In Re: Robert Grier v. Finjan Holdings, Inc. ( 2023 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: FINJAN HOLDINGS, INC. No. 21-16702
SECURITIES LITIGATION,
D.C. No. 3:20-cv-
------------------------------ 04289-EMC
ROBERT GRIER,
Plaintiff-Appellant, OPINION
v.
FINJAN HOLDINGS, INC., and
PHILIP HARTSTEIN,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of California
Edward M. Chen, District Judge, Presiding
Argued and Submitted November 30, 2022
San Francisco, California
Filed January 20, 2023
Before: Michael Daly Hawkins, Carlos T. Bea, and
Jacqueline H. Nguyen, Circuit Judges.
Opinion by Judge Bea
2 GRIER V. FINJAN HOLDINGS, INC.
SUMMARY *
Securities Fraud
The panel affirmed the district court’s dismissal of a
securities fraud action alleging the use of false or misleading
statements in connection with a tender offer, in violation of
§ 14(e) of the Securities Exchange Act of 1934.
The board of directors of Finjan Holdings, Inc., struck a
deal with Fortress Investment Group LLC for Fortress to
purchase all Finjan shares. Finjan’s shareholders approved
the deal. Shareholder Robert Grier then sued Finjan, its
CEO, and members of its board of directors, alleging that
revenue predictions and share-value estimations sent by
Finjan management to shareholders before the sale had been
false.
The panel held that, to state a claim under § 14(e), Grier
was required to plausibly allege that (1) Finjan management
did not actually believe the revenue protections/share-value
estimations they issued to the Finjan shareholders
(“subjective falsity”), (2) the revenue protections/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.
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
GRIER V. FINJAN HOLDINGS, INC. 3
The district court ruled that the subjective falsity element
of Grier’s claim required 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, as is required, under the heightened
pleading standard set forth in 15 U.S.C. § 78u-4(b)(2)(A),
for a claim under § 10(b) of the Securities Exchange
Act. The panel, however, held that, for Grier’s claim under
§ 14(e), scienter was not required, and his allegations need
provide only enough factual material to create a “reasonable
inference,” not a “strong inference,” of subjective falsity.
The panel held that, nonetheless, Grier’s allegations did
not create even a “reasonable inference” of subjective
falsity. The panel concluded that it was not reasonable to
infer from the allegations of the second amended complaint
that Finjan management believed that the sale price of $1.55
per share was too low. None of the allegations, standing
alone, created a reasonable inference of subjective
falsity. Further, even under a holistic review, taking Grier’s
factual allegations together, it was not reasonable to infer
subjective falsity. Thus, Grier failed to allege a critical
element of his § 14(e) claim. The panel therefore affirmed
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.
4 GRIER V. FINJAN HOLDINGS, INC.
COUNSEL
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.
OPINION
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
GRIER V. FINJAN HOLDINGS, INC. 5
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
6 GRIER V. FINJAN HOLDINGS, INC.
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 (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.
GRIER V. FINJAN HOLDINGS, INC. 7
I. FACTS AND PROCEDURAL HISTORY 1
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
1
The facts are related as stated in Grier’s second amended complaint and
in the various documents incorporated into the second amended
complaint by reference. When a general conclusion in a complaint
contradicts specific facts retold in a document attached to the complaint,
incorporated by reference in the complaint, or subject to judicial notice,
those specific facts are controlling. Similarly, where a complaint
incorrectly summarizes or characterizes a legally operative document
attached to the complaint, incorporated by reference in the complaint, or
subject to judicial notice, the document itself is controlling. See Ott v.
Home Sav. & Loan Ass’n, 265 F.2d 643, 646 n.1 (9th Cir. 1958);
Imported Liquors Co. v. Los Angeles Liquor Co., 152 F.2d 549, 552 (9th
Cir. 1945); Alexander v. De Witt, 141 F.2d 573, 576 (9th Cir. 1944). But
if specific facts alleged in the complaint contradict specific facts related
in a non-legally-operative document attached to the complaint,
incorporated by reference in the complaint, or subject to judicial notice,
the conflict is resolved in the plaintiff’s favor. See Khoja v. Orexigen
Therapeutics, Inc., 899 F.3d 988, 1003 (9th Cir. 2018).
8 GRIER V. FINJAN HOLDINGS, INC.
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.
GRIER V. FINJAN HOLDINGS, INC. 9
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
10 GRIER V. FINJAN HOLDINGS, INC.
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.
