Sinovac Biotech LTD v. 1Globe Capital LLC

United States District Court

District of Massachusetts

)

SINOVAC BIOTECH LTD., and )

WEIDONG YIN, )

)

Plaintiffs, )

) Civil Action No.

v. ) 18-10421-NMG

)

1GLOBE CAPITAL LLC, and THE )

CHIANG LI FAMILY, )

)

Defendants. )

)

1GLOBE CAPITAL LLC, )

)

Third-Party Plaintiff/ )

Counter Claimant, )

)

v. )

)

SINOVAC BIOTECH LTD., WEIDONG )

YIN, and NAN WANG, )

)

Counter Defendant/ )

Third-Party )

Defendants. )

)

MEMORANDUM & ORDER

GORTON, J.

In this case involving alleged securities fraud, defendant

1Globe Capital LLC (“1Globe Capital” or “defendant”) filed a

counterclaim for securities fraud and abuse of process in April,

2018, and a motion for preliminary injunction in August, 2018.

It seeks injunctive relief against plaintiff Sinovac Biotech

Ltd. (“plaintiff” or “Sinovac”) and third party defendants

Weidong Yin (“Yin”) and Nan Wang (“Wang”). According to 1Globe

Capital, Yin is Sinovac’s former chairman and corporate

executive officer (“CEO”) and Wang is Sinovac’s former corporate

financial officer (“CFO”).

1Globe Capital alleges that Sinovac, Yin and Wang violated

Section 10(b) of the Securities Exchange Act of 1934 (“Exchange

Act”) and Rule 10b-5 promulgated thereunder by illegally issuing

company stock without notification to or permission from the

legitimate board of directors. Pending before this Court is

defendant’s motion for a preliminary injunction, the subject of

this memorandum, and plaintiff’s motion to dismiss the

counterclaim of defendant. For the reasons that follow, the

motion for a preliminary injunction will be denied.

I. Background

Sinovac is a NASDAQ-listed publicly traded company that is

incorporated in Antigua, West Indies, with its principal place

of business in Beijing, China. Sinovac is a biopharmaceutical

company that researches, develops, manufactures and

commercializes vaccines. 1Globe Capital is a Delaware limited

liability company with its principal place of business in

Cambridge, Massachusetts. 1Globe Capital is one of the largest

shareholders of Sinovac and owns 16.4% of Sinovac’s outstanding

common stock.

A. History of Management and Alleged Corruption

1Globe Capital claims that since at least 2016, Yin, Wang

and other members of the board of directors (“the Old Board”)

have sought to improperly maintain control over Sinovac. 1Globe

Capital alleges that Yin and Wang and members of a buyer group

they formed (“Management Buyout Consortium”) submitted a

proposal to acquire all of Sinovac’s shares at below market

value. In response, a group of Sinovac investors together with

Sinobioway, a large publicly traded Chinese company, arranged a

counteroffer at a higher price per share.

The Old Board then adopted a Rights Agreement in March,

2016, which 1Globe Capital maintains was designed to entrench

the Old Board and to ensure that only the Management Buyout

Consortium could acquire the company. 1Globe Capital claims

that the Old Board used the Rights Agreement as a shield to

prevent other investors from effectively mounting a competing

bid. The Rights Agreement is governed by Delaware Law and its

validity is the subject of ongoing litigation in both Delaware

and Antigua.

In December 2016, an online report disclosing Chinese court

documents revealed that Yin and other Sinovac employees bribed

multiple Chinese officials from 2002 to 2011 to get vaccine

trials approved and distribution of vaccines permitted. The

Securities and Exchange Commission and Department of Justice

began an investigation into those potential violations of the

Foreign Corrupt Practices Act.

On June 26, 2017, Sinovac announced that it had entered

into a definitive agreement in which the Management Buyout

Consortium would acquire the company. Two days later,

Sinobioway submitted a revised proposal to acquire Sinovac at a

14.9% premium over the purchase price offered by the Management

Buyout Consortium. The Old Board rejected Sinobioway’s revised

offer, citing concerns over Sinobioway’s funding.

