Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_19-cv-00615/USCOURTS-cand-3_19-cv-00615-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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United States District Court

Northern District of California

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

EDENBROOK CAPITAL, LLC, et al.,

Plaintiffs,

v.

RHYTHMONE PLC, et al.,

Defendants.

Case No. 19-cv-00615-WHO 

ORDER GRANTING MOTION TO 

DISMISS IN PART AND DENYING IN 

PART

Re: Dkt. No. 18

Plaintiffs Edenbrook Capital, LLC, Edenbrook Long Only Value Fund, LP, and Edenbrook 

Value Fund, LP (collectively “Edenbrook”) allege that defendants RhythmOne Plc and YuMe, 

Inc. (f/k/a Redwood Merger Sub II, Inc.) (“Merger Sub II”) (collectively “RhythmOne”) violated 

Section 14(e) of the Securities and Exchange Act of 1934 (“Exchange Act”) by making a false and 

misleading statement and omission in a tender offer. Edenbrook claims that RhythmOne’s

statements misled it into believing that both tendering and non-tendering shareholders would have 

the option to electronically convert their stock post-merger. While RhythmOne has arguments to 

explain why Edenbrook’s claim is wrong, for purposes of pleading Edenbrook has plausibly 

alleged a material omission and resulting loss causation. For these reasons, I DENY 

RhythmOne’s motion to dismiss.1 

 

1 RhythmOne represents that there are two other issues in this case that it does not raise. First, is 

there a private right of action under section 14(e) of the Securities Exchange Act of 1934, 15 

U.S.C. § 78n(e)? Defendant’s Motion to Dismiss Complaint (“Mot.”) at 1-2 [Dkt. No. 18]. 

Second, if there is a private right of action under section 14(e), must Plaintiffs allege scienter? Id. 

RhythmOne asserts that under current Ninth Circuit caselaw, the answer to the first question is 

“yes” and to the second question is “no,” but that both issues are currently on appeal before the 

Supreme Court. Varjabedian v. Emulex Corp., 888 F.3d 399 (9th Cir. 2018), cert. granted, 139 S. 

Ct. 782 (2019). On April 23, 2019, the Supreme Court dismissed the writ of certiorari in 

Varjabedian as improvidently granted. Emulex Corp. v. Varjabedian, 587 U.S. ____ (2019). 

Because the Ninth Circuit’s decision in Varjabedian remains controlling, no other argument is 

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BACKGROUND2

A. The Parties

Plaintiff Edenbrook Capital, LLC is a New York limited liability company that manages 

private investment funds, including the other two plaintiffs Edenbrook Long Only Value Fund, LP 

and Edenbrook Value Fund, LP. Complaint at ¶¶ 11-13 (“Compl.”) [Dkt. No. 1]. Defendant 

RhythmOne Plc is a public company incorporated under the laws of England and Wales with its 

principal place of business in San Francisco, California. Id. at ¶14. RhythmOne Plc’s shares are 

not listed on a U.S. national securities exchange and are traded on the London Stock Exchange’s 

AIM exchange. Id. at ¶ 48. 

In this case, two entities have used the name YuMe, Inc. The first is the original (and nonparty) YuMe, Inc. (“YuMe”) that Edenbrook invested in. Id. at ¶ 17. YuMe no longer exists as a 

result of its merger with defendant Merger Sub II, which later changed its legal name to YuMe, 

Inc. as well. Id. at ¶ 15. For the purposes of this order, “YuMe” will refer to the original company

that Edenbrook invested in, while “Merger Sub II” will refer to named defendant YuMe, Inc. 

Merger Sub II is a subsidiary of RhythmOne. Id. 

Edenbrook had invested in YuMe since 2014. Id. at ¶ 18. At the time of the merger in 

2017, Edenbrook collectively owned more than 2.6 million shares of YuMe common stock, 

representing over 7% of YuMe’s total outstanding stock. Id. 

