Grier v. Finjan Holdings, Inc. (In re Finjan Holdings, Inc. Sec. Litig.)

• Decision Date: 20 January 2023
• Docket Number: 21-16702
• Citation: 58 F.4th 1048
• Parties: IN RE: FINJAN HOLDINGS, INC. Securities Litigation, Robert Grier, Plaintiff-Appellant, v. Finjan Holdings, Inc., and Philip Hartstein, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

58 F.4th 1048

IN RE: FINJAN HOLDINGS, INC. Securities Litigation,Robert Grier, Plaintiff-Appellant,

v.Finjan Holdings, Inc., and Philip Hartstein, Defendants-Appellees.

No. 21-16702

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 30, 2022 San Francisco, California

Filed January 20, 2023

Juan E. Monteverde (argued), Monteverde & Associates PC, New York, New York, for Plaintiff-Appellant.

James L. Jacobs (argued) and Valerie M. Wagner, GCA Law Partners LLP, Mountain View, California, for Defendants-Appellees.

Before: Michael Daly Hawkins, Carlos T. Bea, and Jacqueline H. Nguyen, Circuit Judges.

BEA, Circuit Judge:

In the summer of 2020, the board of directors of Finjan Holdings, Inc. ("Finjan"), struck a deal with Fortress Investment Group LLC ("Fortress") for Fortress to purchase all Finjan shares at $1.55 per share. Finjan's shareholders subsequently approved the deal.

Robert Grier, a Finjan shareholder at the time of the sale, then sued Finjan, its CEO Philip Hartstein, and members of the Finjan board of directors, alleging that revenue predictions and share-value estimations sent by Finjan management to shareholders before the sale had been false. Grier alleged that Finjan management knowingly provided deflated numbers to create the appearance that the sale price offered by Fortress was a good bargain for Finjan shareholders, thereby to convince shareholders to accept the sale.

Grier alleged that Finjan management was afraid of a hostile takeover of Finjan by a third party known as Party B, which Grier alleged would have removed Finjan management from their employment positions. In the deal with Fortress, however, Finjan management retained their positions. Thus, Grier alleged that Finjan management had a motive to provide deflated revenue projections and estimated share values to shareholders: to keep their jobs at Finjan after the sale to Fortress.

Grier based his claim on Section 14(e) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78n(e), which prohibits the use of false or misleading statements in connection with a tender offer. As we explained in Varjabedian v. Emulex Corp. , 888 F.3d 399 (9th Cir. 2018), there are significant differences between Section 14(e) and Section 10(b)—the securities fraud provision most commonly addressed in our jurisprudence that deals generally with falsities in the purchase and sale of securities.

As explained below, Section 14(e) and relevant Supreme Court precedent have established four elements for Grier's claim. Grier must plausibly allege that (1) Finjan management did not actually believe the revenue projections/share-value estimations they issued to the Finjan shareholders ("subjective falsity"), (2) the revenue projections/share-value estimations did not reflect the company's likely future performance ("objective falsity"), (3) shareholders foreseeably relied on the revenue projections/share-value estimations in accepting the tender offer, and (4) shareholders suffered an economic loss as a result of the deal with Fortress.

The district court characterized Grier's claim as sounding in fraud and applied three heightened pleading standards, discussed further below. The district court then dismissed Grier's first amended complaint with leave to amend for failure to plead sufficient factual material to support the requisite inference of subjective falsity. Grier filed a second amended complaint, which the district court dismissed on the same grounds, this time without leave to amend.

We review a district court's dismissal under Rule 12(b)(6) of the Federal Rules of Civil Procedure de novo. Varjabedian , 888 F.3d at 403.

The district court held that the subjective falsity element of Grier's claim requires allegations of a conscious, fraudulent state-of-mind, also called "scienter." Thus, the district court required that Grier's allegations include enough factual material to create a "strong inference" of subjective falsity. See 15 U.S.C. § 78u-4(b)(2)(A). However, the subjective falsity required by Section 14(e) is not equivalent to the scienter requirement referenced in 15 U.S.C. § 78u-4(b)(2)(A) nor that required by, for example, Section 10(b). Therefore Grier's allegations need provide only enough factual material to create a "reasonable inference"—not a "strong inference"—of subjective falsity, in addition to various particularity requirements. Ashcroft v. Iqbal , 556 U.S. 662, 663, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ; see Varjabedian , 888 F.3d at 404.

