Heng Ren Invs. LP v. Sinovac Biotech Ltd.

588 F.Supp.3d 153

HENG REN INVESTMENTS LP, Plaintiff,

v.SINOVAC BIOTECH LTD., et al., Defendants.

Civil Action No. 19-11612-NMG

United States District Court, D. Massachusetts.

Signed March 3, 2022

James E. Grumbach, Boston Law Collaborative, LLC, Wellesley, MA, Stephen Ryan, Jr., Ryan Litigation and Advocacy PLLC, Arlington, MA, for Plaintiff.

Eric F. Leon, Jooyoung Yeu, Pro Hac Vice, Latham & Watkins LLP, New York, NY, William J. Trach, Latham & Watkins LLP, Boston, MA, Clayton D. LaForge, Pro Hac Vice, J. Christian Word, J. Christian Word, Pro Hac Vice, Latham & Watkins LLP, Washington, DC, for Defendants.

MEMORANDUM & ORDER

GORTON, United States District Judge

This action arises out of a public investment in private equity transaction ("the PIPE transaction"). In that transaction nearly 12 million new shares of Sinovac Biotech Ltd. ("Sinovac" or "defendant") stock were allegedly issued and sold to two private investors affiliated with Sinovac's founder and Chief Executive Officer, Weidong Yin ("Yin"), at below-market price. Plaintiff Heng Ren Investments LP ("Heng Ren" or "plaintiff"), a minority shareholder of Sinovac, contends that, by engaging in the PIPE transaction, Sinovac and Yin breached their fiduciary duties and wrongfully diluted the value of the shares of minority shareholders thereby divesting them of their rights.

Pending before the Court is Sinovac's second motion to dismiss the complaint for failure to state a claim upon which relief can be granted.¹ For the reasons that follow, Sinovac's motion will be allowed, in part, and denied, in part.

I. Background

The Court has previously recited at length the facts giving rise to this action and reiterates them here only to the extent that they bear upon the pending motion. See Heng Ren Invs. LP v. Sinovac Biotech Ltd., 542 F. Supp. 3d 59, 62-64 (D. Mass. 2021).

Sinovac is a biopharmaceutical company based in the People's Republic of China. It engages in the research, development and manufacture of vaccines. Heng Ren is a Boston-based Massachusetts limited partnership and a minority shareholder of Sinovac. It alleges that, since 2016, Yin and a group of allied investors have tried to take control of Sinovac "on the cheap" by, inter alia, attempting a "going private transaction" without success and causing Sinovac's board to adopt a poison pill provision which operated to dilute the voting power of minority shareholders who agreed to vote their shares together.

Heng Ren claims that in July, 2018, Yin consummated the PIPE transaction which caused Sinovac to issue large amounts of company stock to two private investors with whom Yin was associated. It alleges that 1) Yin and Sinovac suppressed the price of those shares by deliberately concealing material facts about the company, such as its breakthrough in developing a polio vaccine, and 2) the effect of the transaction was to siphon off economic value and voting power from public shareholders to the group led by Yin. Heng Ren further asserts that since the PIPE transaction Yin and his allies have continued to engage in transactions which plaintiff deems "unusual" and dilutive.

In May, 2019, Heng Ren filed this action in Massachusetts Superior Court for breach of fiduciary duty and wrongful equity dilution. Sinovac removed the action to this Court based on diversity jurisdiction and designated it as related to another lawsuit that it had initiated in this Court: Sinovac Biotech Ltd. v. 1Globe Capital LLC et al., No. 18-cv-10421-NMG, 2018 WL 5017918 (D. Mass., filed Oct. 15, 2018) (" 1Globe"). Sinovac thereafter moved to dismiss this action, contending that 1) the Court lacked personal jurisdiction, 2) Heng Ren had failed to state a claim upon which relief can be granted and 3) Massachusetts was an inconvenient forum.

The Court denied Sinovac's motion but did so without prejudice to its argument that Heng Ren had failed to state a claim. Because the motion purported to apply the law of Antigua and Barbuda, the Court instructed Sinovac that if it continued to invoke Antiguan law it must address more fully whether 1) Heng Ren's claims were direct or derivative under Antiguan law, 2) those claims are governed by the Antigua and Barbuda International Business Corporations Act ("the IBCA") or common law and 3) there is any prerequisite to initiating a lawsuit under the IBCA. See Heng Ren Invs., 542 F. Supp. 3d at 68. Shortly thereafter, Sinovac filed the pending motion to dismiss, accompanied by a declaration from its expert on Antiguan law, Satcha S-C. Kissoon, and exhibits composed of several hundred pages of case law and treatises. Heng Ren counters with a declaration from its own expert, Leslie Thomas, and a similarly voluminous set of exhibits.

