01:
At that point, any potential acquisition was too speculative or too hypothetical as the district court put it?

[00:03:43] Speaker 02:
Your Honor, the proxy only addresses the potential acquisition of one entity and doesn't state that there were no other potential acquisitions coming in the future.

[00:03:53] Speaker 02:
Moreover, when crafting projections, organic or inorganic, it's all hypothetical.

[00:03:59] Speaker 02:
None of it is a guarantee.

[00:04:00] Speaker 02:
It's all based on currently held reasonable assumptions.

[00:04:03] Speaker 02:
Previously, the company had always included potential inorganic growth in its guidance.

[00:04:11] Speaker 02:
And put and previously had only issued quarterly guidance and that quarterly guidance always included in organic growth.

[00:04:18] Speaker 02:
So even if we want to say that it was justifiable for them to omit an organic growth for argument's sake.

[00:04:23] Speaker 02:
Let's say, you know, the district court was right and

[00:04:26] Speaker 02:
you know, the company made clear it didn't have any prospects and therefore it was justified.

[00:04:31] Speaker 02:
It wasn't justified in not pointing out that omission, though.

[00:04:34] Speaker 02:
Given its historical practice, given that it had always included inorganic growth, investors would have reasonably anticipated that these projections similarly

[00:04:43] Speaker 02:
included both organic and inorganic, but that distinction was not made.

[00:04:48] Speaker 02:
Nowhere did the proxy disclose that the May or July projections focused on organic growth alone.

[00:04:55] Speaker 02:
And again, even that is hypothetical.

[00:04:57] Speaker 02:
Projections by definition are hypothetical.

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We don't know until they materialize later on whether they were right, whether they were wrong.

[00:05:03] Speaker 02:
By nature, they are hypothetical.

[00:05:07] Speaker 02:
And Your Honor, the district court also stated three times in its opinion

[00:05:11] Speaker 02:
It conceded three times that if Avalara plans to continue M&A activity,

[00:05:16] Speaker 02:
and did not include any inorganic growth in the projections that there are statements regarding whether the projections were prepared on a reasonable basis and whether they reflected best currently available estimates and judgments that they would have been false and misleading.

[00:05:31] Speaker 02:
But we know for a fact that Avalara did plan to continue M&A activity because they stated as such, as late as the press release announcing the merger.

[00:05:40] Speaker 02:
In that press release, they stated that they intended to continue pursuing

[00:05:45] Speaker 02:
value a creative M&A going forward, which makes sense considering what a big part of its growth story it had been up until that point.

[00:05:53] Speaker 02:
Aside from the projections, Your Honor, which were objectively false for the reasons just stated, and while I'll address subjective falsity now since we're on the projections as well, and similarly make the point that the court should have only done a subjective and objective falsity analysis with regard to the projections, it's only relevant with regard to either statements of opinion or projections.

[00:06:16] Speaker 02:
but then aired in applying that standard to all the misstatements.

[00:06:20] Speaker 02:
But focusing again just on where we are now, we just covered objective falsity, but the court also erroneously concluded that there was no subjective falsity or negligence as to the projections, and the court actually analyzed them both simultaneously, so I will do the same.

[00:06:38] Speaker 02:
But when the court stated there was no subjective falsity, it didn't include any supporting analysis.

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It stated in a conclusory fashion

[00:06:45] Speaker 02:
that even though there was subjective falsity as to defendant McFarland, and even though the district court conceded that defendant McFarland transmitted all the same data that he possessed, all that same data that underpins the finding of subjective falsity as to him, transmitted that to all the remaining director defendants during nine separate meetings that were covered in the proxy.

[00:07:09] Speaker 02:
For some reason, the court then ruled, nevertheless, there's no subjective falsity as to those remaining defendants.

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provided no reason why.

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Given that the Director Defendants and Defendant McFarland all possess the same information, the same ruling should have applied to both Defendant McFarland and the remaining Director Defendants.

[00:07:28] Speaker 02:
Now, aside from the projections themselves, the SAC also alleges that defendant's statements were false when they stated that they prepared the projections on a reasonable basis, that they reflect best currently available estimates, and presented to the best of management's knowledge and belief the expected financial performance of Avalara.

[00:07:49] Speaker 02:
And they were false because underpinning those statements were purported short-term risks and challenges that directly contradicted

[00:07:57] Speaker 02:
statements that management made during the same timeframe on earnings calls and on analyst day.

[00:08:04] Speaker 02:
Taking each of these risks and challenges in turn, we'll start with upsell growth.

