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Siegmund v. Bian

United States District Court, S.D. Florida, Miami Division

April 2, 2018

FREDERICK SIEGMUND, Plaintiff,
v.
XUELIAN BIAN, WEI GUAN, SIDLEY AUSTIN LLP, SHANGHAI YINLING ASSET MANAGEMENT, CO., LTD., LEADING FIRST CAPITAL LIMITED, and LEADING WORLD CORPORATION, Defendants.

          ORDER GRANTING IN PART AND DENYING IN PART SIDLEY AUSTIN'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 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 names six Defendants and includes the following four counts: (I) violation of Section 10(b) of the Securities and 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.

         Defendant Sidley Austen LLP-named in Counts I, III, and IV-filed a motion to dismiss Siegmund's claims. First, Sidley contends that Siegmund has failed to state a claim for securities fraud under Rule 10b-5. Second, Sidley argues that this Court lacks personal jurisdiction over Sidley on Siegmund's state law claims in Counts III and IV. Third, Sidley maintains that even if the Court has jurisdiction, Counts III and IV fail to state claims for relief.

         With respect to Count I, the Court agrees that Siegmund has failed to state a claim under Section 10(b) of the Exchange Act. Accordingly, Sidley's motion to dismiss Count I with prejudice is GRANTED. As for Counts III and IV, the Court has personal jurisdiction and finds that Siegmund stated a valid claim for relief on both Counts. Therefore, Sidley's motions to dismiss Counts III and IV for lack of personal jurisdiction and failure to state a claim 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); and (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.)); and (b) 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 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 brought the Derivative Action to challenge Xuelian's and Wei's alleged misconduct and self-dealing during the "sham" Reverse Merger transaction. Sidley became involved in the Derivative Action in April 2014 when it agreed to represent Linkwell, Xuelian, and Wei. Unbeknownst to Siegmund, Sidley also began advising and assisting Linkwell, Xuelian, and Wei in all aspects of the Freeze-Out Merger-an idea it had pitched to Xuelian and Wei in March 2014. Sidley allegedly devised the Freeze-Out Merger for the express purpose of triggering a forced sale of Siegmund's Linkwell shares and, in turn, divesting him of standing to pursue claims against Xuelian and Wei in the Derivative Action.

         On August 12, 2014, Linkwell's Board approved the Freeze-Out Merger. It agreed to convert each of the 549, 000 outstanding shares of Linkwell stock into the right to receive $0.88 in cash. The merger consideration paid to Linkwell shareholders totaled $483, 120. That equals less than 1% of Likang Disinfectant's 2014 net asset value. Notably, Linkwell, through Linkwell Tech, owned 16.17% of Likang Disinfectant's equity at the time of the Freeze-Out Merger.

         Following the Board's approval of the Freeze-Out Merger on August 12, Sidley drafted a proxy statement scheduling a special meeting of Linkwell shareholders in Shanghai on September 19, 2014. It also prepared a notice for the special meeting inviting all Linkwell shareholders to attend and vote to approve the Freeze-Out Merger. Additionally, Sidley oversaw and communicated with the transfer agent tasked with mailing the proxy statement and meeting notice to Linkwell's shareholders.

         After the Board's approval of the Freeze-Out Merger but before the shareholders' vote, Sidley (acting as counsel for Linkwell) participated in negotiations with Siegmund's counsel ostensibly to settle the Derivative Action. These talks took place on September 5, 9, and 11, 2014. The day before the September 19 shareholders' vote, Sidley informed Siegmund's counsel that Linkwell would no longer negotiate a settlement of the Derivative Action because the corporation had entered into a transaction.

         The Freeze-Out Merger was approved during the September 19 special meeting. Defendants Xuelian and Wei-who, along with their affiliates, controlled over 60% of Linkwell's outstanding shares-attended the special meeting and voted their Linkwell shares in favor of the merger. The same day, Sidley filed Linkwell's Articles of Merger and Amended Articles of Incorporation with the Florida Secretary of State. Siegmund did not receive the plan of merger, proxy statement, or merger agreement in advance of the special meeting to approve the transaction. He discovered the articles of merger and accompanying documents on the Florida Department of State website on October 26, 2014.

         III. Count I: Securities Fraud

         A. Standards

         "To survive a motion to dismiss, plaintiffs must do more than merely state legal conclusions, " instead plaintiffs must "allege some specific factual basis for those conclusions or face dismissal of their claims." Jackson v. BellSouth Telecomm., 372 F.3d 1250, 1263 (11th Cir. 2004). When ruling on a motion to dismiss, a court must view the complaint in the light most favorable to the plaintiff and accept the plaintiffs well-pleaded facts as true. See St. Joseph's Hosp., Inc. v. Hosp. Corp. of Am., 795 F.2d 948, 953 (11th Cir. 1986). This tenet, however, does not apply to legal conclusions. See Ashcroft v. Iqbal, 556 U.S. 662, 677 (2009). Moreover, "[w]hile legal conclusions can provide the framework of a complaint, they must be supported by factual allegations." Id. at 678. Those "[f]actual allegations must be enough to raise a right to relief above the speculative level on the assumption that all of the complaint's allegations are true." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 545 (2007). In short, the complaint must not merely allege misconduct, but must demonstrate that the pleader is entitled to relief. See Iqbal, 556 U.S. at 679.

         Under Federal Rule of Civil Procedure 9(b), a plaintiff must plead the circumstances constituting fraud with particularity. In considering a motion to dismiss for failure to plead fraud with particularity, however, courts must also keep in mind the notice pleading standard set forth in Rule 8(a). Courts "must be careful to harmonize the directives of Fed.R.Civ.P. 9(b) with the broader policy of notice pleading." SEC v. Physicians Guardian Unit Inv. Trust ex rel. Physicians Guardian, Inc., 72 F.Supp.2d 1342, 1352 (M.D. Fla. 1999) (citing Friedlander v. Nims, 755 F.2d 810, 810 (11th Cir. 1985)). According to the Eleventh Circuit, "Rule 9(b) is satisfied if the complaint sets forth '(1) precisely what statements were made in what documents or oral representations or what omissions were made, and (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) same, and (3) the content of such statements and the manner in which they misled the plaintiff, and (4) what the defendants obtained as a consequence of the fraud.'" Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194, 1202 (11th Cir. 2001) (quoting Brooks v. Blue Cross and Blue Shield of Florida, Inc., 116 F.3d 1364, 1371 (11th Cir.1997)).

         Finally, plaintiffs alleging securities fraud under Section 10(b) of the Exchange Act and Rule 10b-5 must satisfy the heightened pleading standards of the Private Securities Litigation Reform Act ("Reform Act"). These pleading standards include stringent requirements for pleading scienter. See 15 U.S.C. § 78u-4(b)(1)-(2). "[F]or all private 10b-5 claims requiring proof of scienter, 'the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind [i.e., scienter].'" FindWhat Investor Grp. v. FindWhat.com, 658 F.3d 1282, 1296 (11th Cir. 2011) (citing 15 U.S.C. § 78u-4(b)(2)). The complaint must establish this strong inference "for each defendant with respect to each violation." Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015, 1016 (11th Cir. 2004). However, even under the heightened pleading standards of the Reform Act, "all well-pleaded facts are accepted as true, and the reasonable inferences therefrom are construed in the light most favorable to the plaintiff." FindWhat Inv'r Grp. v. FindWhat.com, 658 F.3d 1282, 1296 (11th Cir. 2011). Furthermore, the Court "must consider the complaint in its entirety." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 310 (2007).

         B. Section 10(b) of ...


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