Lerner v. Sinovac Biotech Ltd.

691 F.Supp.3d 326

Michael S. LERNER, Plaintiff, v. SINOVAC BIOTECH LTD. et al., Defendants.

Civil Action No. 22-12063-NMG

United States District Court, D. Massachusetts

Signed September 13, 2023

Eric L. Zagar, Pro Hac Vice, Geoffrey Jarvis, Teddy Starling, Kessler Topaz Meltzer & Check, LLP, Radnor, PA, Stephen Ryan, Jr., Beaton & Petersen PLLC, Shrewsbury, MA, for Plaintiff.

Eric F. Leon, Jason C. Hegt, Jooyoung Yeu, Pro Hac Vice, Latham & Watkins LLP, New York, NY, William J. Trach, Latham & Watkins LLP, Boston, MA, for Defendant Sinovac Biotech Ltd.

MEMORANDUM & ORDER

GORTON, United States District Judge

This action arises out of a public investment in a private equity transaction ("the PIPE transaction") in which nearly 12 million new shares of stock of Sinovac Biotech Ltd. ("Sinovac" or "defendant") were allegedly issued and sold below market price to two private investors affiliated with Sinovac founder and Chief Executive Officer ("CEO"), Weidong Yin ("Yin"). Plaintiff Michael S. Lerner ("Lerner" or "plaintiff") on behalf of himself and a putative class of public shareholders of Sinovac submits that the PIPE transaction was intended to dilute the shares of minority shareholders and divest them of their rights. In December, 2022, plaintiff filed an action for wrongful equity dilution in this Court.

I. Background

A. The Parties

Plaintiff is a shareholder of Sinovac purporting to represent a putative class of similarly situated shareholders. Sinovac is a NASDAQ-listed, publicly traded biopharmaceutical company that is incorporated in Antigua, West Indies and has its principal place of business in Beijing, China.¹ The company researches, develops, manufactures and commercializes vaccines for a variety of diseases, including polio, mumps and COVID-19. Yin is the purported founder of Sinovac and he currently serves as its Chairman, President and CEO.

B. Factual Background

Plaintiff contends that, since at least 2016, Yin and a group of allied investors including SAIF Partners, Advantech, Vivo Capital and C-Bridge Capital ("the Yin Group") have colluded to take complete control of Sinovac for as little expenditure as possible. Plaintiff asserts that in January, 2016, the Yin Group submitted a bid to the Sinovac board of directors to acquire all of Sinovac's shares below market value and to take Sinovac private. Plaintiff contends that the Yin Group later rescinded the bid because other Sinovac investors, together with Sinobioway Group Co. Ltd. ("Sinobioway"), a large, publicly-traded Chinese company, had engineered a counter-offer at a higher price per share.

In March, 2016, Yin purportedly caused Sinovac's board of directors to adopt a Rights Agreement which plaintiff maintains was designed to enable the Yin Group to block any transaction of which they do not approve ("the Agreement"). Plaintiff claims that the Agreement includes a "poison pill" provision which permits the board to block any group of stockholders holding 15% or more of Sinovac's stock which enters into an agreement to vote their shares in unison by diluting the value of their stock.

In June, 2017, Sinovac announced that it had entered into an agreement where the Yin Group would acquire the company by purchasing Sinovac shares, purportedly at below market value, and take the company private. Two days later, Sinobioway submitted a counter-proposal to acquire the shares of all other Sinovac stockholders at a 14.9% premium over the purchase price offered by the Yin Group. In response, Yin once again retracted his agreement and rejected Sinobioway's counter-offer.

Plaintiff alleges that in or about April, 2018, Yin and Sinovac received positive clinical trial results for a new polio vaccine but concealed the results from the public in order

[to] take Sinovac private at a low price so that Yin and his friends could enjoy the profits of a new vaccine.

In July, 2018, Sinovac announced that it had issued and sold nearly 12 million shares of its stock in a PIPE transaction with Vivo Capital and Advantech. Plaintiff contends that the investors were members of the Yin Group and that they purchased the shares at a discounted price so that Yin could gain control of the corporate defendant at below market value. As a result, plaintiff alleges that the voting interest of minority shareholders was diluted.

Plaintiff avers that in early 2019, a multitude of litigation on the subject has caused NASDAQ to halt the trading of Sinovac shares which, coincidentally, have rapidly increased in value. In June, 2021, plaintiff reports that the World Health Organization ("WHO") authorized Sinovac's Covid-19 vaccine for emergency use in adults 18 years or older and that soon thereafter Sinovac received drug registration approval for its polio vaccine from the Chinese National Medical Products Administration and WHO prequalification. Plaintiff asserts that Sinovac posted over $18B in gross profit in 2021, as compared to approximately $443M in 2020 and $204M in 2018.

