These in tandem appeals arise from related suits brought in the aftermath of the initial public offering by nominal defendant Facebook, Inc. (“Facebook”), the world’s largest social media company. In these putative shareholder derivative actions, plaintiffs allege that Facebook’s directors breached duties owed to the company because its Registration Statement failed to disclose the mid-quarter impact of mobile usage on the company’s projected growth.
One of the putative derivative actions was filed in the Southern District of New York. A related action was filed in California state court, and removed to the Northern District of California. A third was filed in the Delaware Court of Chancery, and removed to the United States District Court for the District of Delaware. Before the putative derivative plaintiffs could litigate motions to remand to state court, the Judicial Panel on Multidistrict Litigation transferred all of the actions to the United States District Court for the Southern District of New York (Sweet, /.).
The district court dismissed all of the actions on threshold grounds, ruling that: (i) plaintiffs were not actual or equitable owners of Facebook stock at the time of the alleged wrongdoing, (ii) plaintiffs failed to adequately plead demand futility, and that (iii) the claims were unripe. Plaintiffs in the removed actions argue that the court erred in considering these bases for dismissal before adjudicating subject matter jurisdiction. The plaintiff in the action originally filed in the Southern District of New York appeals the dismissal of his action on these threshold grounds. The removed plaintiffs join, in the alternative, in these arguments.
Facebook urges this Court to affirm the district court in all respects, proffers additional bases to support subject matter jurisdiction as to the removed actions, and
We conclude that it was not error for the district court to decide, as a threshold matter, whether plaintiffs adequately pleaded contemporaneous share ownership, as required by Federal Rule of Civil Procedure 23.1. Because none of the putative derivative plaintiffs satisfied this requirement, we affirm. We do not reach the additional bases for dismissal invoked by the district court, or advanced by Face-book.
BACKGROUND
Facebook’s May 18, 2012 initial public offering (the “IPO”)-was one of the largest in history. In preparation for this event— closely watched by investors, the press, and the public — Facebook filed a Form S-1 Registration Statement (the “Registration Statement”) with the Securities and Exchange Commission (“SEC”). The Registration Statement is a disclosure document that requires a public company to, inter alia, detail its current business model and its competition, provide a prospectus of the planned security, provide information on the offering price and methodology for setting the price, disclose risks, and disclose material dealings between the company and its directors.
Facebook supplemented its Registration Statement on May 9 with a Free-Writing Prospectus, a one-page, stand-alone disclosure, which identified a trend: the number of Facebook users was increasing more rapidly than the number of advertisements. Facebook offered the view that this trend was driven, at least in part, by increased usage of Facebook on mobile devices, on which it had only an “immaterial” number of sponsored stories in users’ “News Feeds,” and which displayed fewer advertisements per page.
The final Registration Statement, filed on May 16, included the following disclosures:
• Facebook did “not currently directly generate any meaningful revenue” from mobile usage;
• its “revenue would be negatively affected” if it was “unable to successfully implement monetization strategies for [its] mobile users”;
• its “ability to monetize” use on mobiles devices was “unproven”;
• daily mobile users were increasing more rapidly than advertisements; and,
• it believed usage of Facebook on mobile devices would continue to grow.
Registration Statement, No. 12-md-2389, Dkt. 25-5, at 5,13, 14-15,16, 51, 53, 57, 93, 94.
Notwithstanding these predictions and disclosures, Facebook’s Registration Statement provided that, in consultation with its Underwriters, it had increased its IPO price range from between 28 to 35 dollars per share to between 34 to 38 dollars per share.
Facebook’s Prospectus, issued two days later, warned that the company generated “a substantial majority” of its revenue from advertising, and that the “loss of advertisers, or reduction in spending by advertisers with Facebook, could seriously harm [its] business.” Compl. ¶¶48, 49, Levy v. Andreessen, Civ. 514585 (Cal. Super. Ct. 2012) (“Levy Compl.”).
