In Re Finjan Holdings, Inc. Securities Litigation

Background

Lead Plaintiff Robert Grier sued Finjan Holdings, Inc., President and CEO Philip Hartstein, and eight former members of Finjan’s Board of Directors. He alleged violations of Sections 14(e) and 20(a) of the Securities Exchange Act of 1934 based on statements in Finjan’s recommendation statement for a tender offer. Fortress Investment Group LLC, through an affiliate, acquired all of Finjan’s stock for $1.55 per share.

Grier alleged that Finjan’s management supplied financial projections to Atlas, Finjan’s financial adviser, for a fairness opinion. Those projections estimated about $160 million in revenue across Finjan’s three business lines from 2020 through 2024. Grier contrasted those projections with a December 2019 investor presentation stating that Finjan expected $200 million to $400 million in licensing and enforcement revenue alone for 2019 through 2022. He claimed that the later projections undervalued Finjan and made the tender offer appear fair when it was not.

The complaint identified four allegedly false or misleading statements: the multiyear projections, Atlas’s discounted-cash-flow analysis based on those projections, statements that the projections were reasonable, and statements that the tender offer was fair. Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim.

Legal standards

The court held that Federal Rule of Civil Procedure 9(b), which requires fraud allegations to be stated with particularity, applied to Grier’s Section 14(e) claim because the claim was based on allegations that defendants knowingly presented false projections, even though a Section 14(e) claim can in some circumstances be based on negligence.

The court did not conclusively decide whether the Private Securities Litigation Reform Act requires a Section 14(e) plaintiff alleging negligence to plead a strong inference of negligence. The court concluded that issue did not need to be resolved because Grier’s claim concerned opinions and therefore required allegations supporting both objective falsity—that the projections were untrue—and subjective falsity—that defendants did not actually believe the projections.

Court’s analysis

The court did not decide whether Grier plausibly alleged objective falsity. It assumed that question need not be resolved because the complaint failed on subjective falsity.

Subjective falsity required Grier to plead facts creating a strong inference that defendants knew the multiyear projections were false while presenting them to Atlas as accurate. The court found that the complaint did not explain why defendants would approve projections they supposedly knew were false. It also found no allegations that defendants would receive benefits unavailable to shareholders if the tender offer succeeded, or that defendants’ interests differed from the shareholders’ interests. The court noted that two independent directors served on the transaction committee and supported the tender offer.

The court also found that the complaint lacked compelling and particularized facts showing fraudulent intent. It pointed to market evidence supporting the $1.55 price, including Party B’s earlier $1.50 offer, Fortress’s offer, the lack of other interested buyers despite Atlas’s marketing efforts, and Atlas’s analyses indicating values that included $1.56 per share and $1.55 per share.

At the hearing, Grier offered a possible motive: management might have preferred the company to become private because employment could be more secure. The court did not consider that theory because it was not alleged in the operative complaint.

Disposition

The court granted defendants’ motion to dismiss. It gave Grier leave to amend his Section 14(e) claim to add allegations supporting a strong inference of subjective falsity, while stating that it was not deciding whether the proposed employment-security allegation alone would be enough. Grier had four weeks from the order’s date to file an amended complaint, and defendants had seven weeks to respond. The order disposed of Docket No. 24.