B. The Merger Agreement Between RhythmOne and YuMe

On September 4, 2017, YuMe entered into an Agreement and Plan of Merger and 

Reorganization (the “Merger Agreement”) with RhythmOne, non-party Redwood Merger Sub I, 

Inc. (“Merger Sub I”), a Delaware corporation, and Merger Sub II. Id. at ¶ 19. The Merger 

Agreement contemplated a two-step merger (the “Transaction”). RhythmOne would first make a 

tender offer for all YuMe common stock, with each share of YuMe stock to be exchanged for the 

 

required on the above two issues.

2

I grant RhythmOne’s requests for judicial notice [Dkt. No. 19, 23] because the documents are 

matters of public record. Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001) (citing

Fed. R. Evid. 201).

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right to receive $1.70 in cash and 0.7325 ordinary shares of RhythmOne. Id. Assuming 

RhythmOne acquired more than 50% of YuMe’s common stock through the tender offer and the 

transaction closed, Merger Sub I would acquire all remaining YuMe shares through a merger into 

YuMe (“the First Merger”) leaving YuMe as the surviving entity. Id. at ¶¶ 20-22. Immediately 

following the First Merger, YuMe would then merge with and into defendant Merger Sub II (the 

“Second Merger”), with Merger Sub II surviving the Second Merger as a wholly-owned 

subsidiary of RhythmOne. Id. at ¶ 20.

The First Merger would be effectuated pursuant to Section 251(h) of the Delaware General 

Corporation Law (“Section 251(h)”), which permits a merger to take place via tender offer without 

a shareholder vote on the merger agreement. Id. at ¶ 21; Del. Code Ann. tit. 8, §251(h). Section 

251(h) mandates that “[e]ach outstanding share . . . of each class or series of stock . . . that is the 

subject of and is not irrevocably accepted for purchase or exchange . . . is to be converted in such 

merger into, or into the right to receive, the same amount and kind of cash, property, rights or 

securities to be paid for shares of such class or series of stock of such constituent corporation 

irrevocably accepted for purchase or exchange in such offer.” Del. Code Ann. tit. 8, §251(h)(5).

On the same day the Merger Agreement was signed, RhythmOne entered into a support 

agreement with the members of the YuMe Board, and others (the “Supporting Stockholders”), to 

support the Transaction and to not sell their YuMe stock for six months following the First 

Merger. Id. at ¶ 23. Together the Supporting Stockholders owned approximately 31.6% of 

YuMe’s outstanding shares. Id.

C. RhythmOne’s Tender Offer

RhythmOne commenced the tender offer by filing a Form F-4 Registration Statement with 

the Securities and Exchange Commission (“SEC”) on December 22, 2017 (the “Initial Offer 

Filing”), which became public on December 26, 2017. Id. at ¶ 28; see also Request for Judicial

Notice (“RJN”) Exhibit A [Dkt. No. 19-1]. Edenbrook identifies several statements in the the 

Initial Offer Filing that it alleges were misleading. Id. at ¶¶ 28-32. Those statements are as 

follows:

Accordingly, RhythmOne anticipates that, if the Offer is completed, 

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the First Merger will be completed on the same day as the Offer. In 

the First Merger, Purchaser will merge with and into YuMe, with 

YuMe surviving the First Merger. At the Effective Time, each 

outstanding YuMe Share that was not acquired in the Offer (other 

than certain dissenting, converted or cancelled shares, as described 

further in this prospectus/offer to exchange) will be converted into the 

right to receive the Transaction Consideration.

Id. at ¶ 29; see also RJN Ex. A at 25. 

The purpose of the First Merger is for RhythmOne to acquire all 

remaining YuMe Shares that it did not acquire in the Offer. In the 

First Merger, each outstanding YuMe Share that was not acquired by 

Purchaser in the Offer (other than certain dissenting, converted and 

cancelled shares, as described further in this prospectus/offer to 

exchange) will be converted into the right to receive the Transaction 

Consideration.

Id. at ¶ 30; see also RJN Ex. A at 109. 

