The Ninth Circuit’s recent ruling lowers the bar for shareholders suing acquisition-target companies over financial projections and other opinions, opening a favorable path for plaintiffs and hardening a split among appeals courts.
The Jan. 20 decision in Grier v. Finjan Holdings said shareholders only have to show negligence—not intent to defraud, or scienter—when suing companies for allegedly false “opinions,” such as revenue projections, given during a public offer to buy their shares.
Many shareholders that sue companies in connection with such tender offers focus on company advisers’ opinions that evaluate the fairness of the offered price. Showing there was an intent to defraud can be difficult.
The US Court of Appeals for the Ninth Circuit’s lowering to the “negligence” standard could allow more plaintiffs in the district to get past the initial stage of litigation, attorneys said.
The ruling “could enable some complaints to survive motions to dismiss even if they would have failed” under the heightened pleading standard for cases requiring proof of scienter, Proskauer Rose LLP partner Jonathan Richman wrote in a recent blog post.
The Supreme Court has already indicated interest in tender offer suits after the Ninth Circuit previously deviated from other circuit courts on an underlying issue. The Ninth Circuit hardening its stance could again attract the high court’s attention.
Intent to Defraud
Finjan makes most of its money from licensing and enforcing patents covering cybersecurity technology, according to the ruling. Fortress Investment Group LLC, an investment firm and unit of
Robert Grier, a Finjan shareholder, alleged in a 2020 lawsuit that Finjan management provided stockholders with false revenue predictions and share-value estimations before the sale. The management wanted to create the appearance that the sale price to Fortress was a good bargain for stockholders, he said.
Grier’s main argument was that Finjan violated the Securities Exchange Act’s Section 14(e), which prohibits false or misleading statements in connection with a tender offer.
In dismissing Grier’s complaint, the US District Court for the Northern District of California said Grier must show Finjan had a conscious intent to defraud investors.
The Ninth Circuit disagreed on the standard. Relying on its earlier opinion in Varjabedian v. Emulex, the appeals court said that “Section 14(e) can be satisfied without scienter, even when the statements at issue are statements of opinion.”
That meant Grier needed only to create a “reasonable inference,” rather than a “strong” inference, that Finjan didn’t believe the financial opinions were true.
“We believe the Finjan decision shows the Ninth Circuit reinforcing its original decision in Emulex and staying the course in terms of applying a slightly lower subjective falsity standard,” Ropes & Gray LLP partner Martin Crisp said.
Emulex held that claims under 14(e) only required a showing of negligence, not that the defendants acted with scienter. The Emulex case centered on a chart in a document recommending a merger, while Grier’s case focused on opinions.
Despite the lower standard, the Ninth Circuit upheld the district court’s decision to dismiss Grier’s complaint. The appeals court said his allegation that Finjan’s management thought the sale price was too low wasn’t plausible.
Tender Offer Disclosures
Companies dealing with a tender offer may hire an investment bank to issue a “fairness opinion,” to evaluate the fairness of the price for shareholders. The banks’ opinions can rely on figures provided by company managers, like in Finjan.
The Ninth Circuit’s ruling in Grier v. Finjan provides further guidance on how such disclosures should be treated within the court’s sprawling territory.
“It adds to the existing case law because it gives more analysis and thought to what’s required in these cases to challenge a fairness opinion,” Robbins Geller Rudman & Dowd LLP partner Danielle Myers said.
It’s easier for investors to show negligence—rather than fraudulent intent—when alleging that an opinion is subjectively false. Still, shareholders shouldn’t expect a slam-dunk in the Ninth.
The Finjan ruling was a “rather rigorous” application of the negligence standard by the Ninth Circuit, Paul Hastings LLP partner Scott Carlton said.
And other hurdles could trip up shareholders.
For example, investors alleging fraud must specify times, dates, and other details of the allegedly fraudulent activity. And when investors allege that a company’s opinion is untrue, they must show that the company’s belief was actually untrue—which can be difficult.
No “alarm bells should sound for the defense bar,” said Myers, who represents investors in securities cases, said.
Emulex put the Ninth Circuit on an island. Several other appeals courts have held shareholders in tender offer cases must show the defendants acted with fraudulent intent.
The Supreme Court agreed to review Emulex in January 2019. Emulex argued that scienter was the proper standard but shareholders shouldn’t be able to sue at all over tender offer disclosures. The Trump administration agreed with the company in an amicus brief.
After hearing arguments, the Supreme Court dismissed the case without a decision, finding that it had been “improvidently granted.”
Questions about 14(e) continue to linger, but it’s not clear that Finjan would be a vehicle for the Supreme Court to revisit these issues.
Having won, Finjan may lack motivation to pursue the issue, some attorneys said. And investors might be reluctant to challenge the Ninth Circuit’s opinion, fearing they could lose the Ninth Circuit’s negligence standard in tender offer cases.
But those who want to limit investor suits may be looking for a “second bite at the 14(e) apple given the new composition of the Court,” Georgetown law professor Urska Velikonja said.
To contact the reporter on this story:
To contact the editors responsible for this story: