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IN RE: RENREN, INC. DERIVATIVE LITIGATION, Plaintiff, v. XXX, Defendant.
Reference is made to the (i) Decision and Order (the 2020 Decision), 67 Misc. 3d 1219(A), 2020 WL 2564684 (Sup. Ct., N.Y. County 2020) affd 192 A.D.3d 539, 140 N.Y.S.3d 701 (1st Dept. 2021) and (ii) the Decision and Order dated December 10, 2021 (the December 10, 2021 Decision; NYSCEF Doc. No. 846), (ii) Supplemental Order dated December 29, 2021 (the First Supplemental Order; NYSCEF Doc. No. 851), and (iii) Supplemental Order dated December 31, 2021 (the Second Supplemental Order; NYSCEF Doc. No. 852; the Second Supplemental Order, together with the December 10, 2021 Decision and the First Supplemental Order, hereinafter, collectively, the 2021 Decision) pursuant to which this Court held that the proposed settlement was “so unfair on its face to preclude judicial approval” (Benedict v. Whitman Breed Abbott & Morgan, 77 A.D.3d 870, 872, 910 N.Y.S.2d 474 [2d Dept. 2010], citing Zerkle v. Cleveland-Cliffs Iron Co., 52 F.R.D. 151, 159 [S.D. N.Y. 1971], quoting Glicken v. Bradford 35 F.R.D. 144, 151 [S.D. N.Y. 1964]; see Mathes v. Roberts, 85 F.R.D. 710, 713 [S.D. N.Y. 1980]; Trainor v. Berner, 334 F. Supp. 1143, 1149 [S.D. N.Y. 1971]) both because the proposed settlement of the derivative action was structured with direct payments to certain minority shareholders but excluded relevant other injured minority shareholders and also because the proposed legal fees were an excessive allocation of the settlement proceeds to the attorneys and away from the injured parties.
Additionally, based on the objections received at the time, and the fact that the spin-off transaction which forms the basis for the complaint was announced on April 30, 2018, the Court indicated that it would appear that the record date should be set for April 29, 2018 — i.e., the day immediately preceding when the announcement was made. Based on the record in front of the Court at that time, the Court gave leave to the defendants to bring a motion to dismiss as to any of the plaintiffs who were not shareholders as of the record date. Based on the papers submitted in connection with this motion, however, it is now apparent that June 21, 2018 is the appropriate record date. For clarity, the issue is when did any such damage to Renren become final and fixed. As such, the motion to dismiss must be granted to the extent that shareholders who were not shareholders on June 21, 2018 (i.e., the date of the closing of the transaction that forms the basis of this lawsuit), do not have standing to maintain this lawsuit.
As this Court previously explained both in the 2020 Decision and in the 2021 Decision, this is a shareholder derivative action brought in New York where Cayman Islands law applies. Familiarity with the facts is presumed.
The defendants move pursuant to BCL § 626 and argue that any shareholders who were not shareholders as of the record date and who currently are not shareholders should be dismissed from this lawsuit. This is the date they argue taking the plaintiffs allegations as true as the Court must at this stage of the proceeding (Leon v. Martinez, 84 N.Y.2d 83, 87-88, 614 N.Y.S.2d 972, 638 N.E.2d 511 ), any “fraud on the minority” occurred (i.e., the date of the alleged transaction), and anyone who is not currently a shareholder also lacks standing. Stated differently, the defendants argue that BCL § 626 encompasses a dual requirement as to the ownership of stock — i.e., contemporaneous ownership and continuing ownership. Anyone who can not satisfy these requirements lacks standing to bring this action.
BCL § 626 provides:
(a) An action may be brought in the right of a domestic or foreign corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates.
(b) In any such action, it shall be made to appear that the plaintiff is such a holder at the time of bringing the action and that he was such a holder at the time of the transaction of which he complains, or that his shares or his interest therein devolved upon him by operation of law.
Indeed, it is well settled that to satisfy BCL § 626 (b) in a derivative action, the plaintiff must demonstrate that she was a shareholder at the time of the transaction, at the time of trial and at the time of entry of judgment (Independent Inv. Protective League v. Time, Inc., 50 N.Y.2d 259, 263, 428 N.Y.S.2d 671, 406 N.E.2d 486 ; Jacobs v. Cartalemi, 156 A.D.3d 605, 607, 67 N.Y.S.3d 63 [2d Dept. 2017]; Slade v. Endervelt, 174 A.D.2d 389, 390, 571 N.Y.S.2d 452 [1st Dept. 1991]).
As the Independent Inv. Protective League Court observed, the contemporaneous ownership requirement originated in the Federal courts to preclude a shareholder from transferring stock to a non-resident to manufacture diversity jurisdiction after a cause of action has accrued. The rule was later adopted by the legislature
to prevent litigious persons from buying stock for the purpose of bringing suit as to alleged past mismanagement’ (e.g., Myer v. Myer, 271 App. Div. 465, 473, [66 N.Y.S.2d 83], aff'd 296 N.Y. 979, [73 N.E.2d 562]; accord Henn, Corporations [2d ed], § 362, p 766). Because it seeks to foster public policy by inhibiting speculation in litigation, the contemporaneous ownership rule must, as a general matter, be rigorously enforced
(Independent Inv. Protective League, 50 N.Y.2d at 263, 428 N.Y.S.2d 671, 406 N.E.2d 486 [emphasis added]).
As the Court of Appeals further observed, the continuing ownership requirement is
rooted in practical considerations. Although in a theoretical sense a derivative action is brought for the benefit of the corporation, “In a very real sense*** the standing of the shareholder is based on the fact that***he is defending his own interests as well as those of the corporation” (Tenney v. Rosenthal, 6 N.Y.2d 204, 211, [189 N.Y.S.2d 158, 160 N.E.2d 463]); see, also, Sorin v. Shahmoon Inds., 30 Misc. 2d 429, 432). Where the plaintiff voluntarily disposes of the stock, his rights as a shareholder cease, and his interest in the litigation is terminated (Tenney v. Rosenthal, supra, at p 21, [189 N.Y.S.2d 158, 160 N.E.2d 463]; Hanna v. Lyon, 179 N.Y. 107, 110-11, [71 N.E. 778]). Being a stranger to the corporation, the former stockowner lacks standing to institute or continue the suit
(id.). Put another way, standing requires both a sufficient legal interest and injury.
Two sets of opposition papers were submitted in connection with the instant motion. The first set of opposition papers were submitted by Heng Ren Silk Road Investments LLC (Heng Ren), Oasis Investment II Master Fund Ltd. (Oasis) and Jodi Arama (Heng Ren and Oasis, together with Ms. Arama, hereinafter, collectively, the HROA Plaintiffs). Ms. Arama was a shareholder since July 2011 (NYSCEF Doc. No. 871) and continues to be a shareholder. As such, she has standing regardless of whether the record date is April 29, 2018 or June 21, 2018. Heng Ren and Oasis, however, were not shareholders until May 2018 (NYSCEF Doc. Nos. 869-870), which is after the date the Court initially indicated should be set as the record date. The HROA Plaintiffs argue that under Cayman Islands law there is no contemporaneous ownership requirement, there is only the requirement that one must be a shareholder at the time of the lawsuit.1 In support of this proposition, the HROA Plaintiffs rely primarily on the affidavit of Judge Ingrid Mangatal (NYSCEF Doc. No. 957), a retired judge of the Grand Court of the Cayman Islands.
As relevant, Judge Mangatal opined as to (1) whether only registered shareholders may bring claims derivatively on behalf of the company, and (2) whether ownership at the time of the alleged wrongdoing is a standing requirement or whether obtaining shares after the time of the alleged wrongdoing bars a plaintiff from having derivative standing.2
In her affirmation, Judge Mangatal indicates:
I entirely agree that under Cayman Islands law, a prospective shareholder plaintiff must be a current registered shareholder of the company in order to bring a derivative action
(NYSCEF Doc. No. 957, ¶ 22).
Thus, it would appear that any potential plaintiffs who are not currently shareholders lack standing both under Cayman Islands law and BCL § 626(b). Inasmuch as there are intervention motions filed on behalf of other potential plaintiffs who are not current shareholders (e.g., shareholders who were shareholders as of April 29, 2018 but who have since then sold their shares), the resolution of this issue is not required in addressing the instant motion and the record is not fully developed as to their position, therefore the Court will address this issue when it addresses the pending intervention motions on the fully developed record.
