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Cartica Mgmt., LLC v. CorpBanca, S.A.

United States District Court, S.D. New York

September 25, 2014

CARTICA MANAGEMENT, LLC, et al., Plaintiffs,
CORPBANCA, S.A., et al., Defendants

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[Copyrighted Material Omitted]

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For Cartica Management, LLC, Cartica Corporate Governance Fund, LP, Cartica Investors, LP, Cartica Capital Partners Master, LP, Plaintiffs: Adam H. Offenhartz, Gibson, Dunn & Crutcher, LLP, New York, NY; David J. Kerstein, James Martin Thompson, Gibson, Dunn & Crutcher, LLP (NY), New York, NY.

For Corpbanca S.A., Alvaro Saieh Bendeck, Corp Group Banking S.A., Compania Inmobiliaria Y De Inversiones Saga Limitada, Jorge Andres Saieh Guzman, Hugo Verdegaal, Fernando Massu Tare, Eugenio Gigogne Miqueles, Defendants: Lynn Katherine Neuner, LEAD ATTORNEY, Peter Eric Kazanoff, Simpson Thacher & Bartlett LLP (NY), New York, NY; Joshua Mark Slocum, Simpson Thacher & Bartlett LLP, New York, NY.

For Itau Unibanco Holding S.A., Banco Itau Chile, Defendants: George T Conway, III, LEAD ATTORNEY, Justin Victor Rodriguez, Wachtell, Lipton, Rosen & Katz, New York, NY.

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P. Kevin Castel, United States District Judge.

Plaintiffs (collectively, " Cartica" ) bring this action, alleging that defendants committed securities fraud in connection with a forthcoming merger of CorpBanca and Banco Itau Chile. Cartica asserts claims pursuant to Section 10(b) of the Securities Exchange Act of 1934 (the " '34 Act" ), 15 U.S.C. § 78u-4(b), Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, Section 13(d) of the '34 Act, 15 U.S.C. § 78m, and Rules 13d-1 and 13d-5 promulgated thereunder, 17 C.F.R. § 240.13d-1 and 17 C.F.R. § 240.13d-5, and Section 20(a) of the '34 Act, 15 U.S.C. § 78t. Cartica also asserts a claim for common law fraud. It requests injunctive relief on its federal securities claims, but seeks damages on its

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common law fraud claim. The defendants move to dismiss.

In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), the Supreme Court examined the text of section 10(b) and Rule 10b-5 and concluded that a claim could not be asserted by a shareholder who was neither a " purchaser" nor " seller" in relation to the alleged fraud. Blue Chip was decided in the context of a money damages claim and, since then, neither the Supreme Court nor the Second Circuit has decided whether a claim for injunctive relief is subject to the same rule. This Court accepts the District of Columbia Circuit's reasoning that " [w]hile it may be possible to discern differences between an action for damages and a suit for an injunction, most of the Supreme Court's argument in Blue Chip applies quite as much to the latter as to the former." Cowin v. Bresler, 741 F.2d 410, 424, 239 U.S. App.D.C. 188 (D.C. Cir. 1984). As will be explained, this Court applies the purchaser or seller rule to Cartica's section 10(b) claim and dismisses that claim.

With respect to Cartica's section 13(d) claim, there is no purchaser or seller requirement and thus Cartica may assert such a claim. However, on a motion to dismiss, this Court may properly consider the text of the disclosures alleged to be false. Corrective disclosures made by certain defendants foreclose Cartica's claim for injunctive relief and that claim will be dismissed as well. Because the complaint fails to plead a primary violation, Cartica's section 20(a) claims are also dismissed. With all federal claims dismissed, the Court declines to exercise supplemental jurisdiction over the common law fraud claims.

I. Background

For the purposes of defendants' motions, all non-conclusory factual allegations are accepted as true, see Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), and all reasonable inferences are drawn in favor of the plaintiff as non-movant. See In re Elevator Antitrust Litig., 502 F.3d 47, 50 (2d Cir. 2007).

a. Parties

Defendant CorpBanca, S.A. is a publicly-traded company based in Santiago, Chile, organized under the laws of Chile and licensed by the Chilean Superintendency of Banks and Financial Institutions to operate as a commercial bank. (Am. Compl. ¶ 38.) It is subject to the reporting requirements of the Chilean Superintendency of Securities and Insurance and files periodic reports, known as " material fact notices," with the Superintendency. (Am. Compl. ¶ 39.) CorpBanca shares are traded on the Santiago Stock Exchange and Chilean Electronic Exchange. (Am. Compl. ¶ 39.) CorpBanca's ADRs are traded on the NYSE under the symbol " BCA." (Am. Compl. ¶ 40.)

