Siegmund v. Bian

          ORDER DENYING XUELIAN BIAN AND WEI GUAN'S MOTION TO DISMISS THE FIRST AMENDED COMPLAINT

          FEDERICO A. MORENO, UNITED STATES DISTRICT JUDGE.

         I. Introduction

         This is a securities class action alleging violations of state and federal law in connection with Linkwell Corporation's 2014 go-private merger ("Freeze-Out Merger"). Frederick Siegmund-the Class Representative-argues that six Defendants engaged in a deceptive scheme designed to help two Linkwell Directors avoid liability for prior self-dealing and fraudulently deprive Linkwell shareholders of their stock for less than fair value. Siegmund's First Amended Complaint includes the following four counts: (I) violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5; (II) breach of fiduciary duty; (III) aiding and abetting breach of fiduciary duty; and (IV) civil conspiracy.

         Defendants Xuelian Bian and Wei Guan-named in Counts I, II, and IV-moved to dismiss Siegmund's claims. First, Xuelian and Wei contend that the Court lacks personal jurisdiction over them on Siegmund's securities fraud claim (Count I) and, regardless, Siegmund fails to state a claim under Rule 10b-5. Second, they challenge the Court's personal jurisdiction over them with respect to Siegmund's claims for breach of fiduciary duty (Count II) and civil conspiracy (Count IV). Third, Xuelian and Wei argue that Siegmund fails to state a claim for relief in Counts II and IV.

         Because the Court has personal jurisdiction over Xuelian and Wei on all three counts, the motion to dismiss for lack of personal jurisdiction is DENIED. With respect to Count I, Siegmund has pled with particularity sufficient facts to state a claim under Section 10(b) of the Exchange Act. Accordingly, Xuelian and Wei's motion to dismiss Count I is DENIED. As for Counts II and IV, the Court finds that Siegmund stated valid claims against Xuelian and Wei for breach of fiduciary duty and civil conspiracy. Therefore, Xuelian and Wei's motions to dismiss Counts II and IV for failure to state claims are DENIED.

         II. Background

         A. Plaintiff

         1. Frederick Siegmund (Class Representative)

         Frederick Siegmund is the named plaintiff bringing this suit individually and on behalf of all similarly situated "street-name" shareholders of Linkwell Corporation. He is a citizen of the State of New York. According to the Complaint, Siegmund owned Linkwell shares throughout the relevant time period. Those shares were cancelled from his brokerage account on November 6, 2014 following the Freeze-Out Merger. Siegmund claims that neither he nor his broker received any information concerning the Freeze-Out Merger. He was not provided with the merger agreement, proxy statement, or notice of the shareholders' meeting to vote on the transaction. Finally, he alleges that he did not receive notice of his statutory appraisal rights or any other rights in connection with the Freeze-Out Merger.

         B. Defendants

         1. Sidley Austin LLP

         Sidley Austin is an international law firm operating as a limited liability partnership. Sidley maintains its headquarters in Chicago, IL and has offices in 20 cities worldwide.

         2. Xuelian Bian

         Xuelian Bian is a Chinese Citizen and former controlling shareholder^[1] of Linkwell. He became a controlling shareholder in May 2005 and remained a controlling shareholder of Linkwell at all relevant times. Siegmund alleges that as an Officer and Director of Linkwell, Xuelian engaged in and authorized the misconduct alleged in the Amended Complaint. Siegmund also asserts that Xuelian had the power to control the contents of Linkwell's public statements to the financial marketplace as well as access to adverse non-public information about the company. Seigmund contends that Xuelian therefore had an obligation to promptly and accurately disclose such adverse facts to the company's shareholders and the financial markets.

         Xuelian also maintains the following positions: (i) Chief Executive Officer and Director of Linkwell Tech since its inception in 2004; (ii) General Manager of Likang Disinfectant since 1993; (iii) Executive Director and controlling shareholder of Zhongyou Pharmaceutical; (iv) Co-Owner of Linkwell International (with Wei); and (v) Owner of 30% of the equity of Zhongyou (Shanghai) Technology Development Company Limited.

