Security software testing firm Rapid7 is being investigated for securities law violations, a Los Angeles-based law firm has revealed.
The news comes as an activist investor has increased its stake in the company and is looking at buyer interest for the Boston-based firm, led by Corey Thomas.
Schall Law Firm, a national shareholder rights litigation firm, disclosed that it is probing claims on behalf of a number of investors in Rapid7 “for potential breaches of fiduciary duty on the part of its directors and management,” as the firm said in a statement.
“The investigation focuses on determining if the Rapid7 board breached its fiduciary duties to shareholders,” the lawyers said.
Brian Schall is leading the proceedings. When approached by QA Financial, the firm confirmed the investigation but declined to comment or provide any further details.
Deal rumours
The legal woes come as it has been reported that activist investor Jana Partners has taken a 13% stake in Rapid7 for about $137 million.
Moreover, the investor is currently evaluating potential buyer interest.
Jana Partners has joined forces with a number of cybersecurity experts as special advisors for any potential deal.
They include Michael Joseph Burns, who served as Imperva’s CFO from 2018 to 2019 and Gigamon’s CFO from 2014 to 2016.
Also on board are Chad Kinzelberg, who was Palo Alto Networks’ senior vice president of business and corporate development from 2012 to 2018, as well as Robert Bradshaw Henske, who was Intuit’s CFO from 2003 to 2004 and Synopsys’ CFO from 2000 to 2002.
They collectively approached investment firm Cannae Holdings. The latter has hinted it may be interested in putting forward a bid for Rapid7.
According to various industry insiders, Jana Partners and Cannae are working with the special advisors to address a range of corporate governance issues and operational challenges that, they believe, has led to Rapid7’s stock being undervalued.
Since the start of this year, the company’s share price has dropped by more than 28% and, compared to November 2021, it is down by more than 70%, when Rapid7’s stock hit an all-time high of $138.
Experts and analysts currently value the company at around $2.5 billion.
Wind of change
Change has been a long time coming at Rapid7. The company has been seen as a potential takeover target since the beginning of 2023, when the firm reportedly hired Golman Sachs with a potential sale to a private equity firm.
At the time, TPG Capital, Google-owner Alphabet as well as Thoma Bravo were all named as potential buyers, but none of the talks materialised.
A few months later, in August 2023, Rapid7 laid off nearly a fifth of its entire workforce, close to 470 roles, to streamline the firm.
Jana Partners stated in a recently filed regulatory filing that the firm faces a host of issues, ranging from investor communication, corporate governance, forecasting, employee retention and operational execution to board composition.
Most recently, in June, Andrew Burton left as president and COO, while a month later chief customer officer Larry D’Angelo departed.
On top of that, Clifford Stevens, vice president of global marketing planning and operations, left in August.
In the filing, Cannae confirmed it is prepared to take part in any acquisition of Rapid7. The investment is somewhat remarkable as Cannae’s ownership footprint includes primarily a range of football clubs, such as English club AFC Bournemouth, Scottish club Hibernian F.C., French club FC Lorient, Tennessee-based O’Charley’s Restaurant & Bar and Massachusetts-based Ninety Nine Restaurant & Pub.
When approached by QA Financial, no one at Rapid7 was available to comment.
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