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In re Facebook, Inc., IPO Derivative Litig.

United States Court of Appeals, Second Circuit

July 24, 2015

In re: Facebook, Inc., Initial Public Offering Derivative Litigation [*]

Argued April 27, 2015

Page 149

[Copyrighted Material Omitted]

Page 150

Plaintiffs appeal from a judgment of the United States District Court for the Southern District of New York (Sweet, J.) dismissing their putative shareholder derivative actions brought against nominal defendant, Facebook, Inc., its directors, and lead underwriters. When confronted with a difficult or novel question of subject matter jurisdiction, a court may sometimes dismiss the case on a threshold, non-merits issue. We hold that such a ground in a derivative action under Rule 23.1 is lack of contemporaneous share ownership. We further conclude that here, all of the putative derivative plaintiffs failed to satisfy this pleading requirement, and that dismissal was therefore appropriate.

Affirmed.

GEOFFREY M. JOHNSON, Scott䧊 LLP, Cleveland Heights, Ohio (with Joseph P. Guglielmo, Scott䧊 LLP, New York, New York and Thomas McKenna and Gregory M. Egleston, Gainey McKenna & Egleston, New York, New York, on the brief) for Appellant-Cross-Appellee Lidia Levy.

ANDREW S. LOVE, Robbins Geller Rudman & Dowd LLP, San Francisco, California (with Joseph David Daley, Robbins Geller Rudman & Dowd LLP, San Francisco, California, Samuel H. Rudman, Robbins Geller Rudman & Dowd LLP, Melville, New York, and Paul A. Fioravanti, Jr., Prickett, Jones & Elliott, P.A., Wilmington, Delaware, on the brief) for Appellants Gaye Jones and Holly McConnaughey.

BRIAN P. MURRAY, Glancy Binkow & Goldberg LLP, New York, New York (with Gregory B. Linkh, Glancy Binkow & Goldberg LLP, New York, New York, Mark R. Rosen, Barrack, Rodos & Bacine, Philadelphia, Pennsylvania, Fred T. Isquith, Wolf Haldenstein Adler Freeman & Herz LLP, New York, New York, and Richard S. Wayne, Strauss & Troy, Cincinnati, Ohio, on the brief) for Appellant Robert Crocitto.

ANDREW B. CLUBOK, Kirkland & Ellis LLP, New York, New York (with Brant W. Bishop, P.C., Kirkland & Ellis LLP, New York, New York, Susan E. Engel, Kellen S. Dwyer, Kirkland & Ellis LLP, Washington, D.C., Richard D. Bernstein, Elizabeth J. Bower, Willkie Farr & Gallagher LLP, Washington, D.C., and Tariq Mundiya, Todd G. Cosenza and Sameer Advani, Willkie Farr & Gallagher LLP, New York, New York, on the brief), for Appellee-Cross-Appellant Facebook, Inc. and Appellees Marc. L. Andreessen, Erskine B. Bowles, James W. Breyer, David A. Ebersman, Donald E. Graham, Reed Hastings, Peter A. Thiel, Mark E. Zuckerberg, Sheryl Sandberg, Cipora Herman, David Spillane, Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC and Goldman, Sachs & Co.

James P. Rouhandeh, Charles S. Duggan, Andrew Ditchfield, Davis Polk & Wardwell LLP, New York, New York, for Appellees Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC and Goldman, Sachs & Co.

Before: JACOBS, POOLER, and HALL, Circuit Judges.

OPINION

Page 151

DENNIS JACOBS, Circuit Judge.

These in tandem appeals arise from related suits brought in the aftermath of the initial public offering by nominal defendant Facebook, Inc. (" Facebook" ), the world's largest social media company. In these putative shareholder derivative actions, plaintiffs allege that Facebook's directors breached duties owed to the company because its Registration Statement failed to disclose the mid-quarter impact of mobile usage on the company's projected growth.

One of the putative derivative actions was filed in the Southern District of New York. A related action was filed in California state court, and removed to the Northern District of California. A third was filed in the Delaware Court of Chancery, and removed to the United States District Court for the District of Delaware. Before the putative derivative plaintiffs could litigate motions to remand to state court, the Judicial Panel on Multidistrict Litigation transferred all of the actions to the United States District Court for the Southern District of New York (Sweet, J.).

The district court dismissed all of the actions on threshold grounds, ruling that: (i) plaintiffs were not actual or equitable owners of Facebook stock at the time of the alleged wrongdoing, (ii) plaintiffs failed to adequately plead demand futility, and that (iii) the claims were unripe. Plaintiffs in the removed actions argue that the court erred in considering these bases for dismissal before adjudicating subject matter jurisdiction. The plaintiff in the action originally filed in the Southern District of New York appeals the dismissal of his action on these threshold grounds. The removed plaintiffs join, in the alternative, in these arguments.

Facebook urges this Court to affirm the district court in all respects, proffers additional bases to support subject matter jurisdiction as to the removed actions, and

Page 152

asserts a conditional cross-appeal pertaining to the district court's refusal to enforce a forum selection clause adopted before plaintiffs filed suit.

We conclude that it was not error for the district court to decide, as a threshold matter, whether plaintiffs adequately pleaded contemporaneous share ownership, as required by Federal Rule of Civil Procedure 23.1. Because none of the putative derivative plaintiffs satisfied this requirement, we affirm. We do not reach the additional bases for dismissal invoked by the district court, or advanced by Facebook.

BACKGROUND

Facebook's May 18, 2012 initial public offering (the " IPO" ) was one of the largest in history. In preparation for this event--closely watched by investors, the press, and the public--Facebook filed a Form S-1 Registration Statement (the " Registration Statement" ) with the Securities and Exchange Commission (" SEC" ). The Registration Statement is a disclosure document that requires a public company to, inter alia, detail its current business model and its competition, price and methodology for setting the price, disclose risks, and disclose material dealings between the company and its directors.[1] Several months after the filing of the Registration Statement, Facebook gave its lead underwriters (Goldman, Sachs & Co., Morgan Stanley & Co., and J.P. Morgan Securities LLC) (the " Underwriters" ) revenue projections for the second quarter and full year of 2012.

Facebook supplemented its Registration Statement on May 9 with a Free-Writing Prospectus, a one-page, stand-alone disclosure, which identified a trend: the number of Facebook users was increasing more rapidly than the number of advertisements. Facebook offered the view that this trend was driven, at least in part, by increased usage of Facebook on mobile devices, on which it had only an " immaterial" number of sponsored stories in users' " News Feeds," and which displayed fewer advertisements per page.[2] Compl. ¶ 38, Crocitto v. Zuckerberg, 13-cv-786 (S.D.N.Y. 2014) (" Crocitto Compl." ). After the Free-Writing Prospectus was filed, Facebook called analysts at the company's Underwriters to ensure that they were aware of the filing, and to provide them with lower revenue estimates, which were 3 to 3.5 percent off of the company's earlier ...


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