Water Island Event-Driven Fund v. MaxLinear, Inc.

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 WATER ISLAND EVENT-DRIVEN Case No.: 23-CV-01607-CAB-VET FUND, on Behalf of Itself and All 12 Others Similarly Situated, ORDER GRANTING MOTION TO 13 DISMISS WITHOUT PREJUDICE Plaintiff,

14 v.

15 MAXLINEAR, INC. et al., 16 Defendant. 17

18 This securities class-action dispute arises out of a failed merger. In its wake, 19 Plaintiffs filed a consolidated complaint (or “Complaint”) alleging violations of Sections 20 (10)(b) and 20(a) of the Securities Exchange Act of 1934. [ECF No. 50.] At issue is 21 Defendants’ Motion to Dismiss the consolidated complaint for failure to state a claim under 22 Rule 12(b)(6). [ECF No. 51.] In light of the Ninth Circuit’s ruling in In re: CCIV / Lucid 23 Motors Sec. Litig., 110 F.4th 1181, 1187 (9th Cir. 2024) (hereinafter, “Lucid Motors”), the 24 Motion is GRANTED. 25

28 1 I. FACTUAL ALLEGATIONS 2 The Court takes the alleged material facts as true and construes them in the light 3 most favorable to Plaintiffs.1 Stoner v. Santa Clara Cnty. Office of Educ., 502 F.3d 1116, 4 1120 (9th Cir. 2007). Defendant MaxLinear is a Delaware corporation with its principal 5 executive offices located in Carlsbad, California. [Compl. ¶ 20.] MaxLinear provides 6 microchips for the telecommunications industry. [Id.] Its stock is publicly traded on the 7 NASDAQ under the ticker “MXL.” [Id.] Defendant Kishore Seendripu is the co-founder 8 of MaxLinear and, as relevant to the allegations in the consolidated complaint, served as 9 its Chief Executive Officer. [Id. ¶ 21.] Defendant Steven Litchfield served as Chief 10 Financial Officer and Chief Corporate Strategy Officer. [Id. ¶ 22.] Both individuals are 11 alleged to have made, approved, or adopted false statements that caused or maintained 12 artificial inflation in the price of Silicon Motion Technology Corporation’s (“SIMO”) 13 shares. [Id. ¶¶ 22–23.] SIMO is a Taiwan-based chip manufacturer and was MaxLinear’s 14 target in the proposed merger. [Id. ¶¶ 21–22.] 15 Lead Plaintiffs are private investment funds who purchased or acquired SIMO 16 American Depository Shares (“ADSs”) from June 6, 2023 through July 26, 2023 (the 17 alleged class period or “Class Period”). [Id. at p.1 & ¶ 127.] Plaintiffs bring these claims 18 on behalf of a class of investors who purchased or acquired SIMO ADSs during the Class 19 20 21 22 1 The Court takes judicial notice of Defendants’ Exhibits 1–5 filed with the motion to 23 dismiss: (1) the merger agreement contained in MaxLinear’s Form S-4 as filed with the Securities and Exchange Commission (“SEC”), (2) the transcript from the June 6, 2023 24 Stifel Conference as published by FactSet CallStreet, LLC, (3) MaxLinear’s Form 425 as 25 filed with the SEC containing an excerpt from the Stifel Conference, (4) MaxLinear’s Form 8-K as filed with the SEC on June 28, 2023, and (5) MaxLinear’s Form 8-K as filed with 26 the SEC on July 26, 2023. [ECF No. 51:4–7]. These exhibits contain facts that are 27 “accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” Fed. R. Evid. 201(b)(2). Plaintiffs incorporate each of these items in their 28 1 Period. [Id. at p.1.] Plaintiffs claim that the acquiring party, MaxLinear, committed fraud 2 in the course of the failed combination with SIMO. [See id. ¶¶ 126–131.] 3 As alleged, MaxLinear and SIMO announced the terms of the “transformative” $3.8 4 billion acquisition on May 5, 2022. [Id. ¶ 1.] The deal promised a 50% premium for SIMO 5 ADS holders. [Id. ¶ 33.] According to Plaintiffs, upon the deal’s announcement, 6 MaxLinear claimed that the merger would allow the combined entity to compete at the 7 highest level of the semiconductor supply industry and expand MaxLinear’s geographic 8 reach. [Id. ¶1.] But MaxLinear would need to clear regulatory hurdles before it could close 9 the deal: approval by the Department of Justice’s Antitrust Division, Federal Trade 10 Commission, and by their Chinese corollary, the State Administration for Market 11 Regulation (“SAMR”). [See id. ¶2; ECF No. 51-4 at 16.] 