Case Name: Matt Wolther v. Shubhan Maheshwari, et al.
Case No.: 18-CV-329690 (lead case)

These consolidated putative shareholder class actions arise from alleged misrepresentations and omissions in the Registration Statement issued in connection with the merger of defendant Veeco Instruments, Inc. with Ultratech, Inc. Before the Court is defendants’ demurrer to each cause of action in the Consolidated Complaint, which plaintiffs oppose.

I. Factual and Procedural Background

Veeco designs and manufactures thin film equipment used to make electronic devices including light emitting diodes (“LED”s), micro-electromechanical systems (“MEMS”), wireless devices, power electronics, hard disk drives, and semiconductor devices. (Consolidated Complaint, ¶ 7.) Its products are sold to semiconductor and advanced packaging device manufacturers. (Ibid.) Ultratech is a recognized leader of lithography products for advanced packaging applications and LEDs, and is a pioneer of laser spike anneal technology used to produce semiconductor devices. (Id. at ¶ 26.) It also offers wafer inspection solutions, leveraging its proprietary coherent gradient sensing technology. (Ibid.)

On February 2, 2017, Veeco and Ultratech entered into an Agreement and Plan of Merger, providing that Veeco would acquire Ultratech as its wholly-owned subsidiary. (Consolidated Complaint, ¶ 32.) Pursuant to the merger agreement, Ultratech shareholders would receive, for each of their Ultratech shares, (i) $21.75 in cash, (ii) .2675 of a share of Veeco stock, and (iii) cash in lieu of fractional shares of Veeco common stock. (Id. at ¶ 34.)

A. The Alleged Misrepresentations and Omissions in the Registration Statement

To solicit Ultratech shareholders to vote in favor of the merger, Veeco and its officers and directors prepared, reviewed, and signed a Registration Statement that was filed with the Securities and Exchange Commission on March 13, 2017, as well as an Amendment filed on April 21. (Consolidated Complaint, ¶ 36.) Plaintiffs allege that the Registration Statement was false and misleading in various respects, causing Ultratech shareholders to vote in favor of the merger, which was completed on May 26, 2017. (Id. at ¶ 37.)

Specifically, the Registration Statement/Offering Documents failed to disclose “that Veeco was experiencing delays in orders for its and Ultratech’s advanced packaging business and increased competition in China in Veeco’s MOCVD market, leading to pricing pressure, and that Veeco was already in dispute [sic] with its largest competitor in China, Advanced Micro-Fabrication Equipment Inc. (‘AMEC’), regarding intellectual property and patent infringement, and that these material problems … would adversely affect its rate of growth and financial results.” (Consolidated Complaint, ¶¶ 39, 57.) The Offering Documents falsely stated that no third party had infringed Veeco’s intellectual property, while failing to disclose “that AMEC was only able to gain market share and undercut Veeco’s prices by infringing Veeco’s intellectual property, … that AMEC, which was 25% owned by the Chinese government and thus had significant political and economic pull in China, intended to aggressively retaliate against Veeco in China in response to Veeco’s allegations of intellectual property infringement, and that these significant disputes were likely to continue to erode Veeco’s market share and margins in its key Chinese market.” (Id. at ¶¶ 41-43.) The Registration Statement also touted that Veeco benefits from the regulatory environment in China, while omitting that AMEC was selling Veeco’s technology, which had been stolen by AMEC’s suppliers, and was insulated from this conduct due to its ownership by the Chinese government. (Id. at ¶ 44.) The Registration Statement omitted that “due to the availability of similar technology in part a result of the patent infringement, Veeco’s customers were pursuing dual supplier strategies that were decimating Veeco’s sales.” (Id. at ¶ 46.) These facts were also omitted from Form 8-K filings that included PowerPoint presentations touting the merger and from Veeco’s Annual Report on Form 10-K, all of which were incorporated into the Registration Statement. (Id. at ¶¶ 49-55.)