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The court based its rejection of allegations regarding upsell growth on a false premise, which was that nothing in plaintiffs brief

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Or the SAC shows that the company did not need new bookings in the first quarter of 2022 because upsell growth was so strong, but they did in fact state that.

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And that quote is included in paragraph 114 of the SAC.

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It's a quote from the first quarter of 2022 earnings call where management stated quote,

[00:08:37] Speaker 02:
We didn't need somebody to sign up for e-commerce this quarter to produce the bookings.

[00:08:42] Speaker 02:
That means we did not need new bookings.

[00:08:44] Speaker 02:
And they provide the reason for this in the next statement, which is we are monetizing through conversion and upsell.

[00:08:50] Speaker 02:
In other words, upsell growth was strong enough that they did not need new bookings for the quarter.

[00:08:56] Speaker 02:
The District Court also held that any optimistic statements made during earnings calls or on analysts say about upsell growth were simply puffery, focusing on phrases like healthy expansion and good momentum.

[00:09:08] Speaker 02:
But what the District Court didn't acknowledge, erroneously, is that those phrases were tied inextricably to metrics.

[00:09:15] Speaker 02:
They were on the exact same slides.

[00:09:17] Speaker 02:
The phrase healthy expansion referred to 25% year over year growth.

[00:09:22] Speaker 02:
Good momentum referred to NRR of 116%, the highest since they had reported that metric.

[00:09:28] Speaker 02:
And defendants don't dispute this.

[00:09:29] Speaker 02:
They don't dispute that the phrases were used with numerically specific metrics.

[00:09:33] Speaker 00:
Ms.

[00:09:34] Speaker 00:
Weinreb, does that include the statements about the impact of lost business from the, I think the European partner, wasn't the European partner partner A?

[00:09:43] Speaker 02:
Thank you, your honor.

[00:09:44] Speaker 02:
Yes, that's one of the other risks and challenges that was noted and I'm happy to address that next.

[00:09:48] Speaker 02:
One of the other risks and challenges that they used to justify downward revisions to the July projections and to justify the deficient per share merger price was that they said they were factoring in lost revenue from this partner A. The district court erroneously rejected allegations

[00:10:06] Speaker 02:
that loss of the Partner A revenue did not justify those revisions to the July projections, though crediting allegations that management had previously made clear this revenue loss would not have any meaningful impact on future revenue growth.

[00:10:22] Speaker 02:
The district court didn't address that per the proxy.

[00:10:25] Speaker 02:
The proxy makes this clear.

[00:10:27] Speaker 02:
The same management that stated that this loss of revenue would not be indicative of future growth also crafted the projections and already contemplated the winding down of that revenue when they put the May projections together.

[00:10:40] Speaker 00:
There was some emphasis on the matter of the general challenges in the international market as a total, were there not?

[00:10:51] Speaker 02:
No, Your Honor, they were specifically referring to the loss of revenue from partner A. And in fact, one of the things that the district court disregarded was the fact that Avalara management had made clear that not only was this loss of revenue insignificant, but was also offset by tremendous strength in the EU business because Avalara had already signed 1,200 EU partners

[00:11:14] Speaker 02:
and expected a $20.5 billion total addressable market due to government mandates and e-invoicing by 2025, both of which would have more than offset the minimal loss of revenue contemplated with regard to Partner A.

[00:11:31] Speaker 02:
Another risk and challenge aside from the upsell growth and partner A was with regard to macroeconomic risk.

[00:11:37] Speaker 02:
The district court acknowledged that Avalara told investors it was well positioned to face macroeconomic downturn, but stated that it found no prior statements suggesting there would be no impact from a downturn.

[00:11:49] Speaker 02:
Those statements, however, are also in paragraph 114 of the SAC, which makes clear that due to the nature of Avalara's business model,

[00:11:58] Speaker 02:
which is the filing of tax and compliance documents, which have to be filed no matter what the macroeconomic conditions are, that Avalara did not face macroeconomic risk.

[00:12:09] Speaker 02:
Defendants don't dispute that they told investors that Avalara's business model was proven resilient and therefore would suffer no impact.

[00:12:16] Speaker 02:
Instead, they say that it's puffery.

[00:12:18] Speaker 02:
But they didn't just state their business model was resilient.

[00:12:21] Speaker 02:
They said it was proven resilient.

[00:12:23] Speaker 02:
And they backed that statement up with hard metrics.

[00:12:26] Speaker 02:
More than 90% of their revenue was earned from subscriptions.