Nonetheless, Grier's allegations do not create even a "reasonable inference" of subjective falsity. It is not reasonable to infer from the allegations of the second amended complaint that Finjan management believed that the sale price was too low. Thus, Grier failed sufficiently to allege subjective falsity, a critical element of his claim. We affirm the district court's dismissal of Grier's second amended complaint despite the district court's erroneous application of a "strong inference" requirement for subjective falsity.

I. FACTS AND PROCEDURAL HISTORY¹

Finjan holds itself out as a "cybersecurity" company. It develops security technologies for mobile devices and invests in intellectual property related to mobile and computer security. However, Finjan does not use this intellectual property to produce any products of its own. Instead, Finjan derives most of its revenue from lawsuits accusing others of infringing on its intellectual property or from extracting licenses for use of the intellectual property under threat of a patent infringement lawsuit.

Finjan became a publicly traded company in 2013 and was listed on the Nasdaq in 2014. Since 2014, Philip Hartstein has served as its President and Chief Executive Officer.

In March 2018, Finjan's board of directors initiated and announced a "strategic review process," which included an exploration of opportunities to sell Finjan to another entity. Finjan hired Atlas Technology Group LLC ("Atlas")—a technology-focused investment bank—to act as its financial advisor with respect to the possible sale of Finjan shares and to assist in communication with potential buyers. On the day Finjan announced that it hired Atlas, Finjan's common stock closed trading at $3.94 per share on Nasdaq.

From August 2018 through November 2018, Atlas contacted more than fifty parties to explore if they had any interest in a transaction with Finjan. Several parties expressed interest, including Fortress and an entity known as Party B.

In Fall 2018, Finjan received offers to purchase all Finjan shares for prices from $4.29 to $5.10 per share. However, Finjan's stock, which had traded at around $3.50 to $4.50 per share for most of 2018, sunk to around $2.50 to $3.00 per share in December 2018, which stalled negotiations. After further business setbacks in December 2018, offers received in early 2019 were as low as $1.86 per share.

In April 2019, Finjan started a new effort to reach out to potential acquirers, but only Fortress and Party B expressed further interest. Over the next several months, bids from Fortress and Party B decreased from $3.00 to $3.40 per share to $2.30 to $2.60 per share. During this time, Party B sent a letter to the Finjan board of directors with criticisms of Finjan's sale process.

In December 2019, Finjan management delivered a presentation to shareholders in which Finjan management projected that Finjan's patent licensing and enforcement business line would generate $200 million to $400 million in revenue from 2019 through 2022.

Significant setbacks hampered Finjan operations in early 2020, including an adverse decision in a case in which Finjan was the plaintiff and the onset of COVID-19, which caused delays of Finjan's patent enforcement trials.

On February 3, 2020, Party B sent a letter to the Finjan board of directors indicating that Party B wished to deal directly with the board of directors on any further discussions. The parties here disagree on who Party B wanted to circumvent by dealing directly with the board, but it was presumably Atlas, Hartstein, or both. Members of the board did meet with representatives for Party B after receiving Party B's letter, but no deal resulted from the discussions.

On March 4, 2020, Finjan publicly announced an end to the strategic review process. On a call with investors that day, Hartstein commented on the close of the strategic review process, saying: "As you most likely read in the press release today, this process is now formally concluded. While we didn't consummate a transaction, we are confident in our path forward as an independent entity." On March 18, 2020, Finjan's stock closed trading at $0.78 per share.

On April 1, 2020, Party B informed Finjan of its intent to purchase enough Finjan shares in the open market to increase its ownership of Finjan to an amount greater than five percent of the company, which purchase would have triggered a requirement for Party B to notify the Securities and Exchange Commission of its shares purchase. See 17 C.F.R. § 240.13d-1. The purchase of shares in the open market sometimes presages a hostile takeover. But Party B also offered to purchase all Finjan shares for $1.50 per share and asked for an opportunity to reopen negotiations.

On April 12, 2020, Finjan contacted Fortress to ask whether Fortress had an interest in resuming acquisitions discussions. The next day, Finjan agreed to provide Party B with exclusivity in negotiations through April 20, 2020 for the purchase and sale of shares. Party B agreed to halt any open-market purchases of Finjan shares.

On April 29, 2020, Party B informed Finjan that it was no longer willing to pursue a transaction at $1.50 per share and proposed restructuring the transaction as a purchase of Finjan assets rather than of Finjan shares. After confirming that Fortress was still interested in negotiating a purchase of Finjan's shares, Finjan's board instructed Atlas to pursue further negotiations with Fortress.

...