United States District Court, D. Delaware
PHILIP HALPERT, derivatively on behalf of ASIAINFO-LINKAGE, INC., Plaintiff,
STEVE ZHANG, JIAN DING, LIBIN SUN, SEAN SHAO, YUNGANG LU, DAVIN A. MacKENZIE, THOMAS J. MANNING, SUNING TIAN, XIWEI HUANG, and GUOXIANG LIU, Defendants, and ASIAINFO-LINKAGE, INC., Nominal Defendant.
REPORT AND RECOMMENDATION
SHERRY R. FALLON, Magistrate Judge.
Presently before the court in this shareholder derivative action brought under Section 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78n(a) et seq., are the following motions: (1) nominal defendant Asialnfo-Linkage, Inc.'s ("Asialnfo") motion to stay (D.I. 37); (2) the motion to dismiss the complaint for lack of standing filed by defendants Jian Ding ("Ding"), Xiwei Huang ("Huang"), Guoxiang Liu ("Liu"), Yungang Lu ("Lu"), Davin A. Mackenzie ("Mackenzie"), Thomas J. Manning ("Manning"), Sean Shao ("Shao"), Libin Sun ("Sun"), Suning Tian ("Tian"), and Steve Zhang ("Zhang") (collectively, the "Individual Defendants") (D.I. 52); and (3) plaintiff Philip Halpert's ("Halpert") motion for leave to file an amended complaint (D.I. 57). For the following reasons, I recommend that the court deny Asialnfo's motion to stay as moot, grant the Individual Defendants' motion to dismiss, and deny Halpert's request to file an amended complaint.
On December 6, 2011, Asialnfo's Board of Directors (the "Board") approved the grant of 750, 000 stock options to President and Chief Executive Officer Zhang, and 110, 000 stock options to Executive Vice President Liu, under Asialnfo's 2011 Stock Incentive Plan (the "Plan"). The Plan provides that no individual may be granted stock option awards intended to qualify as performance-based compensation in excess of 100, 000 shares. (D.I. 58, Ex. 1 at ¶ 27) Halpert filed a derivative complaint on behalf of Asialnfo and against the Individual Defendants on October 17, 2012, alleging that the Individual Defendants knowingly violated the terms of the Plan by awarding Zhang and Liu stock options that exceeded the maximum amount allowable under the Plan, and asserting derivative causes of action for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. (D.I. 1) On January 18, 2013, the Individual Defendants moved to dismiss for failure to state a claim upon which relief could be granted. (D.I. 10) The court denied the motion to dismiss on August 8, 2013. (D.I. 20; D.I. 21) On October 22, 2013, Halpert filed a motion for judgment on the pleadings, which the court denied on June 6, 2014. (D.I. 34; D.I. 66-67)
In January 2012, Asialnfo announced that it was considering a proposal to take the company private. (D.I. 60, Ex. A) On May 13, 2013, Asialnfo announced a proposed merger transaction in which Zhang, Tian, Ding, and CITIC Capital Partners would acquire Asialnfo (the "Merger"). (D.I. 58, Ex. 1 at ¶ 32) The Board amended Zhang and Liu's employment contracts to give them the right to exchange all of their stock options for cash after the closing of the Merger. ( Id. at ¶ 33) On November 18, 2013, Asialnfo issued a Definitive Proxy Statement (the "2013 Proxy") providing shareholders with the terms and background of the transaction, explaining that the offers to acquire Asialnfo were made on a per share basis. (D.I. 60, Ex. B) A majority of Asialnfo's shareholders approved the Merger, and on January 14, 2014, the Merger officially closed and Asialnfo became a privately held company. (D.I. 58, Ex. 1 at ¶¶ 32, 34) Subsequently, Zhang and Liu's stock options were converted into an option to purchase an equal number of shares in the new company or the cash equivalent of that amount.
III. LEGAL STANDARD
Rule 15(a)(2) of the Federal Rules of Civil Procedure provides that after a responsive pleading has been filed, a party may amend its pleading "only with the opposing party's written consent or the court's leave, " and "[t]he court should freely give leave when justice so requires." The decision to grant or deny leave to amend lies within the discretion of the court. See Foman v. Davis, 371 U.S. 178, 182 (1962); In re Burlington Coat Factory Secs. Litig., 114 F.3d 1410, 1434 (3d Cir. 1997). The Third Circuit has adopted a liberal approach to the amendment of pleadings. See Dole v. Arco, 921 F.2d 484, 487 (3d Cir. 1990). In the absence of undue delay, bad faith, or dilatory motives on the part of the moving party, the amendment should be freely granted, unless it is futile or unfairly prejudicial to the non-moving party. See Foman, 371 U.S. at 182; In re Burlington, 114 F.3d at 1434.
An amendment is futile if it is frivolous, fails to state a claim upon which relief can be granted, or "advances a claim or defense that is legally insufficient on its face." Koken v. GPC Int'l, Inc., 443 F.Supp.2d 631, 634 (D. Del. 2006). The standard for assessing futility of amendment under Fed.R.Civ.P. 15(a) is the same standard of legal sufficiency applicable under Fed.R.Civ.P. 12(b)(6). Shane v. Fauver, 213 F.3d 113, 115 (3d Cir. 2000). Specifically, the amended pleading must fail to state a claim upon which relief could be granted even after the district court "tak[es] all pleaded allegations as true and view[s] them in a light most favorable to the plaintiff." Winer Family Trust v. Queen, 503 F.3d 319, 331 (3d Cir. 2007); see also Great W. Mining & Mineral Co. v. Fox Rothschild LLP, 615 F.3d 159, 175 (3d Cir. 2010).
A. Motion for Leave to File Amended Complaint
In support of the motion to amend, Halpert concedes that the consummation of the Merger extinguished his derivative claims, but alleges that he should be able to assert direct claims for breach of contract, conversion, and unjust enrichment based on the award of excess stock options to Zhang and Liu in contravention of the terms of the Plan. (D.I. 58 at 5-9) In response, the Individual Defendants contend that Halpert's amended causes of action are derivative in nature, and Halpert's efforts to recast his derivative claims as direct claims are futile in light of Delaware Supreme Court precedent. (D.I. 59 at 4-10)
To determine whether a claim is direct or derivative, the court must consider "(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?" Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004). Under Delaware law, the same set of facts may inflict both derivative and direct harm on a shareholder, generating both a direct claim and a derivative claim. Protas v. Cavanagh, C.A. No. 6555-VCG, 2012 WL 1580969, at *5 (Del. Ch. May 4, 2012); MCG Capital Corp. v. Maginn, 2010 WL 1782271, at *13 (Del. Ch. May 5, 2010). However, a claim of direct injury "must be independent of any alleged injury to the corporation." Tooley, 845 A.2d at 1039. The court must "independently examine the nature of the wrong alleged and any potential relief to make its own determination" regarding the nature of the claims. Id at 1035 (internal quotation marks omitted).
"Delaware courts have long recognized that actions charging mismanagement which depress the value of stock [allege] a wrong to the corporation; i.e., the stockholders collectively, to be enforced by a derivative action.'" Kramer v. W. P. Indus., Inc., 546 A.2d 348, 353 (Del. 1988) ...