Fortress submitted a proposal for $1.50 per share, and
later raised the proposal to $1.55 per share. On June 9, 2020,
Finjan’s board approved the purchase and sale agreement,
opening a period for shareholders to tender their shares to
Fortress and agreeing to recommend that shareholders do so.
On that day, Finjan’s stock closed trading at $1.33 per share
on the open market.
Finjan management directed Atlas to prepare an opinion
to provide to shareholders as to the fairness of the agreement,
including Atlas’s assessment of the value of Finjan shares.
Finjan management provided financial data to Atlas and
instructed Atlas to assume certain facts as true, including a
projected total revenue of $166 million from 2020 to 2024—
considerably less than the 2019–2022 revenue projections
Finjan had presented to shareholders in December 2019 (pre-
COVID). Grier alleges that this projected revenue was
unreasonable and was known to Finjan management to be
unreasonable.
Atlas conducted various calculations based on the
financial information provided by Finjan management and
GRIER V. FINJAN HOLDINGS, INC. 11
data from similar transactions to estimate the value of
Finjan’s shares. These various calculations are discussed in
greater detail in the discussion section below. In its cash
flow analysis, which relied heavily on the projected revenue
figures provided by Finjan management, Atlas concluded
that the sale price of $1.55 per share was with the range of
reasonable prices. Grier alleges that this estimation of the
value of Finjan’s shares was unreasonable and was known to
Finjan management to be unreasonable.
Finjan management included the projected revenue
figures and Atlas’s estimation of the share value in a
statement to shareholders. The statement said that the
projected revenue figures and share-value estimations were
“reasonable” based on Atlas’s cash flow analysis. The
statement recommended that shareholders approve the
agreement with Fortress. Finjan shareholders accepted the
agreement, and the sale occurred on July 22, 2020.
On June 29, 2020, Robert Grier, then a Finjan
shareholder, filed this putative class action on behalf of
Finjan shareholders against Finjan, Hartstein, and several
other members of the Finjan board, alleging that the
defendants had violated Section 14(e) by issuing the revenue
projections and share-value estimations to shareholders. The
district court ordered that two related class actions filed by
other Finjan shareholders be consolidated with Grier’s and
ordered Grier to file a consolidated amended complaint.
Grier filed the amended complaint, which the district court
dismissed with leave to amend.
Grier then filed a second amended complaint, now the
operative pleading. Grier’s second amended complaint
brought claims against Finjan and Hartstein, but not the other
members of Finjan’s board of directors. On September 13,
12 GRIER V. FINJAN HOLDINGS, INC.
2021, the district court dismissed the second amended
complaint without leave to amend and entered final
judgment. On October 12, 2021, Grier timely filed a notice
of appeal.
II. DISCUSSION
Under Section 14(e), it is
unlawful for any person to make any untrue
statement of a material fact or omit to state
any material fact necessary in order to make
the statements made, in the light of the
circumstances under which they are made,
not misleading, or to engage in any
fraudulent, deceptive, or manipulative acts or
practices, in connection with any tender offer
or request or invitation for tenders, or any
solicitation of security holders in opposition
to or in favor of any such offer, request, or
invitation.
15 U.S.C. § 78n(e).
To state a claim under Section 14(e), a plaintiff must
allege that (1) the defendant made a false statement of
material fact or misleadingly incomplete statement, (2)
shareholders relied on the false or misleadingly incomplete
statement in accepting or rejecting the tender offer, and (3)
shareholders suffered an economic loss as a result of the
acceptance or rejection of the tender offer. 2 See 15 U.S.C. §
78u-4(b); see also Varjabedian, 888 F.3d at 404–08; City of
2
We refer to these last two requirements together as “loss causation.”
See 15 U.S.C. § 78u-4(b)(4).
GRIER V. FINJAN HOLDINGS, INC. 13
Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align
Tech., Inc., 856 F.3d 605, 615–16 (9th Cir. 2017).
Grier challenged three statements made by Finjan
management in the communication to Finjan shareholders.
First, Grier alleged that the revenue projections provided by
Finjan management to Atlas, projecting a total revenue of
$166 million through 2024, were false. Second, Grier
alleged that Atlas’s estimation of the value of Finjan’s
shares, which concluded that the sale price of $1.55 per share
was within the range of reasonable prices, was false. Third,
Grier alleged that statements by Finjan management in their
communication to Finjan shareholders, which endorsed the
revenue projections and estimated share values as
“reasonable,” were false.
