Commercial Division Blog

Posted: January 12, 2022 / Written by: Jeffrey M. Eilender, Samuel L. Butt, Christopher R. Dyess, Joshua Wurtzel, Hillary S. Zilz / Categories Commercial, Derivative Actions

Court Further Explains Denial of Motion to Approve Settlement in Derivative Lawsuit

On December 31, 2021, in Matter of Renren Inc. Derivative Litig. v. XXX, Index No. 653594/2018, 2021 NY Slip Op 51281[U], Justice Andrew S. Borrok issued an additional supplemental order explaining the Court’s denial of a motion to approve a settlement in a derivative lawsuit and granting leave to defendants to move to dismiss certain plaintiffs.  The Court explained:

As this court previously explained in the Prior Decision, in a derivative action, eligible shareholders bring a claim on behalf of the corporation against the alleged wrongdoers. The claim belongs to the corporation. The fact that the claim is brought derivatively does not change that fact. But it is incumbent upon the court to determine who the eligible shareholders are—i.e., in the context of a lawsuit alleging fraud on the minority—the shareholders of record at the time of the alleged wrongdoing are the eligible shareholders. The eligible shareholders in this case are the shareholders of record immediately preceding the announcement of the spin-off which forms the basis of the lawsuit. These are the shareholders to which the fraud on the minority was allegedly perpetrated as of the date the spin-off was announced. They are the ones who were harmed by the "Hobson's choice" (NYSCEF Doc. 405 ¶ 10) when it was announced that Renren's most valuable assets were allegedly to be siphoned off because the market is efficient. The date of the announcement was April 30, 2018. The close of business on April 29, 2018—i.e., the day before the announcement is therefore the Record Date.

Because the market is efficient, the harm to Renren and its then minority shareholders was immediate and occurred at the time of the announcement. To wit, any shareholder who purchased after the Record Date purchased with the knowledge of the spin-off transaction which forms the basis for this lawsuit. It would appear that they therefore are not eligible shareholders to bring this action alleging breach of fiduciary duty and fraud on the minority because they lack standing as to the claim of fraud on the minority as they were not the minority upon whom the fraud was allegedly perpetrated.

Nor, as this Court previously explained, are shareholders who purchased after the Record Date eligible shareholders to participate in a settlement structured as direct payments to them and to the exclusion of the shareholders that were shareholders on the Record Date upon whom this alleged fraud took place. Stated differently, the misappropriation here was as to Renren's assets and the harm to its shareholders as of the Record Date, and they appear to be the correct shareholders to both maintain this suit and participate in any settlement. Subsequent purchasers were aware of the transaction (so a fraud as to their interests could not have taken place).

Therefore, the Record Date shareholders must necessarily participate in any direct payment settlement of this case as they are the ones who were harmed, whose harm cannot be altered by any later appreciation in the stock as they are no longer shareholders. As discussed above, the shareholders who acquired their interests after the Record Date were not harmed and cannot share in the settlement of this case because they were not injured. They purchased their interests with full knowledge of the transaction which forms the basis for this lawsuit. Thus, the defendants must be given leave to bring a motion to dismiss as against the non-Record Date plaintiffs.

The attorneys at Schlam Stone & Dolan frequently litigate derivative lawsuits.  Please contact the Commercial Division Blog editors at commercialdivisionblog@schlamstone.com if you or a client have questions concerning derivative suits.