B. The Events Surrounding the Merger

On April 12, 2017, after contentious private discussions broke down, Veeco filed a patent infringement complaint in the United States District Court for the Eastern District of New York against AMEC’s primary wafer carrier supplier, SGL Carbon, LLC and SGL Carbon SE (collectively, “SGL”), alleging that SGL was infringing Veeco’s patents by making and selling certain wafer carriers to AMEC. (Consolidated Complaint, ¶ 43.) Then, on July 13, 2017—less than three months after the Registration Statement was declared effective—AMEC filed a patent infringement complaint against Veeco Instruments Shanghai Co., Ltd. (“Veeco Shanghai”) with the Fujian High Court in China. (Id. at ¶ 56.)

As Veeco began to reveal the omitted information to analysts and investors following the merger, its stock began to decline. (Consolidated Complaint, ¶¶ 62-73.) On December 7, 2017, Veeco issued a press release disclosing that the Fujian High Court had issued a ruling requiring Veeco Shanghai to stop importing, making, selling, and offering to sell certain products. (Id. at ¶ 74.) By December 8, 2017, just over six months after the merger, Veeco’s stock had declined to $11.90 per share, 62.8 percent less than the merger price, at the same time that the Dow Jones Industrial Average gained 15.96 percent. (Id. at ¶ 61, 75.) Veeco’s stock has never fully recovered and, as of the initiation of this action, traded at approximately $14 per share, an over 56 percent decline from the time of the merger. (Id. at ¶ 76.) By the time the Consolidated Complaint was filed, Veeco was trading at $7-8 per share. (Ibid.)

C. The Proceedings Herein

On June 8, 2018, plaintiff Wolther commenced the first‐filed action against Veeco and its officers and directors in this Court, asserting class claims for violations of sections 11, 12(a)(2), and 15 of the Securities Act of 1933. Two related actions were filed in August and, upon motion by two of the plaintiffs, the Court consolidated the three cases in an order dated November 30, 2018.

On December 11, 2018, plaintiffs filed the Consolidated Complaint, alleging claims for (1) violation of section 11 of the Securities Act, (2) violation of section 12(a)(2) of the Act, and (3) violation of section 15 of the Act. Defendants’ demurrer followed.

II. Legal Standards

1. General Legal Standard Governing Demurrers

The function of a demurrer is to test the legal sufficiency of a pleading. (Trs. Of Capital Wholesale Elec. Etc. Fund v. Shearson Lehman Bros. (1990) 221 Cal.App.3d 617, 621.) Consequently, “[a] demurrer reaches only to the contents of the pleading and such matters as may be considered under the doctrine of judicial notice.” (South Shore Land Co. v. Petersen (1964) 226 Cal.App.2d 725, 732, internal citations and quotations omitted; see also Code Civ. Proc., § 430.30, subd. (a).) “It is not the ordinary function of a demurrer to test the truth of the plaintiff’s allegations or the accuracy with which he describes the defendant’s conduct. … Thus, … the facts alleged in the pleading are deemed to be true, however improbable they may be.” (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 958, internal citations and quotations omitted.)

In ruling on a demurrer, the allegations of the complaint must be liberally construed, with a view to substantial justice between the parties. (Glennen v. Allergan, Inc. (2016) 247 Cal.App.4th 1, 6.) Nevertheless, while “[a] demurrer admits all facts properly pleaded, [it does] not [admit] contentions, deductions or conclusions of law or fact.” (George v. Automobile Club of Southern California (2011) 201 Cal.App.4th 1112, 1120.)

2. The Securities Act

The Securities Act of 1933 protects investors by ensuring that companies issuing securities (known as “issuers”) make a “full and fair disclosure of information” relevant to a public offering. The linchpin of the Act is its registration requirement. With limited exceptions …, an issuer may offer securities to the public only after filing a registration statement. That statement must contain specified information about both the company itself and the security for sale. Beyond those required disclosures, the issuer may include additional representations of either fact or opinion.