12 By its terms, the deal rested on clearance by antitrust authorities on or before August 13 7, 2023. [Compl. ¶ 39; ECF No. 51-4 at 21.] Plaintiffs claim that MaxLinear could 14 terminate the deal if regulators failed to provide their blessing, thereby capping its 15 liabilities to a $160 million merger break-up fee. [Compl. ¶ 47.] MaxLinear could also 16 allegedly terminate if SIMO was in breach of its “representations, warranties or covenants” 17 with certain conditions allowing for cure of the breach. [Id. ¶ 49.] Similarly, MaxLinear 18 could terminate if SIMO experienced a “Material Adverse Event” as defined in the merger 19 agreement. [Id. ¶ 50.] 20 According to Plaintiffs, SAMR antitrust review represented a key deal risk. [Id. 21 ¶ 43.] MaxLinear “swiftly” obtained U.S. approval, but political risks relating to the 22 semiconductor industry apparently created uncertainty about whether China would allow 23 the deal to move forward. [Id. ¶ 44.] In support, Plaintiffs highlight numerous 24 contemporaneously published news articles discussing China’s supposed use of the merger 25 review process to retaliate against U.S. companies as part of a larger trade dispute. [Id. ¶¶ 26 43–44.] 27 Nevertheless, third-party analysts allegedly reported MaxLinear’s optimism about 28 the deal. [See id. ¶ 54.] Plaintiffs’ pleadings identify MaxLinear’s own regular updates 1 about the merger. On April 26, 2023, MaxLinear issued a press release indicating that it 2 remained “excited” by the “pending acquisition” and that “things [were] moving as 3 expected on the SAMR front.” [Id. ¶ 53.] In another statement that also preceded the Class 4 Period, MaxLinear apparently announced on May 3, 2023 that they “continue[d] to actively 5 work to get the [merger] done by mid-year,” consistent with their internal expected 6 timeframe. [Id.] 7 The first category of alleged misrepresentations upon which Plaintiffs’ lawsuit rests 8 followed. Plaintiffs assert that on June 6, 2023, MaxLinear and Defendant Seendripu 9 participated in a conference (“the Stifel Conference”) involving 300 companies and more 10 than 1,600 investors, including institutional investors and those representing private equity 11 and venture capital firms. [Id. ¶ 58.] During a so-called “fireside chat,” a conference 12 representative asked Defendant Seendripu about the merger, one this representative 13 described as “one of the topics investors want to hear most about.” [Id. ¶ 59; ECF No. 51- 14 5 at 9.] Specifically, the representative asked about “SIMO,” an “update on the asset 15 strategically,” and whether SIMO was “an asset that you’re very interested in acquiring.” 16 [Compl. ¶ 59; ECF No. 51-6 at 2.] Defendant Seendripu responded that MaxLinear was 17 “very, very . . . bullish[] that we can acquire the synergies that we told you all about,” that 18 the “basic rationale” for the merger “ha[d] not changed at all,” and that he “believe[ed]” 19 that SIMO was a “very strategic asset for [MaxLinear].” [Compl. ¶ 60; ECF No. 51-6 at 20 2.] Commenting on a specific merger-related synergy, Defendant Seendripu indicated that 21 “together, we bring the portfolio to make it happen.” [Id.] On June 7, 2023, MaxLinear 22 filed a transcript excerpt containing the alleged misrepresentations with the SEC. [Compl. 23 ¶ 61; see generally ECF No. 51-6.] 24 Defendants supplied the next purportedly fraudulent statement on June 28, 2023. 25 [Id. ¶ 62.] At this point, the deal still had not received approval from antitrust regulators. 