The statements challenged by Grier are all statements of
opinion. Because the Exchange Act regulates statements of
“material fact,” a statement of opinion will run afoul of the
Act only in special circumstances. Wochos v. Tesla, Inc.,
985 F.3d 1180, 1188–89 (9th Cir. 2021); In re Atossa
Genetics Inc Sec. Litig., 868 F.3d 784, 802 (9th Cir. 2017).
The Supreme Court has identified three such special
circumstances: subjective falsity, embedded statements of
fact, 3 and misleading omissions.4 See Omnicare, Inc. v.
3
Take, for example, the statement “I believe our TVs have the highest
resolution available because we use a patented technology to which our
competitors do not have access.” If the author of this statement did not
in fact have a patented technology to which his competitors do not have
access, then the statement would be false. Although the sentence begins
with an assertion of opinion, the last half of the sentence qualifies as an
assertion of fact. See Omnicare, Inc. v. Laborers Dist. Council Const.
Indus. Pension Fund, 575 U.S. 175, 185 (2015).
4
Take, for example, the statement “We believe our TV sales practices
comply with the law.” If the author of this statement makes this assertion
14 GRIER V. FINJAN HOLDINGS, INC.
Laborers Dist. Council Const. Indus. Pension Fund, 575
U.S. 175, 184–89 (2015).
In this case, both parties agree that the statements
challenged by Grier could be false only under a theory of
subjective falsity. Subjective falsity attacks the basic factual
assertion that underlies all statements of opinion: the
assertion that the author holds and believes the stated
opinion. Take, for example, the statement “I believe our
TVs have the highest resolution available.” The phrase “I
believe” asserts a fact: that the author holds the belief. No
matter whether the TVs in fact have the highest resolution
available, if the author of the statement did not believe that
his company’s TVs had the highest resolution available, then
the statement would contain a false statement of fact. See id.
at 184.
However, the Supreme Court has held that subjective
falsity alone is not enough to impose liability: “to recognize
liability on mere disbelief or undisclosed motive without any
demonstration that the . . . statement was false or misleading
about its subject would authorize . . . litigation confined
solely to what one skeptical court spoke of as the ‘impurities’
of a director’s ‘unclean heart.’” Virginia Bankshares, Inc. v.
Sandberg, 501 U.S. 1083, 1096 (1991) (quoting Stedman v.
Storer, 308 F. Supp. 881, 887 (S.D.N.Y. 1969)). This rule
is akin to a harmless error rule. Take again, for example, the
statement “I believe our TVs have the highest resolution
available.” If the author’s TVs do have the highest
“without having consulted a lawyer, it could be misleadingly incomplete.
In the context of the securities market, an investor, though recognizing
that legal opinions can prove wrong in the end, still likely expects such
an assertion to reason on some meaningful legal inquiry—rather than,
say, on mere intuition, however sincere.” Id. at 188.
GRIER V. FINJAN HOLDINGS, INC. 15
resolution available, then it is of little consequence whether
the author believed that the TVs have the highest resolution
available. The listener has not been misled as to the
resolution quality of the TVs.
Thus, where a plaintiff relies on a theory of subjective
falsity, the plaintiff must allege “both that ‘the speaker did
not hold the belief she professed’ and that the belief is
objectively untrue.” Dearborn Heights, 856 F.3d at 615–16
(quoting Omnicare, 575 U.S. at 186). These are known as
the “subjective falsity” and “objective falsity” requirements,
respectively. See Rubke v. Capitol Bancorp Ltd, 551 F.3d
1156, 1162 (9th Cir. 2009).
In sum, Grier must plausibly allege that (1) Finjan
management did not believe the revenue projections/share-
value estimations (subjective falsity), (2) the revenue
projections/share-value estimations did not reflect Finjan’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.
A. Pleading Standard
Except where a heightened pleading standard applies, a
motion to dismiss under Rule 12(b)(6) of the Federal Rules
of Civil Procedure is analyzed using the plausibility pleading
standards of Rule 8(a), Bell Atlantic Corp. v. Twombly, 550
U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009).
The district court applied the heightened pleading standards
of Rule 9(b) and of two provisions in the Private Securities
Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4(b).
We address the applicability of each heightened standard in
turn.
16 GRIER V. FINJAN HOLDINGS, INC.
1. Rule 9(b)
Under Rule 9(b), “[i]n alleging fraud or mistake, a party
must state with particularity the circumstances constituting
fraud or mistake.” Fed. R. Civ. P. 9(b). “To comply with
Rule 9(b), allegations of fraud must be ‘specific enough to
give defendants notice of the particular misconduct which is
alleged to constitute the fraud charged so that they can
defend against the charge and not just deny that they have
done anything wrong.’” Bly-Magee v. California, 236 F.3d
1014, 1019 (9th Cir. 2001) (quoting Neubronner v. Milken,
6 F.3d 666, 672 (9th Cir. 1993)). “The complaint must
specify such facts as the times, dates, places, benefits
received, and other details of the alleged fraudulent activity.”
