On March 31, 2025, Pomerantz won a significant victory for investors when the Ninth Circuit Court of Appeals reversed in part Judge Pechman’s (W.D. Wa.) ruling dismissing plaintiff’s Sections 14(a) and 20(a) claims in a securities class action against Avalara, Inc., CEO Scott McFarlane, and the other members of the Avalara Board of Directors. Pomerantz is lead counsel for the class.
Avalara provides cloud-based tax compliance software that automates the routine tax work traditionally performed by a company’s tax or legal department. Instead of independently researching tax rules, manually computing taxes, and submitting individual checks to numerous jurisdictions, Avalara’s customers make a single ACH payment to a single account, and Avalara’s system then handles the tax returns and remittances. Additionally, Avalara is expanding into related business services such as regulatory compliance and e-invoicing.
Plaintiffs’ second amended complaint (“SAC”) alleges that for well over a year before announcing Avalara’s merger with Vista Equity Partners Management, Avalara’s senior executives publicly conveyed extraordinary optimism regarding the company’s future potential, which they backed up with hard data. For example, they provided numeric substantiation for their positive statements and touted Avalara’s expected international growth due to diversification of its customer base and government mandates requiring e-invoicing, Avalara’s insulation from macroeconomic risk due to its business model, and its stellar growth and opportunities in upsell bookings. Avalara’s senior management did not voice or even allude to any concerns that Avalara faced any challenges, weaknesses, or likely risks that would negatively impact or in any way stall the company’s exceptional growth in the coming years.
Despite the strength of Avalara’s fundamentals and its consistently stalwart growth from strategic acquisitions, both organically and inorganically, plaintiffs allege that defendants agreed to and subsequently recommended to shareholders a deficient deal price for the merger. The merger share price was depressed from macroeconomic trends rather than from the company’s actual robust performance or prospects. In fact, the $93.50 per share price defendants agreed upon with Vista fell 17% below the $109 target price set only a month prior by Goldman Sachs (“Goldman”), the financial advisor that issued the fairness opinion for the merger.
To solicit shareholder approval of the inadequate and unfair price at which it had agreed to sell Avalara to Vista, the Board presented a narrative in the Proxy that was completely inconsistent with Avalara senior management’s particularized optimistic public statements for the exact same timeframes, and, to a reasonable investor, would appear to describe an entirely different company.
Plaintiffs allege that, to legitimize the artificially depressed projections Avalara provided to financial advisor, Goldman so it could justify the low price Vista paid to Avalara shareholders, the Proxy painted a falsely pessimistic picture of operational challenges and weaknesses, failing partnerships, and decelerating growth. It also included inaccurate revenue projections—which Goldman relied upon in deeming the deficient merger price fair—that did not factor in inorganic growth from M&A activity even though acquisitions had always been a material part of Avalara’s growth story and management made clear that they would continue to be part of the company’s DNA going forward.
The SAC also alleges that defendants issued a misleading Schedule 14A, touting that Institutional Shareholder Services (“ISS”) had recommended the merger but omitting that the ISS explicitly stated that its recommendation was cautionary and made clear that it found scathing criticism of the deal by several large investors to be credible.
The district court dismissed plaintiffs’ case against Avalara, ruling that the SAC had not alleged objective falsity as to any of defendants’ misstatements. The court based its ruling on, among other things, inferences drawn in defendants’ favor, resolutions of questions of fact that should not have been addressed at the pleading stage, and findings of “puffery”—vague, optimistic statements that a reasonable investor would not rely on when making investment decisions—even though each alleged misstatement included or accompanied hard metrics.
The district court also ruled that the SAC had not alleged subjective falsity or negligence as to any defendant except for CEO defendant McFarlane. However, the court conceded that the SAC had plausibly alleged that McFarlane had transmitted all the same data he possessed, which underpinned the finding of subjective falsity as to him, to the other director defendants during nine separate meetings.
The Ninth Circuit reversed the district court’s ruling in part. It found that the district court had erred in ruling that the omission of inorganic growth from the projections was not objectively false or misleading because the SAC claimed that “acquisitions have always been a material part of Avalara’s growth story and management made clear that they would continue to be a part of the Company’s DNA going forward;” the SAC “underscore[d] how Avalara had always included inorganic growth in its guidance, and when it did not, it “explicitly stated as such;”” and the SAC included “uncontested allegations that Avalara acquired “twenty eight companies from 2007 to 2021, including twelve between 2018 to 2021.” The Court stated that the “plethora of particularized allegations plausibly suggests that the omission—and the lack of notice about such omission—could materially mislead a reasonable investor.” The Ninth Circuit concluded that “Requiring more detail than those presently alleged would transform the PSLRA’s formidable pleading requirement into an impossible one.”
The Ninth Circuit also found that the district court had erred in holding that statements about the ISS recommendation were not objectively false and misleading because defendants had omitted numerous statements from the ISS report demonstrating “that ISS’s recommendation was not as approbatory as Avalara touted. … Indeed, it was “cautionary.” The Ninth Circuit rejected defendants’ argument that certain of the unfavorable excerpts had been included in a separate SEC filing by a third party because “Ordinarily, omissions by corporate insiders are not rendered immaterial by the fact that the omitted facts are otherwise available to the public.”” The Court further rejected defendants’ argument that it is true that ISS did in fact issue a recommendation for the sale because “statements literally true on their face may nonetheless be misleading when considered in context.”
Furthermore, the Ninth Circuit confirmed that the district court’s “meticulous analysis” was correct that the PLSRA safe harbor does not apply to statements regarding the preparation of the projections because “statements that the projections were “prepared on a reasonable basis” or “reflected the best currently available estimates and judgments” are “not forward looking.” They are instead statements about the preparation of, and basis for, the projections that incorporated then existing, verifiable facts.”
Pomerantz continues to vigorously pursue plaintiffs’ securities claims against Avalara.