[00:12:30] Speaker 02:
60% of that from tax calculation products and 40% from tax returns and compliance management products.

[00:12:37] Speaker 02:
None of these, which are services that ebb and flow with the macroeconomic tide.

[00:12:42] Speaker 02:
Another weakness that they referred to was potentially a decrease in regulatory compliance.

[00:12:48] Speaker 02:
However, that directly contradicted statements that were made, including statements by defendant McFarland that by 2025, 80% of organizations would be forced by legislation or trading partners to exchange invoices in electronic format.

[00:13:03] Speaker 02:
The district court erroneously stated those statements couldn't support falsity because they were statements of expectation.

[00:13:09] Speaker 02:
But that's wrong for three reasons.

[00:13:11] Speaker 02:
One, statements of expectations can still be false and misleading.

[00:13:14] Speaker 02:
If that weren't the case, security fraud cases could never be premised on false projections or forecasts.

[00:13:21] Speaker 02:
Second, defendant McFarland didn't state this as a hypothetical expectation.

[00:13:26] Speaker 02:
It was made as a statement of certainty.

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These increases in compliance were coming.

[00:13:32] Speaker 02:
That's the way that he formulated his statement.

[00:13:34] Speaker 02:
And third, defendant McFarland's statements demonstrate that executives cannot have simultaneously held a dueling expectation that regulatory compliance would decrease.

[00:13:44] Speaker 02:
It had to be one or the other.

[00:13:46] Speaker 02:
Defendants don't respond to this argument at all.

[00:13:49] Speaker 02:
They say that instead that a decrease can negatively impact Avalara, but that misses the point because they didn't expect any such decrease.

[00:13:57] Speaker 02:
They also argue for the first time that they meant reduced compliance complexity.

[00:14:02] Speaker 02:
First of all, that argument is waived because they didn't raise it below, but in any event, that's not what the proxy stated.

[00:14:08] Speaker 02:
It didn't state a reduction in compliance complexity.

[00:14:11] Speaker 02:
and an analyst day presentation actually stated the converse, which is we expect international complexity created by e-invoicing to be a major growth driver.

[00:14:20] Speaker 02:
I see I am less than a minute to my time expiring.

[00:14:24] Speaker 02:
If there are other aspects of the weaknesses that your honors would like me to address, I'm happy to do so.

[00:14:30] Speaker 02:
We also didn't address loss causation, though again, that was not an issue the district court passed upon below and is therefore not properly before this court.

[00:14:38] Speaker 02:
But if there are any questions with regard to that, I'm happy to address them.

[00:14:42] Speaker 03:
Yeah, I have no questions.

[00:14:45] Speaker 02:
Okay.

[00:14:45] Speaker 02:
And there was one other weakness also that we didn't address, which was with regard to the second quarter of 2022 results, which I'm happy to address now, or I can do so on rebuttal.

[00:14:56] Speaker 03:
I think you should probably handle it on rebuttal.

[00:15:01] Speaker 02:
Thank you, Your Honours.

[00:15:02] Speaker 03:
And now your time is basically up a few seconds, but I'm going to add two minutes to your clock for rebuttal.

[00:15:12] Speaker 02:
Thank you very much, Your Honor.

[00:15:14] Speaker 03:
You can plan on that.

[00:15:16] Speaker 02:
Thank you.

[00:15:16] Speaker 03:
Now, we'll hear from the appellee.

[00:15:20] Speaker 03:
If the appellee wants an extra two minutes to oppose, we give appellee that.

[00:15:27] Speaker 04:
Thank you, Your Honor.

[00:15:29] Speaker 04:
And Your Honors, may it please the court, Jay Lefkowitz from Kirkland and Ellis for Avalara.

[00:15:36] Speaker 04:
And I apologize if I cough a little bit.

[00:15:38] Speaker 04:
I developed this RSV virus last week.

[00:15:43] Speaker 04:
There are a lot of issues in this case, but I think fundamentally the trial judge, after reviewing two different motions to dismiss on two different complaints,

[00:15:54] Speaker 04:
found that there was simply no falsity.

[00:15:57] Speaker 04:
And I think, although there are a lot of issues in terms of safe harbors and loss causation, I think I just, the best way of using the time today is to respond directly to what Ms.

[00:16:08] Speaker 04:
Weinreb addressed.

[00:16:10] Speaker 04:
And I want to start with the inorganic growth points that Judge Nguyen asked about.

