McEvoy v. Apollo Global Management, LLC

          ORDER

          TIMOTHY J. CORRIGAN, UNITED STATES DISTRICT JUDGE

         This putative securities class action is before the Court on Apollo Defendants' Motion to Dismiss, Doc. 54, and CEVA Group Plc's Motion to Dismiss the Class Action Complaint, Doc. 55. The Court has reviewed the responses, Docs. 65, 66; replies, Docs. 70, 71; and the sur-reply, Doc. 76. On December 3, 2019, the Court held a hearing on the motions to dismiss, the record of which is incorporated herein. Doc. 79.

         I. BACKGROUND^[1]

         Plaintiff Michael McEvoy, a resident of Duval County, Florida, is a former management employee of CEVA Logistics, a freight management and supply chain logistics company. Doc. 35 ¶¶ 4, 5. CEVA Logistics was created between 2006-2007, when investment funds managed or advised by Defendants Apollo Global Management, LLC (“Apollo Global”) and Apollo Management VI, L.P. (“Apollo VI”) (collectively, “Apollo”) acquired two logistics providers TNT Logistics and EGL, Inc. (“Eagle”), and combined them to form CEVA Logistics.^[2]Id. ¶¶ 7, 22. Defendant CEVA Group Plc (“CEVA Group”) is an England and Wales public limited liability company headquartered in the United Kingdom, and is the holding company for CEVA Logistics.^[3] Id. ¶ 5. Until April 2013, CEVA Investments Limited (“CIL”), a Cayman Islands holding company, owned 99.9% of the shares of CEVA Group. Id. At that time, CIL was owned and controlled by four funds under the control of Apollo Global.^[4] In re CIL Ltd., 582 B.R. 46, 62 (Bankr. S.D.N.Y. 2018), amended on reconsideration, No. 13-11272-JLG, 2018 WL 3031094 (Bankr. S.D.N.Y. June 15, 2018). Apollo Global is a Delaware limited liability company headquartered in New York, Doc. 35 ¶ 8, and Apollo VI is a Delaware limited partnership headquartered in New York, id. ¶ 10.

         In 2006-2007, to facilitate the merger and align the interests of Apollo and management, management employees of TNT and Eagle (“Management Co-Investors”), including McEvoy, were required to purchase equity in the company that later became CIL. Id. ¶¶ 30-40. This way, “as in any private equity transaction, ” the Management Co-Investors would have some “skin in the game.” Id. ¶ 30. Overall, the Management Co-Investors contributed over €30 million in direct co-investments. Id. ¶ 40.

         These investments were structured via a special purpose vehicle called the 2006 CIL Long-Term Incentive Plan (“LTIP”), through which the Management Co-Investors purchased restricted shares. Id. ¶ 41; Doc. 35-4. Section 10.1 of the LTIP provides that in the event of a change in the capital structure of CIL, including a recapitalization, the Committee of the Board of CIL “shall make such substitutions or adjustments as it deems appropriate and equitable . . . .” Id. ¶ 45. Section 10.2(b) states that “[a]ny adjustments referred to in Section 10.1 shall be made by the Committee or the Board in its discretion and shall, absent manifest error, be conclusive and binding on all Persons holding Any Awards granted under the Plan.” Id.

         Apollo engaged in a series of complex debt acquisitions around 2008, and as a result, McEvoy alleges that the interests of Apollo and the Management Co-Investors were no longer aligned. Doc. 35 ¶¶ 52, 55 n.11. In 2012, CEVA faced liquidity challenges due to adverse changes in the freight management indu str y. Doc. 54 at 13; Doc. 54 -1 at 16.^[5] Apollo-affiliate funds agreed to convert over €850 million in debt holdings to approximately €880 million in CIL equity in the form of Class B preferred shares. Doc. 54-1 at 18; Doc. 35 ¶¶ 56-57. The Class B preferred shares were senior to the Class A shares held by Apollo funds and by the Management Co-Investors, and were entitled to a liquidation preference. Doc. 54 at 13.

         By late 2012, CEVA continued to face significant financial concerns. The Bondholder Report documents these challenges, from a double-digit drop in EBITDA^[6] in early 2013, to defaults on interest payments. On April 3, 2013, CEVA, Franklin Advisers, Inc., Franklin Templeton Investment Corp., Capital Research and Management Company, and Apollo-affiliated funds that held debt issued by CEVA or its subsidiaries entered into the Restructuring Support Agreement (“2013 Restructuring”). Doc. 54-1 at 70. The Bondholder Report describes the 2013 Restructuring, which eliminated more than €1.2 billion of CEVA's debt, reduced its annual cash interest expense by over €135 million, and provided a capital infusion of at least €205 million. Doc. 54-1 at 69. CEVA's creditors agreed to exchange their CEVA debt for equity in the newly-formed Apollo affiliate, CEVA Holdings LLC, which would become the primary equity owner of CEVA. Doc. 35 ¶¶ 83-84. McEvoy alleges that the equity of CEVA Group held by CIL was transferred to CEVA Holdings for no consideration. Id. ¶ 72. McEvoy alleges that the transaction, referred to as the “recapitalization, ” diluted CIL's ownership of CEVA Group from 100% to 0.01%. Id. ¶ 84; In re CIL Ltd., No. 13-11272-JLG, 2018 WL 878888, at *2 (Bankr. S.D.N.Y. Feb. 9, 2018).