Plaintiff Cartica first purchased CorpBanca shares in October 2012, apparently extraterritorially. On January 18, 2013, it purchased 1.2 million American Depository Receipts (" ADRs" ) in United States transactions during CorpBanca's public offering.[1] (Am. Compl. ¶ 33.) The Cartica funds own approximately 11 billion shares, including common shares and shares represented

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by ADRs, representing approximately 3.22% of CorpBanca's outstanding common stock. (Am. Compl. ¶ 36.)

Defendant Á lvaro Saieh Bendeck (" Saieh" ) is the Chairman and controlling shareholder of privately-held Corp Group and the controlling shareholder of CorpBanca through Corp Group and other investments. (Am. Compl. ¶ 43.) As of December 31, 2013, Saieh controlled approximately 50.44% of CorpBanca's outstanding shares through holding companies, including defendants Corp Group Banking S.A., which holds approximately 45.26% of CorpBanca's common shares, and Companí a Inmobiliaria y de Inversiones Saga Limitada (" Saga" ), which holds approximately 5.18% of CorpBanca's common shares. (Am. Compl. ¶ ¶ 44, 46-47.) According to CorpBanca's 2012 20-F form, Saieh held shares with sufficient voting power to approve all forms of corporate action subject to decision by shareholders' meetings. (Am. Compl. ¶ 45.) Corp Group also has a controlling interest in SMU (Chile's third-largest supermarket operator), Copesa (a media conglomerate), and real estate and insurance operations. (Am. Compl. ¶ 43.) The Court refers to these defendants collectively as " Corp Group" or the " Corp Group defendants." Defendants also include directors and officers of CorpBanca. (Am. Compl. ¶ ¶ 48, 56, 59-60.)

Defendant Itaú Unibanco Holding S.A. is a publicly-held corporation organized under the laws of Brazil. Itaú 's preferred shares have traded in the form of ADRs on the NYSE, under the symbol " ITUB" since February 2002. Itaú files Form 20-Fs and Form 6-Ks with the SEC. (Am. Compl. ¶ 61.) Defendant Banco Itaú Chile is a subsidiary of Itaú Unibanco Holding S.A. and is a corporation organized under the laws of Chile. (Am. Compl. ¶ 62.)

b. The Transaction at Issue

CorpBanca and Itaú announced in January 2014 that they entered into a proposed merger agreement (the " Transaction Agreement" ). (Am. Compl. ¶ 91.) If the merger is approved, 172 billion new shares of CorpBanca stock will be issued to the shareholders of Banco Itaú Chile. The current shareholders of CorpBanca will retain 66.42% of the shares of the merged bank. After closing, the aggregate number of shares of the merged bank will increase from 340 billion to 512 billion duly subscribed and fully paid shares. (Slocum Decl. Ex. 4.)

Saieh gained a majority interest in CorpBanca in 1996. (Am. Compl. ¶ 63.) He does not have sufficient voting power to approve the proposed merger, which requires a vote of two-thirds or more shareholders. (Am. Compl. ¶ 138.)

SMU, the supermarket operator controlled by Corp Group, lost $720 million in the first nine months of 2013. SMU disclosed accounting errors and increased its stated liabilities in a restatement. (Am. Compl. ¶ 70.) Saieh fired 7,000 SMU employees, returned as chairman of SMU's board, and injected $300 million into the chain, 60% of which were from his personal funds. (Am. Compl. ¶ 71.)

On November 29, 2013, CorpBanca disclosed that it had retained " international investment banks" to analyze " potential transactions" involving the bank and other bank operators. (Am. Compl. ¶ ¶ 82, 140.) On December 6, 2013, Moody's cut CorpBanca's credit rating from Baa3 to Baa2, citing the problems at SMU. (Am. Compl. ¶ 84.)

In December 2013, Saieh and CorpBanca made public statements that they would only accept a bid that would permit Saieh to retain some control of CorpBanca. (Am. Compl. ¶ 102.) Concerned by these

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statements, Cartica's director, Tessa Barger, met with Saieh in New York on December 9, 2013, and stated, in substance, that any transaction that included special benefits for Saieh that " did not inure to all shareholders equally would unacceptably and unlawfully shift value from minority shareholders to Saieh." On December 20, 2013, in a letter to Saieh, Barger restated the need to secure the highest value for all shareholders. (Am. Compl. ¶ 102.) Saieh affirmed to Cartica that he would not seek personal benefits, but that he would seek a transaction with the maximum benefit for all shareholders. (Am. Compl. ¶ 103.) Based on Saieh's representations, Cartica purchased an additional 188 million CorpBanca shares and continued to hold its CorpBanca ADRs. (Am. Compl. ¶ 103.) Cartica does not allege that the additional shares were purchased within the United States, and the shares, as distinguished from ADRs, are not alleged to be publically traded in the United States.

