In re Yahoo! Inc. Securities Lit., No. 12-17080 (9th Cir. 5/15/2015) (unpublished), the Court of Appeals for the Ninth Circuit affirmed dismissal of a class action securities fraud complaint that was based upon alleged misstatements or omissions concerning Yahoo's investment in the Alibaba Group online & mobile marketplace (www.alibabagroup.com/en/global/home).
According to allegations in the Consolidated Amended Complaint, which the District Court accepted as true for purposes of the motion to dismiss, Yahoo had acquired 46% of the Alibaba Group in 2005. Alibaba Group, in turn, owned 70% of the Alibaba.com online marketplace. "Alibaba Group also owned … Alipay, an online payment business similar to PayPal [www.alipay.com][.]" Order Granting Motion To Dismiss, at 2, No. C 11-02732 (N.D. Cal. 8/10/2012) (the "District Court Order") (citations omitted). Yahoo reported the value of its investment in the Alibaba Group as approximately $2.3 billion during the Class Period. Id., at n.1. Investors and analysts reported that the Alipay business was worth $6 billion. Id., at 3. "During quarterly earnings calls, Yahoo reported the value of its indirect stake in the publicly traded securities of Alibaba.com, which excluded the value of Alibaba Group’s privately held businesses, such as Alipay. Yahoo does not appear to have separately reported Alipay’s financial results or any valuation of Alipay." Id., at 3-4.
"As alleged by Plaintiff, in China, Internet businesses are generally subject to regulations requiring that they be owned by Chinese nationals ... In June 2010, the Bank of China adopted new regulations which threatened to exclude "companies with foreign capital from the new regulatory framework." Id. In August 2010, Alibaba Group transferred its shares in Alipay to a Chinese company ... for "approximately $46 million – less than 1% of Alipay’s estimated $6 billion value."Id. However, in the transfer, Alibaba Group still "controlled Alipay through a series of agreements ... and consolidated Alipay’s financial results." Id., at 4-5.
In January 2011, the Alibaba Group's control agreements over Alipay were terminated after two letters from the Bank of China asked the Alibaba Group to declare whether it had control agreements connected to Alipay. District Court Order, at 5.
Plaintiffs' Complaint alleged first that "Yahoo misled investors after the ... 2010 transfer of Alipay ... by continuing to speak as though Yahoo still had an ownership interest in Alipay that added significant value to the overall investment." District Court Order, at 5. In August, October and November 2010, Yahoo reported its investment in Alibaba Group to be $2.2 billion. Id. (citations omitted). In January 2011, Yahoo stated that its reported "'$2.3 billion “equity investment'” value did “'not include estimates of the value of Alibaba Group’s privately held businesses[.]'” Id. "They also stated that Yahoo’s “'approximately 40% stake [in the Alibaba Group] has been and continues to be a great investment ... has a bright future [and] . . . will grow in value and continue to greatly benefit our investors over time.'” Id., at 6. Yahoo also repeatedly "warned that variations in the operating performance of the Alibaba Group could impact Yahoo’s stock price." Id., at 5-6.
Yahoo and other Defendants contended they learned about the Alipay restructuring on March 31, 2011. District Court Order, at 6 (citation omitted). Plaintiffs alleged that in April 2011, the defendants still led investors to believe the value of the Alibaba Group investment was much higher than reported, because the reported value still did “'not include estimates of the value of Alibaba’s privately held businesses.'” Id. Plaintiffs also alleged that Defendants failed to correct their previous statements that created a false impression that the Alibaba Group still owned and controlled Alipay. Id.
On May 10, 2011, Defendants disclosed in Yahoo’s 1Q11 Form 10-Q that 100% of Alipay’s shares had been transferred to a Chinese domestic company to expedite Alipay obtaining an essential regulatory license, and that Yahoo was engaged in ongoing discussions regarding the terms of the restructuring. District Court Order, at 6 (citation omitted). Plaintiffs alleged that Defendants continued to mislead investors by concealing that Alipay’s shares were transferred for just $46 million, and that the control agreements had been terminated. Id. This unexpected negative news allegedly caused Yahoo’s stock price to decline by 7.3% the following day. Defendants allegedly did not disclose that they had known about the Alipay restructuring since March 31, 2011, or claim that it had occurred without their knowledge. Id.