That same day, on May 18, Facebook offered 421 million shares of common stock to the public at 38 dollars per share, thereby valuing the IPO at more than 16 billion dollars.
The day after, the press reported that Facebook had altered its guidance on earnings before the IPO. Plaintiffs allege that “the public never found out about” these revised numbers “until after the IPO had been priced.” Crocitto Compl. ¶ 40. In the ensuing days, additional media coverage suggested that the Underwriters had cut their earnings forecasts prior to the IPO based on allegedly selective disclosures. Plaintiffs allege that when the market learned of this, the stock price was “hammered.” Levy Compl. ¶ 11.
Plaintiffs, and other shareholders whose litigation is not now at issue, filed overlapping putative derivative actions in California Superior Court, Delaware Chancery Court, and the Southern District of New York. All of the derivative actions alleged that Facebook’s directors breached their duties to shareholders because the Registration Statement did not include a sufficient description of the effect that increasing mobile usage was projected to have on the company’s revenue growth. Several of the actions alleged an oversight theory of liability. Others alleged that three of the directors’ IPO sales of Facebook stock amounted to insider trading.
Plaintiff Robert Crocitto, who filed his case in the Southern District of New York, alleged that he “beneficially purchased Fa-cebook shares through the purchase of Series 2 Membership Units of SharesPost Private Investments II, LLC.” Crocitto Compl. ¶ 10. SharesPost Private Investments II, LLC (“SharesPost”) is an investment vehicle, which held Facebook shares pre-IPO. The Subscription Agreement governing Crocitto’s purchase of the Series 2 Membership Units (“SharesPost Units”) provided: “The Subscriber acknowledges that it has no direct interest in any Face-book Securities, and that the Facebook Securities are held solely by the Company.” Crocitto J.A. at 219. According to Crocitto’s own complaint, “[t]he Series 2 Membership Units converted into Class B Common Stock of Facebook after the IPO.” Crocitto Compl. ¶ 10. An e-mail from SharesPost, which Crocitto attached to his amended complaint, confirms that Crocitto received the shares in November 2012 — six months after the IPO. Crocitto J.A. at 261.
Plaintiff Lidia Levy, who originally filed her action in California, alleged that she was “an owner and holder of Facebook common stock continuously since May 18, 2012, having purchased shares in the open market the day of Facebook’s IPO.” Levy Compl. ¶ 18.
Facebook successfully removed the state court actions to federal courts, and asked the Judicial Panel on Multidistrict Litigation (“MDL Panel”) to transfer these removed actions to the United States District Court for the Southern District of New York. Plaintiffs moved to remand the actions to the state courts; Facebook, in turn, moved to dismiss. While the remand and dismissal motions were pending, the MDL Panel granted the motion to transfer. In re Facebook,. Inc., IPO Sec. & Derivative Litig.,
Following the transfer, plaintiffs renewed their motions to remand, and Face-book sought dismissal of all of the related derivative actions. In granting Faeebook’s motion to dismiss, the district court concluded that a ruling on subject matter jurisdiction would involve a “possible arduous inquiry.” In re Facebook, Inc., IPO Sec. & Derivative Litig.,
As to the allegation of stock ownership advanced by Crocitto and Jones, the district court held that ownership of Shares-Post Units did not constitute ownership in Facebook, equitable or otherwise. Therefore, these plaintiffs could not pursue their claims in a derivative capacity. As to Levy, the court concluded that she too failed to plead the required contemporaneous ownership. The gravamen of Levy’s complaint challenged disclosures that were made before the IPO, but she did not allege that she acquired Facebook shares before the IPO; rather, she purchased Facebook stock in the IPO.
Jones and Levy, plaintiffs in the removed actions, argue that the court, erred by deciding the motion to dismiss before adjudicating their motions to remand for lack of subject matter jurisdiction. Crocit-to, who originally filed his complaint in the Southern District of New York, does not contest subject matter jurisdiction, and argues solely that dismissal was improper. Jones and Levy join, in the alternative, in this argument.
