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Golub v. Gigamon Inc.

United States District Court, N.D. California

September 3, 2019

JOHN E. GOLUB, Plaintiff,
GIGAMON INC., et al., Defendants.



         Plaintiff John E. Golub brings claims under the § 14(a) and 20(a) of the Securities and Exchange Act of 1934 and SEC Rule 14a-9 against Gigamon Inc., Gigamon Chief Executive Officer Paul A. Hooper, and Gigamon's directors (collectively, these related parties are referred to as “Gigamon”) arising from an allegedly materially false and misleading proxy statement issued in relation to the acquisition of Gigamon by Elliot (the “Acquisition”).[1] Amended Consolidated Complaint (“AC”) [Dkt No. 85]. In a previous order, I dismissed largely identical claims in Golub's Consolidated Complaint (“CC”) [Dkt. No. 48] because I found that the allegedly false and misleading portions of the proxy statement were subject to a statutory safe harbor and were not objectively false. Order Granting Motion to Dismiss (“Order”) [Dkt. No. 83]. Although Golub has amended his complaint, he fails to plead new facts that would change my reasoning. Accordingly, I GRANT Gigamon's motion to dismiss without leave to amend.


         Factual Background

         My previous Order contained a detailed factual background and I will not fully restate it here. Order at 2-9. Gigamon is a provider of traffic visibility solutions into data traversing networks to make it easier for companies to manage, secure, and understand their data-in-motion, which, in turn, enables stronger security and enhances network performance. AC at ¶ 37. On October 26, 2017, it publicly announced that its Board approved the Agreement and Plan of Merger through which Elliott[2] would acquire Gigamon for a price of $38.50 per share in cash. Id. at ¶ 84. On November 24, 2017, Gigamon filed the Proxy Statement at issue in this case. Id. ¶ 85. It issued notices to shareholders on December 4 and December 11, 2017 that urged them to vote on the Acquisition. Id. On December 12, 2017, it issued a “Supplemental Disclosure, ” that augmented the background to the Merger and Fairness Opinion sections of the Proxy Statement. Id.

         On December 22, 2017, a majority of Gigamon shares were cast in favor of the Acquisition. Id. The Acquisition closed on December 27, 2017. Id. Golub asserts that the proxy statement contained materially false and misleading statements related to the Board's financial projections. Id. at ¶ 3.

         The sale process began in spring of 2017 when Elliot started to position itself to acquire Gigamon. Id. at ¶ 73. In May 2017, the board decided to defer a formal sales process until the company released its Q2 2017 results and that it would be “prudent to review the Company's long term business plans and financial projections.” Id. at ¶ 74. On May 30, 2017, the Board was presented with three sets of long-term projections: the Case A Projections, which represented “higher projected performance, ” the Case B Projections, which represented the “base level expectation, ” and the Case C Projections, which represented “lower projected performance.” Id. at ¶ 75. On June 6, 2017, the board instructed Goldman Sachs & Co. LLC (“Goldman Sachs”), Gigamon's financial advisor, to focus on the Case B Projections when conducting its analysis. Id. at ¶ 78.

         On July 27, 2017, Gigamon reported that its revenue had declined by 8% in Q2 2017. Id. at ¶ 67; Gigamon Form 8-K dated July 27, 2017 attached as Ex. 3 [Dkt. No. 89-3] to Declaration of Elizabeth R. Gavin in Support of Gigamon Defendants' Motion to Dismiss Amended Consolidated Complaint for Violations of Securities Exchange Act of 1934 (“Gavin Decl.”) [Dkt. No. 89]. Elliot made an offer of $44-46 per share four days later. Proxy at 36. Although there were other potential buyers at one point in the process, by September 7, 2017, all others had dropped out, leaving Elliot as the sole potential buyer. Proxy at 37.

