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

Background

Altimeo Asset Management and ODS Capital LLC brought a putative class action under the federal securities laws against Qihoo 360 Technology Co. Ltd., Hongyi Zhou, Xiangdong Qi, and Eric X. Chen. The plaintiffs alleged that the defendants planned to take Qihoo private in 2016 at an unfairly low price and later relist its business on a Chinese stock exchange at a much higher valuation, but failed to disclose that plan.

The proposed class included two groups: shareholders who sold Qihoo securities during the period from the merger announcement through its completion, and shareholders who retained their securities and exchanged them for merger consideration. The plaintiffs asserted claims under Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934, as well as Securities and Exchange Commission Rule 10b-5.

The court had previously dismissed the complaint, but the Court of Appeals vacated that decision and sent the case back. After Zhou was served, he moved to dismiss the First Amended Complaint under Rules 12(b)(6) and 9(b), which require a complaint to state a legally sufficient claim and plead fraud with particularity. The court also addressed the complaint’s allegations about discovery, reliance, economic loss, and loss causation—the required connection between the alleged misconduct and the claimed financial harm.

Claims Based on the Proxy Statements

The court held that the complaint plausibly alleged that statements in Qihoo’s proxy materials were misleading because they omitted the alleged concrete plan to relist Qihoo in China. The court also held that statements describing the merger as fair, and statements explaining the reasons for taking Qihoo private, could be misleading because the undisclosed relisting plan would conflict with the impression those statements created for reasonable investors.

The court rejected the claim based on statements that there were no viable strategic alternatives to the merger. The alleged relisting was a plan that depended on first taking Qihoo private under the Buyer Group’s control; the complaint did not allege that shareholders had an available alternative that would have allowed them to retain their interests and benefit from a later relisting. The court therefore dismissed the Section 10(b) claims based on the strategic-alternatives statements.

Tenderer Shareholders

The court assumed, for purposes of its analysis, that the complaint plausibly alleged that misleading proxy materials caused enough shareholders to vote for the merger and exchange their shares for $77 per American Depositary Share. But it held that the alleged economic loss was too speculative. The plaintiffs’ theory required assuming that the merger would have been defeated and that shareholders would later have received more than $77 per share through a higher negotiated price, a future market valuation, or an appraisal proceeding.

The court concluded that the complaint did not plausibly connect those hypothetical future events to the alleged misconduct. The later relisting occurred more than 17 months after the merger and followed a substantial restructuring of Qihoo’s business. The court also found that the allegations concerning money placed in a Cayman Islands appraisal proceeding and an unidentified expert’s valuation did not establish a non-speculative loss. It granted the motion to dismiss all claims brought on behalf of tenderer shareholders.

Seller Shareholders

The court reached a different conclusion for shareholders who sold during the class period. It held that these shareholders could invoke the rebuttable presumption that investors trading in an efficient market rely on the market price. The complaint plausibly alleged that undisclosed information about the relisting plan kept Qihoo’s market price below what it otherwise would have been, even though the price generally increased and never fell after a conventional corrective disclosure.

The court therefore held that the seller shareholders adequately pleaded reliance, economic loss, and loss causation. It denied the motion to dismiss their Section 10(b) claims based on statements about the relisting plan, the merger’s fairness, and the reasons for pursuing the merger. The court also rejected Zhou’s argument concerning shareholders who both bought and sold during the class period, explaining that the issue was not appropriate for resolution on this motion to dismiss.

Section 20(a) and Section 20A Claims

Section 20(a) provides potential control-person liability when a defendant controls a primary securities-law violator. Because the complaint plausibly alleged primary Section 10(b) violations by Zhou and alleged that he controlled the relevant filings as Qihoo’s chairman and chief executive officer, the court allowed Zhou’s Section 20(a) claim to proceed to the extent it was based on the surviving seller-shareholder claims.

Section 20A provides a claim for certain insider-trading violations, but it requires a predicate violation of the Exchange Act and contemporaneous trading by the defendant and plaintiff. The court held that the complaint did not plausibly allege the required underlying insider-trading violation. It therefore dismissed the Section 20A claim.

Disposition

The court granted in part and denied in part Zhou’s motion to dismiss. It dismissed with prejudice, as to all defendants, the Section 10(b) claims based on statements about strategic alternatives, all claims brought on behalf of tenderer shareholders, and the Section 20A claim. It otherwise denied the motion, including as to the seller-shareholder Section 10(b) claims concerning the relisting plan, merger fairness, and merger reasons, and Zhou’s Section 20(a) claim.

The surviving claims were to proceed to discovery. The court did not decide liability or damages at this stage.