B. Disputed Board Election

On February 6, 2018, Sinovac held its annual general

meeting. At that meeting, 1Globe Capital and a majority of the

other shareholders voted to install a new slate of directors

(“the New Board”). Despite that vote, the Old Board has refused

to relinquish management and control of the corporation.

Sinovac and the Old Board claim that the purported election of

the New Board was invalid under Antigua law. Sinovac asserts

that Antigua law requires shareholders to provide advance notice

of their intent to seek replacement of the incumbent board of

directors.

C. Issuance of Additional Shares

In March 2018, a month after the election of the New Board,

Yin and Wang and members of the Old Board issued a large number

of restricted shares to themselves.

On July 2, 2018, the Old Board issued additional shares of

Sinovac pursuant to a private investment in public equity

(“PIPE”) transaction with private investors Vivo Capital, LLC

(“Vivo Capital”) and Prime Success, L.P. (“Prime Success”).

Sinovac claims that the PIPE transaction was approved

unanimously by the Old Board with the assistance and advice of

an independent financial advisor and legal advisor who advised

that the consideration offered was fair to the corporation.

1Globe Capital alleges, however, that Vivo Capital and Prime

Success were members of the Management Buyout Consortium who

purchased the shares at a discounted price in a further attempt

of management to buyout Sinovac at below market value. 1Globe

Capital also alleges that this issuance was an attempt to dilute

the voting interest of the shareholders who voted for the New

Board.

On July 3, 2018, Sinovac publicly announced that it had

completed the PIPE transaction. Under the terms of the

Securities Purchase Agreement (“the SPA”) governing the PIPE

transaction, the transaction can be rescinded if a court of

competent jurisdiction enters an order on the merits determining

that the transaction documents were not duly authorized or

approved by the board of directors or that the shares were not

validly issued or sold.

D. Alleged Violations

On March 5, 2018, Sinovac filed a complaint in this

District against 1Globe Capital and the Chiang Li family.

Sinovac’s complaint includes two counts: 1) violation of Section

13(d) of the Exchange Act against 1Globe Capital and 2)

violation of Section 13(d) of the Exchange Act against the

Chiang Li family. Sinovac claims that Section 13(d) required

1Globe Capital to give advance notice to Sinovac and to update

their Schedule 13 beneficial ownership filings before voting to

elect a new board of directors at the annual general meeting and

that 1Globe Capital violated this disclosure requirement by

failing to do so.

1Globe Capital’s counterclaim includes five counts: 1)

abuse of process against Sinovac, Yin and Wang; 2) securities

fraud in violation of Section 10(b) of the Exchange Act and Rule

10b-5 against Sinovac, Yin and Wang; 3) fraudulent

misrepresentation against Sinovac, Yin and Wang; 4) negligent

misrepresentation against Sinovac, Yin and Wang; and 5) aiding

and abetting against Sinovac.

1Globe Capital alleges that 1) Sinovac directly or

indirectly disseminated false and misleading statements to

artificially lower Sinovac’s stock price to facilitate the

acquisition proposal brought by the Management Buyout

Consortium, 2) continued to disseminate false and misleading

statements with respect to the validity of the election of the

New Board to maintain the Old Board’s control and 3) secretly

entered into private securities transactions without notifying

the shareholders or the New Board elected at the February 6

annual meeting. 1Globe Capital further alleges that Sinovac

brought the underlying complaint in this case to accomplish the

ulterior motive of entrenching the Old Board.

E. Procedural History

Also on March 5, 2018, Sinovac filed a complaint against

1Globe Capital and members of the Chiang Li family in the

Delaware Court of Chancery. In that action, Sinovac seeks

declaratory and injunctive relief with respect to the company’s

Rights Agreement entered into in March, 2016. That action will

determine the validity of the Rights Agreement and whether the

“poison pill” in that agreement was triggered by the shareholder

vote at the February 6, 2018 meeting.

On March 13, 2018, 1Globe Capital filed a claim against

Sinovac in the Eastern Caribbean Supreme Court in the High Court

of Justice, Antigua and Barbuda (“the Antigua Court”) seeking a

declaration that the New Board was validly elected and that any

actions taken by the Old Board on behalf of Sinovac are null and

void. Trial in that action was originally scheduled for early

October, 2018, but has recently been postponed until December,

2018.

