Ninth Circuit Rejects Heightened State-of-Mind Pleading Requirement For Section 14(e) Claims

• Jurisdiction: United States,Federal
• Law Firm: Akin Gump Strauss Hauer & Feld LLP
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Securities, Shareholders
• Author: Mr M. Scott Barnard, Neal Marder, Aileen M. McGrath, Michelle Reed, Josh A. Rubin and Sina S. Safvati
• Published date: 02 February 2023

Key Points

• The 9th Circuit, disagreeing again with the 2nd, 3rd, 5th, 6th and 11th Circuits, reaffirmed that claims under Section 14(e) of the Exchange Act do not require a showing of scienter.
• In the 9th Circuit's view, because claims under Section 14(e) for misrepresentations in connection with tender offers require mere negligence, they are not subject to the PSLRA's Section 4(b)(2) requiring a "strong inference" of scienter. This is true even if a plaintiff in a particular Section 14(e) case proceeds on the theory that a defendant gave a subjectively false opinion.
• In holding that the plaintiff nonetheless failed to state a claim, the 9th Circuit also reinforced that Rule 8's lower pleading standard is not easily met.

Background

Grier v. Finjan Holdings, Inc. centers around a 2020 transaction in which asset manager Fortress Investment Group LLC acquired all shares of a publicly-traded cybersecurity company, Finjan Holdings, Inc., for a purchase price of $1.55 per share.

Two years before, in March 2018, Finjan's board initiated a "strategic review process," which included exploring opportunities to sell the company. Over the next several months, Finjan and an investment bank it had retained contacted various potential buyers, including Fortress as well as another company (described in the complaint and opinion as "Party B"). While Finjan allegedly initially received offers as high as $5.10 per share, negotiations stalled when Finjan's stock price declined in late 2018. In 2019 through early 2020, Finjan renewed its efforts to reach out to potential buyers, but only Fortress and Party B were interested, with offers in the ballpark of $2.30 to $2.60 per share.

As Finjan's stock price continued to fall during the first months of the COVID-19 pandemic, Party B informed Finjan of its intent to purchase more than 5 percent of Finjan's stock on the open market, and also offered to purchase Finjan's outstanding stock for $1.50 per share. With this offer in hand, Finjan contacted Fortress and eventually negotiated a sale of all outstanding stock for $1.55 per share, which was subject to shareholder approval.

Finjan's management issued a statement to its shareholders recommending that they vote in favor of the sale. As part of the statement, Finjan included financial projections that were significantly lower than projections the company had issued several months prior, as well as an analysis based on those projections showing that the $1.55 per share offer...