Bravetti ex rel. Am. Oriental Bioengineering, Inc. v. Liu

DAVID BRAVETTI, Derivatively, on behalf of AMERICAN ORIENTAL BIOENGINEERING, INC., Plaintiff, v. TONY LIU, et al., Defendants.

Civil Action No. 12-7492 (MAS) (TJB)

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

April 28, 2015

NOT FOR PUBLICATION

MEMORANDUM OPINION

SHIPP, District Judge

This is a shareholder derivative action brought by Plaintiff David Bravetti ("Bravetti") on behalf of American Oriental Bioengineering, Inc. ("AOB"). It is before the Court on Defendants Lawrence Wizel, Cosimo Patti, and Eileen Brody's (collectively, the "U.S. Outside Director Defendants") motion to stay or, in the alternative, dismiss the complaint with prejudice, pursuant to Rules 12(b)(6) and 23.1 of the Federal Rules of Civil Procedure.¹ (ECF No. 35.) Bravetti opposed the motion (ECF No. 48), and the U.S. Outside Director Defendants replied (ECF No.51). Nominal Defendant AOB and Defendants Tony Liu, Yanehum Li. Jun Min, Xianmin Wang, and Baiquing Zhang (collectively, with the U.S. Outside Director Defendants, "Defendants") moved to join in the U.S. Outside Director Defendants' motion. (ECF No. 39.) The Court has carefully considered the parties' submissions and decided the matter without oral argument pursuant to Local Civil Rule 78.1. For the reasons stated below. Defendants' motion is granted.

I. Background

On December 6, 2012, Bravetti, an AOB shareholder, filed a shareholder derivative complaint, on behalf of AOB, against present and former directors and officers of AOB, asserting claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment (the "Complaint"). (Compl. ¶ 1.) AOB is a Nevada corporation that develops and manufactures pharmaceutical and healthcare products in China. (Id. ¶¶ 2, 16.) From November 16, 2009, to June 15, 2012, AOB allegedly issued false and improper statements, signed by various Defendants, regarding AOB's audit and accounting controls and financial status. (See generally Compl.)

On June 22, 2012, investors in AOB filed a securities fraud class action in the Central District of California against AOB and certain directors and officers of AOB arising out of the same facts as this action, alleging violations of the Securities Exchange Act of 1934 (the "Securities Class Action"). See McGee v. Am. Oriental Bioengineering, Inc., No. 12-5476 (C.D. Cal. June 22, 2012). Additionally, on October 1, 2012, an AOB shareholder filed a shareholder derivative action, substantially similar to this action, in Nevada state court ("Nevada Derivative Action"). See Barbato v. Liu, et al., No. 12-2480 (Nev. Dist. Ct. Oct. 1, 2012). Two days later, Bravetti made a demand on AOB's board of directors (the "Board") by letter sent to AOB's registered agent. (Compl. ¶ 86.) After not receiving a response from AOB within sixty days, Bravetti filed this action. (Id. ¶¶ 87-88.) Defendants now move to stay or, in the alternative, todismiss this action,² Defendants seek dismissal on two separate grounds: (1) Bravetti fails to adequately plead the additional requirements for shareholder derivative actions under Rule 23.1, and (2) Bravetti fails to state a claim under Rule 12(b)(6).

II. Legal Standard

Rule 8(a)(2) "requires only 'a short and plain statement of the claim showing that the pleader is entitled to relief,' in order to give the defendant fair notice of what the . . . claim is and the grounds on which it rests." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). On a motion to dismiss for failure to state a claim, a "defendant bears the burden of showing that no claim has been presented." Hedges v. United States, 404 F.3d 744, 750 (3d Cir. 2005).

Rule 23.1 of the Federal Rules of Civil Procedure imposes additional pleading requirements unique to shareholder derivative actions. See Fed. R. Civ. P. 23.1. Specifically, Rule 23.1 requires, inter alia, that a plaintiff allege in his complaint that he "was a shareholder or member at the time of the transaction complained of." Fed. R. Civ. P. 23.1(b)(1). Rule 23.1 also contains a heightened pleading standard that requires a plaintiff to allege with particularity "any effort by the plaintiff to obtain the desired action from the directors" and "the reasons for not obtaining the action or not making the effort." Fed. R. Civ. P. 23.1(b)(3); see also Kanter v.Barella, 489 F.3d 170, 180 (3d Cir. 2007) ("Kanter II"). Pleading both the demand and the corporation's refusal to comply therewith is a necessary precondition to bringing a shareholder derivative action. See Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96 (1991). Rule 23.1 raises the "pleading standard higher than the normal standard applicable to the analysis of a pleading challenged under Rule 12(b)(6)." In re Am. Int'l Grp., Inc., 700 F. Supp. 2d 419, 430 (S.D.N.Y. 2010), aff'd, In re Am. Int'l Grp., Inc., 415 F. App'x 285 (2d Cir. 2011); see also Kanter II, 489 F.3d at 176. Accordingly, "Rule 23.1 is not satisfied by conclusory statements or mere notice pleading." In re Am. Int'l Grp., Inc., 700 F. Supp. 2d at 430; see also Kanter v. Barella, 388 F. Supp. 2d 474, 480 (D.N.J. 2005) ("Kanter I"), aff'd, Kanter II, 489 F.3d at 170 ("conclusory allegations do not satisfy the heightened pleading requirements of Rule 23.1").