On May 12, 2011, Alipay issued a press release reporting that its shares were transferred in August 2010. the same day, Yahoo issued a press release stating "that it had been notified by Alibaba Group on March 31, 2011, of 'two transactions that occurred without the knowledge or approval of the Alibaba Group board of directors or shareholders. The first was the transfer of ownership of Alipay in August 2010. The second was the deconsolidation of Alipay effective in the first quarter of 2011.'” District Court Order, at 7 (citations omitted). Between May and July 2011, "Yahoo repeatedly disclosed that it was continuing discussions to resolve these issues." Id.
On July 29, 2011, "Yahoo disclosed that it had entered into an overall Framework Agreement with the Alibaba Group and other relevant parties to resolve the outstanding issues related to Alipay." District Court Order, at 8 (citations omitted). The Framework Agreement included Alipay continuing to provide payment services to the Alibaba Group, Alipay paying the Alibaba Group a royalty and software technology service fee, and the Alibaba Group receiving no less than $2 billion and not more than $6 billion from an Alipay IPO or other liquidity event. Yahoo’s stock price declined to $13.10." Id. Yahoo's stock price had traded as high as $16.36 on April 19, 2011. http://finance.yahoo.com/q/hp?s=YHOO&a=03&b=12&c=2011&d=03&e=20&f=11&g=d. Plaintiffs had filed suit in May 2011.
In the Consolidated Amended Complaint, Plaintiffs purported to represent "a class of investors who purchased Yahoo’s common stock between April 19, 2011, and July 29, 2011." District Court Order, at 8. Plaintiff alleged that "statements made in Yahoo’s April 19, 2011 earnings press release and conference call were false and misleading because Defendants did not disclose information about the Alipay restructuring." Id. at 8-9 (citation omitted). Plaintiff then alleged that Defendants “'reveal[ed]' the transfer of Alipay’s shares in Yahoo’s May 10, 2011 10-Q, but 'continued to mislead' by not disclosing additional details relating to transactions underlying the restructuring of Alipay. Plaintiffs allege that 'most' of these details were 'reveal[ed]' ... in Yahoo’s May 12, 2011 press release." Id., at 9. Plaintiffs alleged that these statements and omissions constituted false and misleading statements in violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) (15 U.S.C. § 78j(b)); SEC Rule 10b-5 (17 C.F.R. § 240.10b-5); and controlling-person provisions of Section 20(a) of the Exchange Act. 15 U.S.C. § 78t(a).
On the motion to dismiss, the District Court held that the Plaintiffs had failed to plead facts sufficient to establish a false or materially misleading statement. District Court Order, at 11. "Section 10(b) and Rule 10b–5(b) do not create an affirmative duty to disclose any and all material information. Disclosure is required ... only when necessary “to make ... statements made, in the light of the circumstances under which they were made, not misleading. ... 'Silence, absent a duty to disclose, is not misleading under Rule 10b–5'. Even with respect to information that a reasonable investor might consider material, companies can control what they have to disclose under these provisions by controlling what they say to the market." Id., citing 17 C.F.R. § 240.10b–5(b); Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1321-22 (2011), Basic Inc. v. Levinson, 485 U.S. 224, 238-239 (1988).
As to the April 19 statements, the Court held that they were not actionable because they did not make any representations about the extent or value of Alibaba Group's "privately held businesses," including or not including Alipay. District Court Order, at 11-17. The Court held that the material facts in the May 10 statements were that, as of that date, “the transaction is potentially wide-ranging, with ongoing consequences, and a definitive restructuring of the company. Moreover, this underscores the impression that the state of affairs is still in flux[.]”Id. Because those material facts were not inconsistent with the Plaintiff’s alleged state of affairs, the Court held that more detailed disclosures were not required: “though this is a close question … the statement is not necessarily misleading because the explanation given is not in conflict with the more specific explanation Plaintiffs think should have been given.” Id., at 19.
