Bisel v. Acasti Pharma, Inc.

1

LAUDEN BISEL, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. ACASTI PHARMA, INC., RODERICK CARTER, JAN D'ALVISE, JOHN CANAN, and DONALD OLDS, Defendants.

No. 21 Civ. 6051 (KPF)

United States District Court, S.D. New York

September 28, 2022

OPINION AND ORDER

KATHERINE POLK FAILLA, District Judge:

Lead plaintiff Michael Castaldo brings this putative class action against Acasti Pharma, Inc. (“Acasti”), and four members of its Board of Directors: Roderick Carter, Jan D'Alvise, John Canan, and Donald Olds (collectively “Defendants”). In brief, Castaldo alleges that Defendants violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 14a-9 promulgated thereunder, in connection with the merger (the “Merger”) of Acasti and Grace Therapeutics Inc. (“Grace”). Specifically, Castaldo alleges that Defendants omitted financial projections prepared by Grace and the adjustments Acasti made to those projections from the proxy statement Acasti issued in conjunction with the proposed Merger. As such, Castaldo contends that certain statements relying on the projections were misleading, and that Acasti shareholders approved an unfair merger. Defendants have filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), Federal Rule of Civil Procedure 9(b), and the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). For the reasons that follow, the Court grants Defendants' motion to dismiss in full.

BACKGROUND^[1]

A. Factual Background

1. The Leadup to the Merger

Acasti is a biopharmaceutical company that focuses on “the research, development, and commercialization of” prescription drugs made with omega-3 fatty acids. (SAC ¶ 19). In September 2020, Acasti began exploring “potential strategic transactions” with other businesses. (Id. at ¶ 21). This process began when a company identified as “Company A” made a non-binding merger offer to Acasti. (Id.). After declining this offer, the Acasti Board began a more comprehensive process of identifying similar opportunities. (Id. at ¶ 22). The Board engaged Oppenheimer, a financial advisor, to assist in this process. (Id.). The Board also determined that a reverse merger was the most realistic strategic transaction. (Id.).

In the following months, from approximately September 2020 to January 2021, Oppenheimer began gauging interest from other companies. (SAC ¶ 23). By the end of this period, 18 companies had signed confidentiality agreements with Acasti. (Id.). And by the end of October 2020, Acasti had received “written initial indications of interest from 21 companies.” (Id. at ¶ 24). Ultimately, the Board narrowed this group to four companies - identified as Companies B, C, D, and E - which companies would continue to the next round of review and due diligence. (Id. at ¶¶ 24-25; see also Proxy at 97-98 (discussing the terms of the non-binding proposals from these companies)).

On January 12, 2021, Grace submitted an initial indication of interest to Oppenheimer. (SAC ¶ 25). Plaintiff notes that “[i]t is unclear from the Proxy whether Grace was included in Oppenheimer's initial outreach[.]” (Id.). Prior to the Merger, Grace was a privately-held rare and orphan disease specialty pharmaceutical company “focused on developing and commercializing products using novel drug delivery technologies.” (Id. at ¶ 20). Specifically, Grace had three “clinical stage assets”: GTX-101, GTX-102, and GTX-104, all intended to treat orphan diseases. (Id.). The Acasti Board met on January 28 and 30, 2021, and further narrowed the review process to Grace, Company B, and Company C. (Id. at ¶ 26; Proxy at 99). Companies D and E were ruled out at this point “for different reasons, including their relatively low valuation of Acasti[.]” (Id. (quoting Proxy at 99)). During this same meeting, the Board determined to increase potential Acasti ownership in a merged entity, due to higher Acasti market capitalization and cash position. (Id. at ¶ 27). If successful in such negotiation, the Board agreed the transaction could be structured as an Acasti acquisition, rather than a reverse merger. (Id.). Thereafter, the Board “[i]nexplicably” (according to Castaldo) approved a 30-day exclusivity agreement with Company C to advance negotiations, despite Company C's proposal contemplating a lower Acasti ownership than the proposals from Company B and Grace. (Id.). Company C and Acasti, however, did not ultimately reach an agreement. (Id.).

Acasti's share price continued to rise, and by February 10, 2021, the company had a market capitalization of $230 million. (SAC ¶ 28). As a result, the finalist companies - Companies B, C, and Grace - renegotiated the transaction from a reverse merger to an Acasti acquisition, whereby Acasti shareholders would hold more than 50% ownership of the merged entity. (Id.). At this point, the Board directed Oppenheimer to “present non-binding acquisition proposals” to the finalists. (Id.).