[00:16:14] Speaker 04:
The plaintiffs essentially are arguing that the proxy is false because it doesn't include purely speculative revenues.

[00:16:22] Speaker 04:
I would suggest that a company would get into a lot of trouble if it were forecasting hypothetical revenues from hypothetical transactions.

[00:16:31] Speaker 04:
There's simply no example that plaintiffs offer of a non-consummated transaction that was ever incorporated into Avalara's projections

[00:16:41] Speaker 04:
Or a transaction that was on the horizon that they were about to enter into, like in the NECA IBEW case that they rely on.

[00:16:51] Speaker 04:
What they say is that the proxy is false.

[00:16:56] Speaker 04:
And they claim that Avalara always included inorganic growth when issuing guidance, but that's not true.

[00:17:03] Speaker 04:
And in fact, if you look at what they cite when they rely on this at SCR 24, they cite a earnings call where the CFO of the company said, and on the second question, is there inorganic growth in the guide?

[00:17:19] Speaker 04:
The guide does incorporate all acquisitions, including acquisitions we did in 2021.

[00:17:27] Speaker 04:
The plaintiffs omit those last six words in their complaint at paragraph 95.

[00:17:34] Speaker 04:
The last six words clearly show this is referring to completed acquisitions.

[00:17:38] Speaker 04:
And then at SCR 608,

[00:17:40] Speaker 04:
in the earnings call, they explained that Avalara's policy is that it's not going to call out inorganic growth specifically every quarter, although it explains that it did identify one merger in the public guidance because it had already occurred.

[00:17:58] Speaker 04:
So I would suggest that there's simply no falsity on that.

[00:18:03] Speaker 04:
I'd like to move to the next issue she raised, which was

[00:18:07] Speaker 04:
the slower than expected growth.

[00:18:09] Speaker 04:
And the fact of the matter is, the company did experience slower growth than it expected.

[00:18:16] Speaker 04:
In prior years, it had been running at a 30 or 35%

[00:18:22] Speaker 04:
rate of increase.

[00:18:24] Speaker 04:
This quarter they said we had 25% upsell growth and while upsell growth is good it doesn't satisfy for not getting new clients.

[00:18:35] Speaker 04:
You might do well in a particular quarter when you get upsell growth from your existing e-commerce customers which is exactly what they said but again to say that most bookings have come from prior customers

[00:18:48] Speaker 04:
activated on e-commerce says nothing about whether bookings are doing well overall.

[00:18:55] Speaker 04:
Avalara could and in fact did experience slower than expected growth in Q1.

[00:19:01] Speaker 04:
It's like hitting a double when you want to get up and hit a home run.

[00:19:05] Speaker 04:
It doesn't mean it's bad, but it's certainly not what you expected or what you hoped for.

[00:19:10] Speaker 04:
And in fact, Avalara is very clear.

[00:19:12] Speaker 04:
It said in the Q1 earnings call, we still have work to do.

[00:19:17] Speaker 04:
And when it said we didn't need somebody to sign up for e-commerce this quarter to make a profit, that actually implies,

[00:19:25] Speaker 04:
that they weren't getting sufficient new customers.

[00:19:29] Speaker 04:
So I don't think there's any question of falsity there.

[00:19:32] Speaker 04:
I want to address a couple of other issues that they raised in their briefing.

[00:19:37] Speaker 01:
Before you move on to other issues and done that at the time.

[00:19:41] Speaker 01:
Can I have you go back to the projection, including inorganic growth?

[00:19:46] Speaker 01:
I just want to make sure that I understand your argument.

[00:19:49] Speaker 01:
Yes.

[00:19:50] Speaker 01:
You find a distinction between the quarterly guidelines and the actual projections.

[00:19:56] Speaker 01:
That's what your argument is based on, because there are plenty of statements, even subsequent, by Tenenbaum, for example, that talks about how important M&A is to the growth of the company and that it's

[00:20:09] Speaker 01:
It's like embedded in the DNA.

[00:20:12] Speaker 01:
You can see that from prior years, but the acquisition come through.

[00:20:15] Speaker 01:
So it's your argument then, okay, the guidelines can take into account the inorganic growth, but when it comes to projections, it's never included unless an acquisition is

[00:20:27] Speaker 01:
Either completed or, or it looks like it's going to materialize.

[00:20:31] Speaker 04:
That is exactly right.

[00:20:32] Speaker 04:
It's perfectly fine for a company to talk about itself and to say DNA.

[00:20:37] Speaker 04:
The M and a is in our DNA.