II. Motion to Dismiss

A. Legal Standard

To survive a motion under Fed. R. Civ. P. 12(b)(6), the subject pleading must contain sufficient factual matter to state a claim for relief that is actionable as a matter of law and "plausible on its face."

Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). A claim is facially plausible if, after accepting as true all non-conclusory factual allegations, the court can draw the reasonable inference that the defendant is liable for the misconduct alleged. Ocasio-Hernandez v. Fortuno-Burset, 640 F.3d 1, 12 (1st Cir. 2011).

When rendering that determination, a court may not look beyond the facts alleged in the complaint, documents incorporated by reference therein and facts susceptible to judicial notice. Haley v. City of Boston, 657 F.3d 39, 46 (1st Cir. 2011). A court also may not disregard properly pled factual allegations even if actual proof of those facts is improbable. Ocasio-Hernandez, 640 F.3d at 12. Rather, the relevant inquiry focuses on the reasonableness of the inference of liability that the plaintiff is asking the court to draw. Id. at 13.

B. Application

i. Governing Law

As a preliminary matter, the Court must determine whether the law of Massachusetts or Antigua and Barbuda governs the present dispute. When a district court's jurisdiction is based upon diversity of citizenship, the court must apply the choice-of-law rules of the forum state. Klaxon v. Stentor Elec. Mfg., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). For disputes regarding the internal affairs of a corporation, Massachusetts courts typically apply the law of the state of incorporation because "only one State should have the authority to regulate [those] affairs". See Mariasch v. Gillette Co., 521 F.3d 68, 71–72 (1st Cir. 2008) (internal quotation marks and citation omitted). Sinovac is incorporated in Antigua and thus Antiguan law governs matters of Sinovac's corporate governance and internal affairs. Those affairs include matters particular to the "relationships among or between [Sinovac] and its current officers, directors, and shareholders", such as the fiduciary duty owed to its minority shareholders. Id. at 72, see also Natale v. Espy Corp., 2 F. Supp. 3d 93, 102–03 (D. Mass. 2014).

Heng Ren asserts claims for: 1) breach of fiduciary duty, against Yin, 2) aiding and abetting that breach, nominally against Yin but in effect against Sinovac, and 3) wrongful equity dilution resulting from the PIPE transaction, against both defendants. Those claims concern the relationship between Sinovac, its executive, Yin, and its shareholder Heng Ren and therefore the Court applies Antiguan law to resolve them. See Mariasch, 521 F.3d at 72, Freid v. Gordon, No. 09-10928, 2011 WL 1157891 at *3, 2011 U.S. Dist. LEXIS 31319 at *7-8 (D. Mass. Mar. 25, 2011) (applying internal affairs doctrine to claims "involving" or "based on" breaches of fiduciary duty).

ii. Prerequisites to Suit under Antiguan Law

Applying Antiguan law, the claims asserted by Heng Ren arise under the IBCA which is the Antiguan statute governing business and corporate affairs. The parties and their experts dispute whether the IBCA imposes prerequisites to suit requiring Heng Ren to bring its claims in Antiguan courts.

Heng Ren's complaint implicates several sections of the IBCA. Section 201 concerns derivative actions and provides that a complainant may "apply to the court" for leave to bring such an action. Section 2 defines "the court" as the High Court of Antigua and Barbuda ("the High Court").² Section 202 requires that "the court" make certain preliminary findings before granting leave to file a derivative action, namely, that the complainant has provided notice to the directors and is proceeding in good faith and in the interest of the corporation.

Section 204 pertains to direct actions. It similarly provides that a complainant shareholder may apply to "the court" for an order to rectify the oppressive or unfairly prejudicial actions of a corporation, its directors or its affiliates. Unlike Section 201, Section 204 does not require that the court make preliminary findings prior to the commencement of an action.

Sinovac contends that the use of the term "the court" in Sections 201, 202 and 204, considered in light of Section 2, vests exclusive jurisdiction over direct and derivative claims in the High Court. Heng Ren disagrees and asserts that the application requirements in Sections 201 and 204 are procedural rules rather than conditions precedent to the exercise of its substantive rights. The distinction is significant because, while a federal court sitting in diversity applies the substantive law of the forum state (here Antiguan law, as directed by Massachusetts choice-of-law rules), it applies its own procedural law. See Haley, 657 F.3d at 53, Chan v. Wellington Capital Mgmt. Co. LLP, 424 F. Supp. 3d 148, 153 (D. Mass. 2019) (applying federal procedural law to employment dispute arising under the substantive law of Hong Kong).

This Court has previously addressed Section 201 as it pertained to the 1Globe action. See 1Globe, 2018 WL 5017918 at *5-6, 2018 U.S. Dist....