Grace was the only company willing to accept “substantially all of the key material terms” of Acasti's new proposals. (SAC ¶ 29). On February 19, 2021, Acasti proposed to Grace that Acasti shareholders retain 55% ownership of the merged entity. (Id.). The companies then entered into an exclusivity period from the end of February 2021 to May 6, 2021. (Id.; Proxy at 100-04). On May 7, 2021, Acasti and Grace entered into an Agreement and Plan of Merger, whereby Acasti Pharma U.S. Inc., a wholly-owned subsidiary of Acasti, would be merged into Grace. (SAC ¶ 2).

2. The Proxy Statement and the Consummation of the Merger

On July 15, 2021, Acasti and its Board authorized the filing of a proxy statement with the SEC in order to persuade Acasti shareholders to vote in favor of the proposed merger. (SAC ¶ 3). Plaintiff alleges that the Proxy contained false and misleading statements and omitted material information about “the intrinsic value of Grace and the combined company[.]” (Id. at ¶ 36). Specifically, Plaintiff avers that the Acasti Board failed to disclose to shareholders (i) financial projections prepared by Grace management (the “Projections”); and (ii) “upward adjustments” made to the Projections by Acasti, which adjustments were one factor in the analyses discussed in the fairness opinion issued by Oppenheimer related to the Merger. (Id. at ¶¶ 3, 4, 37; see also Proxy at Annex B (full fairness opinion)). The Projections included ten years of cash flow projections. (Id. at ¶ 39). The Proxy references the Projections, and the fact that Acasti made adjustments to them, at several points. (Id. at ¶ 40 (citing Proxy at 40, 95, 104, 105, 107, 108)).

Oppenheimer's valuation analyses included a Discounted Cash Flow Analysis (the “DCF”) informed by the Projections as adjusted by Acasti. (SAC ¶ 41; Proxy at 111). Oppenheimer's DCF analysis “found substantial value for Grace - up to $227.5 million.” (SAC ¶ 42). But other statements in the Proxy urged caution, and suggested that Grace's prospects were uncertain. (Id. at ¶ 43). For example, the Proxy noted that Grace was “‘unable to predict when, if ever, we will generate revenue and material net cash inflows from the commercialization and sale of any of our product candidates for which we may obtain marketing approval.'” (Id. (quoting Proxy at 188); see also Proxy at 190 (“Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability.”)). Plaintiff alleges that the contrast between the finding of substantial value in the DCF analysis and the more cautious statements in the Proxy necessarily means that Acasti's upward adjustments to the Projections created the illusion of substantial value. (SAC ¶ 45).

Plaintiff alleges that other sections of the Proxy reveal that Acasti made upward adjustments to the Projections. As one example, Acasti “quadrupled the total addressable market for GTX-101” - a Grace product - from $400 million to $1.6 billion by expanding the target indication for the drug. (SAC ¶ 46). This led to new commercialization plans for the drug. (Id. at ¶ 47 (citing Proxy at 47, 178)). Acasti also commissioned a study conducted by Fletcher Spaght, a market research firm, to determine the expanded total addressable market. (Id. at ¶ 50 (citing Proxy at 175); see also Proxy at 174 (Fletcher Spaght chart discussing possible expanded indication for GTX-101)). Acasti did not include the fact that it commissioned the study in the Proxy. (SAC ¶ 50). Plaintiff summarizes his core allegation as follows:

Simply stated, the Defendants allowed the Proxy to incompletely and misleadingly refer to the “adjustments” made to the Grace Management Projections while omitting the fact that the adjustment was a meaningful upward adjustment, and then allowed the Proxy to summarize Oppenheimer's valuation analyses predicated on the unreasonably upward Adjusted Grace Projections, which misled Acasti shareholders about Grace's true value and the fairness of the Merger. The summary of Oppenheimer's DCF Analysis on page 111 of the Proxy was materially incomplete and misleading because it failed to disclose the key facts and metrics that were necessary for shareholders to fully recognize: [i] the illegitimacy of the analyses, i.e., that the Grace Management Projections had been meaningfully and unjustifiably upward adjusted by Acasti; and [ii] how off-base the misleading resulting implied equity value was.

(Id. at ¶ 59).

The Acasti shareholder vote on the Merger took place on August 26, 2021. (SAC ¶¶ 5, 34). At the vote, 79,679,548 Acasti shares were present (id.), satisfying the company's requirement that a quorum of one-third of...