As to the second question, Judge Mangatal was not able to state definitively that contemporaneous ownership is not a requirement under Cayman Island law. She states in her affirmation that she is not aware of a contemporaneous ownership requirement that has been recognized in Cayman Island law:
The ‘contemporaneous ownership’ rule, as described in the Motion, is not a concept or rule that exists in Cayman Islands law. I also am not aware of any requirement under Cayman Islands law for a shareholder to be a member at the time of the alleged wrongdoing.
Albeit contained in UK specific legislation, I note with interest that sub-section 260(4) of the English Companies Act 2006, (that follows subsection 260 which incorporated the common law as to members), provides that it does not matter if the cause of action that is the subject of the claim occurred before the shareholder became a member
This question appears to relate to the issue of good faith alluded to in the Motion. Firstly, it is obvious even from the quote itself from Directors’ Duties by Professor Andrew Keay (paragraph 14.97 of the Text), that the fact that a shareholder plaintiff has bought shares after the wrongdoing has been revealed is only an element in considering whether or not the proceeding is an abuse and is not an automatic bar for standing.
(id., ¶¶ 23-25).
She cites no Cayman statute or case for this speculation and instead quotes an article by Professor Andrew Keay:
It has been argued that when actions are pursued by a member who is in business as a competitor, or where the claimant has purchased shares in the company after the wrong complained of has come to light as to the price paid by the applicant reflects the company's loss, the courts should be more inclined to scrutinise the applicant's good faith, and be swifter to bar a claim on grounds of lack of good faith
Given the common approach of the Australian and UK courts to this issue (good faith), it seems highly likely that, under the Act, the courts will scrutinize the bona fides of a shareholder more carefully where the shareholder has no financial interest in the action, either because, as in Harley Street capital the price at which the shareholder purchased the shares already reflected in the market's response to the alleged wrongdoing, or where, as in Barrett v Duckett, the company may be insolvent. In such cases the courts are likely to require additional evidence as to bona fides. Again, under the Act, since it is up to the shareholder to establish that it satisfies the permission criteria, some evidence must be led on this point if it is not otherwise obvious from the facts
The presence of the good faith factor has been criticized as a rhetorical device that is ‘replete with uncertainty and highly unworkable in practice.’ Nevertheless, the courts are likely to derive some guidance from cases that have addressed the requirement under the common law process for derivative actions. Besides these cases, Professor Jennifer Payne, writing well before the drafting of the CA 2006 suggested that cases applying the clean hands doctrine could also be treated as relevant to interpreting good faith. Under the old system in the UK if a shareholder did not have clean hands applicants would be denied permission to bring an action. Payne was of the opinion that the same approach will be employed under a statutory derivative action, on the basis that the requirement that the applicant was acting in good faith would mean that any bad faith that the applicant exhibited would disqualify him or her
In my research, I have not found a Cayman Islands decision in relation to derivative actions that expressly deals with the question of good faith. Indeed, whether that is because there is no such requirement under Cayman Islands law remains a possibility. As appears from the quotation in the above paragraph, the requirement under the English Companies Act 2006 seems to have invited some criticism. I have also not found a Cayman Islands case dealing with the interaction of derivative actions and the ‘clean hands’ doctrine
However, assuming that both these considerations apply under Cayman law, it is in my view obvious from the passages quoted at paragraphs 28 and 29 above that obtaining shares after the time of the alleged wrongdoing, indeed, even acquiring the shares after the event complained of has come to light, is not a bar to such a shareholder having derivative standing under Cayman Islands law. Furthermore, the passages quoted, and the general principles of fairness and equity would themselves seem to dictate that the court should look at all the facts and circumstances shown by the evidence, and not just the timing of the application.
In my view, acquiring the shares after the time of the alleged wrongdoing, is an element to be considered by the court when deciding on the question of standing, and does not pose an absolute bar to such status
(id., ¶¶ 26, 28-32).
Based on this speculation, the HROA Plaintiffs argue that because their expert has not identified a Cayman Island law requirement for contemporaneous ownership and the recovery sought is for the value of Renren that was siphoned off, not the value of the shares, they have standing to maintain this lawsuit. The argument slightly misses the point.