The District Court also held that Yahoo did not have any duty to correct pre-class statements about the Alibaba Group. The Court considered that perhaps, a “duty to disclose may arise when a company makes a statement that it believes is true but later discovers that the statement was untrue or misleading when the statement was made” (citations omitted). District Court Order, at 20. Plaintiffs argued that 15 statements made between August 2010 and February 2011 created a false impression of Alibaba Group’s control over Alipay, and therefore created a duty to correct that misimpression at least during the class period of April through July 2011. Id., at 22-23. The Court dismissed these arguments because Yahoo’s financial results, and discussions of its investment in Alibaba Group, never included any valuation of Alipay. Id., at 23-24. The Court also dismissed the impact of the statements as “vague expressions of enthusiasm” that are not actionable under the securities laws. Id. (citations omitted).
However, the District Court did find that Yahoo had a duty to correct two February 2011 statements that spoke of increasing value and prospects of the Alibaba Group without disclosing its loss of control over Alipay. District Court Order, at 26-27. The Court found that Yahoo disclosed the restructuring of Alibaba Group and Alipay in its May 2011 10Q, and on multiple occasions from May to July 2011 when Yahoo “disclosed that it, the Alibaba Group, and others had entered into the Framework Agreement, which compensated the Alibaba Group for Alipay and resolved other outstanding issues.” Id., at 32. The Court found that it was reasonable for Yahoo to investigate the situation for approximately five weeks before making its first announcement, so that Yahoo timely corrected its February 2011 statements about the Alibaba Group. Id., at 33.
On appeal, the Ninth Circuit panel held that Yahoo's failures to disclose details about Alipay were not actionable because Yahoo's statements about the Alibaba Group "'neither stated nor implied anything regarding'” Alipay’s value or the fact of its restructuring." Slip Op. at 3, citing Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002). Yahoo's statements about the transfer of Alipay from Alibaba Group's control also were “'entirely consistent with the more detailed explanation'” of the restructuring that Plaintiffs alleged. Id. The panel also declined to recognize a duty to correct prior statements, Slip Op. at 4, and also held in the alternative, like the District Court, that Yahoo's delay in announcing the transfer of Alipay from the Alibaba Group was the result of a reasonable investigation and appropriately timed to be made in a quarterly public filing. Id., at 5.
In sum, the courts declined to allow claims that Yahoo could be responsible for correcting optimistic market projections or other impressions that did not result directly from Yahoo's public statements. Significantly for a motion to dismiss, the panel upheld the District Court's drawing of inferences against the Plaintiffs: "the statement is not necessarily misleading because the explanation given is not in conflict with the more specific explanation Plaintiffs think should have been given.” District Court Order, at 19; Slip Op. at 3: "the information disclosed was 'entirely consistent with the more detailed explanation” of the restructuring'" (citation omitted). The Private Securities Litigation Reform Act (PSLRA) provides:
“[T]he complaint shall specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading[.] The PSLRA also requires Plaintiffs to state with particularity facts giving rise to a strong inference of Defendants’ scienter. See 15 U.S.C. §78u-4(b)(2). 'The inference of scienter must be more than merely ‘reasonable’ or ‘permissible’; – 'it must be cogent and at least as compelling as any opposing inference one could draw from the facts alleged.' See Tellabs v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007). Therefore, a court 'must consider plausible nonculpable explanations for the defendant’s conduct.' Id."
District Court Order, at 9-10.
Here, the courts apparently applied the "compelling inference" standard ofTellabs to whether the issuer's public statements were misleading in the first instance. Also, there now may be a developing circuit split regarding the duty to correct or update an issuer's public statements. See District Court Order, at 20 (considered in the Third & Seventh Circuits); Slip Op. at 4 ("even if we were to recognize a duty to correct, which we do not …").