[00:20:39] Speaker 04:
We're always trying to acquire companies.

[00:20:41] Speaker 04:
I think all companies at a certain level are trying to always grow.

[00:20:44] Speaker 04:
organically and inorganically, and whether you call it puffery or not, that's not the statement in the proxy that they're saying is misleading.

[00:20:53] Speaker 04:
What they're saying is misleading of the proxy is that the proxy doesn't include revenue projections

[00:21:00] Speaker 04:
for acquisitions that haven't happened.

[00:21:03] Speaker 04:
And number one, I think it would be irresponsible to do that.

[00:21:07] Speaker 04:
And number two, there's no evidence that Avalara ever did that once in its history.

[00:21:13] Speaker 04:
It only ever included numbers based on acquisitions that had been completed.

[00:21:19] Speaker 04:
And so it is clearly not false to put out projections that don't include

[00:21:24] Speaker 04:
hypothetical transactions with hypothetical partners.

[00:21:27] Speaker 04:
In fact, the proxy even discloses that there had been some potential partners on the horizon and those deals didn't materialize.

[00:21:37] Speaker 01:
If I can move on, Your Honor.

[00:21:39] Speaker 01:
Can I have you address the ISS views about the sale?

[00:21:44] Speaker 01:
There was an alternate recommendation to sell, but at the same time, there were just a lot of cautionary admonitions in there

[00:21:54] Speaker 01:
The district court said that that particular statement wasn't false because parts of the information is available elsewhere.

[00:22:04] Speaker 01:
That appears to be contrary to our circuit case law.

[00:22:07] Speaker 01:
I'm not sure that we require misleading statements or that we allow misleading statements to be cured when investors can scour

[00:22:17] Speaker 01:
documents available to the public elsewhere.

[00:22:19] Speaker 01:
So can you address that?

[00:22:21] Speaker 04:
Yes, I can, Your Honor.

[00:22:23] Speaker 04:
They're essentially saying that it was false or misleading.

[00:22:28] Speaker 04:
In point of fact, ISS did make a recommendation in favor.

[00:22:33] Speaker 04:
And so it is not false or misleading to say they recommended in favor.

[00:22:38] Speaker 04:
I think their argument is that it was misleading because we didn't identify any of the cautionary notes that ISS put on the record.

[00:22:48] Speaker 04:
But of course, there's no question that they were all presented to the shareholders because Altair

[00:22:54] Speaker 04:
filed in exactly the same proxy, they filed their own 14A, and they identified very specifically some of the statements that were negative and cautionary, where they said... That was in a separate SEC filing, correct?

[00:23:11] Speaker 00:
Correct, but it went to the shareholders... As I understand, that's impressive.

[00:23:17] Speaker 00:
with respect to that, that a separate information on a separate SEC filing does not render other statements not being false or misleading because it was omitted.

[00:23:26] Speaker 00:
So one would have to check the other separate filings and I thought that there's authority from the Ninth Circuit that indicates that, I think it's the Miller case,

[00:23:35] Speaker 00:
Indicates that investors are not generally required to look beyond a given document.

[00:23:39] Speaker 00:
So that's my inquiry on that following up with judge wins question.

[00:23:43] Speaker 00:
Sure.

[00:23:44] Speaker 04:
In a, in a, in a more recent case, after Miller, and obviously not binding in any way.

[00:23:52] Speaker 04:
Judge Aurick addressed his very issue and distinguished Miller because he said Miller would have required the plaintiffs to go and start looking through old drafts of proxies.

[00:24:04] Speaker 04:
Here, in the case that Judge Aurick was talking about, Sanchez versus Iksis,

[00:24:10] Speaker 04:
The court simply said that the plaintiffs could have looked at a Bloomberg report here.

[00:24:16] Speaker 04:
It's even stronger because they didn't have to go out and go and look for the report.

[00:24:21] Speaker 04:
The information from the report was put into the mix of information.

[00:24:26] Speaker 04:
And so.

[00:24:28] Speaker 00:
I mean, I'm trying to make sure I understand the record here wasn't some of the.

[00:24:34] Speaker 00:
certain unfavorable excerpts not included, and they were included in a separate SEC filing, so it would require the investors to actually search through other filings, correct?

[00:24:48] Speaker 00:
It wasn't really in this particular matter.

[00:24:49] Speaker 04:
Well, Your Honor, I would say to be very clear,

[00:24:53] Speaker 04:
Avalara filed an additional document after the proxy was filed because when they filed the proxy they didn't have any information from ISS.

