On June 8, 2018, Qualcomm shareholders filed a lawsuit in the Southern District of California against Qualcomm Inc., its CEO, and its CFO for, essentially, secretly requesting a Committee on Foreign Investment in the United States (“CFIUS”) review of Broadcom Ltd.’s attempted takeover of Qualcomm. Camp v. Qualcomm Inc., 18-cv-1208 (S.D. Cal. filed June 8, 2018). The CFIUS review, as previously reported by V&E, ultimately led to President Trump’s executive order that ended Broadcom’s takeover efforts.

The shareholders allege that as a result of the CFIUS review, the executive order, and Qualcomm’s failure to promptly disclose its involvement in seeking the review, Qualcomm stock prices fell by approximately $5.70 per share. This lawsuit illustrates the significant risks inherent in attempting to use CFIUS as a weapon to ward off potential hostile takeovers.

Broadcom’s Attempted Takeover of Qualcomm

Singapore-based Broadcom Ltd., a semiconductor developer, attempted to take over U.S.-based Qualcomm Inc., a developer of mobile and wireless microprocessors. In November 2017, Broadcom offered to purchase Qualcomm for $103 billion and then increased its offer to $121 billion in February 2018. After its first bid was rejected, Broadcom sought to replace members of Qualcomm’s Board of Directors with Broadcom’s own nominees, presumably to stack the Board in favor of Broadcom’s takeover efforts.

On January 23, 2018, Qualcomm sent a letter to its shareholders urging them to re-elect the current Board of Directors and warning that an attempted takeover by Broadcom would face significant hurdles in obtaining CFIUS approval. Six days later, on January 29, Qualcomm unilaterally requested that CFIUS review Broadcom’s efforts to replace Qualcomm’s Board of Directors. But at the time, Qualcomm did not publicly announce it had requested the review. Over one month later, on March 4, CFIUS issued an interim order, delaying Qualcomm’s upcoming shareholder meeting and Board of Directors vote, to allow CFIUS to continue its investigation into national security concerns raised by the potential acquisition. The next day, Broadcom issued a press release revealing that Qualcomm had secretly filed the request for CFIUS review on January 29. Ultimately, on March 12, President Trump issued an executive order effectively blocking Broadcom’s acquisition of Qualcomm.

Qualcomm Shareholders’ Lawsuit

According to the Complaint, class plaintiffs are Qualcomm shareholders who purchased Qualcomm securities between January 31, 2018 and March 12, 2018. Class plaintiffs allege that Qualcomm and its executives violated the Exchange Act by: 1) conspiring to fraudulently maintain artificially high market prices for Qualcomm in violation of § 10(b); and 2) filing false financial statements with the SEC in violation of § 20(a). They seek compensatory damages, equitable relief, and reasonable costs and expenses incurred in the case, including attorney fees. Compensatory damages will presumably include stock losses that class plaintiffs allege derived from the CFIUS review and executive order.

The Complaint alleges that Qualcomm’s SEC 10-Q filing made on January 31, 2018, for the period ended December 24, 2017, was materially false and misleading because it did not disclose or otherwise indicate to investors that the company had filed a unilateral request with CFIUS on January 29. Plaintiffs claim that investors were thus kept in the dark as to the fact that Qualcomm had requested CFIUS review of Broadcom’s potential acquisition of Qualcomm. Therefore, the price of Qualcomm stock was kept artificially inflated and subsequently declined by $5.71 per share when that information became public. Plaintiffs identify three separate events that caused significant decreases in Qualcomm’s stock price, and attempt to quantify those decreases: 1) Qualcomm’s unilateral request to CFIUS became public through a Broadcom press release and Qualcomm’s 8-K Filing on March 5, disclosing CFIUS’s interim order (-$0.73/share); 2) Qualcomm submitted another 8-K Filing on March 6, disclosing it had received a March 5 letter from CFIUS outlining its national security concerns with the takeover (-$1.87/share); and 3) President Trump’s March 12 executive order that terminated Broadcom’s takeover efforts (-$3.11/share).

Notably, the shareholders’ alleged damages derive from the existence and results of CFIUS’s review and the executive order, not just the delayed disclosure of Qualcomm’s involvement in the request for the review. This distinction is significant because the two largest alleged stock price decreases occurred after Qualcomm’s involvement in submitting the unilateral CFIUS request had already been publicly disclosed (on March 5, by Broadcom). It is not clear whether CFIUS would have reviewed the proposed takeover absent Qualcomm’s request.

Implications

Attempts to use CFIUS as a weapon to ward off potential hostile takeovers carry significant risks. In our previous analysis, V&E warned “that weapon can backfire.” This premonition proved correct. As this suit illustrates, companies and executives that unilaterally seek CFIUS review risk bearing the blame for subsequent decreases in stock price, thus exposing themselves to potential shareholder class action lawsuits. Such repercussions may be compounded if a company does not disclose the fact that it is seeking CFIUS review to its shareholders.

Even if the Qualcomm class plaintiffs do not ultimately prevail, the lawsuit will still negatively impact the company. If not dismissed, discovery likely will require substantial resources, and include the production of the CEO’s and CFO’s (both are named defendants) emails and other correspondence. Depositions of these and other officers will consume burdensome amounts of time. Either settlement or litigation will be very costly for the company. Although Qualcomm dodged one bullet (a hostile takeover), it has now been struck by another. This lawsuit may be the first shot in a coming fusillade.