In re Facebook, Inc. IPO Derivative Litig.
Docket Nos. 14-1445, 14-1784, 14-1788, 14-1309, 14-632
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
July 24, 2015
August Term, 2014
(Argued: April 27, 2015)
Before: JACOBS, POOLER, and HALL, Circuit Judges.
Plaintiffs appeal from a judgment of the United States District Court for the Southern District of New York (Sweet, J.) dismissing their putative shareholder derivative actions brought against nominal defendant, Facebook, Inc., its directors, and lead underwriters. When confronted with a difficult or novel question of subject matter jurisdiction, a court may sometimes dismiss the case on a threshold, non-merits issue. We hold that such a ground in a derivative
GEOFFREY M. JOHNSON, Scott+Scott LLP, Cleveland Heights, Ohio (with Joseph P. Guglielmo, Scott+Scott LLP, New York, New York and Thomas McKenna and Gregory M. Egleston, Gainey McKenna & Egleston, New York, New York, on the brief) for Appellant-Cross-Appellee Lidia Levy.
ANDREW S. LOVE, Robbins Geller Rudman & Dowd LLP, San Francisco, California (with Joseph David Daley, Robbins Geller Rudman & Dowd LLP, San Francisco, California , Samuel H. Rudman, Robbins Geller Rudman & Dowd LLP, Melville, New York, and Paul A. Fioravanti, Jr., Prickett, Jones & Elliott, P.A., Wilmington, Delaware, on the brief) for Appellants Gaye Jones and Holly McConnaughey.
BRIAN P. MURRAY, Glancy Binkow & Goldberg LLP, New York, New York (with Gregory B. Linkh, Glancy Binkow & Goldberg LLP, New York, New York, Mark R. Rosen, Barrack, Rodos & Bacine, Philadelphia, Pennsylvania, Fred T. Isquith, Wolf Haldenstein Adler Freeman & Herz LLP, New York, New York, and Richard S. Wayne, Strauss & Troy, Cincinnati, Ohio, on the brief) for Appellant Robert Crocitto.
James P. Rouhandeh, Charles S. Duggan, Andrew Ditchfield, Davis Polk & Wardwell LLP, New York, New York, for Appellees Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC and Goldman, Sachs & Co.
DENNIS JACOBS, Circuit Judge:
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
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, J.).
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.
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
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,
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.2 Compl. ¶ 38, Crocitto v. Zuckerberg,
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.
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 Facebook shares through the
Like Crocitto, plaintiff Gaye Jones purchased SharesPost Units; her Subscription Agreements stated that she acknowledged that she had “no direct interest in any Facebook Securities.”4 Jones J.A. at 262, 453. Also, as with Crocitto, the Subscription Agreement stated that the SharesPost “Manager in its
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., 899 F. Supp. 2d 1374, 1376-77 (J.P.M.L. 2012). The MDL Panel observed that “[p]laintiffs in the removed derivative actions [could] present their pending motions for remand to state court to the transferee court.” Id. at 1376.
Following the transfer, plaintiffs renewed their motions to remand, and Facebook sought dismissal of all of the related derivative actions. In granting
As to the allegation of stock ownership advanced by Crocitto and Jones, the district court held that ownership of SharesPost 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.
DISCUSSION
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., 526 U.S. 574, 588 (1999). We review such an exercise of discretion for abuse of discretion. See id. Whether contemporaneous stock ownership is the type of threshold question that can be resolved before adjudicating a motion to remand for lack of subject matter jurisdiction is a question of law that this Court reviews de novo. See Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d 133, 137 (2d Cir. 2004) (“[W]here a challenge is made to the legal precepts applied by the district court in making a discretionary determination,
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
“It is hardly novel for a federal court to choose among threshold grounds for denying audience to a case on the merits.” Ruhrgas, 526 U.S. at 585. Thus, “district courts do not overstep Article III limits when they decline jurisdiction of state-law claims on discretionary grounds without determining whether those claims fall within their pendant jurisdiction, or abstain under Younger [v. Harris, 401 U.S. 37 (1971)] . . . without deciding whether the parties present a case or controversy.” Ruhrgas, 526 U.S. at 585 (internal citations omitted). And, under
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, 590 F.3d 195, 205 n.6 (2d Cir. 2009) (internal quotation marks omitted). Failure to satisfy the contemporaneous ownership requirement of
Another consideration counsels in favor of our conclusion that the district court properly “bypass[ed],” Sinochem, 549 U.S. at 432, the jurisdictional inquiry to dismiss the case for failure to plead contemporaneous stock ownership. The complicated questions of subject matter jurisdiction arise in this case only if plaintiffs may properly proceed in a derivative capacity.
As noted,
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., 283 F.3d 315, 319 n.6 (5th Cir. 2002) (emphasis added). But, because there is “no mandatory sequencing” of threshold, non-merits inquiries (“[i]n appropriate circumstances“), it is a proper exercise of judicial power--and good craft--to decide the contemporaneous share ownership question first. Sinochem, 549 U.S. at 431 (internal quotation marks omitted).
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.”
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., 320 F.3d at 297 (“[A] plaintiff does not have standing to bring a derivative suit unless the plaintiff was a shareholder . . .
Accordingly, we affirm the district court‘s ruling that the contemporaneous stock ownership requirement of
II
“In the mine run of cases, jurisdiction will involve no arduous inquiry and both judicial economy and the consideration ordinarily accorded the plaintiff‘s choice of forum should impel the federal court to dispose of those issues first.”
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.8 In re Facebook, Inc., IPO Sec. & Derivative Litig.,
III
To invoke derivative standing, all plaintiffs were required to allege facts adequately suggesting that they owned Facebook stock “throughout the course of the activities that constitute the primary basis of the complaint[s].” In re Bank of N.Y. Derivative Litig., 320 F.3d at 299. “[A] proper plaintiff must have acquired his or her stock in the corporation before the core of the allegedly wrongful conduct transpired.” Id. at 298. Since none of the putative derivative plaintiffs satisfied this requirement, dismissal was proper.
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
A formulaic recitation of the derivative standing requirements will not suffice. Cf. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (“A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do.” (internal quotation marks omitted)). We are “not . . . bound to accept conclusory allegations or legal conclusions masquerading as factual conclusions.” Faber v. Met. Life Ins. Co., 648 F.3d 98, 104 (2d Cir. 2011) (internal quotation marks omitted).
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.”
Nor did plaintiffs’ SharesPost Units make them equitable owners of Facebook stock for purposes of
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, 957 F. Supp. 2d 466, 469 (S.D.N.Y. 2013) (concluding that “a mere allegation of ownership” will not suffice).
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.”
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 information. 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
CONCLUSION
For the foregoing reasons, we affirm the judgment of the district court.