On April 10, 2018, 1Globe Capital applied to the Antigua

Court for an emergency order enjoining the Old Board’s attempt

to enforce a judgment of the Delaware Court with respect to the

validity of the Rights Agreement. On July 9, 2018, the Antigua

Court denied 1Globe Capital’s application for an interim

injunction and shortly thereafter, the Delaware Court of

Chancery denied Sinovac’s motion for an expedited trial and

1Globe Capital’s application for a status quo order. It ruled

that the application should be presented in the first instance

to the Antigua Court.

On August 1, 2018, 1Globe Capital filed a motion for a

preliminary injunction with this Court seeking to enjoin the

issuance of shares to the PIPE investors and the issuance of any

future shares pending the trial in the Antigua Court. On August

20, 2018, Sinovac filed its opposition to defendant’s motion for

injunctive relief. Sinovac asserts that: 1) 1Globe Capital

cannot demonstrate a reasonable likelihood of success on the

merits of its underlying claim because 1Globe Capital lacks

standing to sue directly under Section 10(b) and has not

obtained leave of the Antigua Court to bring a derivative claim

on behalf of Sinovac as required by Antigua law; 2) 1Globe

Capital cannot demonstrate an imminent risk of irreparable harm

because the terms of the SPA provide that the PIPE transaction

may be rescinded in the event that a court finds that the

issuance of those shares was unauthorized; 3) the balancing of

equities favors denying the preliminary injunction because

1Globe Capital has unclean hands; and 4) there is no public

interest served by this Court considering an internal corporate

dispute governed by Antigua law.

The Court heard oral argument on plaintiff’s motion on

October 11, 2018, after which it took the matter under

advisement.

Pending before this Court are defendant’s motion for a

preliminary injunction and plaintiff’s motion to dismiss the

counterclaim but only the former is addressed in this Memorandum

and Order.

II. Plaintiff’s Motion for a Preliminary Injunction

A. Legal Standard

In order to obtain a preliminary injunction, the moving

party must establish 1) a reasonable likelihood of success on

the merits, 2) the potential for irreparable harm if the

injunction is withheld, 3) a favorable balance of hardships and

4) the effect on the public interest. Jean v. Mass. State

Police, 492 F.3d 24, 26-27 (1st Cir. 2007). Out of these

factors, the likelihood of success on the merits “normally

weighs heaviest in the decisional scales.” Coquico, Inc. v.

Rodriguez-Miranda, 562 F.3d 62, 66 (1st Cir. 2009).

The Court may accept as true “well-pleaded allegations [in

the complaint] and uncontroverted affidavits.” Rohm & Haas Elec.

Materials, LLC v. Elec. Circuits, 759 F. Supp. 2d 110, 114, n.2

(D. Mass. 2010) (quoting Elrod v. Burns, 427 U.S. 347, 350, n.1

(1976)). The Court may also rely on otherwise inadmissible

evidence, including hearsay, in deciding a motion for

preliminary injunction. See Asseo v. Pan Am. Grain Co., Inc.,

805 F.2d 23, 26 (1st Cir. 1986). Ultimately, the issuance of

preliminary injunctive relief is “an extraordinary and drastic

remedy that is never awarded as of right.” Peoples Fed. Sav.

Bank v. People’s United Bank, 672 F.3d 1, 8-9 (1st Cir. 2012)

(quoting Voice of the Arab World, Inc. v. MDTV Med. News Now,

Inc., 645 F.3d 26, 32 (1st Cir. 2011)).

B. Application

1. Likelihood of Success

Defendant alleges that plaintiff violated Section 10(b) of

the Exchange Act and Rule 10b-5 by secretly entering into

securities transactions after the February election without

notifying the New Board or the shareholders. 1Globe Capital

seeks to prevent Sinovac and the Old Board from 1) issuing stock

to Vivo Capital and Prime Success pursuant to the PIPE

transaction, 2) issuing additional shares of Sinovac stock in

other transactions 3) otherwise dissipating Sinovac assets and

4) otherwise violating Section 10(b) of the Exchange Act or Rule

10b-5.

