Building on its significant appellate victory earlier this year, Pomerantz achieved another important win for investors in the securities class action against tax software company Avalara, Inc., its CEO Scott McFarlane, and Avalara’s Board of Directors.
The plaintiffs allege that Avalara misled investors ahead of an $8.4 billion deal to take the company private. On remand from the Ninth Circuit, Judge Marsha Pechman of the U.S. District Court for the Western District of Washington denied in part the defendants’ renewed motion to dismiss, allowing key claims to proceed and paving the way for discovery.
As previously reported in The Pomerantz Monitor, on March 31, 2025, the Ninth Circuit reversed in part the district court’s dismissal of the plaintiffs’ Section 14(a) and 20(a) claims. The Ninth Circuit held that the plaintiffs’ Second Amended Complaint (“SAC”) adequately alleges that the projections included in Avalara’s Proxy were false and misleading because they improperly excluded inorganic growth from mergers and acquisitions (“M&A”) activity, despite M&A being a significant aspect of Avalara’s growth strategy and a stated ongoing priority for management. Additionally, the Ninth Circuit was persuaded by Pomerantz’s argument that the defendants cherry-picked positive information from a report issued by Institutional Shareholder Services (“ISS”) while failing to disclose that its recommendation of the merger was “cautionary” rather than an unqualified endorsement, and that the report validated scathing criticism of the deal by several large investors.
Following the Ninth Circuit’s decision, the case returned to the district court with three narrow issues remaining: (i) whether the SAC sufficiently alleges subjective falsity and negligence for the Avalara Board members aside from CEO McFarlane; (ii) whether the alleged misstatement concerning the ISS recommendation was material; and (iii) whether the SAC adequately demonstrates loss causation.
On remand, the district court held that the SAC plausibly alleges subjective falsity and negligence as to all of the defendants, crediting allegations that McFarlane had shared with the Board the same data he possessed about Avalara’s projections across nine separate meetings. This included the omission of inorganic growth from the projections and the fact that the Proxy’s narrative of “risks and weaknesses” contradicted management’s own contemporaneous public statements about Avalara’s strong prospects.
The district court further ruled that the SAC sufficiently alleges the materiality of misstatements concerning the ISS recommendation because the Proxy’s selective presentation of ISS’s recommendation could reasonably have led shareholders to wrongly believe that ISS had unequivocally endorsed the merger. The district court ruled that these omissions were significant enough that a reasonable investor would have considered them important in deciding how to vote on the proposed merger.
Finally, the district court held that the SAC adequately alleges loss causation because the $93.50-per-share merger price was significantly below both the $109 target price set by Avalara’s financial advisor, Goldman Sachs, only one month prior, and Avalara’s share price closed at $95.50 per share the day before the merger announcement. The defendants had argued that leaks regarding the impending deal artificially inflated Avalara’s stock price pre-merger announcement. However, the district court rejected that argument, explaining that if the investing public believed Avalara would soon be sold, a $95.50 trading price would reasonably reflect investor expectations that Avalara would command at least that amount in a sale.
Following the plaintiffs’ win in the district court, the case will now proceed into discovery. This latest decision represents another significant step forward for investors seeking accountability.