Neubronner, 6 F.3d at 672.
Rule 9(b) applies where a claim is “grounded in fraud”
or “sound[s] in fraud,” even if fraud is not an essential
element of the cause of action. Vess v. Ciba-Geigy Corp.
USA, 317 F.3d 1097, 1103 (9th Cir. 2003). In other words,
if “a plaintiff . . . choose[s] . . . to allege in the complaint that
the defendant has engaged in fraudulent conduct,” then “the
pleading of that claim as a whole must satisfy the
particularity requirement of Rule 9(b).” Id. at 1103–04.
Because Grier’s claim asserts that Finjan management
knew that the revenue predictions they gave to Atlas were
incorrect and that they endorsed the predictions and the
resulting analysis of Atlas as “reasonable” to convince
shareholders to accept the sale to Fortress, Grier’s claim
“sounds in fraud.” Thus, the pleading of his claim must
comply with Rule 9(b), even if fraud is not an essential
element of the claim. The district court was correct to apply
Rule 9(b).
GRIER V. FINJAN HOLDINGS, INC. 17
2. PSLRA Part One: Particularity Requirements for
Allegations of Untrue Statements of Material Fact
The district court applied two pleading standards from
the PSLRA, separate from Rule 9(b)’s pleading
requirements for fraud allegations, in its analysis of the
sufficiency of the allegations. First, the district court applied
a heightened standard which requires increased particularity
for allegations of untrue statements of material fact:
In any private action arising under [the
Exchange Act] in which the plaintiff alleges
that the defendant . . . made an untrue
statement of a material fact . . . the complaint
shall specify each statement alleged to have
been misleading, the reason or reasons why
the statement is misleading, and, if an
allegation regarding the statement or
omission is made on information and belief,
the complaint shall state with particularity all
facts on which that belief is formed.
15 U.S.C. § 78u-4(b)(1) (“Section 4(b)(1)”). We have said
that Section 4(b)(1) commands a plaintiff to “reveal ‘the
sources of [his] information,’” Rubke, 551 F.3d at 1166(quoting In re Silicon Graphics Inc. Sec. Litig., 183 F.3d
970, 985 (9th Cir. 1999), as amended (Aug. 4, 1999)), and
requires a complaint to “include . . . corroborating details.”
Silicon Graphics, 183 F.3d at 985. The particularity
requirements of Section 4(b)(1) and Rule 9(b) are not
identical, but they are similar.
It is undisputed that Section 4(b)(1) applies to all Section
14(e) actions, including this one. See Rubke, 551 F.3d at
1167. The district court was correct to apply Section 4(b)(1).
18 GRIER V. FINJAN HOLDINGS, INC.
3. PSLRA Part Two: Plausibility Requirement for
State-of-Mind Allegations
Second, the district court applied a heightened pleading
standard applicable to state-of-mind allegations:
[I]n any private action arising under [the
Exchange Act] in which the plaintiff may
recover money damages only on proof that
the defendant acted with a particular state of
mind, the complaint shall, with respect to
each act or omission alleged to violate [the
Exchange Act], state with particularity facts
giving rise to a strong inference that the
defendant acted with the required state of
mind.
15 U.S.C. § 78u-4(b)(2)(A) (“Section 4(b)(2)”).
Unlike Section 4(b)(1), Section 4(b)(2) substantially
increases the pleading requirement. “PSLRA’s ‘strong
inference’ requirement has teeth. It is an ‘exacting’ pleading
obligation that ‘presents no small hurdle for the securities
fraud plaintiff.’” Nguyen v. Endologix, Inc., 962 F.3d 405,
414 (9th Cir. 2020) (alteration adopted) (first quoting Zucco
Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th
Cir. 2009), then quoting Schueneman v. Arena Pharms., Inc.,
840 F.3d 698, 705 (9th Cir. 2016)). The “strong inference”
requirement is exacting because the Supreme Court has said
that a “strong” inference “must be cogent and at least as
compelling as any opposing inference of nonfraudulent
intent.” Tellabs, 551 U.S. at 314. Thus, unlike the
particularity requirements of Rule 9(b) and Section 4(b)(1),
Section 4(b)(2) increases the plausibility requirement,
setting a bar significantly above the pleading requirements
GRIER V. FINJAN HOLDINGS, INC. 19
of Twombly and Iqbal.
