This week, the Court addresses the pleading standard for a claim of false or misleading statements in connection with a tender offer under Section 14(e) of the Securities Exchange Act of 1934.
The Court holds that Section 14(e) does not require a heightened pleading standard of a “strong inference” of subjective falsity, but that the plaintiff failed to satisfy even the more lenient standard of a “reasonable inference” of subjective falsity.
The panel: Judges Hawkins, Bea, and Nguyen, with Judge Bea writing the opinion.
Key highlight: “Because an author could negligently state an opinion in which he does not subjectively believe, subjective falsity does not necessarily require scienter. Thus, Section 14(e) can be satisfied without scienter, even when the statements at issue are statements of opinion.”
Background: Finjan Holdings, Inc. (“Finjan”) is a publicly traded company that develops security technologies for mobile devices. In 2018, Finjan’s board of directors (“the Board”) initiated a process to explore the possibility of selling Finjan to another entity. In 2020, the Board approved an agreement to sell Finjan to Fortress Investment Group, LLC for $1.55 per share. The Board hired Atlas Technology Group LLC (“Atlas”), a technology-focused investment bank, to prepare an opinion for shareholders about the fairness of the sale. Atlas concluded that the sale price of $1.55 per share was within the reasonable range of estimated share values. The Board provided shareholders a statement that incorporated Atlas’s assessment of share value estimates, concluded that the share value estimates were reasonable, and recommended that shareholders approve the sale. Finjan shareholders approved the sale, which occurred in June 2020.
Plaintiff Robert Grier, a then-shareholder of Finjan, filed a class action against the Board. Grier alleged that the Board had violated Section 14(e) of the Securities Exchange Act of 1934, which prohibits any person from “mak[ing] any untrue statement of material fact . . . in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request, or invitation.” 15 U.S.C. § 78n(e). When the alleged false statement is an opinion, Section 14(e) can only be satisfied under special circumstances. One such circumstance is “subjective falsity”—that is, when the speaker did not actually believe the statement he or she made. In this case, Grier alleged that the Board did not actually believe that the sale price or Atlas’s estimate of Finjan’s share value was reasonable. Grier claimed that the Board undervalued Finjan’s shares in order to deceive shareholders into believing that the sale price was a good bargain and approving the sale.
The district court dismissed the complaint. It applied three heightened pleading standards to subjective falsity: Federal Rule of Civil Procedure 9(b), Section 4(b)(1) of the Private Securities Litigation Reform Act (“PSLRA”), and Section 4(b)(2) of the PSLRA. Rule 9(b) and Section 4(b)(1) require particularity with respect to allegations of fraud or untrue statements of material fact. Section 4(b)(2), however, requires more. It states: “[I]n any private action arising under [the Securities Exchange Act] in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall . . . state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A). The district court held that Grier failed to satisfy Section 4(b)(2) because he did not plead facts sufficient to support a “strong inference” of subjective falsity.
Result: The Ninth Circuit affirmed but applied a different pleading standard than the district court. The Ninth Circuit agreed that Federal Rule of Civil Procedure 9(b) and Section 4(b)(1) applied to the claim and required particularity. The Ninth Circuit disagreed, however, with the district court’s application of Section 4(b)(2). That provision only requires a “strong inference” of subjective falsity to causes of action containing a “scienter” element—that is, causes of action that require a particular state of mind. Following an earlier case, Varjabedian v. Emulex Corp., 888 F.3d 399 (9th Cir. 2018), the Ninth Circuit held that a claim of false or misleading statements in violation of Section 14(e) does not require scienter. It reasoned, for example, that a speaker could negligently state an opinion that he or she did not subjectively believe. Such a statement would violate Section 14(e) even though it lacked scienter. Therefore, the Ninth Circuit concluded that Section 4(b)(1) did not apply to claims under Section 14(e), so Grier did not need to plead a “strong inference” of subjective falsity in order to state a claim. He needed only to plead facts sufficient to create a “reasonable inference” of subjective falsity.
The Ninth Circuit nonetheless affirmed the district court’s dismissal because it held that Grier had failed to satisfy even the less stringent “reasonable inference” standard. Finjan had contacted over fifty parties during the sale process, and $1.55 per share was the best final offer it had received. The Ninth Circuit noted that this was a very strong indication that the price was a fair value. On the other side, the Ninth Circuit identified only two facts that tended to support Grier’s claim that the share price was undervalued: (1) that pre-COVID open-market share prices were higher, and (2) that the Board’s December 2019 revenue projections were higher than its projections for 2020 to 2024. The Ninth Circuit held, however, that these facts were not sufficient to support a reasonable inference that the Board did not subjectively believe that the $1.55 share price was reasonable. The Ninth Circuit pointed out that the pandemic had affected Finjan’s business, so pre-COVID values and projections carry little weight. Accordingly, the Ninth Circuit concluded that Grier had failed to state a claim under Section 14(e).