(Omnicare, Inc. v. Laborers Dist. Council Const. Industry Pension Fund (2015) 135 S.Ct. 1318, 1323, citations omitted.)

Section 11 of the Act creates a private remedy for any purchaser of a security if any part of the registration statement “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading….” (In re Stac Electronics Securities Litigation (9th Cir. 1996) 89 F.3d 1399, 1403-1404, quoting 15 U.S.C. § 77k(a).) No scienter is required; defendants are liable even for innocent or negligent misstatements or omissions. (Ibid.) “The ‘materiality’ of [a statement or] omission is a fact-specific determination that should ordinarily be assessed by a jury.” (Id. at p. 1405.) Only where “ ‘the adequacy of [any] disclosure or the materiality of the statement is so obvious that reasonable minds could not differ are these issues appropriately resolved as a matter of law.’ ” (Ibid., internal citation omitted.)

Section 12(a)(2) imposes similar liability on sellers of securities for misstatements or omissions in a prospectus, and Section 15 imposes liability on those who “control[ ] any person liable” under Sections 11 and 12. (In re Ply Gem Holdings, Inc. Securities Litigation (S.D.N.Y. 2015) 135 F.Supp.3d 145, 149.) Claims under Sections 11, 12, and 15 may consequently be considered together for purposes of determining whether the statements or omissions at issue are actionable. (Ibid.)

III. Request for Judicial Notice

Defendants’ request for judicial notice of Veeco’s SEC filings (Exs. 1-6 to defendants’ request) is GRANTED with regard to the existence and contents of those filings only. (Evid. Code, § 452, subds. (c) and (h); StorMedia, Inc. v. Superior Court (Werczberger) (1999) 20 Cal.4th 449, 456, fn. 9 [taking judicial notice of the existence of proxy statement and registration statement filed with SEC]; Sosinsky v. Grant (1992) 6 Cal.App.4th 1548, 1564-1568 [court cannot take judicial notice of the truth of hearsay statements or facts set forth in otherwise judicially noticeable documents].) Their request for judicial notice of Veeco’s stock prices between May 26, 2017 and June 8, 2018 as reflected by Yahoo Finance (Ex. 7 to defendants’ request) is also GRANTED. (Evid. Code, § 452, subd. (h); In re Marriage of Brigden (1978) 80 Cal.App.3d 380, 385, fn. 3 [taking judicial notice of a company’s share price].)

Defendants’ request for judicial notice of unpublished trial court orders in other cases (Exs. 8-9 to defendants’ request) is DENIED. (See Cal. Rules of Court, rule 8.1115(a) [unpublished California opinions “must not be cited or relied on by a court or a party in any other action”]; Schachter v. Citigroup, Inc. (2005) 126 Cal.App.4th 726, 738 [a trial court ruling has no precedential value]; Drummond v. Desmarais (2009) 176 Cal.App.4th 439, 448, fn. 4 [“in the absence of some additional showing—such as the conditions for claim or issue preclusion—the actions of other judges are simply irrelevant”].)

Plaintiffs’ request for judicial notice of an additional SEC filing (Ex. A to plaintiffs’ request) is GRANTED, and their request for judicial notice of unpublished trial court orders (Exs. B-D to plaintiffs’ request) is DENIED.

IV. Analysis

Defendants demur to all three causes of action in the complaint on the ground that plaintiffs fail to allege an actionable misrepresentation or omission under Sections 11, 12, and 15. The individual defendants demur to the second cause of action on the ground that plaintiffs fail to allege they are “sellers” under Section 12. Finally, defendants demur to the third cause of action on the ground that a claim under Section 15 must be based on a violation of Section 11 or 12.

A. Actionable Misrepresentations or Omissions

Defendants contend that the complaint challenges forward-looking opinions regarding Veeco’s business outlook, and plaintiffs fail to meet the heightened pleading requirements that apply to such a claim. Plaintiffs contend that the Registration Statement omits disclosures required under Items 303 and 503 of SEC Regulation S-K and otherwise contains misstatements and omissions of material, known facts, not opinions or forward-looking statements.