[00:25:03] Speaker 04:
So then they posted something to the SEC website that all the shareholders saw in which they said ISS supports this transaction.

[00:25:12] Speaker 04:
Then shortly thereafter Altair, one of the shareholders that was unhappy, posted in exactly the same way on the SEC website

[00:25:22] Speaker 04:
information that said actually Glass Lewis was strongly opposed to this and even ISS, which supported it, was cautionary and it expressly said it was cautionary for the following reasons and it identified a couple of reasons.

[00:25:37] Speaker 04:
I would suggest that on two independent bases this is sufficient.

[00:25:41] Speaker 04:
Number one, that the total mix of information available to the shareholder

[00:25:46] Speaker 04:
also includes information outside of the proxy statement.

[00:25:50] Speaker 04:
And although the Ninth Circuit has not addressed this specifically, the Fifth Circuit has addressed it, other circuits have addressed this, and Judge Oreck has addressed it, obviously, in the district court.

[00:26:01] Speaker 04:
And in fact, in Judge Oreck's case, it was not presented to the shareholders.

[00:26:07] Speaker 04:
They actually would have had to gone out and looked at an independent Bloomberg report, which was actually behind a paywall.

[00:26:15] Speaker 04:
And the court still said, it's public information.

[00:26:18] Speaker 04:
And citing some federal district court cases, both in New York and elsewhere,

[00:26:23] Speaker 04:
The rule was, in today's world, it's unrealistic to argue, and I'm quoting from that opinion, that documents available on an SEC website are not readily accessible to the investing public.

[00:26:34] Speaker 04:
But here, Altair put the mix of information in front of the shareholders.

[00:26:42] Speaker 04:
I'd like to just move on very briefly.

[00:26:44] Speaker 04:
There was 1 other issue that council didn't address.

[00:26:47] Speaker 04:
I want to address to make clear that there's no confusion.

[00:26:50] Speaker 04:
They suggest that there's some misinformation or false and misleading references because in the proxy avalara talks about how the.

[00:27:04] Speaker 04:
results for the quarter were below management expectations.

[00:27:08] Speaker 04:
And again, this is a true statement.

[00:27:10] Speaker 04:
As we point out on page 30 of our brief, and we cite a study about corporate managers' perspectives on forward-looking guidance, companies often put out public guidance, which tends to be conservative.

[00:27:24] Speaker 04:
It's for the investing public, and then they create expectations for their own management.

[00:27:29] Speaker 04:
This is for how they want to engage their own workforce for bonus pools and the like.

[00:27:35] Speaker 04:
And here, the proxy on at least six different occasions explicitly contrasts management expectations with public guidance.

[00:27:45] Speaker 04:
It explains, for example, on page 98, SER 98,

[00:27:50] Speaker 04:
that Alvalara has historically prepared and provided certain public guidance, and we make no other public projections.

[00:27:58] Speaker 04:
And then it says, however, prospective financial information has been prepared by the management

[00:28:05] Speaker 04:
to guide the management and to guide other companies in this sale process.

[00:28:10] Speaker 04:
And then the company goes on and identifies precisely what that management guidance was in the proxy at SCR 99.

[00:28:20] Speaker 04:
And it says,

[00:28:21] Speaker 04:
the revenue objective was 904 million.

[00:28:24] Speaker 04:
And so while it is certainly true that the revenue for that quarter was between 867 and 871 million and was within the public guidance, it is equally true that it was short of the management expectations.

[00:28:41] Speaker 04:
The only way

[00:28:43] Speaker 04:
the statement in the proxy, which is the potentially actionable statement, can be deemed false is if you assume that management expectations and public guidance is always identical.

[00:28:56] Speaker 04:
And we know that that is not the case.

[00:28:58] Speaker 04:
And in fact, we even cite other cases in addition to this study, this journal that makes that clear.

[00:29:08] Speaker 04:
So I would suggest, Your Honor, that fundamentally what the plaintiffs are objecting to here, and they actually say this very clearly in their opening brief, they say that Avalara's company was higher valued than it was being reflected in the stock market, and that the reason it had fallen was because of macroeconomic risks.

[00:29:29] Speaker 04:
and the company shouldn't have engaged in the sale process.

[00:29:33] Speaker 04:
But ultimately the company engaged in the sale process and the stock ultimately was sold at a significant premium to the stock price by an overwhelming number of shareholders.

[00:29:45] Speaker 04:
Their claim that a company can't sell when macroeconomic risk

[00:29:51] Speaker 04:
have impacted the share price is essentially an assault on the business judgment rule.