         On September 8, 2017, Elliot reduced its offer price to $42 per share. AC at ¶ 78. On September 10, 2018, the board discussed the proposal and concluded that if Gigamon achieved its projected Q3 2017 results, Elliot's offer would be inadequate. Proxy at 38. Elliot and Gigamon continued to negotiate through September 19, 2019 and Elliot indicated its willingness to increase its offer to $42.25-$42.50. Id. at 38-39. On September 24, 2017, after learning that $42.50 was Elliott's best and final offer, the Board determined that the price was acceptable. Id. at 40.

         Shortly after, Gigamon's Q3 2017 financial results fell $5.5 million below the analysts' consensus; instead of reporting 3% growth, Gigamon reported 5% decline. Id. at 40; AC at ¶ 81. In response, on October 5, 2017, Elliott reduced its offer price to $38 per share. AC at ¶ 79; Proxy at 41.

         The Board met that day to discuss the revised offer and also discussed “whether management's long-term financial projections were outdated due to actual second and third quarter performance and trend lines that such results suggested for the full year and beyond.” Proxy at 41. According to the Proxy, the board “recognized that earlier valuation ranges for the Company, which had been based on the Case B projections, were materially higher than Elliott's then current offer price and could no longer be relied upon.” Id. at 41. After a week of unsuccessful attempts to negotiate a higher price, the Board met on October 14, 2017 and were provided with an updated draft set of Case B financial projections that reflected the Q2 2017 and Q3 2017 results “without otherwise changing the long-term growth assumptions.”[3] AC at ¶ 79, 97(c); Proxy at 41-42. The Board “expressed concern that Gigamon's recent results . . . might suggest that the long-term growth assumptions reflected in the Case B projections overstate Gigamon's likely long-term financial prospects.” AC ¶ 97(c); Proxy at 42.

         On October 19, 2017, Elliott increased its offer price to $38.50 as an “absolute best and final offer.” AC ¶ 80; Proxy at 43. On October 20, 2017, Gigamon's Transaction Committee agreed that they needed management's best estimate of the long-term outlook to properly assess Elliott's offer and that “Gigamon's recent performance clearly suggested that the Case B Projections were no longer appropriate given recent performance and third quarter results.” Proxy at 43; AC ¶ 97(d). On October 24, 2017, the Board “agreed that they needed Gigamon's best estimate of [its] long-term financial outlook in order to properly assess a sale of Gigamon.” AC ¶ 97(e); Proxy at 43. The Board determined that the Case C Projections “appeared to reflect a better estimate of Gigamon's long-term prospects (particularly, in view of the fact that the Company was currently performing at levels even below the Case C Projections).” AC ¶ 97(e); Proxy at 43. According to the Proxy, management determined that the Case B Projections were no longer realistic given Q3 2017 performance and updated the original Case C Projections “to take into account actual results of Q2 2017 and Q3 2017 and the revised outlook for Q4 2017.” Proxy at 58; AC ¶ 80.

         The Proxy included the Updated Case C Projections, which management stated that it believed reflected “the most likely standalone financial forecast of Gigamon's business.” Proxy at 58. The Board approved sharing the Updated Case C Projections with Elliott and directed Goldman to rely on it for its fairness opinion. Id.

         This action is based on Golub's claim that the Board did not actually believe the Updated Case C Projections contained in the Proxy were accurate. AC at ¶¶ 88-98. Instead, Golub alleges that the Board knew that the Updated Case B Projections were accurate and that they should have been included in the proxy instead. Id. at ¶¶ 88-98. As evidence of this, Golub points to Gigamon's more successful Q4 2017 and Q1 2018. Id. at ¶¶ 86-87.

