Nash v. Qualtrics Int'l

1

LEONARD W. NASH, an individual, Plaintiff, v. QUALTRICS INTERNATIONAL INC., a Delaware corporation formerly known as CLARABRIDGE, INC., BAS BRUKX, an individual, KARL KNOLL, an individual, and MARK BISHOF, an individual, Defendants.

Civil Action No. 23-596-GBW-SRF

United States District Court, D. Delaware

January 22, 2024

REPORT AND RECOMMENDATION

SHERRY R. FALLON, UNITED STATES MAGISTRATE JUDGE.

Presently before the court in this securities action for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) is a motion to dismiss for failure to state a claim under Rule 12(b)(6), filed by defendants Qualtrics International Inc. (“Qualtrics”), f/k/a Clarabridge, Inc. (“Clarabridge”), Bas Brukx, Karl Knoll, and Mark Bishof (collectively “Defendants”).^[1] (D.L 9) For the following reasons, I recommend that the court GRANT-IN-PART the motion to dismiss.

I. BACKGROUND

Plaintiff Leonard W. Nash (“Plaintiff”) is a former senior executive of Clarabridge and was a key holder of 357,392 shares of preferred Clarabridge stock. (D.L 1 at ¶¶ 1,16) After analyzing his securities portfolio in connection with his retirement planning, Plaintiff contacted Clarabridge's Chief Financial Officer (“CFO”), Bas Brukx, on November 10,2020 to request a telephone call regarding Clarabridge's financial performance and prospects. (Id. at ¶¶ 20-22) During the ensuing call on November 13 Brux indicated that Clarabridge's value was in the range of $300 million to $350 million. (Id. at ¶ 24) When Plaintiff asked if there was a pending sales process with potential acquirers or if Clarabridge had retained bankers to sell the company, Brux did not disclose that Clarabridge had begun sales discussions with Qualtrics. (Id. at ¶¶ 2426)

After the call, Brukx conferred with Clarabridge's CEO, Mark Bishof, and referred Plaintiff to Sanju Bansal, a member of Clarabridge's Board of Directors, as someone who might be interested in acquiring Plaintiff's preferred stock. (Id. at ¶¶ 27-29) On November 16, 2020, Plaintiff offered to sell his stock to Bansal for $7.50 per share, and Bansal countered with an offer of $6.30 per share three days later. (Id. at ¶¶ 30-34) At no time during this exchange did Bansal disclose that Clarabridge was involved in sales discussions with Qualtrics. (Id.)

On December 15, 2020, Plaintiff gave notice to other key holders of Clarabridge stock that he intended to sell his shares to Bansal for $6.30 per share. (Id. at ¶ 38) Two days later, Clarabridge's general counsel, Karl Knoll, called Plaintiff's attorney, Michael Schwamm, to give unofficial notice that Clarabridge would exercise its right of first refusal (“ROFR”) to purchase Plaintiff's preferred stock on the same terms offered by Bansal. (Id. at ¶ 39) Schwamm asked Knoll if Clarabridge had been engaged in sales discussions in the last six months, and Knoll represented that it had not. (Id. at ¶ 40) Brukx formally notified Plaintiff of Clarabridge's intent to exercise its ROFR to purchase Plaintiff's stock on December 24,2020, and Brukx and Knoll confirmed to Schwamm that Clarabridge was not involved in a sale process and was not holding a letter of agreement (“LOA”). (Id. at ¶¶ 41-44)

Knoll circulated a draft Stock Repurchase Agreement (the “Agreement”) which contained a “big boy” provision stating that “[t]he Holder hereby acknowledges that Holder has not relied on any representation or statement of the Company in making Holder's investment decision to sell the Shares and acknowledges that the Company has no duty or obligation to provide such Holder any such information,” waiving and releasing any claims against Clarabridge “with respect to the nondisclosure of the Non-Public Information in connection with the sale of the Shares and the transactions contemplated by this Agreement.” (Id. at ¶ 45) On December 28, Schwamm proposed a revision to the Agreement stating that “[t]he Company is not actively engaged in negotiations with respect to the sale of all or a significant amount of the securities or assets of the Company ... nor has it received within the prior six months or reasonably expects to receive within the next six months an indication of interest, letter of intent, or similar document with respect to a Sale of the Company.” (Id. at ¶¶ 46-47) Knoll rejected the inclusion of Schwamm's proposed language in the Agreement, writing “Michael, thanks, but to be clear, I told you I could tell you that, but we wouldn't' provide a company rep to that effect in the document. We wouldn't include something that undermines in any way the big boy reps that our board is requiring[.]” (Id. at ¶ 48)

