On March 13, 2021, Judge John G. Koeltl of the Southern District of New York granted a motion to dismiss claims brought under Sections 10b and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b5-1 promulgated thereunder, as well as Sections 11 and 15 of the Securities Act of 1933 (the “Securities Act”), against a Norwegian browser services company (the “Company”), its individual directors, and the underwriters of its initial public offering (the “IPO”). Brown v. Opera Limited et al, No. 1:2020-cv-00674 (S.D.N.Y. Mar. 13, 2020). Plaintiffs alleged that the Company's IPO offering materials contained materially false and misleading statements and omissions, and defendants made false or misleading statements in other documents and analyst calls regarding the Company's market share and entry into the “fintech” market. The Court granted defendants' motion to dismiss plaintiffs' consolidated class action complaint (the “CCAC”), with leave to amend.
Plaintiffs alleged that various filings and statements were misleading because defendants failed to state that the Company's market share was decreasing and that the decline was likely to affect annual revenue. Although plaintiffs conceded that defendants' statements were accurate with respect to revenue figures, they alleged that the Company misleadingly identified itself as a “market leader” despite its “declining market share of the total browser user base, which includes mobile users and PC users.” Plaintiffs also alleged that the Company failed to sufficiently disclose that it was shifting its focus to fintech operations in developing countries, as well as the risk that third-party channel providers could cease to host the Company's fintech services on its platforms, which allegedly occurred when Google cited predatory lending regulations as a basis for discontinuing its relationship with a fintech company partially owned by the Company.
The Court held that the CCAC did not sufficiently allege that “the decrease in market share of the total browser market would have been likely to negatively affect revenue” and accordingly did not adequately plead that the Company “suffered or would have been likely to suffer a decline in revenue.” Moreover, in considering the allegedly misleading statements regarding mobile user statistics, the Court found that the Company sufficiently “cabined the statements to market share of mobile users” and did not make any representations that it led the market for the total user base. The Court further held that plaintiffs failed to plead a material misrepresentation concerning market share because “the ‘truth' was publicly available.” The Court observed that “the very statements that plaintiffs contend are misleading directed investors” to an independent third-party web analytics company for more complete information about user count and market share, thereby “undercutting plaintiffs' argument that the alleged misstatements were material.” The Court also found that statements about the Company's “growth and being a market leader” were statements of “corporate puffery” that were “too general to cause a reasonable investor to rely upon them.”
Turning to plaintiffs' allegations that the Company misleadingly failed to disclose its plans to enter into the fintech market, the Court held that defendants' omissions were not material, because plaintiffs failed to adequately allege that the Company itself was involved in the fintech market at the time of its IPO or that the fintech entity acquired by the Company post-IPO—and in which the Company previously owned a minority share—was a subsidiary of the Company at the time of the IPO. Regarding the risk of third-party channel providers refusing to host the fintech company's services, the Court found that the Company adequately disclosed that “third party channel providers [including Google Play]” could “refuse to continue to provide [their] services to us and our users for any reason,” which could “materially and adversely affect our business.”
The Court further held that plaintiffs failed to sufficiently plead scienter, emphasizing that defendants referred investors to an independent web analytics company concerning user count and market share and that “plaintiffs cannot adequately allege that defendants had access to facts contrary to what they stated,” because the allegedly misleading statements referred to information that was publicly available. The Court also held that plaintiffs failed to adequately plead scienter with respect to the alleged omissions regarding the Company's entry into the fintech market, finding that plaintiffs “failed to point to any specific reports or contrary information that defendants failed to disclose” and that “unproven allegations in another case” cited by plaintiffs “provide no support for an inference of scienter in this case.”
The Court similarly held that plaintiffs failed to sufficiently allege loss causation, noting that the report plaintiffs cited as providing a “corrective disclosure” in fact cited publicly available information and that the Company's disclosures referred investors to that same data. Moreover, the Company disclosed its entry into the fintech market nearly one year before the report cited by plaintiffs was published. Therefore, according to the Court, that report could not “constitute a corrective disclosure sufficient to allege loss causation because it merely analyzed the public data to which the defendants directed investors.”
Finally, the Court dismissed plaintiffs' Section 11 claims as “plaintiffs have failed to show a material misstatement in the Offering documents” and additionally “because the claims are untimely and the defendants have shown that the alleged misstatements did not cause the plaintiffs' alleged loss.” In so holding, the Court noted that courts “have recognized that the negative loss causation affirmative defense in the Section 11 context and the loss causation element of Section 10(b) claims are ‘mirror images'” and that “[b]ecause the allegedly corrective information was already publicly known and referred to in the allegedly misleading statements, those statements could not have caused plaintiffs' loss.”
Because plaintiffs did not adequately plead claims under Section 10(b) of the Exchange Act and Section 11 of the Securities Act, the Court dismissed the control person liability claims under Section 15 of the Securities Act or Section 20(a) of the Exchange Act.
Originally Published by Shearman & Sterling, March 2021
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