As noted by defendants, the misrepresentations and omissions alleged by plaintiffs fall into two general categories. First, plaintiffs allege that the Registration Statement failed to disclose “that Veeco was experiencing delays in orders for its and Ultratech’s advanced packaging business and increased competition in China in Veeco’s MOCVD market, leading to pricing pressure” as customers pursued dual-supplier strategies. (Consolidated Complaint, ¶¶ 39, 46, 57(a)-(b).) Second, plaintiffs allege that Veeco failed to disclose an existing intellectual property dispute with a supplier to its largest competitor in China, AMEC, which contributed to these problems. (Id. at ¶¶ 39, 57.) Defendants urge that these risks were disclosed in its 10-K, which was incorporated by reference into the Registration Statement.

While the 10-K discusses general risks associated with competition and intellectual property enforcement, it does not mention Veeco’s developing intellectual property dispute with AMEC or existing problems in the Chinese market of the nature alleged by plaintiff. Defendants characterize these subjects as pertaining to forward-looking opinions; however, plaintiffs clearly allege that these problems and disputes had already materialized by the time the Registration Statement issued. (See, e.g., Consolidated Complaint, ¶¶ 1, 43 [Veeco filed a patent infringement complaint against AMEC’s primary wafer carrier supplier on April 12, 2017, while the Registration Statement was effective April 24], 46 [AMEC’s suppliers’ patent infringement “was materially harming Veeco’s MOCVD equipment sales in China,” and “due to the availability of similar technology in part as a result of the patent infringement, Veeco’s customers were pursuing dual supplier strategies that were decimating Veeco’s sales”], 57 [Veeco “was already experiencing, at the time of the Merger” the undisclosed negative trends in China], 58 [“Veeco saw that it was losing significant market share and sales as a result” of the issues in China].)

Still, to state a claim, plaintiffs must show that these were omissions of material fact “required to be stated … or necessary to make the statements [in the Registration Statement] not misleading….” (15 U.S.C. § 77k(a).) With regard to the first type of liability, plaintiffs urge that Items 303 and 503 of SEC Regulation S-K required the disclosure of the problems in the Chinese market and the dispute with AMEC’s supplier.

Item 303 of SEC Regulation S-K requires the disclosure of “any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” (17 C.F.R. § 229.303(a)(3)(ii); see Steckman v. Hart Brewing, Inc. (9th Cir. 1998) 143 F.3d 1293, 1296 [there is liability under section 11 if a registrant fails to state a material fact required to be stated under Item 303].) To state a claim based on Item 303, the plaintiff must allege “knowledge of an adverse trend,” “material impact,” and “also that the future material impacts are reasonably likely to occur from the present-day perspective” (or already have occurred). (Steckman v. Hart Brewing, Inc., supra, 143 F.3d at p. 1297, italics original.) “The ‘reasonably expects’ language in Item 303(a)(3)(ii) helps distinguish statements of known facts relating to the future, which are mandatory, from forward-looking statements, which are not required. Only when future impacts are ‘reasonably likely to occur’ do they cease to be optional forecasts and instead become present knowledge subject to the duty of disclosure.” (Ibid., citation omitted.)

