The opinion of the court was delivered by: Sand, J.
Plaintiff Stephen Greco, a common stock shareholder of nominal Defendant Local.com Corporation ("Local.com"), brings this derivative action alleging that Defendant Hearst Communications, Inc. ("Hearst") purchased securities of Local.com in violation of section 16(b) of the Securities Exchange Act of 1934 ("section 16(b)"). Hearst now moves for leave to amend its answer to assert the affirmative defenses of res judicata and collateral estoppel, and for summary judgment dismissing Plaintiff's Complaint based on these defenses. This Court has jurisdiction pursuant to 15 U.S.C. § 78aa.
For the reasons stated below, Hearst's motion is granted.
a.The Disputed Transactions
The following facts are not in dispute. On February 22, 2007, Hearst obtained from Local.com convertible notes and two series of warrants to purchase Local.com's common stock. Mansfield Decl. Ex. C, Local.com Form 8-K, Jul. 31, 2007 ("Form 8- K"), at 4. The parties agreed that Local.com could not issue additional securities for ninety days following the transaction. Mansfield Decl. Ex. D, Consent to Equity Sales, at ¶ C. Subsequent to that agreement, Local.com determined that it wished to acquire new financing before the conclusion of the ninety day period. Meanwhile, between July 19 and 25, 2007, Hearst converted its notes and sold some of its Local.com stock. As long as Hearst retained an ownership interest in Local.com greater than 10% of its outstanding shares, it was subject to the prohibition on reaping short-swing profits contained in section 16(b). See 15 U.S.C. §§ 78p(a)(1), (b) (requiring that beneficial owners of more than 10 percent of securities yield to issuer any profit realized by any purchase and sale, or sale and purchase, within six months of each other).
On July 31, 2007, Hearst and Local.com entered into a Consent to Equity Sales agreement, where Hearst agreed to waive the ninety-day prohibition on Local.com issuing additional securities, and Local.com agreed to reduce the exercise price of Hearst's warrants by fifty cents ($0.50) per share. Mansfield Decl. Ex. D, Consent to Equity Sales, at ¶ C. The agreement was conditioned on Local.com filing a Form 8-K outlining the terms of the transaction before 5:00 p.m. on August 1, 2007. Id. at ¶ 2. Also on July 31, 2007, Local.com entered into a Securities Purchase Agreement ("SPA") with third-party investors not related to this case, outlining the issuance of 2,356,900 shares of its common stock. Mansfield Decl. Ex. E, SPA, at ¶ B. When these new shares became outstanding securities, they would dilute Hearst's holdings in Local.com to less than 10% of the latter's outstanding shares and thereby exempt it from coverage under section 16(b). On August 1, 2007 at 4:06 p.m., the third party investors rendered payment to Local.com for the new shares. Mansfield Decl. Ex. F, Norman Dep., at 65:8-13.
On October 2, 2007, Deborah Donoghue, an investor in Local.com, brought a derivative action against Hearst alleging that the latter violated section 16(b). Specifically, Donoghue alleged that the fifty-cents-per-share discount contained in the Consent to Equity Sales agreement signed by Hearst and Local.com on July 31, 2007 resulted in a "deemed purchase" of all the shares underlying Hearst's warrants on Local.com's stock. Mansfield Decl. Ex. A, Donoghue Orig. Compl. ¶ 15. These purchases, coming after Hearst's sales of Local.com stock between July 10 and 25, 2007, allegedly yielded short-swing profits that Hearst was obligated to remit to Local.com under section 16(b). Id. at ¶ 19. Donoghue filed an Amended Complaint on December 3, 2007, bringing different allegations. Donoghue claimed that the discount on the warrants contained in the Consent to Equity Sales agreement became "irrevocably binding" when Local.com filed its Form 8-K at 4:32 p.m. on August 1, 2007. Mansfield Decl. Ex. B, Donoghue Amended Compl. ¶ 14. Given that the new shares for the third party investors-reducing Hearst's share of Local.com to below the ten percent threshold for section 16(b) liability-were not issued until August 1 at 4:45 p.m., Donoghue's amended complaint claimed that Hearst violated section 16(b) for thirteen minutes between the filing of the Form 8-K and the issuance of the securities to the third-party investors. On February 11, 2008, Hearst moved for a judgment on the pleadings, arguing that the new shares were owned by the third parties prior to the filing of the Form 8-K, and that therefore Hearst owned less than ten percent of Local.com at the time the Form 8-K was filed. On June 26, 2008, with the parties' agreement, this Court converted Hearst's motion for judgment on the pleadings to a motion for summary judgment.
On February 3, 2009, this Court granted Hearst's motion for summary judgment, concluding that the third parties' ownership of the new securities was vested when it paid full consideration to Local.com at 4:06 p.m. Therefore, Hearst was not covered by section 16(b) when Local.com filed its Form 8-K at 4:32 p.m., and was not liable for the alleged deemed purchase which took place at that time. Donoghue v. Local.com, No. 07 Civ. 8550 (LBS), 2009 WL 260797 (S.D.N.Y. Feb. 3, 2009). Donoghue appealed, and in a summary order handed down on December 9, 2009, the United States Court of Appeals for the Second Circuit affirmed this Court's grant of summary judgment. Donoghue v. Local.com, 355 Fed. Appx. 520 (2d Cir. 2009).
c.Procedural History of the Instant Case
On April 8, 2008, Plaintiff filed the instant section 16(b) derivative action in the United States District Court for the Central District of California. No. SACV08-374 AG. The Complaint tracks the factual allegations of Donoghue's original complaint, claiming that Hearst re-purchased its stock in Local.com when the Consent to Equity Sales agreement was signed on July 31, 2007. On July 16, 2008, Hearst filed a motion to transfer the action to this Court. Plaintiff opposed the motion, and filed a motion for summary judgment on October 6, 2008. On November 3, 2008, Hearst amended its answer to include affirmative defenses based on res judicata. On December 8, 2008, the Central District of California declined to decide Plaintiff's summary judgment motion, and transferred this action to this Court. Hearst filed the instant motion for leave to amend its answer and for summary judgment on October 21, 2010, raising the affirmative defense of res judicata. On November 19, 2010, Plaintiff filed its own motion for summary judgment, asserting that no genuine material facts contravened the conclusion that Hearst violated section 16(b). On December 29, 2010, this Court ordered that proceedings on Plaintiff's motion be stayed, pending its decision on this motion.