On January 4,2021, Plaintiff sold his preferred stock to Clarabridge at a price of $6.30 per share. (Id. at ¶ 51) On July 29,2021, Qualtrics announced that it had entered into an agreement to purchase Clarabridge for $1,125 billion, or about $22 per share. (Id. at ¶ 52) Two weeks later, Clarabridge's CEO, Mark Bishof, held a shareholder meeting in which he disclosed that he “had been talking probably for over a year now in earnest” about the sale of Clarabridge to Qualtrics. (Id. at ¶¶ 53-54)

Plaintiff brought this suit against Defendants on May 31,2023, seeking recovery of damages incurred as a result of Defendants' alleged misrepresentations about the value of Plaintiffs preferred stock. (D.L 1) Defendants moved to dismiss the complaint on July 27, 2023. (D.L 9) The motion is fully briefed and ripe for resolution.

II. LEGAL STANDARDS

A. Rule 12(b)(6)

Rule 12(b)(6) permits a party to seek dismissal of a complaint for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). To state a claim upon which relief can be granted pursuant to Rule 12(b)(6), a complaint must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). Although detailed factual allegations are not required, the complaint must set forth sufficient factual matter, accepted as true in the light most favorable to the plaintiff, to “state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); see also Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009). A claim is facially plausible when the factual allegations allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Iqbal, 556 U.S. at 663; Twombly, 550 U.S. at 555-56.

The court's determination is not whether the non-moving party “will ultimately prevail,” but whether that party is “entitled to offer evidence to support the claims.” In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410,1420 (3d Cir. 1997) (internal citations and quotation marks omitted). This “does not impose a probability requirement at the pleading stage,” but instead “simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of [the necessary element].” Phillips v. Cty. of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008) (quoting Twombly, 550 U.S. at 556). “[A] complaint may not be dismissed merely because it appears unlikely that the plaintiff can prove those facts or will ultimately prevail on the merits.” Id. at 231.

B. Rule 9(b) and the Private Securities Litigation Reform Act

Claims for securities fraud are subject to the heightened pleading requirements of Rule 9(b) and the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Institutional Invs. Grp. v. Avaya, Inc., 564 F.3d 242, 253 (3d Cir. 2009). Under Rule 9(b), a plaintiff alleging securities fraud must “state with particularity the circumstances constituting fraud or mistake,” including “the ‘who, what, when, where and how' of the events at issue.” Fed.R.Civ.P. 9(b); In re Rockefeller Center Prop. Sec. Litig, 311 F.3d 198, 217 (3d Cir. 2002) (quoting In re Burlington Coat Factory, 114 F.3d at 1422). The heightened pleading standard of the PSLRA requires a plaintiff to (1) “specify each statement alleged to have been misleading and the reason or reasons why the statement is misleading;” and (2) “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321 (2007) (internal citations and quotations omitted).

III. DISCUSSION

A. Securities Fraud Under Section 10(b) and Rule 10b-5

Count I of the complaint is brought under Section 10(b) of the Exchange Act, which makes it unlawful “to use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe[.]” 15 U.S.C. § 78j(b). Rule 10b-5 implements Section 10(b) and makes it unlawful:

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. § 240.1 Ob-5. Plaintiff alleges that the complaint asserts liability under each of the three subsections of Rule 10b-5. (D.L 18 at 9-19)

1. Material misstatement or omission under Rule 10b-5(b)

To state a claim for violation of Section 10(b) of the Exchange Act and Rule 10b-5(b), a plaintiff must plead “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the...