To determine whether Section 4(b)(2) applies, we must
decide whether Grier’s Section 14(e) claim requires “proof
that the defendant acted with a particular state of mind.”
This kind of state-of-mind requirement involved in fraud
cases is referred to as a “scienter” requirement. See Ernst &
Ernst v. Hochfelder, 425 U.S. 185, 188 (1976) (defining
scienter as “an allegation of intent to deceive, manipulate, or
defraud on the part of the defendant”). It is not enough that
the complaint “sounded in fraud” or that the allegations tend
to expound a theory of fraud. The question is instead
whether the cause of action itself has scienter as a required
element.
In Varjabedian, a panel of this court was faced with a
question similar to the one here—whether Section 4(b)(2)
applies in Section 14(e) cases. 888 F.3d at 404. Analyzing
the text of Section 14(e), the panel concluded that a Section
14(e) plaintiff could succeed with proof of negligence, and
that proof of scienter is not necessary. Id. at 407. Because
negligence does not require proof of a mental state, see
DSAM Glob. Value Fund v. Altris Software, Inc., 288 F.3d
385, 391 (9th Cir. 2002), Section 4(b)(2) does not apply as a
pleading standard to a Section 14(e) case. Varjabedian, 888
F.3d at 409–10.
Yet here, the district court nonetheless held that Grier’s
Section 14(e) claim had a scienter requirement and
accordingly applied Section 4(b)(2). The district court gave
two reasons for doing so. Neither is convincing.
First, the district court noted that “as a factual matter,
[Grier has] put forward a theory that Defendants knew that
the financial projections given to Atlas were false.”
20 GRIER V. FINJAN HOLDINGS, INC.
Grier indeed alleged that Finjan management knowingly
misrepresented the value of Finjan. However, the question
is whether Section 14(e) itself requires a plaintiff to make
such allegations of fraud to state a proper claim for relief.
Section 4(b)(2)’s pleading standard takes effect only in a
“private action . . . in which the plaintiff may recover money
damages only on proof [of scienter].” § 78u-4(b)(2)(A)
(emphasis added). The language of Section 4(b)(2) focuses
on the proof demanded by the nature of the “action,” not on
the particularities of the allegations in the complaint. Thus,
the mere fact that a plaintiff has included allegations of fraud
will not by itself add a scienter element to every cause of
action alleged in the complaint. See Vess, 317 F.3d at 1103.
Second, the district court noted that “where opinions are
at issue, a plaintiff must plead not only objective falsity but
also subjective falsity, which is essentially a state-of-mind
requirement.”
As mentioned above, because the statements at issue in
this case are statements of opinion, Grier must allege, inter
alia, that “the speaker did not hold the belief [the speaker]
professed.” Omnicare, 575 U.S. at 186. It is rare for a
speaker to express an opinion without knowing that he is
doing so. But it is not impossible. For example, an
individual could negligently issue a statement that includes
an opinion that the speaker does not hold. If a corporate
executive prepares a statement truthfully indicating that he
believes his corporation will have a revenue of $400 million
over the next year, but through a scrivener’s error the
statement is released to the public with the figure instead
reading $40 million, then the corporate executive has
perhaps negligently released a statement to the public with
an opinion that the corporate executive does not believe.
Were this to happen, then the statement would be
GRIER V. FINJAN HOLDINGS, INC. 21
subjectively false, but the author would not have acted with
scienter.
Because an author could negligently state an opinion in
which he does not subjectively believe, subjective falsity
does not necessarily require scienter. Thus, Section 14(e)
can be satisfied without scienter, even when the statements
at issue are statements of opinion. Varjabedian is thus
indistinguishable, and we are bound by it 5: Section 4(b)(2)
does not apply in Section 14(e) actions, even when the
challenged statement is a statement of opinion.
We now proceed to an analysis of the case using Rule
9(b), Section 4(b)(1) of PSLRA, and Twombly/Iqbal—the
proper pleading standards. As discussed below, even under
these less exigent pleading requirements, Grier failed to
allege facts sufficient to state a plausible claim to relief.
Thus, although the district court erroneously applied Section
4(b)(2), the error was harmless.
B. Grier’s Allegations of Subjective Falsity
At issue is whether Grier included factual allegations
sufficient to create a reasonable inference that Finjan
management did not believe the sale price of $1.55 per share
was reasonable. 6 Grier’s complaint and the documents
incorporated by reference into the complaint provided ten
facts that tend to represent Finjan’s true value.