Section 251(h) of the DGCL provides that following the 

consummation of a successful tender offer for the outstanding shares 

of voting stock of a corporation whose shares are listed on a national 

securities exchange, and subject to certain statutory provisions, if the 

acquiring corporation owns at least the amount of shares of each class 

or series of stock of the target corporation that would otherwise be 

required to adopt a merger agreement providing for the merger of the 

target corporation, and as soon as practicable thereafter each 

outstanding share of each class or series of stock of the target 

corporation subject to, but not tendered in, the tender offer is 

subsequently converted by virtue of such a merger into, or into 

the right to receive, the same amount and kind of consideration 

for their stock in the merger as was payable in the tender offer, 

the acquiring corporation can effect such a merger without the vote of 

the stockholders of the target corporation.

Id. at ¶ 31; see also RJN Ex. A at 120 (emphasis added). 

RhythmOne filed amendments to the Initial Offer Filing on January 4, 2018, January 16, 

2018 and January 26, 2018 and filed its final offer via Form 424B3 on February 1, 2018. Id. at ¶¶ 

33-34. All above statements were contained in all amendments and the final offer. Id. 

RhythmOne’s tender offer to YuMe’s stockholders expired at the end of the tender period, one 

minute after 11:59 P.M., Pacific Standard Time, on February 1, 2018. Id. at ¶ 37. 

At the end of the tender period, approximately 74.4% of YuMe common stock was validly 

tendered. Id. at ¶ 37. As a result, Edenbrook’s shares were subject to the First Merger between 

YuMe and Merger Sub I in accordance with Section 251(h). Id. at ¶ 39. The First Merger became 

effective five hours later, at 5:00 A.M. Pacific Standard Time on February 2, 2018. See

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Supplemental Request for Judicial Notice, filed herewith (“Supp. RJN”), Ex. A, at 2 [Dkt. No. 23]. 

The Second Merger with Merger Sub II closed 30 minutes later, at 5:30 A.M. Pacific Standard 

Time on February 2, 2018. See Supp. RJN Ex. B at 2. 

Edenbrook vocally opposed the transaction. Compl. at ¶¶ 25-27. Consistent with its 

opposition, Edenbrook did not tender its YuMe shares. Id. at ¶ 39. 

D. Delivery of Transaction Consideration to YuMe Shareholders

On or about February 6, 2018, all YuMe stockholders who tendered their shares received 

the cash and had their YuMe shares electronically converted into RhythmOne shares. Id. at ¶ 38. 

Edenbrook, as non-tendering stockholder, received its cash on February 6, 2018, but it was not 

given the option to electronically convert its stock. Id. at ¶ 41. Instead, RhythmOne mailed 

physical stock certificates to Edenbrook’s broker two weeks after tendering shareholders received 

their stock electronically. Id. at ¶¶ 41-42. Edenbrook’s broker received a single physical stock 

certificate for all its clients and presumably took two weeks to “break down” the certificate into 

the individual holdings of each of its clients before delivering them to Edenbrook on March 8, 

2018. Id. at ¶¶ 43-46.

By the time Edenbrook received its converted RhythmOne stocks, RhythmOne’s share 

price had dropped approximately 20% below its price when the tender offer was consummated and 

the volume of trading had declined. Id. at ¶ 47. Because Edenbrook’s position in RhythmOne 

stock was multiples of its daily trading volume, it alleges that there was no viable way to liquidate 

its position without destroying RhythmOne’s share price. Id. at ¶ 50. As a result, Edenbrook 

alleges that it still holds shares that are a fraction of their value at the time of the merger and that it 

has suffered damages. Id. at ¶¶ 50, 68. 

Edenbrook states that if it had received its RhythmOne shares on the same day that 

tendering stockholders did, it would have sold the shares immediately based on RhythmOne’s risk 

factor disclosure regarding its own liquidity:

RhythmOne does not currently intend to list the RhythmOne Shares 

on a U.S. national securities exchange, and therefore a U.S. trading 

market for RhythmOne Shares may not develop. 