Here, as already discussed, plaintiffs allege that defendants had knowledge of existing problems in the Chinese market and of a related intellectual property dispute with a supplier to its largest Chinese competitor. This theory is not subject to the Private Securities Litigation Reform Act’s safe harbor for forward-looking statements. (See Mallen v. Alphatec Holdings, Inc. (S.D. Cal. 2012) 861 F.Supp.2d 1111, 1126, aff’d sub nom. Fresno County Employees’ Retirement Ass’n v. Alphatec Holdings, Inc. (9th Cir. 2015) 607 Fed. App’x. 694 [“to the extent Plaintiffs also challenge Defendants’ alleged omission of present facts with respect to the challenged statements, the PSLRA’s safe harbor does not apply”], italics original.) Nor does it sound in fraud, a finding that would call for an analysis defendants do not attempt in their moving papers. (See ibid. at pp. 1123-1124 [to determine whether a complaint sounds in fraud requires a finding that it alleges a unified course of fraudulent conduct and relies entirely on that course of conduct as the basis of a claim]; In re Facebook, Inc. IPO Securities and Derivative Litigation (S.D.N.Y. 2013) 986 F.Supp.2d 487, 506 [heightened pleading standard does not apply in Section 11 and 12(a)(2) claims that do not sound in fraud; applying notice pleading in an Item 303 case]; Schuh v. HCA Holdings, Inc. (M.D. Tenn. 2013) 947 F.Supp.2d 882, 887 [declining to impose “a heightened pleading standard with regard to knowledge” in an Item 303 case; noting that even under Federal Rule of Civil Procedure 9(b), knowledge may be alleged generally]; but see Firefighters Pension & Relief Fund of the City of New Orleans v. Bulmahn (E.D. La. 2014) 53 F.Supp.3d 882, 898 [Item 303 “requires that a plaintiff plead, with some specificity, facts establishing that the defendant had actual knowledge of the purported trend”].) Further, plaintiffs do plead some specifics to support their conclusion that Veeco knew of these trends prior to filing the Registration Statements: for example, the dispute with AMEC’s supplier had progressed to active litigation, and Veeco’s Chief Financial Officer stated a few months after the merger that Chinese customers had been pursuing a dual supplier approach “for a long time” (Consolidated Complaint, ¶ 63).

Defendants do not address the materiality of these circumstances in their moving papers; in any event, this issue should ordinarily be assessed by a jury. (See In re Stac Electronics Securities Litigation, supra, 89 F.3d at p. 1405.) Here, the 10-K itself acknowledges that Veeco “generate[s] a significant portion of [its] revenue in China.” An existing intellectual property dispute with a supplier of a Chinese competitor coupled with material harm to Chinese sales is certainly something that a reasonable investor could deem material. (See ibid.)

For these reasons, the Consolidated Complaint states an actionable claim under Item 303. The Court accordingly need not address plaintiffs’ alternative theories involving Item 503 and statements in the Registration Statement that are allegedly misleading in light of defendants’ omissions. (See PH II, Inc. v. Superior Court (Ibershof) (1995) 33 Cal.App.4th 1680, 1682-1684 [a demurrer does not lie to a portion of a cause of action].)

B. Solicitation Under Section 12(a)(2)

The individual defendants also demur to the second cause of action on the ground that it fails to allege they are “sellers” under Section 12(a)(2). As urged by defendants, the Consolidated Complaint alleges in general terms that the individual defendants are “sellers” because, motivated by their financial interest in Veeco and the merger, they signed the Registration Statement and otherwise solicited Ultratech shareholders to approve the merger. (Consolidated Complaint, ¶¶ 8-17, 89-95.)

As demonstrated by the citations in the parties’ respective briefs, federal authorities have split over whether simply alleging that a defendant signed a registration statement and generally solicited purchasers will suffice to state a claim under Section 12, and no published California authority has addressed the issue. (See Welgus v. TriNet Group, Inc. (N.D. Cal., Jan. 17, 2017, No. 15-CV-03625-BLF) 2017 WL 167708, at *19 [noting that the Ninth Circuit also has not addressed the issue].) The authorities differ in their interpretation of the governing opinion by the Supreme Court of the United States, Pinter v. Dahl (1988) 486 U.S. 622, which serves as the foundation to the Court’s analysis.