While the value of Sinovac stock has purportedly skyrocketed, plaintiff alleges that the Yin Group has "siphon[ed] the value of the Company away from shareholders and towards insiders". He claims that in May, 2020, Vivo Capital and Advantech, both of which were part of the PIPE transaction, each invested the equivalent of a 7.5% equity interest in Sinovac LS. Sinovac LS is a wholly owned subsidiary of Sinovac that purportedly developed Sinovac's Covid-19 vaccine. As a result, plaintiff asserts that "the value of Sinovac's [Covid-19 vaccine] resides in Sinovac LS".

While Sinovac LS reaps the considerable profits from the Covid-19 vaccine, Plaintiff avers that the equity investment of Vivo Capital and Advantech in that entity was acquired for less than market value. He contends that the Vivo Capital and Advantech acquisitions valued Sinovac LS "at only approximately $100 million" as compared with the December, 2020, equity investment of Sino Biopharmaceutical Limited in Sinovac LS which valued it at approximately $3.3B.

With trading halted, plaintiff asserts that Sinovac has deliberately maintained an active litigation posture in the related 1Globe action (see infra, § I.C) so that the Yin Group can continue to "transfer value away from Sinovac shareholders and [into] Yin and his insiders".

Plaintiff now brings a direct claim of wrongful equity dilution under Antigua's International Business Corporations Act ("IBCA"), § 204 against all defendants and seeks substantial monetary damages.

C. The "Related" Actions

1. The 1Globe Suit

In March, 2018, Sinovac filed in this Court a complaint against the Chiang Li family and 1Globe Capital LLC ("1Globe"), a company controlled by that family and one of Sinovac's largest shareholders. Sinovac seeks to enjoin 1Globe from electing a new board of directors, acquiring additional Sinovac shares and voting its existing Sinovac shares.

In response, 1Globe filed counterclaims for securities fraud and abuse of process in May, 2018. It alleges that, beginning in 2016, Yin and other members of the then-board of directors ("the Old Board") refused to relinquish management and control of the corporation, although they had been voted out of office at an annual meeting held in February, 2018 ("the February election"). Moreover, 1Globe maintains that Sinovac filed the underlying complaint in an effort to entrench the Old Board and to further Yin's illicit attempts to acquire control over the company.

In August, 2018, one month after the PIPE transaction, 1Globe amended its counter-claims and also moved for a preliminary injunction to enjoin the Old Board from issuing the stock it sold to the private investors in the PIPE transaction until the results of the February election are confirmed.

In October, 2018, this Court denied 1Globe's motion for injunctive relief for lack of standing and failure to allege irreparable harm. The case is currently stayed pending resolution of an appeal of yet another related case from the Eastern Caribbean Supreme Court in the High Court of Justice, Antigua and Barbuda ("the Antiguan Court"), 1Globe Capital, LLC, and Sinovac Biotech Ltd. (Claim No. ANUHCV 2018/0120).

2. The Heng Ren Suit

In May, 2019, Heng Ren, an individual public shareholder of Sinovac brought claims against both Yin and Sinovac in Massachusetts Superior Court. Heng Ren seeks damages for breach of fiduciary duty, aiding and abetting breaches of fiduciary duty and wrongful equity dilution arising out of the same PIPE transaction at issue in the case at bar.

Sinovac timely removed the case to this Court and moved to dismiss the complaint on several grounds in September, 2020. That motion was predicated, in part, on the purported failure of Heng Ren to state a claim under Antiguan law. As a result, this Court denied the motion without prejudice and instructed Sinovac that, if it were to continue to invoke Antiguan law, it must proffer a more complete explication of the governing authority. Heng Ren Invs. LP v. Sinovac Biotech Ltd., 542 F. Supp. 3d 59, 68 (D. Mass. 2021) ("Heng Ren I").

Sinovac then filed a second motion to dismiss in July, 2021, accompanied by a declaration from an expert on Antiguan law and exhibits consisting of pertinent statutes, judicial decisions and excerpts from treatises.

In March, 2021, the second motion to dismiss was allowed, in part, and denied, in part, resulting in the reduction of Heng Ren's complaint to one count of wrongful equity dilution. Heng Ren Invs. LP v. Sinovac Biotech Ltd., 588 F. Supp. 3d 153 (D. Mass. 2022) ("Heng Ren II"). Shortly thereafter, Sinovac moved for reconsideration of the denial of its motion to dismiss as to the wrongful equity dilution claim, which this Court denied. Heng Ren Invs. LP v. Sinovac Biotech Ltd., 609 F. Supp. 3d 17 (D. Mass. 2022) ("Heng Ren III").

II. Motion to Dismiss

A. Lack of Standing

1. Legal Standard

A challenge to plaintiff's standing goes to this Court's subject matter jurisdiction.

To survive a motion to dismiss for...