RhythmOne currently does not intend to list the RhythmOne Shares 

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on a U.S. national securities exchange. Liquidity in AIM-traded 

shares tends to be significantly lower than that of NYSE-traded 

shares. This could make it more difficult for you to sell your 

RhythmOne Shares following the closing of the Transactions and 

could adversely affect the price of those shares. Reduced liquidity 

also could result in increased volatility, and the price for the 

RhythmOne Shares may vary significantly in the future.

Id. at ¶¶ 6, 48 (emphasis in original). Edenbrook also claims that had it known that by declining to 

tender its shares it would not receive them until a month after the merger closed, it would have 

tendered its shares rather than be in the position it is in now. Id. at ¶ 6.

LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint 

if it fails to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion to 

dismiss, the plaintiff must allege “enough facts to state a claim to relief that is plausible on its 

face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible when 

the plaintiff pleads facts that “allow the court to draw the reasonable inference that the defendant 

is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation 

omitted). There must be “more than a sheer possibility that a defendant has acted unlawfully.” Id. 

While courts do not require “heightened fact pleading of specifics,” a plaintiff must allege facts 

sufficient to “raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555, 570.

Section 14(e) of the Exchange Act prohibits a person from making “any untrue statement 

of a material fact or omit to state any material fact necessary in order to make the statements 

made, in the light of the circumstances under which they are made, not misleading, or to engage in 

any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or 

request or invitation for tenders, or any solicitation of security holders in opposition to or in favor 

of any such offer, request, or invitation.” 15 U.S.C. § 78n.

Rule 9(b)’s heightened pleading requirements apply to claims asserted under Section 14(e) 

of the Exchange Act. See, e.g., Deutsch v. Flannery, 823 F.2d 1361, 1362 (9th Cir. 1987) 

(applying Rule 9(b) to 14(e) claim that tender offer solicitation “failed to disclose” material 

information). “To satisfy Rule 9(b), a pleading must identify the who, what, when, where, and 

how of the misconduct charged, as well as what is false or misleading about [the purportedly 

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fraudulent] statement, and why it is false.” Cafasso, U.S. ex rel. v. Gen. Dynamics C4 Sys., Inc., 

637 F.3d 1047, 1055 (9th Cir. 2011) (internal quotation marks and citations omitted). 

Moreover, plaintiffs must satisfy the additional standards of the Private Securities 

Litigation Reform Act (“PLSRA”). 15 U.S.C. § 78u-4(b)(1). Unlike Rule 9(b), the PSLRA 

requires a plaintiff to plead with particularity facts giving rise to a “strong inference that the 

defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A) (emphasis added); 

see also Fed. R. Civ. P. 9(b) (“[C]onditions of a person’s mind may be alleged generally.”). The 

Ninth Circuit recently found that the level of culpability required for Section 14(e) violations is 

negligence. Varjabedian, 888 F.3d at 401, 408. Therefore, “[p]laintiffs must plead with 

particularity facts that give rise to a strong inference of negligence.” In re Ocera Therapeutics, 

Inc. Sec. Litig., No. 17-cv-06687-RS, 2018 WL 7019481, at *3 (N.D. Cal. Oct. 16, 2018). 

In deciding whether a plaintiff has stated a claim upon which relief can be granted, the 

court accepts plaintiff’s allegations as true and draws all reasonable inferences in favor of the 

plaintiff. Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). However, the court is 

not required to accept as true “allegations that are merely conclusory, unwarranted deductions of 

fact, or unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 

2008). 

If the court dismisses the complaint, it “should grant leave to amend even if no request to 

amend the pleading was made, unless it determines that the pleading could not possibly be cured 

by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000). In making 

this determination, the court should consider factors such as “the presence or absence of undue 

delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments, 

undue prejudice to the opposing party and futility of the proposed amendment.” Moore v. Kayport 

Package Express, 885 F.2d 531, 538 (9th Cir. 1989).