To determine whether these facts give rise to a
reasonable inference that Finjan management did not believe
5
See Miller v. Gammie, 335 F.3d 889, 900 (9th Cir. 2003).
6
Grier challenges both the estimated share values and the projected
revenue figures. However, the projected revenue figures are a factor
subsumed into the discussion of the estimated share values.
22 GRIER V. FINJAN HOLDINGS, INC.
in the reasonableness of the $1.55 sale price, “we will
conduct a dual inquiry: first, we will determine whether any
of the plaintiff’s allegations, standing alone, are sufficient to
create a [reasonable] inference of [subjective falsity];
second, if no individual allegations are sufficient, we will
conduct a ‘holistic’ review of the same allegations to
determine whether the insufficient allegations combine to
create a [reasonable] inference of [subjective falsity].”
Zucco Partners, 552 F.3d at 992.
1. After an open sale process involving the solicitation
of bids from more than fifty entities, the final share-purchase
offers were $1.50 per share from Party B (which Party B
later withdrew in favor of a proposal to purchase Finjan
assets) and $1.55 per share from Fortress.
This strongly supports the conclusion that Finjan
management did not believe the sale price was too low. As
the Delaware Supreme Court has recognized, a “price
resulting from arms-length negotiations where there are no
claims of collusion is a very strong indication of fair value.”
M.P.M. Enterprises, Inc. v. Gilbert, 731 A.2d 790, 797 (Del.
1999). 7 Finjan’s management would presumably hold the
same belief.
2. In the year prior to the sale, Finjan’s shares were
trading on the open market for prices ranging from $0.78 to
$2.36 per share.
These numbers are of no great use because they vary
widely, and as revealed by Atlas’s studies, the sale price of
a company sold through tender offer can be drastically
7
There are no claims of collusion, strictly speaking, because Grier did
not allege any collusive communication between Fortress and Finjan
management.
GRIER V. FINJAN HOLDINGS, INC. 23
different from the open-market price.
3. Finjan conducted an analysis of its liquidation value
and concluded that a sale of Finjan’s assets would result in a
net value of $0.70 per share.
This number is of no great use because the complaint
does not indicate any typical relationship between a
liquidation valuation and reasonable sale price. However,
the liquidation valuation does imply that the sale price of
$1.55 per share would have offered a better deal to
shareholders than a sale of Finjan’s assets, which Party B
had offered to Finjan shortly before Finjan finalized the deal
with Fortress.
4. Atlas conducted a “Premiums Paid Analysis,” which
looked at acquisitions of twenty-one other publicly traded
technology companies in the United States since January 1,
2017, with transaction values between $15 million and $100
million. Atlas compared the sale price of these transactions
to the open-market price of the acquired company’s shares
one day prior, one week prior, and one month prior to the
announcement of the transaction. Finding that the sale price
typically exceeds the trading price by 18.4% (one day prior),
21.0% (one week prior), and 33.2% (one month prior) per
share, Atlas concluded that Finjan’s sale price would be
expected to be between $1.56 per share and $1.64 per share.
This analysis is inconclusive. Historic sales are not
necessarily indicative of the reasonableness of a particular
sale price, and even assuming they are, the estimated range
of values in the Premiums Paid Analysis had a low end of
$1.56 per share—only one cent above the sale price.
5. Atlas conducted a “Discounted Cash Flow
Analysis,” a complicated analysis that involved an
24 GRIER V. FINJAN HOLDINGS, INC.
assessment of the cash that each Finjan asset is expected to
generate and when it is expected to generate the cash. This
analysis relied on the projected revenue figures provided by
Finjan management. It was conducted using two different
sets of assumptions, with the first set resulting in a predicted
share value of $1.27 to $1.68 and the second resulting in a
predicted share value of $1.42 to $1.55. Even Grier
acknowledges that the Discounted Cash Flow Analysis is
“recognized as the most important valuation.”
This analysis strongly supports the conclusion that
Finjan management did not believe the sale price for $1.55
was too low because $1.55 falls within the range of
reasonable shares under either set of assumptions used by
Atlas.
Grier attacks the Discounted Cash Flow Analysis on the
basis that it relied on the revenue projections from Finjan
management that materially differed from the December
2019 revenue projections. But for the reasons discussed
below, the December 2019 revenue projections are too
remote to have been used as a basis for assessing Finjan’s
value after the onset of the COVID-19 pandemic in 2020,
and there are no factual allegations tending to show that
Finjan management continued to believe in the December
2019 revenue projections after the onset of the pandemic.
