VisionChina Media Inc. and Vision Best Limited appeal from the order of the Supreme Court, New York County (Charles E. Ramos, J.), entered November 3, 2011, which, to the extent appealed from, granted defendants' motion to dismiss the first, third, and fourth causes of action in VisionChina Media Inc. v Shareholder Representative Servs., LLC, and granted plaintiffs' motion to dismiss the first, third, fourth, and fifth counterclaims in Shareholder Representative Servs., LLC v VisionChina Media Inc. pursuant to CPLR 3211; the order of the same court and Justice, entered November 4, 2011, which, in Shareholder, granted plaintiffs' motion to attach defendants' assets; and the order of the same court and Justice, entered on or about August 13, 2012, which granted the Shareholder plaintiffs' motion to compel defendants to transfer $60 million into New York and to extend the time period to perfect their levies. Cross appeals from the order of the same court and Justice, entered June 15, 2012, which, to the extent appealed from as limited by the briefs, granted the Shareholder plaintiffs' motion to confirm two ex parte orders of attachment and denied their motion for partial summary judgment on their first and second causes of action and reinstated the previously dismissed fifth counterclaim as an affirmative defense.
Arnold & Porter, LLP, New York (Charles G. Berry, Stewart D. Aaron and Ian Jay of counsel), for appellants/appellants-respondents.
Cahill Gordon & Reindel LLP, New York (Thomas J. Kavaler of counsel), for respondents/respondents- appellants.
Mintz & Gold LLP, New York (Steven G. Mintz and Terence W. McCormick of counsel), for Oak Investment Partners XII, Limited Partnership, respondent/respondent-appellant.
Akin Gump Strauss Hauer & Feld LLP, New York (David M. Zensky and Brian T. Carney of counsel), for Gobi Partners, Inc., Gobi Fund, Inc., and Gobi Fund II, L.P., respondents/respondents- appellants.
Spears & Imes LLP, New York (Linda Imes and Charlita Mays of counsel), for Sierra Ventures, IX, LP, respondent.
David Friedman, J.P., Leland G. DeGrasse, Rosalyn H. Richter, Paul G. Feinman, JJ.
In 2010, VisionChina Media, Inc. (VisionChina) and its wholly owned subsidiary Vision Best Limited (collectively, the buyers) acquired their then competitor, nonparty Digital Media Group Company Limited (DMG), from that company's shareholders and/or officers (the sellers). VisionChina is one of the largest out-of-home digital mobile television advertising networks in the People's Republic of China (PRC). It uses digital mobile technology to deliver advertising content to displays on public transportation systems across that country. DMG operated a digital media advertising network, and sold advertisements on a network of television screens across public transportation systems throughout the PRC.
Merger negotiations first commenced in 2008, but were unsuccessful because the buyers believed DMG, which had never turned a profit, was overpriced. They recommenced in the summer of 2009 when the buyers received oral representations that DMG had significantly improved its financial condition. On September 26, 2009, the buyers entered into a letter of intent to purchase, with the closing to occur on October 15, 2009, subject to a 21-day due diligence period. During due diligence, the buyers were provided with DMG's audited financial statements for the years 2006 through 2008. They were also given unaudited financial statements for January 1, 2009 to August 31, 2009 (the Management Accounts). The audited statements confirmed that DMG had never made a profit, and the Management Accounts bore out the sellers' representations that in 2009 there was increasing net income and decreasing losses. The buyers were also told that by September DMG had met or exceeded its costs, and that this upward trend would continue into the fourth quarter, the industry's peak season.
The Management Accounts and the oral representations were allegedly material in the buyers' decision to acquire DMG. The parties entered into an agreement on October 15, 2009, when they were provided with the unofficial September 2009 figures showing greater net revenues than expenses. The closing date was November 16, 2009; on this date the parties signed an Amended and Restated Agreement and Plan of Merger, wherein on January 2, 2010 (the Effective Time), DMG would be merged into one buyer's wholly owned subsidiary, and the buyers would acquire all of DMG's assets, including all electronically stored data. The buyers could terminate the agreement prior to the Effective Time if "any of the representations and warranties [of the sellers] herein become untrue or inaccurate...."
The buyers covenanted that on the closing date, they would deposit $29, 350, 000 and shares into escrow as the "Effective Time Escrow Amount, " which would be released at the Effective Time. They further covenanted that at the Effective Time, they would issue and deliver to the sellers $100 million as initial consideration, consisting of cash and shares, and that on the next two anniversaries of the closing date, two deferred payments of another $30 million each comprised of cash and shares would be delivered. Of the initial consideration, the buyers would deposit nearly $50 million and shares into three separate escrow accounts, including an Indemnity Escrow Fund, and a segregated expense fund. Any amounts not subject to indemnity obligations would be disbursed to the shareholders after the first anniversary date.
The sellers warranted that both the audited financial statements and the Management Accounts were "true and complete" and prepared in accordance with industry standards (GAAP). Between the closing date and the Effective Time, sellers covenanted not to "transfer or dispose of... any property, rights, businesses or assets (including Intellectual Property)." They would make reasonable efforts to provide a report by the accounting firm of Ernst & Young (E & Y report) concerning the Management Accounts by December 31, 2009. In the event they did not, the buyers could retain $2 million in the Indemnity Escrow Fund until receipt of the E & Y report.
The sellers would indemnify the buyers for any losses arising from their representations and warranties, upon a "claim notice" made by the buyers no later than November 16, 2010. This was the buyers' sole remedy after the January 2, 2010 Effective Date. The maximum shareholder liability for claims of breach of contract and fraud would be based on the number of shares held.
According to the sellers' complaint and the buyers' corresponding answer with defenses and counterclaims, the buyers timely funded the various escrow accounts, and at the Effective Time the buyers authorized the release of $100 million in initial consideration. The E & Y report was provided to the buyers a week early, nine days before the Effective Time. The E & Y report showed that DMG's revenue for the first eight months of 2009 was considerably lower, and its losses considerably higher, than the sellers had orally represented and as stated in the Management Accounts, and that DMG was on a downward trend. Nonetheless, the merger was completed on January 2, 2010. No later than April 2010, when the computer servers were physically ...