DISCUSSION

I. THE MATERIAL OMISSION CLAIM

The crux of Edenbrook’s complaint is that RhythmOne’s failure to disclose that nontendering shareholders would not have an option to electronically convert their shares of YuMe 

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stock constitutes a material omission. Compl. at ¶ 55. Edenbrook claims that RhythmOne’s mail 

delivery of physical stock certificates instead of electronic conversion is a deviation from standard 

market practice and is a “cumbersome and off-market method” intended to punish non tendering 

shareholders. Id. at ¶¶ 41, 52-53.

To state a claim for a material omission under Section 14(e), the “omission must be 

misleading; in other words it must affirmatively create an impression of a state of affairs that 

differs in a material way from the one that actually exists.” Brody v. Transitional Hosps. Corp., 

280 F.3d 997, 1006 (9th Cir. 2002) (internal citation omitted). As the Ninth Circuit stated in 

Varjabedian, a plaintiff “must plead a highly unreasonable omission,” involving “not merely 

simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary 

care,” and “which presents a danger of misleading buyers or sellers that is either known to the 

defendant or is so obvious that the actor must have been aware of it.” Varjabedian, 888 F.3d at 

408 (quoting Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009)). 

Further, Section 14(e) prohibits only misleading and untrue statements, not statements that are 

incomplete. Brody, 280 F.3d at 1006. 

RhythmOne moves to dismiss Edenbrook’s omission-based claim, arguing that there was 

no material omission because all stockholders received the same set of instructions stating that 

YuMe shares would be converted either by issuing paper stock certificates or by using Euroclear’s 

CREST system. Mot. at 7-9. RhythmOne explains that because RhythmOne Plc is a UK 

corporation and listed on the London Stock Exchange’s AIM exchange, its stock must be handled 

differently than stock listed on US exchanges. Id. at 7-8. An electronic exchange of an AIMlisted stock for a NYSE-listed stock cannot be wholly accomplished through the Depository Trust 

Company and Cede & Company, as would normally occur with US-listed stocks. Id. (citing RJN 

Ex. A at 26-27, 117-18; RJN Ex. B at 26-27, 117-18, 644, 650-51, 663, 665, 669, 671). Instead, 

stock transfers involving AIM-listed shares must be made either by issuing paper stock certificates 

or through Euroclear’s CREST system. Id. Euroclear is the central securities depository for the 

United Kingdom and allows securities to be transferred electronically. Id. (citing RJN Ex. B. at 

699). 

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According to RhythmOne, because only tendering shareholders were given the option to

provide CREST instructions when they filled out the tender documents, by default non-tendering 

shareholders would understand that only paper stock certificates would be available to them. Id. at 

8-9. It argues that although its statements could have been more specific, Edenbrook has only 

identified non-actionable incomplete statements under Section 14(e). Id. 

In opposition, Edenbrook argues that it should not be expected to “figure out” that it would 

not be given the option to electronically convert its shares from the disclosures and that all 

disclosures about CREST were expressly directed only toward tendering shareholders and did not 

suggest that non-tendering shareholders would be treated differently. Plaintiff’s Opposition to 

Defendant’s Motion to Dismiss (“Oppo.”) at 14-16 [Dkt. No. 21]. Instead, Edenbrook claims that 

based on both RhythmOne’s express disclosures that it would treat tendering and non-tendering 

shareholders equally and general market practice, it understood that RhythmOne would make 

provisions for non-tendering shareholders to also electronically convert their stock via CREST. 

Id. It characterizes providing CREST information as an administrative formality and that it had no 

reason to conclude that it would not have an opportunity to provide CREST information after the 

completion of the merger. Id. Finally, it contends that even if it is “conceivable” that an investor 

would understand the disclosures cited by RhythmOne to mean that there would be no electronic 

conversion option for non-tendering stockholders, that is not the only plausible interpretation. Id. 

Rather, in light of the disclosed risk factor that RhythmOne’s shares would likely be illiquid postclosing, its interpretation of the disclosures is more plausible and sufficient to survive a motion to 

dismiss where I must construe Edenbrook’s pleadings in a light most favorable to it. Id.