Grier provides no other basis for inferring that the
Discounted Cash Flow Analysis was objectively false or
believed to be false by Finjan management.
6. Atlas conducted an analysis of “Selected Public
Company Trading Multiples.” This analysis compared the
revenue and open-market share prices of four similar
publicly traded technology companies. Using Finjan’s
historic revenue data, Atlas predicted a share value of $1.62
GRIER V. FINJAN HOLDINGS, INC. 25
to $1.63 for Finjan’s shares. Atlas provided this prediction
to shareholders alongside several clearly stated caveats,
including that the four other companies are not exactly
similar to Finjan, that there was limited financial data on the
selected companies, and that comparisons among companies
with intellectual property licensing business models using
historical and projected data may not be meaningful because
their revenue events can span years.
Because Atlas’s own statements suggested that this
analysis had low utility, it is not reasonable to infer that
Finjan’s management put much faith in this analysis.
7. An article from a “sophisticated Finjan investor”
predicted that Finjan’s shares were worth 4.8 to 10 times the
$1.50 share price. The complaint alleges that this article
relied on “public statements made by [Finjan] and
management,” but there is no allegation regarding how the
“sophisticated Finjan investor” calculated the estimated
share value, nor what specific “public statements” made by
Finjan were relied upon by the “sophisticated Finjan
investor.”
This article is irrelevant because there is no allegation
that Finjan management knew of the article. There is no way
to infer whether Finjan management could have reached the
same conclusion because there are no allegations regarding
how the “sophisticated Finjan investor” reached his
conclusion.
8. An article from a financial investment website in
May 2020 claimed that Finjan was worth $5.00 per share.
The complaint alleges that this figure represents an average
of multiple estimations by “Wall Street analysts,” but again
there is no allegation regarding who were the analysts nor
how they conducted their own calculations of the estimated
26 GRIER V. FINJAN HOLDINGS, INC.
share value.
This article is also irrelevant because there is no
allegation that Finjan management knew of the article.
There is no way to infer whether Finjan management could
have reached the same conclusion because there are no
allegations regarding how the financial investment website
reached its conclusion.
9. Finjan told shareholders in December 2019 (pre-
COVID) that Finjan’s licensing and enforcement division
would generate $200 to $400 million total revenue over the
next three years. Grier uses these revenue predictions to
calculate that Finjan’s shares were worth $4.36 to $15.50 per
share.
The December 2019 revenue projections carry little
weight for two reasons. First, these projections were made
before the COVID-19 pandemic. Although Finjan
management expressed optimism in the face of the
pandemic, 8 Grier’s complaint also details many ways in
which the pandemic affected Finjan’s operations, including
delaying Finjan’s patent enforcement trials and forcing
Finjan to reduce non-litigation expenses by 25%. Grier
points out that, as of May 2020, Finjan’s enforcement trials
were still expected to occur by 2024, within the timeframe
for the revenue projections Finjan provided to Atlas.
Nevertheless, delays involve uncertainty, and in any event,
8
In a March 2020 presentation to investors, Hartstein stated that he had
“average to possibly even high expectations that [Finjan’s licensing]
portfolio will certainly yield more profit than it did expense.” In the
same presentation, a slide displayed Finjan’s response to the pandemic,
noting that Finjan would continue to conduct “Business as Usual”—
meaning that Finjan would continue to pursue licensing deals and
litigation settlements.
GRIER V. FINJAN HOLDINGS, INC. 27
the completion of a trial is not guaranteed to generate
revenue even were Finjan to prevail if, for example, the
defendant appeals or fails immediately to pay the judgment.
Thus, the pre-COVID revenue figures are too remote to
create the reasonable inference that Finjan’s post-COVID
revenue would be similar.
Second, Grier’s own calculations show that the pre-
COVID revenue figures would support a valuation of $4.36
to $15.50 per share. This figure is anomalous when read
alongside the considerably lower valuations provided by
every other calculation (except the unexplained calculations
by the “sophisticated Finjan investor”). Even had Finjan
management once believed in these pre-COVID revenue
projections, Grier has failed to allege sufficient facts to infer
that such revenue predictions continue to hold any water or
that Finjan management continued to believe those
projections were accurate.
10. Grier’s complaint also includes a motive allegation
relevant to this assessment of subjective falsity: Grier alleges
that Finjan management feared a hostile takeover by Party B
because Party B would remove the then-leaders of Finjan
from their positions. Party B was a strategic acquirer with
its own management team already in place, and Grier alleges
that Party B therefore would not have needed the then-
existing Finjan leadership. Grier also alleges that, by asking
to deal directly with the Finjan board and by criticizing the
sale process, Grier alleges that Party B had expressed
displeasure with the then-existing Finjan leadership.
