Corporate Counsel Daily, SaaS company’s shareholders didn’t show proxy omissions were misleading, but they can replead, (Apr 9, 2025)

By Rebecca E. Hoffman, J.D.

The proxy statement omitted that the company beat guidance as to three key metrics in two quarters, but the plaintiffs did not adequately claim that the omissions were important in deciding how to vote.

The Northern District of California April 8 granted in large part—but with leave to amend—a motion to dismiss a putative shareholder class action, in which the plaintiffs claim that Sumo Logic, Inc. left out of its pre-merger vote proxy that the company had beaten guidance as to three key metrics, and that these omissions gave the shareholders the wrong idea about the company’s performance, thus swaying the vote (Michel v. Sumo Logic, Inc., No. 23-cv-03665 (N.D. Cal. Apr. 8, 2025)).

The court determined that the plaintiffs had not adequately alleged that the omissions were misleading or that the CEO acted with negligence. Claims pertaining to other alleged misrepresentations and omissions were dismissed in an earlier hearing, and the order here is based on the ensuing amended complaint.

Acquisition offers. The plaintiffs are common stock owners of Sumo Logic, a software-as-a-service company. Its initial public offering was in September 2020, closing at $22 per share, and Francisco Partners Management, L.P., first offered to acquire Sumo in June 2022, the court explained. Sumo exceeded the publicly disclosed guidance on total revenue, non-GAAP operating margin, and non-GAAP net loss per share for Q2, Q3 and Q4 of fiscal year 2023, and over that period, Francisco increased its bid several times, while other potential acquirers made offers. Sumo and Francisco signed a merger agreement in February 2023, after agreeing on a share price of $12.05.

Sumo filed a proxy with the SEC in April of that year, making shareholders aware of the merger. The proxy stated that in deciding how to vote, shareholders should rely only on what was in the proxy, or what was incorporated by reference, which did not include Form 8-Ks discussing Sumo’s results in Q2, Q3, or Q4. The merger closed on May 12, 2023, netting nearly $43 million for the CEO.

Missing from the proxy. The plaintiffs alleged that the proxy reflected that Sumo beat guidance on the three metrics in Q2, but “misleadingly omitted” that it had also done so in Q3, which would make shareholders think that the company’s performance and prospects had deteriorated in that quarter. The proxy also stated that the company’s financial results for Q4 were below its internal forecast and analyst estimates of the performance on new annual recurring revenue, without stating that the company beat guidance, and the plaintiffs alleged that this would cause shareholders to wrongly think there was further deterioration in Q4. The plaintiffs asserted that the company and its CEO violated Exchange Act Sections 14(a) and 20(a).

The court determined that the plaintiffs’ Section 14(a) claim alleged fraud, implicating Fed. R. Civ. P. 9(b)’s requirement that they state the circumstances with particularly. “Specifically,” the complaint stated that the CEO “engaged in self-dealing and mismanagement when he ‘solicited shareholders’ to accept an ‘undervalued price’ via a misleading proxy statement and his actions were motivated by a ‘massive and personally transformative cash payday,’” the court said.

The court went on to find that, as in the first dismissal order, the plaintiffs did not adequately plead negligence. The complaint did not reveal why the CEO should have known that the alleged omissions were false, given his knowledge that the ARR growth was trending down and the Q4 results were below the company’s internal forecast. “Plaintiffs have failed to allege why … a reasonably prudent CEO would have recognized that omitting that Sumo Logic beat guidance on the three metrics concerning Sumo Logic’s performance in Q3 and Q4 2023 would be misleading when [the CEO] and Sumo Logic had publicly announced a declining growth rate in ARR.”

Materially misleading? The guidance-beat situation in the latter two quarters was omitted from the proxy, the court acknowledged, but the plaintiffs were required to show that the proxy omitted a material fact that would have made the statements not misleading. The plaintiffs alleged that shareholders would assume from the omissions that the Q3 results did not beat guidance, and that performance was poor in Q4. However, the court said, “there is no doubt that Sumo’s internal guidance, based on ARR, showed a slowing of revenue growth.”

“Further, Sumo’s Q3 and Q4 financial results were publicly available in Sumo’s regularly filed 8-K reports—which are regularly relied upon and reviewed by reasonable investors,” the court observed. The Form 8-Ks and earning call transcripts were part of the “total mix” of information on which the shareholders could base their voting decisions. “While the Proxy instructed the shareholders to ‘rely only on the information contained or incorporated by reference’ in the Proxy, … Plaintiffs have not adequately alleged that a reasonable shareholder would not have been aware of the guidance beat when voting their shares,” the court concluded.

The court also granted the defendants’ motion to dismiss the plaintiff’s Section 20(a) claim against the CEO, which requires an underlying violation, but denied the motion as to the defendants’ claim that the plaintiffs failed to plead loss causation.

The case is No. 23-cv-03665.

Judge: Freeman, B.

Attorneys: Juan E. Monteverde (Monteverde & Associates PC) for Joseph Michel, Armin Wasicek, Devendra Modium and Ranjit Kapil. Anna Terteryan (Kirkland & Ellis LLP) for Sumo Logic, Inc. and Ramin Sayar.

Companies: Sumo Logic, Inc.; Francisco Partners Management, L.P.

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