RhythmOne replies that Edenbrook confuses pleading and materiality standards and that 

any alleged omission is immaterial. Reply in Support of Defendants’ Motion to Dismiss 

(“Reply”) at 4-6 [Dkt. No. 22]. A misstatement or omission is material “if there is a substantial 

likelihood that a reasonable shareholder would consider it important in deciding how to vote.” 

TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). A plaintiff need not allege that a 

misstatement or omission would have caused a reasonable investor to change her vote. See id. 

Rather, “there must be a substantial likelihood that the disclosure of the omitted fact would have 

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been viewed by the reasonable investor as having significantly altered the ‘total mix’ of 

information made available.” Id. “The ‘total mix’ of information normally includes information 

that is and has been in the readily available general public domain and facts known or reasonably 

available to the shareholders.” Kapps v. Torch Offshore, Inc., 379 F.3d 207, 216 (5th Cir. 2004) 

(internal citation omitted). 

Edenbrook’s claim that RhythmOne’s failure to explicitly state that non-tendering 

shareholders would not be given an option to electronically convert their stock, taken together 

with the allegations that delivering paper stock certificates is not a typical practice in a merger and 

that RhythmOne’s shares are less liquid because they are traded on a U.K. stock exchange, 

sufficiently alleges a material omission. A reasonable shareholder who opposes RhythmOne’s 

tender offer would be concerned that the market for RhythmOne’s shares, as described by 

RhythmOne in its disclosures, would present liquidity issues. Because such a shareholder would 

likely want to sell their shares in RhythmOne stock quickly based on the belief that the merger is a 

poor decision, having no option to electronically convert shares in a way that would allow for a 

quick sale would be material and alter the total mix of information. Whether the delivery of paper 

stock certificates is actually atypical or RhythmOne’s stock is actually as illiquid as alleged are 

questions reserved for summary judgment or trial.

Relatedly, the parties disagree on applicability of Berson v. Applied Signal Tech., Inc., 527 

F.3d 982 (9th Cir. 2008). Oppo. at 15; Reply at 6. In Berson, the defendant’s customers were 

almost all government customers who could, at any time and for any reason, issue a “stop-work 

order” forcing the defendant to stop working on an existing contract. 527 F.3d at 984. The 

plaintiffs alleged that since most stop-work orders ended in cancelled contracts, the company 

misled investors by counting stopped work as part of its backlog when it knew it would likely 

never perform those contracts. Id. The Ninth Circuit held that while the defendant did not 

necessarily have an affirmative duty to disclose its stop-work orders, once it chose to tout its 

backlog as a sign of coming financial health, it had to do so in a manner that would not mislead 

investors about the contents of the backlog. Id. at 985-987. In reaching this conclusion, the court 

rejected the defendant’s argument that reasonable investors would accurately interpret the 

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description of the backlog (containing “uncompleted portions of existing contracts”) to include

stop-work orders because a stop-work order did not actually cancel the contract, even though the 

defendant did not expect to complete the work. Id. The court reasoned that while this was a 

conceivable interpretation of the disclosure, it was not the only, or even most plausible one, and an 

investor could interpret it differently. Id. Therefore, the court could not say that as a matter of law

that the statement was not misleading at the motion to dismiss stage. Id.

By contrast, RhythmOne asserts that its disclosures explicitly stated that stock conversions 

would be done by paper certificate if the stockholder did not furnish CREST instructions and that 

because non-tendering stockholders could not furnish CREST instructions, the only reasonable 

conclusion is that they would receive their conversions by paper certificate. Id. I find Berson

persuasive and agree with Edenbrook at this stage. Although RhythmOne’s interpretation of its 

statements is plausible, it is not the only, or even most likely, interpretation to be gleaned from its 

statements on share conversion. It does not support a finding that its alleged omission was not 

misleading as a matter of law at this stage. RhythmOne’s motion to dismiss Edenbrook’s 

omission claim is denied.3

II. THE MATERIAL MISSTATEMENT CLAIM

There appears to be some confusion between the parties about what Edenbrook is alleging 

was the actionable material misstatement contained in RhythmOne’s merger filings. Mot. at 5-7; 