On January 29, 2014, CorpBanca announced that it reached an agreement in which Itaú would merge its Chilean and Colombian units with CorpBanca. (Am. Compl. ¶ 91.) The Transaction Agreement provided that Corp Group would vote its CorpBanca shares in favor of the proposed merger. (Slocum Decl. Ex. 8.1. § 4.4(g))

On January 30, 2014, the day after the announcement of the transaction, defendants provided disclosures to certain shareholders in an early morning meeting, to which Cartica was not invited. (Am. Compl. ¶ 107.) Defendants also provided disclosures about the transaction via a public call. (Am. Compl. ¶ ¶ 106, 153.) CorpBanca filed a 6-K which announced the agreement and attached a Merger Notice. (Am. Compl. ¶ 151.) On the same date, CorpBanca filed a separate Form 6-K disclosing that it had announced the merger via a press release, which characterized the merger as a " stock-for-stock transaction." (Am. Compl. ¶ 152.)

In February 2014, Cartica purchased an additional 2 billion CorpBanca shares. (Am. Compl. ¶ 105). Cartica does not allege that the additional shares were purchased in the United States.

In March 2014, CorpBanca issued a public letter responding to questions raised by Cartica. (Am. Compl. ¶ 154.) CorpBanca also published a series of questions and answers, which included some of the alleged benefits Saieh would reap from the transaction. (Am. Compl. ¶ 155.)

On March 14, 2014, defendants disclosed the text of the Transaction Agreement and the Shareholders Agreement on CorpBanca's website. (Am. Compl. ¶ 109.) Cartica alleges that the Shareholders Agreement and Transaction Agreement provide special benefits to Saieh and Corp Group at the expense of minority shareholders, including the following: (i) Itaú 's subsidiary will provide Corp Group with a $1.2 billion credit line at a highly favorable interest rate; (ii) the post-merger bank will purchase all of Corp Group's CorpBanca Colombia shares for an inflated price; and (iii) Corp Group will receive put and call rights. The complaint alleges that Corp Group will receive additional rights or benefits which " represent[] a transfer of value from the Bank's shareholders to CorpGroup." (Am. Comp. ¶ 110.)

On May 29, 2014, the Corp Group defendants filed a Schedule 13D, which they amended on June 24, 2014. (Am. Compl. ¶ 132; Slocum Decl. Ex. 15.) On July 7, 2014, Itaú Unibanco Holding S.A. filed a Schedule 13D relating to the common shares of CorpBanca. (Rodriguez Decl. Ex. 3.)

Because the transaction at issue is a merger transaction in which shareholders of Banco Itaú Chile would exchange their

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shares of Banco Itaú Chile for shares of CorpBanca, Cartica would own the exact number of shares and ADRs of CorpBanca after the transaction that it owned before the transaction. It is forced to part with neither its shares nor its ADRs. Cartica does not (nor could it) challenge the fairness or adequacy of the transaction in this proceeding, which is a matter of the fiduciary duties of directors of a Chilean entity. The federal securities claims relate solely to the adequacy and propriety of disclosures. The amended complaint alleges that defendants have made misleading statements and omissions in their filings with the SEC, public statements, and private statements. (Am. Compl. ¶ ¶ 133, 139-68.)

c. Procedural History

Cartica filed the initial complaint in this action on April 1, 2014. After a conference with the Court, Cartica filed an amended complaint, adding the Itaú defendants. (Docket # 48.) Cartica's claims against defendants Fernando Aguad Dagach, Jorge Selume Zaror, Rafael Guilisati Gana, Francisco León Dé lano, Francisco Mobarec Asfura, Gustavo Arrigada Morales, José Luis Mardones Santander, Marí a Catalina Saieh GuzmÁ n, and Ana Beatriz Holuigue Barros have been voluntarily dismissed without prejudice. (Docket # 77.) This Court previously denied Cartica's motion to lift the PSLRA discovery stay. (Docket # 113.)

II. Legal Standards on a Motion to Dismiss

Pursuant to Rule 12(b)(6), Fed. R. Civ. P., to survive a motion to dismiss, " a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Legal conclusions are not entitled to the presumption of truth, and a court assessing the sufficiency of a complaint disregards them. Id. Instead, the Court must examine only the well-pleaded factual allegations, if any, " and then determine whether they plausibly give rise to an entitlement to relief." Id. at 679. When reviewing a motion to dismiss pursuant to Rule 12(b)(6), a court " may consider any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public ...

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