Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co.

663 F.Supp.3d 334

ALTIMEO ASSET MANAGEMENT and ODS Capital LLC, individually and on behalf of all others similarly situated, Plaintiffs, v. QIHOO 360 TECHNOLOGY CO. LTD., Hongyi Zhou, Xiangdong Qi, and Eric X. Chen, Defendants.

19 Civ. 10067 (PAE)

United States District Court, S.D. New York

Signed March 21, 2023

Jennifer Pafiti, Pomerantz LLP, Los Angeles, CA, Carol Cecilia Villegas, Labaton & Sucharow LLP, New York, NY, Jeremy Alan Lieberman, Pro Hac Vice, Michael Grunfeld, Pro Hac Vice, Pomerantz LLP, New York, NY, for Plaintiff Altimeo Asset Management.

Carol Cecilia Villegas, Jake E. Bissell-Linsk, David Jacob Schwartz, Labaton & Sucharow LLP, New York, NY, Jeremy Alan Lieberman, Michael Grunfeld, Pomerantz LLP, New York, NY, Jennifer Pafiti, Pomerantz LLP, Los Angeles, CA, for Plaintiff ODS Capital LLC.

Eric Foster Leon, Jason Craig Hegt, Hanyu Xie, Latham & Watkins LLP, New York, NY, Brian Christopher Raphel, Orrick Herrington & Sutcliffe LLP, New York, NY, Angela Liu, David H. Kistenbroker, Joni Jacobsen, Dechert LLP, Chicago, IL, for Defendants Qihoo 360 Technology Co. Ltd., Eric X. Chen.

Eric Foster Leon, Jason Craig Hegt, Hanyu Xie, Latham & Watkins LLP, New York, NY, for Defendant Hongyi Zhou.

OPINION & ORDER

PAUL A. ENGELMAYER, District Judge:

This is a putative class action under the federal securities laws. Lead plaintiffs Altimeo Asset Management ("Altimeo") and ODS Capital LLC ("ODS") (collectively, "plaintiffs") claim that internet company Qihoo 360 Technology Co. Ltd. ("Qihoo") and three of its leaders carried out a scheme to depress the price of Qihoo's American Depositary Shares ("ADS") and stock (together, "Qihoo securities") to enable them to pay Qihoo shareholders an unfairly low price when they took the company private in 2016 (the "Go-Private Merger" or the "Merger"). The three leaders are Qihoo's co-founder and chief executive officer ("CEO") Hongyi Zhou, co-founder and president Xiangdong Qi, and director and special committee chair Eric Chen (with Qihoo, Zhou, and Qi, "defendants").

Plaintiffs allege that at the time the Go-Private Merger was announced, defendants had a concrete plan eventually to relist Qihoo on a Chinese stock exchange, but did not disclose this information. Defendants' non-disclosure of their plan to revive Qihoo as a public company, plaintiffs claim, depressed the market price of Qihoo shares, harming shareholders who (1) sold shares in the open market before the Merger or (2) traded their shares in at a negotiated price as part of the Merger. They allege that Qihoo made various false and misleading statements regarding the Merger between December 18, 2015, the day the Merger was announced in a press release, and July 15, 2016, the Merger's effective date (the "class period"). Plaintiffs bring suit on behalf of a putative class comprised of owners of Qihoo securities who sold shares during the class period ("seller shareholders"), or who tendered those shares for the Merger consideration ("tenderer shareholders").¹ Plaintiffs allege violations of §§ 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 ("Exchange Act") and the implementing rule of the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10b-5 ("Rule 10b-5").

In an earlier decision, this Court granted Qihoo and Chen's motion to dismiss plaintiffs' First Amended Complaint ("FAC"), Dkt. 53, for failure to state a claim under Federal Rules of Civil Procedure 12(b)(6) and 9(b). See Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co. ("Altimeo I"), No. 19 Civ. 10067 (PAE), 2020 WL 4734989 (S.D.N.Y. Aug. 14, 2020), vacated and remanded, 19 F.4th 145 (2d Cir. 2021). The Court held that the FAC did not plausibly allege "that defendants, as of the Merger, had in place a concrete plan to relist," which was the factual premise on which its "claims of material misrepresentations and omissions all turn." Id. at *17. The Second Circuit vacated that decision. See Altimeo Asset Mgmt. ("Altimeo II"), 19 F.4th 145. The Circuit held that the FAC alleged facts plausibly supporting the inference that, as of the shareholder plan to approve the Go-Private Merger, defendants had an undisclosed plan in place to relist. Id. at 149-52. The Circuit remanded the case for further proceedings. Id. at 152.

At the time of the Circuit's decision, Zhou had not been served, but now has been. He now moves to dismiss the FAC under Rules 12(b)(6) and 9(b), making arguments both specific to him and of broader applicability. For the following reasons, the Court grants the motion in part and denies it in part.

I. Background²

A. The Parties

Altimeo is an independent portfolio management company based in France and approved by the French Financial Authority. FAC ¶ 18. ODS is a Florida limited liability company. Id. ¶ 20. Both entities owned Qihoo securities, including ADS purchased on the New York Stock Exchange ("NYSE"), during the putative class period.³ They seek to represent a class of similarly situated investors. Id. ¶¶ 19-20.