Oppo. at 12-14. In its opposition, Edenbrook clarifies that the misstatement from the Initial Offer 

Filing that forms the basis of its claim is:

The First Merger will be completed as soon as practicable following 

Purchaser’s acceptance of YuMe Shares tendered in the Offer if the 

Offer is completed, assuming the satisfaction or waiver of the other 

conditions to the Merger at such time. If the Offer is completed, the 

 

3 RhythmOne, at the end of its reply, states that if it had insisted that non-tendering shareholders 

also provide their CREST information before the tender offer closed, opponents such as 

Edenbrook would have accused it of attempting to coerce them to tender. Reply at 9-10. 

RhythmOne contends that it would only expect a small percentage of non-tendering shareholders 

to provide CREST information because non-tendering shareholders usually do not need to submit 

anything if they do not wish to accept a tender offer. Id. It also asserts that had it solicited 

CREST information from non-tendering shareholders post-closing, it would have been difficult 

logistically and delayed conversion further. Id. While this may all be true, a motion to dismiss 

considers only the facts alleged in the complaint; these arguments are not relevant now.

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First Merger will be subject to Section 251(h) of the DGCL, which 

means that no vote of YuMe stockholders will be required to complete 

the First Merger. Accordingly, RhythmOne anticipates that, if the 

Offer is completed, the First Merger will be completed on the same 

day as the Offer. In the First Merger, Purchaser will merge with and 

into YuMe, with YuMe surviving the First Merger. At the Effective 

Time, each outstanding YuMe Share that was not acquired in the 

Offer (other than certain dissenting, converted or cancelled shares, as 

described further in this prospectus/offer to exchange) will be 

converted into the right to receive the Transaction Consideration. 

After the First Merger, YuMe will be held as a wholly-owned 

subsidiary of RhythmOne, and the former stockholders of YuMe will 

no longer have any direct ownership interest in the surviving 

corporation.

Oppo. at 12; Compl. at ¶ 29. In Edenbrook’s view, by sending physical stock certificates to nontendering stockholders, RhythmOne failed to comply with Section 251(h) to provide the same 

consideration to non-tendering shareholders “as soon as practicable” following the consummation 

of the tender offer. Oppo. at 12-14.

RhythmOne responds that Edenbrook’s misstatement claim fails because: (i) what Section 

251(h)(1)(b) says is that “merger shall be effected” not “shares not tendered must be converted” as 

soon as practicable; (ii) the First and Second Mergers were in fact completed shortly after the 

tender period; and (iii) a violation of Section 251(h) cannot support a Section 14 claim. Reply at 

2-3. 

I agree with RhythmOne’s first and second arguments and need not reach its third. As 

RhythmOne correctly noted, Section 251(h)(1)(b) requires only the “merger” be completed as 

soon as practicable. Del. Code Ann. tit. 8 §251(h)(1)(b). The Delaware Court of Chancery 

explained that this means “the second-step merger must be effected as soon as practicable 

following the consummation of the first-step tender offer.” In re Volcano Corp. Stockholder 

Litig., 143 A.3d 727, 743 (Del. Ch. 2016) (citing Del. Code Ann. tit. 8, §251(h)(1)(b)). Here, the 

second-step merger is the First Merger between Merger Sub I and YuMe. After RhythmOne’s 

tender offer expired one minute after 11:59 P.M., Pacific Standard Time, on February 1, 2018, the 

First Merger became effective five hours later, at 5:00 A.M. Pacific Standard Time on February 2, 

2018. Compl. at ¶ 37; Supp. RJN, Ex. A at 2. The complaint only alleges that the conversion of 

shares to non-tendering shareholders was not “as soon as practicable,” not completion of the First 

Merger. Compl. at ¶ 54. It appears that Edenbrook confused the completion of the First Merger 

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and the delivery of stock consideration. RhythmOne’s motion to dismiss Edenbrook’s material 

misstatement claim identified above is granted. 