III. Choice of Law

Although Rule 23.1 sets forth the procedural requirements for pleading a derivative suit, the substantive requirements of demand are determined in accordance with the applicable state law. See Kamen, 500 U.S. at 97 ("[I]n order to determine whether the demand requirement may be excused by futility in a derivative action . . . we must identify the source and content of the substantive law that defines the demand requirement in such a suit."); see also Blasband v. Rales, 971 F.2d 1034, 1047 (3d Cir. 1992) ("The substantive requirements of demand are a matter of state law."). Therefore, federal courts are required to apply state substantive law to determine whether the facts plead adequately demonstrate demand and refusal. See Lieberson v. Johnson & Johnson Consumer Companies, Inc., 865 F. Supp. 2d 544, 555 (D.N.J. 2011). To determine what substantive law should apply, a federal court sitting in diversity must apply the choice-of-law rules of the forum state. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Bravetti brought this action in the District of New Jersey, and thus, New Jersey's choice-of-law rules apply."Under New Jersey's choice-of-law rules, the law of the state of incorporation governs internal corporate affairs." Fagin v. Gilmartin, 432 F.3d 276, 282 (3d Cir. 2005) (citing Brotherton v. Celotex Corp., 202 N.J. Super. 148 (N.J. Super. Ct. Law Div. 1985)). AOB is a Nevada corporation, and the parties agree that Nevada substantive law should apply. (Defs.' Br. 20, n.25, ECF No. 36; Pl.'s Br. 21, ECF No. 48.) Additionally, when Nevada law does not provide an answer, Nevada courts generally look to Delaware for guidance on issues of corporate law. See Shoen v. SAC Holding Corp., 122 Nev. 621, 634 (2006).

IV. Analysis

In support of their motion, Defendants argue that this action should be dismissed because Bravetti failed to meet the pleading requirements of Rule 23.1 and failed to state a claim under Rule 12(b)(6). Because this Court's determination as to Rule 23.1 is dispositive, the Court will not address Defendants' arguments under Rule 12(b)(6). Defendants assert that Bravetti failed to adequately plead the stock purchase date and pre-suit demand. The Court will address each argument in turn.

A. Contemporaneous Ownership Requirement

Federal Rule of Civil Procedure 23.1(b) requires that a complaint "allege that the plaintiff was a shareholder or member at the time of the transaction complained of." Fed. R. Civ. P. 23.1(b)(1). Defendants argue that Rule 23.1(b)(1) requires both contemporaneous and continuous ownership. Specifically, Defendants argue the Complaint is deficient because Rule 23.1 requires a plaintiff to allege the exact dates he purchased a company's shares and Bravetti has not done so here.

The Complaint alleges that "Plaintiff was a shareholder at the time of the wrongdoing of which he complains and has continuously been a shareholder." (Compl. ¶¶ 15, 85.) TheComplaint does not contain any other allegations regarding Bravetti's stock ownership. On a motion to dismiss, the Court must accept all factual allegations as true. See Mayer v. Belichick, 605 F.3d 223, 229 (3d Cir. 2010). While the truth of these facts may be doubtful to Defendants, Bravetti's Complaint is verified, and courts in this Circuit have held that such allegations meet the pleading requirements of Rule 23.1(b). See Recchion v. Kirby, 637 F. Supp. 284, 288-89 (W.D. Pa. 1985). The Third Circuit has not adopted any additional pleading requirements that necessitate the pleading of specific dates a shareholder acquired his shares as others courts have done and on which Defendants rely on for support. See, e.g., Sokolowski ex rel. Las Vegas Sands Corp. v. Adelson, No. 14-111, 2014 WL 3748191, at *3 (D. Nev. July 30, 2014) (applying Rule 23.1(b) of the Federal Rules of Civil Procedure and holding that courts in the Ninth Circuit have interpreted the Rule to require "plaintiff to precisely indicate the stock acquisition date in the complaint"). Therefore, Bravetti has adequately plead contemporaneous ownership under Rule 23.1(b).

B. Pre-Suit Demand Requirement

Defendants also argue that Bravetti lacks standing because he failed to adequately plead the demand requirement under Rule 23.1 and Nevada's corporations laws. Specifically, Defendants assert that under Nevada law this requirement is only met when, after demand is made, the board wrongfully refuses the demand to take action.³ Defendants argue that Bravetti's filing of this suit was premature because the Board never refused Bravetti's demand, let alone wrongfully refused it. Bravetti does not dispute that he made a demand on the Board. Instead,...