         3. Wei Guan

         Wei Guan is a Chinese Citizen and former controlling shareholder^[2] of Linkwell. He became a controlling shareholder in May 2005 and remained a controlling shareholder of Linkwell at all relevant times. Siegmund alleges that as an Officer and Director of Linkwell, Wei engaged in and authorized the misconduct alleged in the Amended Complaint. Siegmund also asserts that Wei had the power to control the contents of Linkwell's public statements to the financial marketplace as well as access to adverse non-public information about the company. Seigmund contends that Wei therefore had an obligation to promptly and accurately disclose such adverse facts to the company's shareholders and the financial markets.

         Wei also maintains the following positions: (i) Vice President of Linkwell Tech since its inception in June 2004; (ii) Vice General Manager of Likang Disinfectant since 2002; (iii) Co-Owner of Linkwell International (with Xuelian); (iv) Owner of 35% of the equity of Zhongyou Technology (he also serves as a supervisor).

         4. Shanghai Yinling Asset Management Company, Limited

         Shanghai Yinling is a Chinese limited liability company formed on April 18, 2014. Yinling operates primarily in Shanghai, China. Yinling is the sole shareholder of Leading First and is a minority shareholder of Zhongyou Pharmaceutical.

         5. Leading First Capital Limited

         Leading First is a British Virgin Islands Company with a business address in Shanghai, China. Siegmund alleges that Sidley formed Leading First "on or about June 25, 2014 for the purpose of entering into and consummating transactions contemplated by the merger agreement."

         6. Leading World Corporation

         Leading World is a Florida corporation with a business address in Shanghai, China. It is a wholly owned subsidiary of Leading First. Siegmund alleges that "Sidley formed Leading World on or about August 5, 2014 for the purpose of entering into and consummating transactions contemplated by the merger agreement."

         C. Relevant Non-Parties

         1. Linkwell Corporation

         Linkwell is a Florida corporation with its principal place of business in Shanghai, China. During the relevant period, Linkwell operated as a public holding company for a number of affiliated entities, including the following direct operating subsidiaries: (i) Linkwell Tech; (ii) Likang Biological; and most notably (iii) Likang Disinfectant. Through these entities, Linkwell developed, manufactured, sold, and distributed disinfectant health care products in China. Siegmund alleges that Linkwell and Likang Disinfectant share the same registered business address and office space. He also contends that Likang Disinfectant accounted for greater than 99% of Linkwell's total net revenues in 2011.

         D. Statement of Facts

         This lawsuit stems from a 2014 merger transaction ("Freeze-Out Merger") that converted Linkwell Corporation from a publicly traded company into a private entity. According to Siegmund, the Freeze-Out Merger was "undertaken on behalf of and for the benefit of [Defendants] Xuelian and Wei to: (a) extinguish the valuable claims asserted against them in a previously filed derivative action (Siegmund v. Bian, et al., No 12-cv-62539 (S.D. Fla.)); (b) and directly acquire for Xuelian, Wei, and their affiliates total control of the Company's disinfectant business in China."

         Siegmund previously filed a derivative action ("Derivative Action") on behalf of Linkwell alleging that Xuelian and Wei engaged in self-dealing during a 2012 "sham" reverse merger transaction ("2012 Reverse Merger") involving Linkwell, Likang Disinfectant, and several third-party entities. The 2012 Reverse Merger allegedly involved two components. First, Linkwell issued 94% of its equity to two companies-Metamining Incorporated and China Direct Investments Incorporated-in exchange for 100% ownership of a company called Metamining Nevada. Siegmund contends that Metamining Nevada had no assets, operations, or employees. Second, Linkwell secretly spun-off Likang Disinfectant and transferred ownership to Xuelian and Wei for no consideration. Siegmund contends that the purpose of the 2012 Reverse Merger "was to enable Xuelian and Wei to transfer control of Linkwell to certain related third parties, while stripping the assets and operations of the subsidiary disinfectant business in China for themselves and for no consideration to [Linkwell]."

         Xuelian and Wei met with Sidley on March 7, 2014 and March 28, 2014 to discuss a possible take-private transaction and ultimately hired Sidley on April 4, 2014 to begin effectuating the Freeze-Out Merger. The Freeze-Out Merger was designed for the express purpose of triggering a forced sale of Siegmund's (and other shareholders') Linkwell stock and, in turn, divesting him of standing to pursue claims against Xuelian and Wei in the ...