Section 10(b) of the Exchange Act and Rule 10b-5

promulgated thereunder make it illegal for any person directly

or indirectly

(a) [t]o employ any device, scheme, or artifice to defraud,

(b) [t]o make any untrue statement of material fact or to

omit to state a material fact necessary in order to make

the statements made, in the light of the circumstances

under which they were made, not misleading, or (c) [t]o

engage in any act, practice, or course of business which

operates or would operate as a fraud or deceit upon any

person, in connection with the purchase or sale of any

security.

17 C.F.R. § 240.10b-5; see also 15 U.S.C. § 78j(b).

The basic elements of a Section 10(b) and Rule 10b-5 claim

are (1) a material misrepresentation, (2) scienter, (3) a

connection to the purchase or sale of a security, (4) reliance,

(5) economic loss and (6) a causal connection between the

material misrepresentation and the loss. Dura Pharm., Inc. v.

Broudo, 544 U.S. 336, 341 (2005). 1Globe Capital brings its

Section 10(b) and Rule 10b-5 claim both directly on behalf of

itself and derivatively on behalf of Sinovac.

a. Action on Behalf of 1Globe Capital

The Supreme Court in Blue Chip Stamps v. Manor Drug Stores,

421 U.S. 723 (1975), made it clear that to have standing to

bring an action under Section 10(b) and Rule 10b-5, the private

party must have been an actual purchaser or seller of

securities. Id. at 730-31. Defendant asserts, however, that a

party seeking only injunctive relief does not have to show that

the damages suffered were in connection with the purchase or

sale of a security. Defendant relies on Langner v. Brown, 913

F. Supp. 260 (S.D.N.Y. 1996), for that proposition. The court

in that case relied, in turn, on Mutual Shares Corp. v. Genesco,

Inc., 384 F.2d 540, 546-47 (2d Cir. 1967). The particular

holding in Mutual Shares cited in Langner has, however,

apparently been overruled. See Cartica Mgmt., LLC v. Corpbanca,

S.A., 50 F. Supp. 3d 477, 488 (S.D.N.Y. 2014) (holding that

Mutual Shares has been overruled by Blue Chip and that the

explicit holding of Blue Chip “bars claims for injunctive relief

absent a purchase or sale of securities”).

In addition to relying on tenuous law, defendant also cites

cases that dealt with unrelated issues. See Simon DeBartolo

Grp., L.P. v. Richard E. Jacobs Grp., Inc., 186 F. 3d 157, 170

(2d Cir. 1999) (“To be clear, we do not hold that DeBartolo had

standing to seek an injunction; that issue is not before us.”);

Advanced Res. Int’l, Inc. v. Tri-Star Petroleum Co., 4 F.3d 327,

332 (4th Cir. 1993) (“We need not today decide whether to

endorse the exception to the Blue Chip standing rule . . . .”);

Pelletier v. Stuart-James Co., Inc., 863 F.2d 1550, 1557 n.15

(11th Cir. 1989) (stating only in dicta that the policy

considerations underlying Blue Chip would not require dismissal

of a suit for injunctive relief where the plaintiff is not a

purchaser or seller of a security); Davis v. Davis, 526 F.2d

1286, 1289 (5th Cir. 1976) (approving, in dicta, the Second

Circuit’s approach in Mutual Shares with respect to injunctive

relief but holding that plaintiff was actually a seller of

securities for the purpose of his securities claim).

Only one Circuit Court of Appeals has addressed the

particular issue of whether a party seeking only injunctive

relief must show that the damages suffered were in connection

with the purchase or sale of a security. In Cowin v. Bresler,

741 F.2d 410 (D.C. Cir. 1984), the D.C. Circuit held that only

purchasers or sellers of securities have standing to seek

injunctive relief under Section 10(b) and Rule 10b-5. The Court

concluded that the same textual and policy considerations that

informed the Supreme Court’s decision in Blue Chip to limit

standing to actual purchasers and sellers of securities applied

equally to actions for injunctive relief. Id. at 424.