26 [Id.] MaxLinear filed a Form 8-K with the SEC confirming that MaxLinear and SIMO 27 “re-filed” for merger clearance under the Hart-Scott-Rodino Act. [Id. ¶ 62; ECF No. 51-7 28 at 3.] Plaintiffs claim that this statement was a misrepresentation in context. Allegedly, 1 MaxLinear’s finances had taken a downturn, costs of financing had increased dramatically, 2 and the merger no longer constituted an attractive business proposition. [Id. ¶¶ 65–70.] 3 Plaintiffs allege that although Defendants went through the regulatory motions, they had 4 no intention of completing the merger and instead hoped that SAMR would deny antitrust 5 approval. [See id. ¶ 71.] Indeed, Plaintiffs maintain that MaxLinear was “not genuinely 6 interested in closing the transaction” with SIMO given that “Defendants had not taken the 7 most basic and rudimentary steps to prepare for an integration of the two companies.” [See 8 id. ¶¶ 90–99.] 9 On July 26, 2023, SAMR granted regulatory approval for the merger through an 10 announcement on the agency’s website. [Id. ¶ 72.] That same day, apparently within ten 11 hours of SAMR’s approval of the merger, MaxLinear issued a press release in which it 12 announced the termination of the merger agreement on grounds that (1) SIMO had failed 13 to specify certain merger conditions, (2) SIMO suffered a continuing Materially Adverse 14 Event, and (3) SIMO made unspecified “breaches” of the Merger Agreement. [Id. ¶ 75; 15 see ECF No. 51-8 at 3.] MaxLinear claimed in its press release that SIMO’s qualifying 16 breach had occurred months earlier, “as of May 5, 2023.” [Id.] 17 II. STANDARD OF REVIEW 18 Fed. R. Civ. P. 12(b)(6) permits a party to file a motion to dismiss for “failure to 19 state a claim upon which relief can be granted.” “To survive a motion to dismiss, a 20 complaint must contain sufficient factual matter . . . to ‘state a claim for relief that is 21 plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. 22 v. Twombly, 550 U.S. 544, 570 (2007)). 23 “Section 10(b) of the Exchange Act bars conduct involving manipulation or 24 deception, manipulation being practices that are intended to mislead investors by 25 artificially affecting market activity, and deception being misrepresentation, or 26 nondisclosure intended to deceive.” Desai v. Deutsche Bank Sec. Ltd., 573 F.3d 931, 938 27 (9th Cir. 2009) (quoting Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000)). 28 1 “Section 20(a) of the Exchange Act imposes secondary liability on controlling persons 2 involved in a primary Section 10(b) violation.” Lucid Motors, 110 F.4th at 1184. 3 To assert a claim under Section 10(b), a plaintiff must allege: “(1) a material 4 misrepresentation or omission by the defendant [(“falsity”)]; (2) scienter; (3) a connection 5 between the misrepresentation or omission and the purchase or sale of a security; (4) 6 reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” 7 In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1052 (9th Cir. 2014) (citation omitted). 8 Plaintiffs alleging 10(b) violations are subject to heightened pleading standards pursuant 9 to Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act. Zucco Partners, 10 LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009), as amended (Feb. 10, 2009). 11 These requirements at the 12(b)(6) stage have been characterized as “formidable.” Metzler 12 Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1055 (9th Cir. 2008). 