Altimeo Asset Management v. Qihoo 360 Technology Co. Ltd.

Background

Altimeo Asset Management and ODS Capital LLC brought a proposed class action for investors in Qihoo securities. They alleged that Qihoo 360 Technology Co. Ltd., Hongyi Zhou, Xiangdong Qi, and Eric X. Chen planned to take Qihoo private in 2016, later relist its main internet business in China at a much higher valuation, and conceal that plan from Qihoo securityholders. The plaintiffs claimed that statements in merger-related proxy materials and other filings were false or misleading because they did not disclose the alleged plan or its potential financial benefits.

The complaint asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, as well as related claims under Sections 20(a) and 20A. Section 20(a) concerns control-person liability, while Section 20A concerns insider trading. The motion addressed in this opinion was filed by Qihoo and Chen; the opinion states that Zhou and Qi had not yet been successfully served.

Qihoo’s merger proposal was announced in December 2015 and became effective on July 15, 2016. The shareholders’ proxy materials repeatedly disclosed the possibility that Qihoo or a substantial part of its business might later be relisted on another internationally recognized stock exchange. Qihoo’s main internet business later became publicly traded in China through a transaction involving SJEC, a company listed on the Shanghai Stock Exchange.

Motion and legal standards

Qihoo and Chen moved to dismiss the First Amended Complaint under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim, and Rule 9(b), which requires fraud allegations to be stated with particularity. The court also applied the heightened pleading requirements of the Private Securities Litigation Reform Act. Under those requirements, the plaintiffs had to identify each misleading statement or omission, explain specifically why it was misleading, and plead particular facts supporting the required state of mind.

The court explained that a Section 10(b) claim requires a material misrepresentation or omission, a culpable state of mind, a connection to the purchase or sale of a security, reliance, economic loss, and loss causation. The court decided that it needed to address only whether the plaintiffs adequately alleged a material misrepresentation or omission. The Section 20(a) and Section 20A claims depended on adequately pleading a primary Section 10(b) violation.

Court’s analysis

The court identified the central factual premise of the plaintiffs’ claims as the allegation that, before the merger, the buyer group had a concrete and definite plan to relist Qihoo in China. To the extent the plaintiffs alleged only that defendants failed to disclose the possibility of a future relisting, the court rejected that theory because the proxy materials had expressly disclosed that possibility.

The plaintiffs relied mainly on a confidential witness identified as CW1 and on newspaper articles. The court found CW1’s allegations insufficiently reliable and particularized. The complaint did not adequately describe CW1’s job responsibilities, did not provide corroborating facts or meaningful investigative efforts by counsel, and did not give enough detail about who formulated the alleged plan, what the plan involved, when it was formed, or how it would be carried out. The court also found that some of CW1’s statements were not clearly tied to the period before the merger.

The court likewise found that the news articles did not establish a concrete pre-merger plan. Although some articles suggested that buyer-group investors had received more optimistic projections or had considered a future relisting, the articles did not describe the plan’s terms, participants, profitability, or mechanics. In the court’s view, the allegations showed at most that a future relisting was considered as a possibility, not that a definite plan was already in place when the merger materials were issued.

Disposition

The court held that the First Amended Complaint did not adequately plead the material-misrepresentation or omission element of a Section 10(b) claim. It therefore dismissed the Section 10(b) claim with prejudice. Because Sections 20(a) and 20A required an adequately pleaded primary Exchange Act violation, the court also dismissed those claims with prejudice.

Judge Paul A. Engelmayer dismissed the First Amended Complaint with prejudice, directed the clerk to terminate the pending motions, and closed the case.