         Procedural Background

         In the Order, I dismissed Golub's consolidated complaint on several grounds. First, I found that the challenged portions of the Proxy Statement were forward looking provisions protected by the PSLRA's “safe harbor” provision and that they were accompanied by meaningful cautionary language. Order at 13-19. I reasoned that:

The Updated Case C Projections are classic forward-looking statements because they pertain to revenues and other financial data, the accuracy of which cannot be determined until after the projection period (assuming the Acquisition had not been consummated and Gigamon were still an independent entity). Trahan v. Interactive Intelligence Grp., Inc., 308 F.Supp.3d 977, 991-92 (S.D. Ind. 2018) (citing [ ]15 U.S.C. § 78u-5(i)(1)(A)).
That Gigamon would later announce that it had a “record-setting” close in 2017 and that it had maintained its momentum with its customer base does not, without more, create an inference that the Gigamon Defendants knew that relying on the Updated Case C Projections constituted a misrepresentation of the value of the company. Compl. at ¶¶ 136-37. It does not necessarily follow that Gigamon's weak Q2 and Q3 2017, followed by a presumably successful Q4 2017, boded well for the company's long term prospects. To infer that would constitute a claim of “fraud by hindsight, ” precisely what the PSLRA safe harbor is designed to guard against. FEI, 289 F.Supp.3d at 1171-72 (“fraud by hindsight suits are not meaningfully different from [claims under Section 14(a) because] [i]n both cases, a company makes a purportedly inaccurate forward-looking statement that induces plaintiffs to act to their detriment”) (internal quotation marks omitted). Golub has not alleged that there is a misrepresentation baked into the Updated Case C Projections that would render the Gigamon Defendant's Proxy a present statement outside the PSLRA's safe harbor requirement.

Id. at 17.

         Second, I found that Golub's reliance on Gigamon's successful Q4 2017 did not help him plead objective falsity as required by a Section 14 claim because:

The Updated Case C Projections estimated revenues of $314 million, a new record for yearly revenues (in 2016 and 2015 Gigamon brought in $311 million and $222 million, respectively). Id.; Proxy Statement at 58. Additionally, the Updated Case C Projections also assumed record-setting revenues for Q4 2017of $96.105M, which was $11 million higher than Gigamon's prior best quarter. Id.[4] Given that the Updated Case C Projections still predicted a record setting fiscal year and fourth quarter, the Updated Case C Projections cannot be said to be objectively false in light of the May 3, 2018 press release.

Id. at 20-21. I also held that:

The optimistic statements by the Gigamon defendants between January 10 and August 8, 2017 neither support Golub's claim of objective falsity with regards to the Updated Case C Projections nor show that the Gigamon Defendants secretly believed that the Case B Projections were correct. Compl. at ¶¶ 50-69, 74-75, 78, 85, 90-97, 99-100, 106. These statements were made before what Gigamon acknowledged was a surprisingly poor Q3 2017. The Proxy Statement explains that management adjusted its projections in response. Compl. at ¶ 111; Proxy Statement at 42. It is of no help to Golub that the board changed its projections after its optimism that Q2 2017 would create a glide path to market growth rate in the second half of the year was shown to be unwarranted after a disappointing Q3 2017. See Trahan v. Interactive Intelligence Grp., Inc., 308 F.Supp.3d 977, 991 (S.D. Ind. 2018) (rejecting argument that forecasts in proxy were false because they were “not commensurate with” defendants' prior, more hopeful and optimistic statements).
Golub has failed to show objective falsity with particularized facts that “directly contradict” or are “necessarily inconsistent with” the Updated Case C Projections. In re Read-Rite Corp., 335 F.3d 843, 848 (9th Cir. 2003), abrogated on other grounds as recognized in S. Ferry, L.P. No. 2 v. Killinger, 542 F.3d 776, 782-84 (9th Cir. 2008).

Id. at 21-22.

         Third, I found that the failure to include the refreshed Case B projections was not a material omission because: (i) they were not relied upon by the Board; (ii) the “older long-term projections had been regularly communicated to investors and analysts in quarterly earning calls” and their materiality was dubious; and (iii) the Proxy Statement described in detail when and why the Board updated the Case C Projections. Id. at 22. Finally, because Golub failed to allege ...

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