On September 13, 2021, Judge Edward M. Chen of the United States District Court for the Northern District of California dismissed with prejudice a putative class action against a cybersecurity company (the Company") and its CEO for violations of Section 14(e) and 20(a) of the Securities Exchange Act of 1934.  In re Finjan Holdings, Inc. Sec. Litig., No. 20-cv-04289 (N.D. Cal. Sep. 13, 2021).  Plaintiff alleged that defendants made material misrepresentations about the value of the Company in connection with the sale of the Company through a tender offer (the "Merger") and that the CEO was motivated by his desire to retain his position at the Company.  The Court dismissed the claims, holding that (i) the sales process indicated that the offer price reflected the market value of the Company's stock, and (ii) plaintiff failed to present particularized evidence that the CEO had a motive to mislead shareholders.

The Merger was the culmination of the Company's exploration of strategic alternatives, which began in March 2018 and lasted over two years.  The sales process included, among other things, the Company's financial advisor reaching out to more than 50 parties to explore a potential transaction and entering into confidentiality agreements with 11 of those parties, five of which proceeded with due diligence.  Ultimately only two parties-the acquiring company ("the Acquiror") and another strategic acquiror ("Party B")-remained interested.  Both the Acquiror and Party B made competing offers with different transaction structures, in the range of $3.00 to $3.40 per share, which offers were subsequently lowered after further due diligence.  After a series of negotiations with both parties-including a pause in the discussions as the Company briefly decided to continue as an independent entity-the Company's Board unanimously approved a merger agreement with the Acquiror at $1.55 per share, and recommended that shareholders tender their shares.  The Merger was consummated in July 2020.

Plaintiff's claims-amended once after dismissal for failure to allege subjective falsity-were based on select portions of the Form Schedule 14D-9 (the "Recommendation Statement") that was disseminated to the Company shareholders prior to their making a decision on whether to tender their shares in the offer.  Specifically, plaintiff claimed that defendants' statement that the offer of $1.55 per share was reasonable based on the Company's then-current revenue projections was false and that, just six months earlier, defendants had stated that they expected to generate greater revenue than the projections on which the Recommendation Statement was based.  Plaintiff also claimed that the CEO had a motive to make misrepresentations undervaluing the Company because the Merger, as compared to a combination with another bidder, presented an opportunity for the CEO to continue "his lucrative position, with the 'obvious benefits [of] leading a private company, including avoiding strict formalities, legal requirements, and oversight that come with serving as the CEO of a publicly traded corporation.'"  In support of these allegations, plaintiff pointed to statements in the Recommendation Statement describing the sales process in which Party B sent a letter criticizing the sales process and expressing its desire to deal directly with the Company's Board.

As an initial matter, the Court noted that plaintiff had selectively focused on certain events of the sales process described in the Recommendation Statement while ignoring others.  Upon considering the full contents of the Recommendation Statement under the incorporation-by-reference doctrine, the Court dismissed the complaint, holding that it had "serious doubts" as to whether plaintiff sufficiently alleged objective falsity and that plaintiff had failed to allege subjective falsity.

First, the Court stated that it "continue[d] to have serious questions as to whether [plaintiff has] sufficiently alleged objective falsity."  Although plaintiff claimed that the offer of $1.55 per share undervalued the Company, it did not dispute that Party B's offer was similar, at $1.50 per share.  Moreover, those bids were a result of a "true and tested sales process" that was described in the Recommendation Statement-including the continued negotiations with two competing potential acquirors, each of which knew about the competitor-and thus suggested that the valuation was "reflective of true market value" rather than "mere happenstance."  The Court, however, did not reach a definitive ruling because it found that plaintiff failed to plead subjective falsity.

Next, the Court held that plaintiff had failed to allege subjective falsity, and that the allegations in the amended complaint regarding the CEO's purported motive to undervalue the Company was "of no help."  Plaintiff had conceded that the "golden parachute of approximately $1 million" that was alleged as a purported motive only would be available if the CEO was terminated in certain circumstances, which undermined plaintiff's claim that the CEO was motivated to undervalue the Company in favor of the Acquiror's bid to continue his position post-Merger.  Moreover, there were no factual allegations to support plaintiff's allegation that Party B's criticism of the process and desire to deal directly with the Company Board was directed to the CEO individually, rather than the management generally, the committee formed to evaluate strategic alternatives, or the Company's counsel.  Finally, plaintiff's claim that the CEO stood to gain $310,000 from the accelerated vesting of equity grants was equally insufficient.  Not only was that benefit available to all restricted stock unit (RSU) holders, but the benefits of such grants also would be increased by a higher tender offer and it would have been contrary to the CEO's financial interest in the RSUs to undervalue Company shares.

Because the Court had previously given plaintiff an opportunity to amend its complaint to address the deficiency in its allegations of subjective falsity and those deficiencies remained, the Court dismissed the complaint with prejudice.

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