Pinter held that Section 12 imposes liability on any person who “offers or sells” a security in violation of the Act, with “offer” defined to include “solicitation of an offer to buy.” (See Pinter v. Dahl, supra, 486 U.S. at 641-643.) It explained that Section 12 liability is not limited to “sellers” who pass title to the buyer because

[t]he solicitation of a buyer is perhaps the most critical stage of the selling transaction. It is the first stage of a traditional securities sale to involve the buyer, and it is directed at producing the sale. In addition, brokers and other solicitors are well positioned to control the flow of information to a potential purchaser, and, in fact, such persons are the participants in the selling transaction who most often disseminate material information to investors. Thus, solicitation is the stage at which an investor is most likely to be injured, that is, by being persuaded to purchase securities without full and fair information.

(Pinter v. Dahl, supra, 486 U.S. at pp. 646-647.)

Pinter also clarified the definition of solicitation by holding it does not include gratuitously urging another to make a particular investment decision solely for the buyer’s benefit: “liability extends only to the person who successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner.” (Id. at p. 647.) It rejected the “substantial factor” test as a basis for Section 12 liability, concluding that “mere participation” in the transaction did not give rise to liability and “Congress did not intend that the section impose liability on participants collateral to the offer or sale,” including “securities professionals, such as accountants and lawyers, whose involvement is only the performance of their professional services.” (Id. at pp. 650-651.)

Among the many cases to address allegations similar to those at issue here following Pinter is In re Charles Schwab Corp. Securities Litigation (N.D. Cal. 2009) 257 F.R.D. 534. The opinion confirmed that “[i]n Pinter, the Supreme Court left little doubt that mere participation in a solicitation or sale will not suffice” to create liability under Section 12. (Id. at p. 549, emphasis original.) “The decision further explained that ‘[t]he “purchase from” requirement of § 12 focuses on the defendant’s relationship with the plaintiff-purchaser.’ ” (Ibid.) Charles Schwab applied those principles to find that allegations that defendants had signed a registration statement, coupled with general allegations of “active[] solicit[ation],” sufficed to state a claim under Section 12:

Plaintiffs alleged more than mere participation. As many courts have found, the registration statement is itself a solicitation document. Although the act of signing a registration statement, alone, may not always suffice, it is at least suggestive of solicitation activity. As stated, the complaint also alleges that defendants “actively solicited the sale of the fund’s shares” and that certain defendants were involved in marketing the fund. Whether or not defendants actually solicited plaintiffs’ sales is a factual question which should generally be left to the jury; at this stage plaintiffs need only satisfy Rule 8(a)’s lenient pleading standards.

(In re Charles Schwab Corp. Securities Litigation, supra, 257 F.R.D. at pp. 549-550.)

This Court agrees with Charles Schwab and finds that allegations that the defendants signed the Registration Statement, generally solicited officers, and were motivated by a financial benefit to themselves and the securities owner suffice to state a claim under Section 12. (See also Craftmatic Securities Litigation v. Kraftsow (3d Cir. 1989) 890 F.2d 628, 637 [Section 12 claim was stated based on general allegations that “[e]ach of the defendants … either sold said securities directly to plaintiffs … or solicited plaintiffs … to buy Craftmatic common stock … and in so acting were motivated by a desire to serve their own financial interests or the financial interests of the owner(s) of Craftmatic securities, and they … conspired with and aided and abetted one another in connection with the preparation of the false and misleading Prospectus and Registration Statement used in conjunction with the sale of Craftmatic securities”].) Notably, Pinter focused on a defendant’s role in “disseminat[ing]” and “control[ling] the flow of information” to purchasers, processes in which the registration statement itself plays a critical role, as well as the defendant’s financial benefit from the sale, which is clearly alleged here.

The individual defendants’ demurrer to the second cause of action accordingly fails.

C. Liability Under Section 15

While their notice of motion indicates that they demur to the third cause of action under Section 15 for failure to plead “control person liability,” defendants urge in their moving and reply briefs that the third cause of action fails simply because no underlying Section 11 or 12 claim is stated. For the reasons already discussed, this argument lacks merit.

V. Conclusion and Order

Defendants’ demurrer is OVERRULED in its entirety.

The Court will prepare the order.