Hussey v. Ruckus Wireless, Inc. et al
Filing
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ORDER by Judge Edward M. Chen Granting 42 Defendants' Motion to Dismiss. (emcsec, COURT STAFF) (Filed on 2/21/2017)
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UNITED STATES DISTRICT COURT
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NORTHERN DISTRICT OF CALIFORNIA
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Plaintiffs,
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Docket No. 42
RUCKUS WIRELESS, INC., et al.,
Defendants.
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For the Northern District of California
United States District Court
ORDER GRANTING DEFENDANTS’
MOTION TO DISMISS
v.
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Case No. 16-cv-02991-EMC
MIGUEL HUSSEY, et al.,
Currently pending before the Court is Defendants‟ motion to dismiss. A hearing was held
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on Defendants‟ motion on February 16, 2017. This order memorializes the rulings made by the
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Court at the hearing and provides additional analysis, as necessary.
I.
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A.
DISCUSSION
Section 14(d)(7) Claim
Lead Plaintiff failed to make any substantive argument in response to Defendants‟ motion
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to dismiss the § 14(d)(7) claim. Accordingly, the motion to dismiss the § 14(d)(7) claim is
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dismissed with prejudice.
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B.
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Section 14(e) Claim
Section 14(e) of the 1934 Act covers an untrue statement of material fact or omission of
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fact with respect to a tender offer. As an initial matter, the Court rejects Lead Plaintiff‟s argument
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that scienter is not an element of a § 14(e) claim. Multiple circuit courts (in particular, the Second,
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Third, Fifth, Sixth, and Eleventh Circuits) have held that scienter is an element, as Lead Plaintiff
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itself admits. See Opp‟n at 20 (citing cases). So has Judge Orrick in his recent decision in
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Manger v. Leapfrog Enterprises, Inc., No. 16-cv-01161-WHO, 2017 WL 282739 (N.D. Cal. Jan.
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23, 2017). The reasoning underlying those decisions is sound. See, e.g., Smallwood v. Pearl
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Brewing Co., 489 F.2d 579, 605 (5th Cir. 1974) (noting that “Congress adopted in Section 14(e)
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the substantive language of the second paragraph of Rule 10b-5 and in so doing accepted the
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precedential baggage those words have carried over the years”). Furthermore, Supreme Court
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case law weighs in favor of Defendants, as does Ninth Circuit case law. See, e.g., Schreiber v.
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Burlington Northern, Inc., 472 U.S. 1, 10 (1985) (stating that “[§] 14(e) adds a „broad antifraud
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prohibition,‟ modeled on the antifraud provisions of § 10(b) of the [1934] Act and Rule 10b-5”)
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(quoting Piper v. Chris-Craft Indus., 430 U.S. 1, 22 (1977)); Vaughn v. Teledyne, Inc., 628 F.2d
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1214, 1219 (9th Cir. 1980) (stating that “[§] 14(e) is generally the same as § 10(b) and Rule 10b-5,
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but is applicable specifically to tender offers rather than other purchases or sales of securities”).
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Lead Plaintiff‟s primary argument in opposition is that a tender offer situation (§ 14(e))
should be treated the same as a proxy/shareholder vote situation (§ 14(a)). But the wording of the
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For the Northern District of California
United States District Court
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two sections differ, and they were enacted at different times. Lead Plaintiff‟s argument is based
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not on statutory language but on policy and is thus better addressed to the legislature rather than
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the Court. Lead Plaintiff‟s last-minute argument (presented for the first time at the hearing) – i.e.,
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that any scienter requirement should apply only to, e.g., third-party accountants – was made
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without any supportive authority.
Because Lead Plaintiff has not made sufficient allegations of scienter, dismissal of the §
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14(e) claim is warranted.
Dismissal is also warranted because Lead Plaintiff has failed to adequately plead falsity,
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particularly under the standard required by Rule 9(b) and the PSLRA. At the hearing, Lead
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Plaintiff primarily argued that the 14D-9 was misleading because it overstated the value of the
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offer consideration; in particular, the value of the offer consideration was overstated because it
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was implicitly based on an overstated value of Brocade stock (stand alone) which valuation was
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not expressly stated in the 14D-9. But this specific theory was never articulated, at least not
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clearly, in the operative complaint.1
In its papers, Lead Plaintiff claimed falsity on two other grounds: (1) because there was an
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The Court does not opine at this point on the sustainability of such a theory.
