19 F.4th 145
2d Cir.2021Background
- Qihoo 360 (Cayman-incorporated, Beijing HQ) executed a going-private merger on Dec. 18, 2015; proxy materials told shareholders the Buyer Group had no "current plans" for extraordinary corporate transactions but might "propose or develop" a future relisting.
- Shareholders approved the Merger (99.8%); transaction closed July 15, 2016; Qihoo’s business was later spun into 360 Technology and effectively relisted on Shanghai exchanges via a backdoor/ reverse merger (announced Nov. 2017; trading began Feb. 2018).
- Plaintiffs Altimeo and ODS traded Qihoo securities Dec. 2015–June 2016 and allege they sold at depressed prices because the Proxy Materials misled that no relisting plan existed when one did.
- Complaint alleges Buyer Group had an existing relisting plan at the time of the proxy, supported by: (a) two contemporaneous Chinese news articles reporting a privatization plan that included relisting, (b) a confidential witness in Qihoo’s PR dept. describing instructions to keep relisting plans secret, and (c) an M&A expert opining that relisting via backdoor merger typically requires a year+ of preparatory steps.
- District court dismissed under Rule 12(b)(6), concluding the complaint failed to plead a concrete relisting plan with sufficient specificity and discounted the confidential witness; held plaintiffs did not plead a material misstatement/omission.
- The Second Circuit vacated and remanded, holding the pleaded circumstantial facts plausibly alleged a material misstatement or omission under §10(b)/Rule 10b‑5 and reinstated the derivative §20(a) and §20A claims to proceed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs pleaded a material misstatement or omission under §10(b)/Rule 10b‑5 | Proxy statement representation that Buyer Group had "no current plans" to relist was false or misleading because a concrete relisting plan existed at the time of the Merger | Proxy language merely said no current plans and permissibly disclosed that management "may" propose relisting later; plaintiffs’ allegations lack concrete terms/participants and therefore fail Rule 9(b)/PSLRA specificity | Vacated dismissal: the circumstantial allegations (news articles, timelines, expert timeline) permit a plausible inference a relisting plan existed and that omission was material; claim survives motion to dismiss |
| Materiality of alleged omission (would disclosure have altered the "total mix") | A relisting at a much higher valuation was probable enough and would have meaningfully altered shareholders’ assessment of the Merger | Alleged negotiations were speculative and not sufficiently "jell[ed]" to be material at the time of the proxy | Materiality is a fact-intensive inquiry; court held plaintiffs’ allegations were not so obviously unimportant that dismissal was warranted |
| Reliance on confidential witness allegations | CW testimony supports that insiders were planning relisting and instructed secrecy | District court found CW lacked indicia of reliability and should be discounted | Appellate court did not decide CW reliability because other pleaded facts independently suffice to survive dismissal |
| Viability of §20(a) and §20A claims (require independent Exchange Act violation) | §10(b) claim adequately pleaded, so controlling‑person and contemporaneous‑trader claims can proceed | If §10(b) fails, derivative §20(a)/§20A claims fail too | Because §10(b) claim survives, dismissal of §20(a) and §20A is vacated and those claims remanded |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (establishes plausibility pleading standard)
- Rombach v. Chang, 355 F.3d 164 (statements are material if they would mislead a reasonable investor)
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (omission materiality standard: disclosure would have significantly altered the total mix)
- Basic Inc. v. Levinson, 485 U.S. 224 (materiality depends on probability and magnitude of the event)
- Fecht v. Price Co., 70 F.3d 1078 (circumstantial evidence can satisfy fraud pleading particularity)
- SEC v. Shapiro, 494 F.2d 1301 (negotiations can be material even if a deal is not yet probable)
- Synchrony Fin. Sec. Litig., 988 F.3d 157 (discusses heightened pleading requirements for securities fraud)