III. ALLEGATION OF LOSS CAUSATION

The parties dispute whether Edenbrook is able to plead loss causation based on its inability 

to sell its shares of RhythmOne until roughly a month after the merger. Typically, in securities 

cases, loss causation is shown by the drop in share price due to a misstatement or omission by the 

defendant. Lloyd v. CVB Fin. Corp., 811 F.3d 1200, 1209 (9th Cir. 2016) (“The burden of 

pleading loss causation is typically satisfied by allegations that the defendant revealed the truth 

through corrective disclosures which caused the company’s stock price to drop and investors to 

lose money.”) (internal quotation marks and citations omitted). Edenbrook does not allege that the 

material omission discussed above led to the drop in the price of RhythmOne’s stock. Oppo. at 

16. 

Instead, Edenbrook alleges that it suffered a loss by being unable to sell its shares in 

RhythmOne earlier due to the delay incurred by the time it took RhythmOne to mail its broker the 

paper stock certificate, and the added time Edenbrook’s broker required to then break the 

certificate down into units for each of the broker’s clients. Compl. at ¶¶ 4, 43, 47, 49-50. It

argues that this delay caused it to miss out on an opportunity to sell its shares during the period of 

significant selling activity in the days following closing the merger. Id. at ¶ 49. It alleges, and 

RhythmOne does not contest, that it would have tendered its YuMe shares if it had known that it 

was the only way for it to electronically convert its shares. Reply at 7.

In support of its argument, Edenbrook cites Mineworkers' Pension Scheme v. First Solar 

Inc., 881 F.3d 750, 753 (9th Cir. 2018) where the Ninth Circuit articulated the test for loss 

causation as being the familiar test for proximate cause. “To prove loss causation, plaintiffs need 

only show a causal connection between the fraud and the loss by tracing the loss back to the very 

facts about which the defendant lied[.]” Id. (citation and internal quotation marks omitted). 

“Disclosure of the fraud is not a sine qua non of loss causation, which may be shown even where 

the alleged fraud is not necessarily revealed prior to the economic loss.” Id. (citation and internal 

quotation marks omitted). Although First Solar was a case where the loss was the drop in share 

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price and not an unexpected delay in the ability to sell, the court stated that “[r]evelation of fraud 

in the marketplace is simply one of the ‘infinite variety’ of causation theories a plaintiff might 

allege to satisfy proximate cause” and that its “approval of one theory should not imply our 

rejection of others.” Id. at 754 (internal citations omitted). By way of example, the court stated 

that “a stock price drop [which] comes immediately after the revelation of fraud can help to rule 

out alternative causes[,]” “[b]ut that sequence is not a condition of loss causation.” Id. at 754.

The parties have not cited any cases that are factually analogous to support or preclude a 

finding of loss causation under these facts. Although this allegation of loss is unusual in the 

securities context, Edenbrook’s allegations plausibly state a claim for loss causation. It claims that 

it was delayed from taking an action that it would have been entitled to take (and would have 

taken) as a result of RhythmOne’s omission, and that the delay caused it to suffer an economic 

loss. If this general description of events were found outside of the securities context, it would not

be controversial to find that loss causation was adequately stated. As the Ninth Circuit articulated

in First Solar, the test to be applied is simply the familiar proximate cause test, not one that is 

unique to securities cases. 881 F.3d at 753. Accordingly, I find that Edenbrook has adequately 

alleged loss causation.

CONCLUSION

RhythmOne’s motion to dismiss is granted in part and denied in part. Edenbrook has 

failed to plead a material misstatement by RhythmOne, but has pleaded a material omission and 

loss causation. Edenbrook is given leave to amend its material misstatement claim within 20 days 

of this Order.

IT IS SO ORDERED.

Dated: April 24, 2019 

William H. Orrick

United States District Judge

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