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inadequate disclosure in the 14D-9 regarding Morgan Stanley‟s conflicts of interest and (2)
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because certain financial projection information was not included in the 14D-9. The first ground
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is arguably problematic because, as Lead Plaintiff acknowledges in its complaint, Morgan
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Stanley‟s 13F disclosed its specific holdings in Brocade – i.e., such information was available to
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the public. Other concerns have been raised by Defendants‟ argument that the 13F disclosures
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included “both holdings for [Morgan Stanley‟s] own account and those held for clients for whom
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they make investment decisions,” Reply at 3, and by Defendants‟ argument that Ruckus‟s actual
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financial advisor (Morgan Stanley & Co. LLC) was only one of fifteen affiliated entities
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represented on the Form 13F, and it “itself had investment discretion over only 415,049 Brocade
accept Lead Plaintiff‟s numbers, there is no context to determine whether Morgan Stanley‟s
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For the Northern District of California
shares of common stock and no Brocade notes.” Reply at 3 n.3. Finally, even if the Court were to
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United States District Court
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holding of 3.67 million shares of Brocade common stock and $9.762 million in Brocade notes was
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significant to Morgan Stanley. See also Reply at 4 (arguing that, in the Form 13F, “Morgan
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Stanley and its affiliates collectively disclosed securities valued at over $259 billion, of which the
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Brocade holdings represented 0.0017% for Morgan Stanley (or 0.019% of the overall portfolio
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including affiliates‟ holdings”) (emphasis in original).
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As for the second ground, Lead Plaintiff is basically criticizing Defendants for providing
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an incomplete picture. But an incomplete picture does not necessarily establish that the 14D-9 is
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false or misleading. The question is whether and how the disclosed projections in the 14D-9 were
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rendered false or misleading because of the incomplete information. See Brody v. Transitional
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Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002) (“Rule 10b-5 and Section 14(e) in terms prohibit
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only misleading and untrue statements, not statements that are incomplete.”) (emphasis omitted).
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For the foregoing reasons, the Court grants Defendants‟ motion to dismiss the § 14(e)
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claim. However, because it is not clear that Lead Plaintiff could not cure the deficiencies in an
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amended pleading, the Court gives Lead Plaintiff leave to amend. In the amended complaint,
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Lead Plaintiff must address scienter as to each defendant (i.e., “lumping together” of Defendants
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will not be accepted); in addition, Lead Plaintiff must explain with specificity what the false or
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misleading statement or omission is and why it is false or misleading.2 Lead Plaintiff is advised to
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address in its amended complaint the issues noted above.
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C.
Section 20(a) Claim
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Lead Plaintiff‟s § 20(a) claim is derivative of its § 14(e) claim. Thus, the § 20(a) claim
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falls with the § 14(e) claim. Consistent with the above, Lead Plaintiff has leave to amend the §
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20(a) claim.
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D.
At this juncture, the Court shall not address Defendants‟ arguments in favor of dismissal of
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State Law Fiduciary Duty Claims
the state law fiduciary duty claims. The Court will not entertain any arguments related to the
that Lead Plaintiff has adequately pled a federal securities claim (§ 14(e) and/or § 20(a)) in the
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For the Northern District of California
fiduciary duty claims over which it has supplemental jurisdiction unless and until it determines
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United States District Court
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first instance.
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However, because the Court is already giving leave to Lead Plaintiff to amend the § 14(e)
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and § 20(a) claims, it shall also give Lead Plaintiff leave to amend its allegations in support of the
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fiduciary duty claims. In this regard, the Court notes that it would be helpful for Lead Plaintiff to
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identify what specific fiduciary duties have allegedly been violated and then explain how. In
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addition, similar to above, Lead Plaintiff should not lump Defendants together but have allegations
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specific as to each defendant. Finally, in light of the Delaware Supreme Court‟s affirmance in In
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re Volcano Corp. Stockholder Litigation, see Docket No. 56-1, Lead Plaintiff should make clear
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how the shares tendered by disinterested shareholders constitute less than a majority of the total
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shares. The “other management” holding 2.2% of the shares seems to include three executive
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officers who – at least facially – Lead Plaintiff has not claimed to be interested (i.e., Lead Plaintiff
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has not sued all of those individuals as defendants).
II.
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CONCLUSION
For the foregoing reasons, the Court grants Defendants‟ motion to dismiss. The § 14(d)(7)
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The Court does not, at this juncture, make a ruling as to Lead Plaintiff‟s contention that it need
not plead loss causation for a § 14(e) claim. Out of an abundance of caution, Lead Plaintiff would
be well advised to include specific loss causation allegations in its amended complaint.
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claim is dismissed with prejudice. The § 14(e) and § 20(a) claims are dismissed without
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prejudice, and Lead Plaintiff has leave to amend. The Court defers ruling on the fiduciary duty
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claims but Lead Plaintiff may amend the factual allegations in support.
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The amended complaint shall be filed by March 20, 2017. Defendants‟ response shall be
filed by April 20, 2017.
This order disposes of Docket No. 42.
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IT IS SO ORDERED.
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For the Northern District of California
United States District Court
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Dated: February 21, 2017
______________________________________
EDWARD M. CHEN
United States District Judge
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