Altimeo and ODS each sold shares during the class period and tendered shares in connection with the Go-Private Merger. See id.; see also Dkt. 12-3 (certifications of Altimeo and ODS purchase and sales). Altimeo purchased 140,261 Qihoo ADS during the class period and sold 79,613 such shares during that period. FAC ¶ 19. As of the Merger, Altimeo retained 61,500 Qihoo shares, including some it had acquired before the start of the class period; it exchanged those for cash pursuant to the Merger. Id. ODS purchased 86,300 ADS during the class period and sold at least 11,800 ADS during that time. Id. ¶ 20. It retained 74,500 ADS through the Merger; it exchanged those securities for cash pursuant to the Merger. Id.

Qihoo is a Cayman Islands corporation headquartered in Beijing. Id. ¶ 21. It offers various internet and cloud-based products—including internet and mobile security tools, an internet browser, a search engine, and a mobile app store—to hundreds of millions of customers. Id. ¶¶ 34-36.

Qihoo's "core business at the time of the Merger was its internet security business." Id. ¶ 38. Before the Merger, Qihoo-registered ADS were listed and traded on the NYSE under the ticker symbol "QIHU." Id. ¶ 21. The Bank of New York Mellon administered Qihoo's ADS from its New York corporate headquarters and trust office and served as the depositary for Qihoo's ADS. Id. ¶ 15. The Hongkong and Shanghai Banking Corporation was the custodian holding the ADS. Final Proxy Statement at v. Each ADS was redeemable for 1.5 of Qihoo's Class A ordinary shares. FAC ¶ 15. Qihoo's common stock was not registered with the SEC or publicly traded in the United States before the Merger. Id.

Zhou is Qihoo's co-founder and served as chairman and CEO during the class period. Id. ¶ 22. He also owned shares in some equity investors that participated in taking Qihoo private. Id. ¶¶ 29-30 & n.2. Before the Merger, Zhou owned 17.3% of Qihoo. Id. ¶ 62. According to the final proxy statement, after the Merger, he personally owned 22.8% of the Company. Id. ¶ 64.

Qi is Qihoo's co-founder and served as president and director during the class period. Id. ¶ 23. Like Zhou, he also owned shares in some entities that participated in taking Qihoo private. Id. ¶¶ 29-30 & n.3. Before the Merger, Qi owned 8.1% of Qihoo. Id. ¶ 62. According to the final proxy statement, he personally owned 2.2% of the Company after the Merger, plus an additional 11.5% via Tianjin Xinxinsheng Investment Limited Partnership ("Xinxinsheng"), in which he was the general partner. Id. ¶ 64.

Chen served as a Qihoo director from 2014 through the Merger, and acted as chairman of the special committee of independent directors that the Company appointed to evaluate the Merger. Id. ¶¶ 24, 26.

B. The Go-Private Merger

1. Origins of the Merger

In early May 2015, Zhou discussed the possibility of acquiring Qihoo with Golden Brick Capital Private Equity Fund and China Renaissance Holdings Limited. Id. ¶ 41. Later that month, he discussed such a transaction with Qi and representatives of CITIC Securities Co. Ltd. and Sequoia Capital China, whose founding managing partner is a Qihoo director. Id. These discussions sparked the transaction at the center of this dispute. Id. On June 17, 2015, the four investment companies and Zhou (collectively, the "Buyer Group") approached Qihoo's board with a preliminary non-binding proposal to acquire all of Qihoo's outstanding shares for $77.00 in cash per ADS and $51.33 in cash per Class A or Class B ordinary share. Id. ¶ 42.

Two days later, on June 19, 2015, Qihoo's board formed a special committee, chaired by Chen, to evaluate the transaction. Id. ¶ 44. Zhou was not a member of the committee. Id. ¶ 26. The committee was charged with evaluating the terms of the Buyer Group's proposal, negotiating with the Buyer Group or its representatives, exploring strategic alternatives, negotiating definitive agreements, and reporting to the Board recommendations and conclusions as to the fairness of the proposed transaction to Qihoo's stakeholders. Id. ¶ 44. The special committee retained J.P. Morgan Securities to act as a financial advisor in connection with its review of the Merger proposal, id. ¶ 45, and Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden Arps") to act as legal counsel, Final Proxy Statement at 30.

Heated negotiations over the terms of the Merger agreement followed. During the negotiation period, the Buyer Group rejected the special committee's proposal to extend the go-shop period, during which it could solicit alternative acquisition proposals.

Final Proxy Statement at 35. The Buyer Group also repeatedly rejected the special committee's attempts to negotiate a higher Merger price of $80.00 per ADS on December 9, 2015. Id. at 35-36.

After the Buyer Group's first rejection of the $80.00 per ADS price, the special committee discussed the Buyer Group's rejection and a renewed strategy for negotiating that price with J.P. Morgan and Skadden Arps....