On June 10, 2024, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a putative shareholders' class action against a real estate company (the "Company") and several of its directors (the "Individual Defendants"), asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 promulgated thereunder. Maso Cap. Invs. Ltd. v. E-House (China) Holdings Ltd., No. 22-355 (2d Cir. June 10, 2024). Plaintiffs alleged the Company made false and misleading statements and omissions to entice approval of a go-private merger with a buyer group comprised of the Individual Defendants. The district court granted the Company's motion to dismiss. Reviewing the district court's decision de novo, the Court affirmed finding that plaintiffs failed to identify a single actionable statement or omission.
The Company is a China-based real estate services company that sold American depository shares on the New York Stock Exchange. In 2015, the Individual Defendants approached the Company with a buyout offer to take the Company private, which members of the Company's board who were not part of the buyout group accepted. In advance of a shareholder vote, the Company released a proxy detailing, among other things, the Company's future projections and the Company's plans following the go-private merger (the "Proxy"). The shareholders ultimately approved the merger in August 2016. Approximately two years later, the Company was re-listed on the Hong Kong Stock Exchange ("HSKE").
Plaintiffs allege that the Company made various material misrepresentations and omissions in the Proxy, namely that the Proxy allegedly: (1) contained stale Company projections that had been supplemented by newer, stronger projections that were omitted; and (2) misled investors as to the purpose of the merger and the Company's post-merger plans. Judge Edgardo Ramos of the United States District Court for the Southern District of New York dismissed the action, holding that Plaintiffs failed to plausibly allege the falsity of any of the purported misrepresentations and omissions set forth in the complaint. In re E-House Secs. Litig., No. 20 Civ. 2943 (ER) (S.D.N.Y. Sept. 29, 2021). Judge Ramos granted plaintiffs one last opportunity to amend, but plaintiffs appealed Judge Ramos's dismissal instead. On appeal, the Court examined both categories of alleged misstatements to determine whether the district court had erred in finding plaintiffs failed to adequately plead falsity.
Reviewing plaintiffs' allegations de novo, the Court affirmed Judge Ramos's dismissal of the action. The Court first addressed plaintiffs' allegations that the Company's projections contained in the Proxy were artificially low and supplanted by newer projections that allegedly would have supported a higher Company valuation and, thus, more lucrative share price. The Court held, as a threshold matter, that plaintiffs' failure to explain who created those new projections, for what purpose they were prepared, and to whom they were made available doomed plaintiffs' claim. But even assuming plaintiffs could explain the origination of the allegedly stronger projections, the Court found that the Proxy contained express cautionary language that would have put the reasonable investor on notice that the projections did not take into account events or circumstances that occurred after the projections were prepared. Finally, the Court rejected plaintiffs' assertion that the Company had an independent duty to disclose the allegedly newer projections under a "pure omission" theory, opining that, following Macquarie Infrastructure Corp. v. Moab Partners L.P., 601 U.S. 257, 265 (2024), it is no longer a viable theory of liability.
The Court next addressed plaintiffs' allegations that the Proxy misled investors that the Company had no plans to materially alter the Company's structure, when the Individual Defendants had, in fact, already formulated plans to relist the Company on the HKSE prior to the merger's consummation. The Court rejected this theory, finding it to be significant that "virtually all" of the alleged statements plaintiffs relied upon to demonstrate the Individual Defendants' plans to relist the Company occurred after the merger. Moreover, the Proxy expressly disclosed that Individual Defendants "may propose or develop plans" to relist the Company, or a substantial part of its business, "on another stock exchange."
The Court affirmed dismissal of plaintiffs' control-person liability theory in light of the absence of an adequately alleged predicate violation.
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