13 III. DISCUSSION 14 Plaintiffs’ theory of liability is straightforward. Plaintiffs allege that Defendants 15 made material misrepresentations about MaxLinear’s commitment to the merger all while 16 surreptitiously intending to exit the agreement. But instead of unraveling the merger with 17 due penalties, Defendants banked on the possibility that SAMR would thwart the 18 transaction by withholding antitrust clearance. When SAMR unexpectedly approved the 19 merger, Defendants concocted a sham breach by SIMO to avoid liabilities that MaxLinear 20 would otherwise face from its own unilateral exit. 21 A preliminary question, aside and apart from Article III standing, is whether 22 Plaintiffs have standing under the law to assert the claim. The private right of action from 23 the text of Section 10(b) is a judicially fashioned one, and as such, the Supreme Court has 24 placed limits on the class of plaintiffs who may seek relief under the statute. See Lucid 25 Motors, 110 F.4th at 1184–85. Defendants challenge Plaintiffs’ standing to maintain a 26 Section 10(b) suit. [ECF No. 51 at 27.] As they allege in their consolidated complaint, 27 Plaintiffs did not purchase MaxLinear stock during the Class Period and instead, held only 28 1 the securities of the target SIMO. According to Defendants, to have Section (10)(b) 2 standing, Plaintiffs must have purchased MaxLinear securities during the Class Period. 3 At the time the parties initially briefed the motion to dismiss, Defendants sought to 4 import the strict application of a standing test from the Second Circuit. Under this test— 5 the “purchaser-seller” rule—Plaintiffs must “have bought or sold the security about which 6 a misstatement was made.” See Menora Mivtachim Ins. Ltd. v. Frutarom Indus. Ltd., 54 7 F.4th 82, 85, 88 (2d Cir. 2022). Applying this test, the Second Circuit held that “purchasers 8 of a security of an acquiring company [did] not have standing under Section 10(b) to sue 9 [a] target company for alleged misstatements the target company made about itself prior to 10 the merger between the two companies.” Id. at 88. But at that earlier stage of litigation, 11 Defendants and Plaintiffs agreed that the strict satisfaction of the “purchaser-seller” rule 12 was not a requirement for litigants in the Ninth Circuit. See, e.g., In re Mullen Auto. Sec. 13 Litig., No. CV223026DMGAGRX, 2023 WL 8125447, at *6 (C.D. Cal. Sept. 28, 2023) 14 (explaining that the purchaser-seller rule “in the Second Circuit is not uniformly adopted 15 outside that Circuit[]”). 16 The parties did not then have the benefit of the Ninth Circuit’s recent opinion in 17 Lucid Motors which adopted the Second Circuit’s reasoning from Menora.2 In doing so, 18 the Ninth Circuit explained that the “purchaser-seller” rule represented a “bright-line rule” 19 faithful to Supreme Court precedent that “ma[de] clear that a plaintiff has standing to sue 20 under Section 10(b) if the plaintiff purchased or sold the securities about which the alleged 21 misrepresentations were made.” Lucid Motors, 110 F.4th at 1186 (citing Blue Chip Stamps 22 v. Manor Drug Stores, 421 U.S. 723, 727, 755 (1975)). 23 Admittedly, the facts of Menora differ slightly from the ones animating the current 24 dispute. Although Menora decided that shareholders of an acquirer did not have Section 25

26 27 2 Defendants filed a notice of supplemental authority on August 9, 2024 in which they cited to Lucid Motors and reasserted their standing arguments. [ECF No. 58.] Plaintiffs 28 1 10(b) standing to sue the target, it did so in the context of the target company’s alleged 2 misstatements about “itself” prior to the merger. Menora, 54 F.4th at 88. Specifically, 3 those statements were limited to the target’s own compliance with various anti-bribery 4 laws. See id. Here, Plaintiffs have alleged misrepresentations made by Defendants relating 5 to their: (1) evaluation of the merger, including SIMO’s benefits to MaxLinear, and (2) 6 commitment to completing the merger. 7 Plaintiffs, holders of SIMO securities, allege that the misrepresentations by 8 MaxLinear harmed the value of their SIMO securities thereby providing statutory standing 9 under Section 10(b). The Ninth Circuit in Lucid Motors, 110 F.4th at 1186, however 10 rejected an alternative to the “purchaser-seller” rule, which asks the court to decide whether 11 a security is “sufficiently connected to a misstatement” to establish statutory standing. 