[00:29:57] Speaker 04:
The question in this case is, was there anything false or misleading in the proxy?

[00:30:04] Speaker 04:
I believe that some of the statements, and I'll just finish on this, some of the statements here are actually protected by the safe harbor because they are completely forward-looking statements.

[00:30:17] Speaker 04:
For example,

[00:30:19] Speaker 04:
when they talk about partner A, they're suggesting that we shouldn't have forecast a 4% reduction based on partner A. But of course, earlier in the year, we had said, partner A, if we lose it, would cost about 4%.

[00:30:36] Speaker 04:
And while we said 4% isn't that big a deal in the scheme of the company, it is certainly not false or misleading.

[00:30:42] Speaker 04:
And indeed, I think it is protected by the safe harbor to suggest

[00:30:47] Speaker 04:
that it is, in fact, a 4% drop.

[00:30:52] Speaker 04:
It would have been misleading not to say that once we knew that we had lost that.

[00:30:55] Speaker 00:
Essentially, you're saying that within the Safe Harbor provisions of 78U, that it's a meaningful cautionary statement, essentially.

[00:31:02] Speaker 04:
And there is no question, if you look at the cautionary statement here in the record, there is an extensive two or three page

[00:31:11] Speaker 04:
sorry, cautionary statement identified.

[00:31:15] Speaker 04:
But again, I would suggest that statements like the partner A loss or the risk in the future of macroeconomics or the risk in the future of reduction in compliance, those are all not only completely truthful and accurate if you want to look at it from objective falsity, but they are also forward-looking statements accompanied by very meaningful

[00:31:41] Speaker 04:
Meaningful questionary statements.

[00:31:43] Speaker 04:
If if the court has no further questions, the last thing I would like to say is.

[00:31:53] Speaker 04:
that here on objective, the court also reached subjective falsity.

[00:31:58] Speaker 04:
The court didn't need to reach subjective falsity.

[00:32:01] Speaker 04:
But I would say that unlike the first part of the case, the objective false statements where the standard is simply, is it plausible?

[00:32:10] Speaker 04:
The Iqbal Twombly standard.

[00:32:12] Speaker 04:
And I would suggest that they've actually made their claims with particularity as to those.

[00:32:18] Speaker 04:
They just haven't made them plausible.

[00:32:20] Speaker 04:
With respect to the subjective falsity, they haven't said anything with particularity and frankly for the judge to have made a ruling of subjective falsity as to the CEO because of a hypothetical

[00:32:34] Speaker 04:
golden parachute, which of course he didn't get and which the plaintiffs actually say he didn't want to get.

[00:32:40] Speaker 04:
They actually say in their brief, the only reason he supported the transaction is that he wanted to hold on to his job.

[00:32:46] Speaker 04:
That doesn't give you any particularity about the state of mind to show subjective falsity.

[00:32:53] Speaker 04:
So I would suggest that although the court doesn't need to reach subjective falsity, if it affirms on objective falsity, I don't believe there's anything in the record for subjective falsity either.

[00:33:08] Speaker 04:
Thank you, your honor, for accommodating me and for the brief extension in the argument.

[00:33:13] Speaker 03:
Thank you very much, counsel.

[00:33:15] Speaker 03:
They will hear about them now.

[00:33:19] Speaker 02:
Thank you, your honor.

[00:33:19] Speaker 02:
I'll try to address some of these points as quickly as possible in the limited time left, starting with the weakness, which was the false statement in the proxy that Q2-22 results fell below expectations.

[00:33:32] Speaker 02:
The district court got it wrong there because in order to rule,

[00:33:36] Speaker 02:
that Q2 2022 expectations referred to internal expectations.

[00:33:40] Speaker 02:
The court had to make an inference in defendant's favor that is not supported by the proxy or any other fact in the record.

[00:33:46] Speaker 02:
In fact, the statements that Mr. Lefkowitz read out of the proxy do not support any other results.

[00:33:54] Speaker 02:
In fact, what he read confirms that historically guidance included in organic growth

[00:34:00] Speaker 02:
and that the only non-public guidance it referenced were the July and May projections, which again, were only internal until their revelation in the proxy.

[00:34:10] Speaker 02:
There is no other expectation for the quarter, for the second quarter that is identified in any way and the court improperly drew an inference in defendant's favor to rule otherwise.

[00:34:22] Speaker 02:
With regard to inorganic growth, Your Honor,

[00:34:25] Speaker 02:
Mr. Lefkowitz cited quotes by Avalara management that they would no longer call out inorganic growth.