Further, Grier alleges that Party B’s threat of purchasing
more shares on the open market caused Finjan’s board to
28 GRIER V. FINJAN HOLDINGS, INC.
reopen the sales process only weeks after closing it. 9
Grier’s motive allegation is implausible. Grier
essentially alleges that Party B’s April 1, 2020
communication (notifying Finjan’s board of Party B’s intent
to acquire additional shares in the open market) triggered a
dash for Finjan to secure a deal with Fortress, with Finjan
management manipulating revenue figures to convince
Finjan shareholders that the deal with Fortress should be
accepted. This is not plausible for four reasons:
First, the allegedly faulty revenue predictions were
generated on April 25, 2020, updated on May 27, 2020, and
provided to Fortress before the agreement was executed on
June 10, 2020. Thus, if Finjan management were falsely to
lowball Finjan’s revenue predictions, it could have
convinced Fortress that the deal was bad just as much, if not
more, than it would have convinced shareholders that the
deal was good.
Second, Finjan management did not need false revenue
figures to steer the deal toward Fortress. Party B had
withdrawn its final offer for $1.50 per share, but Fortress was
willing to go through with a deal for $1.55 per share.
Fortress simply offered the better deal. 10
9
Grier’s complaint also contains allegations that Hartstein was
motivated by the monetary compensation that he received as a result of
the sale under his Finjan employment contract. However, Grier
abandoned this theory below when it became clear that Hartstein would
have received more monetary benefits from a deal with Party B than he
received in the deal with Fortress, thus undermining Grier’s theory.
Grier does not raise the issue on appeal.
10
At oral argument, Grier’s counsel argued that Finjan management
should have avoided any sale of the company. This argument contradicts
one of the core allegations in Grier’s complaint: Finjan management
GRIER V. FINJAN HOLDINGS, INC. 29
Third, on April 13, 2020—weeks after Party B
threatened to acquire additional shares—Finjan entered into
an agreement with Party B, providing Party B with the
exclusive right to negotiate with Finjan through April 20,
2020. This demonstrates that Finjan was not averse to
dealing with Party B despite the alleged threat of a hostile
takeover.
Fourth, Grier’s factual allegations are insufficient to
create a reasonable inference that Finjan management would
lose their jobs in a deal with Party B. The complaint asserts
that Party B is “a publicly traded strategic acquirer” and
therefore would not need the Finjan management team. This
is too great of an inferential leap. That Party B is “a publicly
traded strategic acquirer” does not imply any particular
leadership structure for Party B, nor does it imply that Finjan
management could not continue in leadership positions after
the sale.
* * *
Thus, none of the allegations, standing alone, creates a
reasonable inference of subjective falsity—a reasonable
inference that Finjan management believed that the revenue
projections or share-value estimations provided to
shareholders were inaccurate.
Even taking Grier’s factual allegations together, it is not
reasonable to infer subjective falsity. The only facts that
have any tendency to support this conclusion are Finjan’s
allegedly believed that a failure to sell the company would result in a
hostile takeover by Party B. A sale to Fortress for $1.55 per share was
better for shareholders than a hostile takeover by Party B, in which
shareholders would have presumably received only the market rate for
their shares, $1.33—a clearly inferior option.
30 GRIER V. FINJAN HOLDINGS, INC.
pre-COVID open-market share prices and Finjan’s
December 2019 revenue predictions. However, it is not
reasonable to infer from the allegations of the complaint that
Finjan management still believed these figures were
predictive post-COVID. Finjan management’s
announcement of a 25% reduction in non-litigation expenses
indicates that it believed COVID had a serious impact on
Finjan.
Any minimal faith in the old revenue predictions must
have been defeated as Finjan management watched the sale
process play out. More than fifty parties were contacted, and
several engaged in negotiations; that $1.55 per share was the
best final offer received “is a very strong indication” that this
share price was a “fair value.” Gilbert, 731 A.2d at 797. It
is unreasonable to infer from these factual allegations that
Finjan management subjectively believed that the revenue
projections or the estimated share values produced therefrom
were too low.
Accordingly, Grier failed to provide a plausible
allegation of subjective falsity, a critical element of his
Section 14(e) claim.
III. CONCLUSION
For the foregoing reasons, we AFFIRM the district
court’s dismissal of Grier’s second amended complaint.