Altimeo Asset Management v. Jumei International Holding Limited

Background

This proposed securities-fraud class action arose from Jumei’s 2020 buyout by its chief executive officer, Leo Ou Chen. Altimeo Asset Management, the court-appointed lead plaintiff, sued Jumei, members of its board, and Chen under Sections 10(b), 14(e), and 20(a) of the Securities Exchange Act of 1934.

Altimeo alleged that Jumei’s recommendation of Chen’s $2-per-share tender offer falsely or misleadingly described the offer as fair and in shareholders’ best interests. According to Altimeo, the financial analysis supporting that recommendation used understated projections for Jiedian, Jumei’s power-bank-sharing business, and improperly assumed that Jumei would wind down its e-commerce and short-video businesses. Altimeo also alleged that Jumei’s merger documents incorrectly stated that minority shareholders would not have appraisal rights under Cayman Islands law in a short-form merger.

Motions and Legal Standards

Jumei filed two motions to dismiss: one addressing the First Amended Class Action Complaint and another addressing new allegations and claims in the Second Amended Class Action Complaint. The court considered the motions under Rule 12(b)(6), which permits dismissal when a complaint does not adequately state a legally actionable claim. Securities-fraud claims also had to satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act. Those requirements demanded particular facts supporting the alleged misleading statements, the defendants’ required state of mind, and the causal connection between the alleged misconduct and the claimed loss.

For a Section 10(b) claim, the required state of mind is scienter—meaning intentional misconduct or deliberate recklessness. Section 14(e), which governs misleading statements or omissions connected with tender offers, requires negligence rather than scienter under Ninth Circuit precedent. Both types of claims nevertheless require adequate pleading of loss causation, meaning a causal connection between the alleged deception and the plaintiff’s economic loss. A Section 20(a) claim for control-person liability depends on an underlying securities-law violation.

Scienter

The court held that Altimeo failed to plead facts creating the required strong inference of scienter for its Section 10(b) claims. The allegations against Special Committee members Sean Shao and Adam Zhao relied mainly on motive, opportunity, their compensation, and their alleged dependence on Chen. The court found those allegations conclusory and insufficient, particularly because the compensation was not alleged to depend on their recommendation and the complaint did not identify specific information showing that they knew the challenged assumptions were false.

The court also found that the complaint contained no concrete allegations against directors Zhenquan Ren and Mang Su. As to Chen, the court explained that the fairness opinion was issued by the Special Committee and Board, not by Chen personally. Chen was on the buyer’s side of the transaction, and the complaint did not adequately allege that he participated in preparing the Recommendation Statement or exerted specific improper influence over the Board. The court therefore granted Jumei’s motion to dismiss the Section 10(b) claims and dismissed the derivative Section 20(a) claims as well.

The court separately found that the appraisal-rights allegations did not create a strong inference of scienter. A Cayman Islands trial court later held that appraisal rights were available in short-form mergers, but that decision apparently addressed an issue of first impression and came about a year after Jumei’s statements. The court found the more plausible inference was that the defendants believed their interpretation of the Cayman statute was correct, especially because the merger documents included the statutory text.

Negligence Under Section 14(e)

The court declined to definitively rule on whether Altimeo adequately pleaded negligence under Section 14(e). It described that issue as close but identified pleading problems, including Altimeo’s tendency to refer to the defendants collectively rather than specify how each defendant failed to act with reasonable prudence. The court also noted Jumei’s arguments that the Special Committee conducted a substantial review, met repeatedly with its advisers, and considered more than 30 factors before recommending the transaction.

Loss Causation

The court held that Altimeo failed to plead loss causation for both its Section 10(b) and Section 14(e) claims. Altimeo’s theory was that shareholders received less than the shares’ true value because misleading statements caused them to accept Chen’s offer. The court found that theory speculative. Much of the information Altimeo cited to show that Jumei was worth more than $2 per share was publicly available, while the stock had traded below $2 before the offer and the offer represented about a 15 percent premium over the contemporaneous market price.

The absence of competing buyers also weakened Altimeo’s theory that the company was substantially undervalued. The court relied on Ninth Circuit precedent rejecting a similar theory in which shareholders claimed they would have held out for a better offer based on more optimistic projections. The court also held that the appraisal-rights theory required too many uncertain steps, including that disclosure of possible appraisal rights would attract arbitrageurs, raise the stock price, and force Chen to increase his offer.

Disposition

The court granted Jumei’s motions to dismiss the First Amended Class Action Complaint and the Second Amended Class Action Complaint. It granted dismissal based on the failure to plead loss causation and, for the Section 10(b) claims, the failure to plead scienter. The court also dismissed the derivative Section 20(a) claim because the underlying Section 10(b) and Section 14(e) claims were dismissed. The court did not conclude that amendment would be futile and gave Altimeo 30 days to file an amended complaint. The order disposed of Docket Nos. 58 and 72.