[00:34:32] Speaker 02:
They were just stating that they weren't going to separate it out.

[00:34:34] Speaker 02:
Not that they weren't going to include it in the guidance going forward.

[00:34:37] Speaker 02:
They just weren't going to say this portion of guidance is organic and this portion is inorganic, but they were still going.

[00:34:43] Speaker 01:
I just want to make sure before you run out of time to get this question answered.

[00:34:47] Speaker 01:
Is there an allegation in the complaint that

[00:34:51] Speaker 01:
in prior years, projections included unrealized acquisitions?

[00:34:57] Speaker 02:
Yes, Your Honor.

[00:34:58] Speaker 01:
Again, to go back to the point that I made earlier, which I think is- The actual projections, because I thought I heard Mr. Lefkowitz says that unrealized acquisitions are never included, have never been included in projections.

[00:35:12] Speaker 02:
Well, first of all, Your Honor, that's a factual dispute that's inappropriate for resolution at this point.

[00:35:17] Speaker 02:
But putting that aside, the statements that Mr. Lefkowitz cites and that defendants cite in their briefs to support the contention that only completed acquisitions had been included historically don't in fact support that contention.

[00:35:29] Speaker 02:
One of the statements said that all acquisitions were included, never stated that it was limited to completed acquisitions.

[00:35:36] Speaker 02:
It simply stated that it included completed acquisitions.

[00:35:39] Speaker 02:
And the other statement they cite too isn't talking about guidance at all, but was talking about revenue results for the quarter and revenue results that had already materialized.

[00:35:48] Speaker 02:
Your honor, just going to the upsell growth for a moment, Mr. Lefkowitz talks about slow growth and talks about how it went from 35% in 2020 to 44% in 2021 to 25% in 2022, but it's an apples to oranges comparison.

[00:36:03] Speaker 02:
because the 2020 and 2021 results were annual, and the 25% growth rate in the first quarter of 2022 is therefore not comparable.

[00:36:12] Speaker 02:
It's a result for the quarter.

[00:36:15] Speaker 02:
And in fact, in the Investor Day presentation that talks about that growth rate, they call it healthy expansion.

[00:36:21] Speaker 02:
It can't simultaneously be strong and healthy and also weak and slow.

[00:36:25] Speaker 02:
Those two things don't exist together.

[00:36:27] Speaker 02:
With regard to the ISS statements,

[00:36:31] Speaker 02:
It was significant that defendants did not disclose that the ISS recommendation was not unequivocal, but was cautionary.

[00:36:39] Speaker 02:
As Your Honors correctly noted, this was not soliciting material.

[00:36:43] Speaker 02:
The Altair report was not part of the proxy.

[00:36:46] Speaker 02:
The proxy specifically told investors not to look outside the proxy.

[00:36:51] Speaker 03:
Council, I'm sorry to interrupt, but you're over your already extended time.

[00:36:58] Speaker 03:
And so I think you need to finish the sentence and wrap up.

[00:37:03] Speaker 02:
Yes, your honor.

[00:37:04] Speaker 02:
Thank you.

[00:37:04] Speaker 02:
I appreciate that.

[00:37:06] Speaker 02:
I just wanted to make the point quickly as your honor stated that the Altair report was not part of the proxy.

[00:37:11] Speaker 02:
The proxy told investors not to look elsewhere.

[00:37:14] Speaker 02:
And also that this is not a case as Mr. Lefkowitz stated where we're saying that a company can never sell itself in poor macroeconomic conditions, but simply that they can't mislead investors.

[00:37:25] Speaker 02:
There's a very big difference.

[00:37:27] Speaker 02:
Thank you, Your Honors.

[00:37:28] Speaker 03:
Thank you, Council.

[00:37:32] Speaker 03:
That will do it for our argument.

[00:37:35] Speaker 03:
I want to say, I think both Council on both sides of the case for the excellent arguments made.

[00:37:44] Speaker 03:
It's a complicated matter and we'll give it our attention and the parties will hear from us in due course.

[00:37:57] Speaker 03:
So thank you very much.

[00:37:59] Speaker 04:
Thank you, Your Honors.

[00:38:01] Speaker 02:
Thank you, Your Honors.

[00:38:02] Speaker 03:
And the court will now submit this case with thanks to the parties.

[00:38:12] Speaker 03:
Thank you, Your Honor.

[00:38:17] Speaker 03:
Court for this session stands adjourned.