1Globe Capital’s claim for injunctive relief relates

exclusively to securities issued to Vivo Capital and Prime

success in connection with the PIPE transaction and to other

unspecified future securities transactions. 1Globe Capital did

not purchase or sell any Sinovac securities in connection with

the PIPE transaction, nor does it allege that it would purchase

or sell securities in connection with the unspecified future

transactions. Under Blue Chip, apparently 1Globe Capital lacks

standing to bring a Section 10(b) and Rule 10b-5 claim because

its alleged damages are unrelated to the purchase or sale of

securities. Furthermore, 1Globe Capital has cited no Circuit

Court case law holding that the Blue Chip standing limitation

does not apply to motions for injunctive relief. Indeed, the

only Circuit Court that has directly addressed that issue

rejects 1Globe Capital’s proposition.

For these reasons, defendant has not shown that it has a

reasonable likelihood of success on the merits of its claim and

thus its motion for preliminary injunctive relief on behalf of

itself pursuant to Section 10(b) and Rule 10b-5 will be denied.

b. Derivative Action

In addition to suing directly on behalf of oneself, a

shareholder of a corporation may bring a claim derivatively on

behalf of the corporation. Generally, any damages in a

derivative claim are awarded to the corporation rather than to

the individual shareholder bringing the claim. The laws of

several states and foreign countries require a shareholder to

make a demand on the board of directors before bringing a

derivative suit. See, e.g., MODEL BUSINESS CORPORATION ACT § 7.42(AM.

BAR ASS’N 2016).

Sinovac is incorporated in Antigua and Barbuda and thus

Antigua law governs matters of Sinovac’s corporate governance

and internal affairs. See Kamen v. Kemper Fin. Servs., 500 U.S.

90, 108-09 (1991) (holding that the content and scope of the

demand requirement is derived from the law of the state of

incorporation); Mariasch v. Gillette Co., 521 F.3d 68, 72 (1st

Cir. 2008) (applying the law of the jurisdiction with authority

over the corporation’s internal affairs, namely its place of

incorporation). 1Globe Capital argues that the demand

requirement is irrelevant here because Fed. R. Civ. P. 23.1

governs shareholder derivative actions in federal court and that

rule contains no demand requirement. See Shady Grove Orthopedic

Assocs., P.A. v. Allstate Ins. Co., 559 U.S. 393, 417 (2010)

(“It is a long-recognized principle that federal courts sitting

in diversity apply state substantive law and federal procedural

law (internal quotation marks omitted) (quoting Hanna v. Plumer,

380 U.S. 460, 465 (1965))). The Supreme Court held, however,

that Fed. R. Civ. P. 23.1 relates only to the pleading

requirements for derivative actions and does not set out the

substance of the demand requirement which is governed by the

state law of the state of incorporation. See Kamen, 500 U.S. at

96-97, 108-09.

The International Business Corporations Act of Antigua and

Barbuda (“the IBC”) provides that

a complainant may, for the purpose of prosecuting,

defending or discontinuing an action on behalf of a

corporation, apply to the court for leave to bring an

action in the name and on behalf of the corporation or any

of its subsidiaries . . . [and that] [n]o action may be

brought . . . unless the court is satisfied (a) that the

complainant has given reasonable notice to the directors of

the corporation or its subsidiary of his intention to apply

to the court under Section 201 . . . ; (b) that the

complainant is acting in good faith; and (c) that it

appears to be in the interests of the corporation or its

subsidiary that the action be brought, prosecuted, defended

or discontinued.

Id. §§ 201, 202. Reference to “the court” in §§ 201 and 202 of

the IBC is specifically to the Antigua Court. Id. § 2 (defining

“court” as “the High Court”).

The relevant sections of the Antiguan statute indicate that

a shareholder must apply to the Antiguan Court before a

shareholder can proceed to bring an action on behalf of the

corporation. 1Globe Capital has not sought leave from the High

Court to pursue a derivative claim for securities fraud on

behalf of Sinovac and therefore cannot show that it is likely to

succeed on the merits of its derivative claim.

