IN RE: ROBERT GRIER, ET AL V. FINJAN HOLDINGS, INC., ET AL, No. 21-16702 (9th Cir. 2023)
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The board of directors of Finjan Holdings, Inc., struck a deal with Fortress Investment Group LLC for Fortress to purchase all Finjan shares. Finjan’s shareholders approved the deal. Shareholder Plaintiff then sued Finjan, its CEO, and members of its board of directors, alleging that revenue predictions and share-value estimations sent by Finjan management to shareholders before the sale had been false and in violation of Section 14(e) of the Securities Exchange Act of 1934. The district court dismissed Plaintiff’s claim.
The Ninth Circuit affirmed the district court’s dismissal. The panel held that to state a claim under Section 14(e), Plaintiff was required to plausibly allege that (1) Finjan management did not actually believe the revenue protections/share-value estimations they issued to the Finjan shareholders (“subjective falsity”), (2) the revenue protections/share value estimations did not reflect the company’s likely future performance (“objective falsity”), (3) shareholders foreseeably relied on the revenue-projections/share-value estimations in accepting the tender offer, and (4) shareholders suffered an economic loss as a result of the deal with Fortress. The district court ruled that the subjective falsity element of Grier’s claim required allegations of a conscious, fraudulent state-of-mind, also called “scienter.”
The panel, however, held that, for Plaintiff’s claim under Section 14(e), scienter was not required, and his allegations need to provide only enough factual material to create a “reasonable inference,” not a “strong inference,” of subjective falsity. The panel held that, nonetheless, Plaintiff’s allegations did not create even a “reasonable inference” of subjective falsity.
Court Description: Securities Fraud The panel affirmed the district court’s dismissal of a securities fraud action alleging the use of false or misleading statements in connection with a tender offer, in violation of § 14(e) of the Securities Exchange Act of 1934. The board of directors of Finjan Holdings, Inc., struck a deal with Fortress Investment Group LLC for Fortress to purchase all Finjan shares. Finjan’s shareholders approved the deal. Shareholder Robert Grier then sued Finjan, its CEO, and members of its board of directors, alleging that revenue predictions and share-value estimations sent by Finjan management to shareholders before the sale had been false. The panel held that, to state a claim under § 14(e), Grier was required to plausibly allege that (1) Finjan management did not actually believe the revenue protections/share-value estimations they issued to the Finjan shareholders (“subjective falsity”), (2) the revenue protections/share- value estimations did not reflect the company’s likely future performance (“objective falsity”), (3) shareholders foreseeably relied on the revenue-projections/share-value estimations in accepting the tender offer, and (4) shareholders suffered an economic loss as a result of the deal with Fortress. GRIER V. FINJAN HOLDINGS, INC. 3 The district court ruled that the subjective falsity element of Grier’s claim required allegations of a conscious, fraudulent state-of-mind, also called “scienter.” Thus, the district court required that Grier’s allegations include enough factual material to create a “strong inference” of subjective falsity, as is required, under the heightened pleading standard set forth in 15 U.S.C. § 78u-4(b)(2)(A), for a claim under § 10(b) of the Securities Exchange Act. The panel, however, held that, for Grier’s claim under § 14(e), scienter was not required, and his allegations need provide only enough factual material to create a “reasonable inference,” not a “strong inference,” of subjective falsity. The panel held that, nonetheless, Grier’s allegations did not create even a “reasonable inference” of subjective falsity. The panel concluded that it was not reasonable to infer from the allegations of the second amended complaint that Finjan management believed that the sale price of $1.55 per share was too low. None of the allegations, standing alone, created a reasonable inference of subjective falsity. Further, even under a holistic review, taking Grier’s factual allegations together, it was not reasonable to infer subjective falsity. Thus, Grier failed to allege a critical element of his § 14(e) claim. The panel therefore affirmed the district court’s dismissal of Grier’s second amended complaint, despite the district court’s erroneous application of a “strong inference” requirement for subjective falsity. 4 GRIER V. FINJAN HOLDINGS, INC.
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