         McEvoy alleges that the 2013 Restructuring was rife with conflicts of interest, with “members of the Board of CIL and Board of CEVA Group, along with Apollo as the manager of the Apollo Shareholders as majority controlling shareholders, [standing] on both sides of the 2013 Transaction.” Id. ¶¶ 75-83, 92. The ACAC quotes CIL's counsel, Mintz Levin, as stating that he wanted “to give off an appearance the we are operating at an arms' [sic] length basis.” Id. ¶ 75. McEvoy alleges that Defendants began planning the resignations of multiple directors of CEVA Group and CIL to give the appearance of an arm's length transaction. Id. ¶ 76. The ACAC contains allegations of Mintz Levin stating that “we need to consider the ramifications if any, of a vote by Apollo without any notice or meeting in a process that will ultimately benefit Apollo at the CEVA level while wiping out the equity interest of all other shareholders at the CIL level.” Id. ¶ 80. Further, McEvoy alleges that Apollo VI effectuated the vote on behalf of the Management Co-Investors “without notice or safeguards as to their conflicted status.” Id. ¶ 81.

         On April 2, 2013, CIL filed for a provisional liquidation in the Cayman Islands. Id. ¶ 87. On April 5, 2013, CIL sent the Management Co-Investors, including McEvoy, a letter stating that their investment in CEVA Group is “now without value, in consequence of the financial condition of CEVA.” Id. ¶ 94; Doc. 54-1 at 208-09. The letter further advised the recipients of CIL's liquidation and that “it is unlikely that there will be any recoveries for shareholders of [CIL] in their capacities as shareholders.” Id. Essentially, the Management Co-Investors' investment was wiped out.

         However, McEvoy alleges that under the LTIP, the Management Co-Investors were owed an equitable adjustment in the event of “Corporate Transactions” of CIL or its subsidiaries, including CEVA Group. Id. ¶ 95. In June 2013, some Management Co-Investors “were being awarded a cash award equal to 60% of their net cumulative investments in CIL.” Id. ¶ 97. However, the cash award was “independent of the new long-term incentive plan, ” id. ¶ 99, and McEvoy and numerous other Management Co-Investors “did not receive the required adjustment pursuant to the LTIP, nor notice of the adjustment, ” id. ¶ 103.

         On April 2, 2013, CIL filed a petition beginning insolvency proceedings in the Cayman Islands. In re CIL Ltd., 582 B.R. at 66. On April 22, 2013, three noteholders filed an uncontested involuntary chapter 7 petition against CIL in the United States Bankruptcy Court for the Southern District of New York. Id. On May 13, 2013, the bankruptcy court granted the involuntary chapter 7 petition. Id. On December 8, 2014, the chapter 7 Trustee began an adversary proceeding in the bankruptcy court against CIL directors Gareth Turner and Mark Beith, CEVA Group, CEVA Holdings, and a related company, CEVA Logistics Finance B.V. Id. That case is still pending. Id.

         II. PROCEDURAL HISTORY

         On August 3, 2017, McEvoy filed this putative class action lawsuit against Beith, Turner, and Apollo Global. Doc. 1. CEVA Group and Apollo VI were not named in that complaint. However, on October 18, 2017, the chapter 7 trustee for CIL filed a motion in the New York bankruptcy court to enjoin this case, arguing that it violated the automatic stay imposed by 11 U.S.C. § 362(a). Specifically, the trustee argued that the claims McEvoy asserted were duplicative of those the trustee had filed and were therefore derivative claims that were property of CIL's estate. The bankruptcy court agreed. In re CIL Ltd., 2018 WL 878888, at *12. Thus, on February 9, 2018, the bankruptcy court held that McEvoy's putative class action in this Court was “null and void ab initio.” Id.

         Although McEvoy's attempt to appeal the order failed, the District Court for the Southern District of New York permitted McEvoy to ask whether he could amend his complaint to assert direct claims rather than derivative claims. In re CIL Ltd., No. 18-cv-2226 (JSR), Doc. 7 (S.D.N.Y.). McEvoy proposed an amended complaint, and on October 16, 2018, the bankruptcy court allowed McEvoy to file the amended complaint in this Court.^[7] Doc. 31-2. On December 7, 2018, McEvoy filed the ACAC, asserting numerous claims against Apollo and CEVA Group, including: (1) violation of the Investment Advisors Act of 1940 against Apollo VI (Count I); (2) breach of fiduciary duty against Apollo (Count II); (3) breach of fiduciary duty against Apollo VI (Count III); (4) breach of ...