12 The key issue for standing is whether the misrepresentations were made about 13 SIMO. The Court finds they were not. The identified statements amount to MaxLinear’s 14 evaluation of the benefits of the merger and MaxLinear’s continued commitment to the 15 merger’s success as reflected in MaxLinear’s own regulatory filing. Although there 16 appears be a significant connection between the shares of a target and the merger-related 17 statements of its acquirer, the Ninth Circuit has set a bright-line rule that the “security” at 18 issue must be one about which the alleged misrepresentations were made. The Ninth 19 Circuit has imposed this rule despite the result that such a bright-line may “prevent[] some 20 deserving plaintiffs from recovering damages.” Id. at 1185 (quoting Blue Chip Stamps, 21 421 U.S. at 738). 22 To distinguish Lucid Motors, Plaintiffs cite to In re Turquoise Hill Res. Ltd. Sec. 23 Litig. for the proposition that even under the “purchaser-seller” rule, plaintiffs who held 24 shares of a majority-owned subsidiary had standing to bring a Section 10(b) lawsuit against 25 the defendant-parent company for statements the parent made about a joint mining project. 26 625 F. Supp. 3d 164, 202 (S.D.N.Y. 2022). But the facts alleged in Turquoise Hill involved 27 a parent company that exercised “near total control” over the subsidiary and their joint 28 venture, including contractual control over the subsidiary’s “public statements” about the 1 mining project. See id. at 202. As such, the court reasoned that any statement the parent 2 company made about the joint project was necessarily made about the subsidiary. Id. The 3 district court concluded that the parent’s alleged misstatements were not “self-referential” 4 but “directly concern[ed] the company in which [p]laintiffs invested”—the subsidiary in 5 which the plaintiffs held shares. Id. (internal quotation marks omitted). In contrast to the 6 unique factual scenario pleaded in Turquoise Hill, Plaintiffs’ consolidated complaint 7 makes clear that “[a]t the time of Defendants’ alleged misrepresentations, [MaxLinear] and 8 [SIMO] were two entirely separate companies.”3 Lucid Motors, 110 F.4th at 1187. 9 Moreover, the Turquoise Hill opinion, which preceded the Second Circuit’s decision 10 in Menora, applied the “sufficiently connected” test (one that measured the relationship 11 between the “false statements of the non-issuer” and the plaintiffs’ purchase of the 12 subsidiary’s stock). See Turquoise Hill, 625 F. Supp. 3d at 201. This test is one that the 13 Ninth Circuit explicitly disavowed in Lucid Motors. 110 F.4th at 1186. Nevertheless, 14 whether the Turquoise Hill analysis impedes on the Ninth Circuit’s “bright-line” 15 application of the “purchaser-seller” rule is a question this Court need not answer since no 16 similar “control” facts have been pleaded here. 17 /// 18 /// 19 /// 20 21 22 23 24 25

26 27 3 Plaintiffs themselves underscore this separation through their allegation that Defendants failed to engage in even the most “basic” pre-merger integration planning. [See Compl. 28 I IV. CONCLUSION 2 The Court is not aware of any relevant exceptions to the “purchaser-seller” rule 3 |}which is now controlling law in the Ninth Circuit. Because Plaintiffs did not hold 4 ||MaxLinear’s stock during the Class Period and the alleged misrepresentations were made 5 ||about MaxLinear, the Court grants the Defendants’ motion to dismiss [ECF No. 50] for 6 || lack of 10(b) standing pursuant to Fed. R. Civ. P. 12(b)(6). 7 The Court dismisses this case without prejudice with consideration to the intervening 8 || decision in Lucid Motors. Plaintiffs may file any amended complaint by Sept. 18, 2024. 9 10 It is SO ORDERED. 11 12 Dated: August 28, 2024 jb 13 Hon. Cathy Ann Bencivengo 14 United States District Judge 15 16 17 18 19 20 21 22 23 24 25 26 27 28