Defendant also submitted that § 204 of the IBC permits a

shareholder to pursue an order restraining oppressive conduct on

behalf of the corporation without first having to seek leave of

the Antigua Court. To the contrary, however, that section

simply provides that “[a] complainant may apply to the court for

an order under this section” but it does not otherwise alter the

requirements of §§ 201 and 202 to pursue a derivative action.

The language of § 204 is entirely consistent with a requirement

that a shareholder seek leave of the Antigua Court to pursue an

order restraining oppressive conduct on behalf of the

corporation.

Because defendant is unable to demonstrate a reasonable

likelihood of success on its securities fraud action brought on

its own behalf or its derivative action brought on behalf of

Sinovac, defendant’s motion for a preliminary injunction will be

denied.

c. State Law Claims

Finally, defendant asserts various state law claims as a

basis for granting preliminary injunctive relief. In its

initial memorandum in support of its motion for a preliminary

injunction, 1Globe Capital makes no mention, however, of its

state law claims but rather relies solely on alleged violations

of the federal securities laws as the basis for preliminary

injunctive relief. The movant always bears the burden of

establishing entitlement to a preliminary injunction. Esso

Standard Oil Co. (P.R.) v. Monroig-Zayas, 445 F.3d 13, 18 (1st

Cir. 2006); Holmes Prods. Corp. v. Catalina Lighting, Inc., 67

F. Supp. 2d 10, 12 (D. Mass. 1999). By failing to cite any

authority in support of its state law claims, defendant, as the

moving party, has not met that burden of showing a reasonable

likelihood of success on the merits of those claims and thus is

not entitled to a preliminary injunction.

2. Potential for Irreparable Harm

While the likelihood of the success on the merits provides

the “touchstone of the preliminary injunction inquiry,” the

second element for consideration, namely irreparable harm, in

this case weighs heavily against defendant. Philip Morris, Inc.

v. Harshbarger, 159 F.3d 670, 674 (1st Cir. 1998). To obtain

preliminary injunctive relief, 1Globe Capital must demonstrate

that it will suffer irreparable harm that is real and not purely

theoretical. Matos ex rel. Matos v. Clinton Sch. Dist., 367 F.3d

68, 73 (1st Cir. 2004).

1Globe Capital argues that it will suffer irreparable harm

because Sinovac will soon issue shares pursuant to the PIPE

transaction which will dilute 1Globe Capital’s ownership and

voting power. According to Sinovac, however, those shares were

already issued to Vivo Capital and Prime Success in July, 2018,

and thus the pending motion for a preliminary injunction is too

late to prevent the alleged harm. Furthermore, contrary to

1Globe Capital’s claim that this transaction cannot be undone,

there is a provision in the SPA that permits such rescission if

the PIPE transaction is found not to have been duly authorized.

There is, therefore, no risk of irreparable harm with respect to

the PIPE transaction warranting preliminary injunctive relief.

1Globe Capital also maintains that there is a risk of

irreparable harm to shareholder voting rights if Sinovac and the

Old Board is permitted to consummate future securities

transactions. 1Globe Capital has not, however, alleged facts

indicating that any stockholder vote is imminent or that Sinovac

is contemplating other securities transactions in the immediate

future. Rather, 1Globe Capital attempts to shift the burden of

showing irreparable harm to Sinovac by suggesting that Sinovac

has not shown how the issuance of a preliminary injunction would

harm it pending resolution of the Antigua action.

The burden of proving irreparable harm remains on 1Globe

Capital and it cannot satisfy that burden because its alleged

harm with respect to shareholder voting rights and future

securities transactions is speculative at this point. Thus,

preliminary injunctive relief is unwarranted. See Coriatt-Gaubil

v. Roche Bobois Int’l, S.A., 717 F. Supp. 2d 132, 138 (D. Mass.

2010).

ORDER

For the forgoing reasons, defendant’s motion for a

preliminary injunction (Docket No. 25) is DENIED.

So ordered.

_/s/ Nathaniel M. Gorton_____

Nathaniel M. Gorton

United States District Judge

Dated October 15, 2018