Finjan Beats Investor Suit Over $44M Fortress Deal, For Now
By Sarah Jarvis
Law360 (April 14, 2021, 7:33 PM EDT) -- Cybersecurity company Finjan Holdings has beaten shareholders' proposed securities class action, but a California federal judge left room for the investors to amend their claims that the company made misrepresentations about its $44 million acquisition deal last year.
U.S. District Judge Edward M. Chen said in his order on Tuesday that lead plaintiff Robert Grier didn't include in his November amended complaint any allegations as to why Finjan and its leaders would endorse as true certain financial projections that allegedly undervalued the company if management actually believed the projections were false.
"The FAC does not contain any allegations suggesting that defendants would secure unique benefits not afforded to shareholders if the tender offer were to go through," Judge Chen said. "Nor are there any other allegations suggesting that defendants' interests regarding the tender offer were not aligned with those of the shareholders."
Judge Chen called the complaint's lack of motive "highly problematic" in light of a recent Ninth Circuit opinion in Prodanova v. H.C. Wainwright & Co. LLC, which found that if a complaint "fails to plead a plausible motive for the allegedly fraudulent action, the plaintiff will face a substantial hurdle in establishing scienter," according to Tuesday's order.
Grier and the proposed class had filed suit against Finjan, its president and CEO Philip Hartstein and former members of its board of directors, relating to an announced deal in which Fortress Investment Group LLC agreed to buy Finjan's outstanding shares for $1.55 each in a tender offer. The transaction closed in July, according to an announcement from Finjan.
Judge Chen said Finjan's board issued a recommendation statement that was supported by a fairness opinion prepared by financial adviser Atlas Technology Group LLC. The shareholders had alleged that only one of three analyses in the fairness opinion supported the fairness of the merger consideration of $1.55 per share, but that analysis was allegedly flawed because it was based on false or misleading information from Finjan management.
The shareholders alleged that the "multiyear projections" used in the analysis undervalued Finjan. Those projections, based on information Finjan gave to Atlas in May, indicated Finjan was expected to earn about $160 million in revenue across its three business lines over five years. But Finjan said in an investor presentation in December 2019 that it expected to generate $200 million to $400 million in licensing and enforcement revenue alone for the 2019-2022 period, according to the order.
Grier said that with $200 million in revenue, Finjan stock would have been worth about $4.36 per share, and with $400 million, it would have been worth about $15.50 per share. He also argued that "optimism aside," the state of Finjan at that time justified more than $1.55 per share, according to the order.
Finjan argued that the recommendation statement and fairness opinion were accurate, because there was volatility and a downward trend in revenues in the months leading up to the deal, adding that operating expenses were high and the coronavirus pandemic created uncertainty, a delay in revenue and an increase in expenses.
Finjan also indicated the company's cash balances had decreased from $65 million in June 2018 to the $27 million they had projected for June 2020, according to the order.
Judge Chen said he can't overlook the shareholders' failure to allege a plausible motive, because there are not "compelling and particularized facts alleged in support of the claim of fraudulent intent." He added there was concrete market evidence that the merger consideration was reasonable, noting that around the same time of Fortress' offer, another party had made an offer of $1.50 per share.
But Judge Chen gave Grier leave to amend his Securities Exchange Act claim, saying the shareholder argued at a court hearing that Finjan managers would have wanted to carry out the merger because the company would become private and they would have had more secure employment.
"This motive, however, has not been alleged in the operative pleading and therefore the court gives it no consideration at this juncture," Judge Chen said.
Counsel for the parties did not immediately respond to requests for comment.
Grier and the proposed class are represented by Juan E. Monteverde, David E. Bower, Miles D. Schreiner and John Baylet of Monteverde & Associates PC.
Finjan is represented by James L. Jacobs and Valerie M. Wagner of GCA Law Partners LLP.
The case is In re: Finjan Holdings Inc. Securities Litigation, case number 3:20-cv-04289, in the U.S. District Court for the Northern District of California.
--Additional reporting by McCord Pagan. Editing by Nicole Bleier.