When a determination as to subject matter jurisdiction raises a difficult or novel question, the district court has discretion to decide certain threshold bases for dismissal without deciding whether it has subject matter jurisdiction. See Ruhrgas AG v. Marathon Oil Co.,
Rule 23.1 provides that, in a derivative action, the complaint must “allege that the plaintiff was a shareholder or member at the time of the transaction complained of, or that the plaintiffs share of membership later devolved on it by operation of law.” Fed.R.Civ.P. 23.1(b)(1). We review de novo the district court’s dismissal on the ground that plaintiffs lacked standing to proceed in a derivative capacity because they were not contemporaneous stock owners for purposes of Rule 23.1. See In re Bank of N.Y. Derivative Litig.,
I
The Supreme Court has made clear that a court should not assume “hypothetical jurisdiction” over a case for purposes of adjudicating the merits when its jurisdiction is “in doubt,” because to do so would “carr[y] the courts beyond the bounds of authorized judicial action.” Steel Co. v. Citizens for a Better Envt.,
“It is hardly novel for a federal court to choose among threshold grounds for denying audience to a case on the merits.” Ruhrgas,
A derivative action is “an exception to the normal rule that the proper party to bring a suit on behalf of a corporation is the corporation itself, acting through its directors or a majority of its shareholders.” Halebian v. Berv,
Another consideration counsels in favor of our conclusion that the district court properly “bypass[ed],” Sinochem,
Supreme Court precedent in the class certification context suggests that if a threshold, non-merits basis for dismissal is “logically antecedent” to the adjudication of an alleged jurisdictional defect, the court is not required to decide the jurisdictional question. Specifically, the Court explained that the “class certification issues” could “properly be treated before Article III standing.” Ortiz,
As noted, Federal Rule of Civil Procedure 23.1 requires that the plaintiff in a derivative action demonstrate possession of an ownership interest in the company it seeks to represent that is contemporaneous with the conduct for which it seeks recovery. Fed.R.Civ.P. 23.1(b)(1). The rule thus ensures that the plaintiff is “a proper party to assert claims on behalf of the corporation.” Lewis v. S.L. & E., Inc.,
Unlike in the cases the Supreme Court considered in the Rule 23 context, the posture of this case does not “create the jurisdictional issue.” Rivera v. Wyeth-Ayerst Labs.,
This is so because the derivative action “may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of shareholders or members who are similarly situated in enforcing the right of the corporation or association.” Fed.R.Civ.P. 23.1(a). If plaintiffs cannot properly act in a derivative capacity, the suit would not exist (at least not as brought by these plaintiffs).
The contemporaneous stock ownership rule is thus a procedural requirement which, in effect, denies a putative derivative plaintiff standing to challenge wrongdoing that predated the time the plaintiff became a shareholder. See In re Bank of N.Y. Derivative Litig.,
Accordingly, we affirm the district court’s ruling that the contemporaneous stock ownership requirement of Rule 23.1 may properly be considered and decided as a threshold matter before a difficult or novel question of subject matter jurisdiction.
II
“In the mine run of cases, jurisdiction will involve no arduous inquiry and both judicial economy and the consideration ordinarily accorded the plaintiffs choice of forum should impel the federal court to dispose of those issues first.” Si-nochem,
Here, the district court identified several potentially “arduous” inquiries that would have to be made in order to decide plaintiffs’ motion to remand for lack of subject matter jurisdiction — including whether a federal question is necessarily presented by plaintiffs’ claims, as well as complicated questions as to the proper interpretation of SLUSA.
Ill
To invoke derivative standing, all plaintiffs were required to allege facts adequately suggesting that they owned Face-book stock “throughout the course of the activities that constitute the primary basis of the eomplaint[s].” In re Bank of N.Y. Derivative Litig.,
A
Plaintiffs Crocitto and Jones argue that simply employing the language of the rule in their complaints—which they maintain they did—satisfies the contemporaneous ownership requirement of Rule 23.1. Crocitto alleges that he “has continuously held his ownership interests in Fa-cebook since the time of [his] purchases” of SharesPost Units, “up to and continuing through the time of the efforts culminating in the IPO.” Crocitto J.A. at 146. Jones’ complaint alleges that she “is a stockholder of [Facebook] and was a stockholder during the misconduct alleged [in her complaint] and has been such continuously since then.” Jones J.A. at 211. She subsequently clarified that, like Crocitto, she maintains she was a stockholder because, prior to the IPO, she purchased Shares-Post Units. Id. at 262.