This is a derivative action. As such, the alleged injury was to the company -- Renren. Based on the alleged wrongdoing, it is Renren that allegedly suffered a loss—i.e., the siphoned off assets. Because the market is efficient, Renren would be worth less and this loss of value would to some extent be reflected in a decrease in the market capitalization of Renren and reflected in the share price (Samuel Martin Pierce Dawson Affirmation relying on Prudential Assurance Company Limited Newman Industries Limited (No.2.)  Ch 204 at 222H [SD2, page 51] and Primeo Fund (in Official Liquidation) v Bank of Bermuda (Cayman Ltd) and ors.  UKPC 22 at  [SD2, page 127] citing Marex Financial Ltd. v Sevilleja  UKSC 31; NYSCEF Doc. No. 919). The point is not however that the share price is what is being sought in the way of recovery (Serino v. Lipper, 123 A.D.3d 34, 994 N.Y.S.2d 64 [1st Dept. 2014]). This is not an action seeking “reflective loss”. The point is, as the Court of Appeals acknowledged in Independent Inv. Protective League and as codified in the BCL, standing requires ownership at the time the injury accrued to protect against speculation in litigation.3 Thus, shareholders who did not own their interests as of the record date can not maintain this lawsuit.4
In their opposition papers, CRCM indicates that it agrees with the Court's analysis in the 2021 Decision except that the 2021 Decision should be modified to reflect that the record date was June 21, 2018, i.e., when the spin-off transaction closed. CRCM asserts that Renren did not suffer its loss until it was divested of its interest in SoFi and OPI which occurred at the closing and that as such this is when Renren suffered its loss. CRCM further argues that because although the spin-off was announced in April, the final amount of the cash dividend was not finalized until the closing, and as such, investors were not presented with the “Hobson's choice” until then. Thus, CRCM argues that June 21, 2018 is the proper record date. As discussed above, CRCM is correct. The issue is when the damage to Renren was final and fixed and this occurred when the transaction was no longer contingent and subject to modification or cancelation.5
Accordingly, it is hereby ORDERED that the motion to dismiss is granted to the extent of dismissing the claims brought by shareholders who were not shareholders as of June 21, 2018; and it is further
ORDERED that the 2021 Decision is modified to set the record date as of June 21, 2018.
1. The HROA Plaintiffs assert that the issue of standing must be decided under Cayman Islands law pursuant to the internal affairs doctrine because it is a substantive issue and not a procedural one. While the issue of standing is generally a procedural matter (Royal Park Investments SA/NV v. Stanley, 165 A.D.3d 460, 461, 86 N.Y.S.3d 14 [1st Dept. 2018], lv denied 32 N.Y.3d 1143, 92 N.Y.S.3d 181, 116 N.E.3d 665 ), standing in a shareholder derivative action is governed by the laws of the state of the subject company's incorporation (Matter of CPF Acquisition Co. v. CPF Acquisition Co., 255 A.D.2d 200, 200, 682 N.Y.S.2d 3 [1st Dept. 1998]) and is therefore substantive.
2. Judge Mangatal also opined as to (1) whether a shareholder has individual claims for individual harms suffered due to diminished value of the shares of a company and (2) whether reflective loss is a prerequisite or requirement to have derivative standing. Inasmuch as this is a derivative action seeking redress for harm allegedly done to Renren and its shareholders and the lawsuit does not seek “reflective loss”, these portions of her affirmation need not be addressed at this time.
3. Indeed, this may well be why Judge Mangatal indicates that good faith is required in determining whether standing exists.
4. The point is however moot because June 21, 2018 is the record date and as of that date Heng Ren and Oasis were shareholders.
5. Additionally, CRCM argues that following the announcement of the spin-off, in May 2018, CRCM objected to the transaction. CRCM sent two letters to Renren's board, dated Mary 15, 2018 (NYSCEF Doc. No. 961) and May 29, 2018 (NYSCEF Doc. No. 962), detailing CRCM's objections to the spin-off and suggesting either a liquidation trust or changing OPI's corporate governance so that CRCM's managing partner could act as a shareholder representative on OPI's board. By letter, dated May 30, 2018 (NYSCEF Doc. No. 963), Renren's counsel informed CRCM that the request to change corporate governance had been denied by SoftBank. Separately, in May 2018, a group of Renren investors filed a complaint with the US Securities and Exchange Commission to stop the spin-off (NYSCEF Doc. No. 960). This does not however address the issue head-on. The question is when the injury to Renren accrued because the damage was fixed and final. It is not clear how the events in May cited by CRCM relate to that issue.
Andrew Borrok, J.
Response sent, thank you
Docket No: Index No. 653594/2018
Decided: March 09, 2022
Court: Supreme Court, New York County, New York.
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