A formulaic recitation of the derivative standing requirements will not suffice. Cf. Ashcroft v. Iqbal,
Crocitto and Jones purchased SharesPost Units, and acknowledged that they held no direct interest in Facebook stock until well after the IPO. Crocitto J.A. at 219; Jones J.A. at 262, 453. They do not argue on appeal that they became stockholders “by operation of law.” Fed. R.Civ.P. 23.1(b)(1). And even if they did advance such an argument, we would reject it: plaintiffs became stockholders “not by operation of law but by contract.” Stephenson v. Landegger,
Nor did plaintiffs’ SharesPost Units make them equitable owners of Facebook stock for purposes of Rule 23.1 standing. “Agreeing to purchase stock does not make one a stockholder, especially if the stock will not even be issued until the consummation of the challenged series of actions.” In re Nine Sys. Corp. S’holders Litig.,
Accordingly, Crocitto and Jones failed to make an adequate allegation of share ownership through the pre-IPO period of alleged misconduct, and they lacked standing to proceed in a derivative capacity. See Smith v. Stevens,
B
Levy admits that she purchased shares in the public market on the day of Facebook’s IPO, but contends that she has demonstrated contemporaneous ownership because, although some of the alleged wrongs occurred before the IPO, they were part of a “continuing wrong.” Rule 23.1 requires that a plaintiff be a shareholder “at the time of the transaction complained of.” Fed.R.Civ.P. 23.1(b)(1). We have “decline[d] to adopt the expansive definition of the term ‘transaction’ that is inherent in the continuing wrong doctrine.” In re Bank of N.Y. Derivative Litig.,
Levy cannot satisfy this standard. The primary basis of Levy’s complaint is that Facebook’s directors allowed the company to violate the securities laws by filing a Registration Statement that omitted material, nonpublic information and that certain directors illegally traded on that informar tion. The challenged disclosures, however, were made prior to the IPO and appeared in the Prospectus, which was declared effective by the SEC before Levy acquired her shares. Since the core activity complained of thus predated Levy’s acquisition of Facebook stock, she is not an appropriate party to assert the derivative claims put forward in this case.
CONCLUSION
For the foregoing reasons, we affirm the judgment of the district court.
Notes
. See Boyce v. Soundview Tech. Grp., Inc.,
. A "News Feed” is a list of continuous notifications on a user's account, which displays updates about people in that user’s list of friends, as well as advertisements.
.Facebook’s revised projections ultimately turned out to be too conservative: the company reported second-quarter revenue of 1.184 billion dollars (near the upper end of its original projected range) and 2012 revenue of over five billion dollars (beating both its original and revised projections).
. The Jones action was consolidated with Holly McConnaughey's action and will be referred to collectively. See Crocitto J.A. at 81.
. We do not consider the additional grounds for dismissal (demand futility and ripeness) invoked by the district court. See, e.g., Indus. Risk Insurers v. Port Auth. of N.Y. & N.J.,
. True, in ruling on a threshold question, a court might need to engage in analysis that "involve[s] a brush with factual and legal issues of the underlying dispute.” Sinochem,
. A class action complaint filed by investors, in a non-derivative capacity, which raises many similar allegations stemming from the same alleged conduct, is pending before the district court. We express no view on the merits of that action. See In re Facebook, Inc. IPO Sec. & Derivative Litig.,
. Federal courts may exercise jurisdiction "over a 'special and small’ category of ... state claims that present significant, disputed issues of federal law.” NASDAQ OMX Grp., Inc. v. UBS Secs., LLC,