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December 2013: Victory for Sandoz in $500 Million Securities Action

December 2013

On August 7, 2013, Quinn Emanuel obtained a victory for four clients, Sandoz AG, Sandoz International GmbH and two individuals, by securing dismissal on constitutional standing grounds of eleven federal and state securities, breach of contract, and negligent misrepresentation claims filed against them in the United States District Court for the Southern District of New York by Shareholder Representative Services LLC (“SRS”). SRS, a stockholder representative that frequently acts on behalf of the former shareholders of entities that are sold through mergers and acquisitions, brought the claims in connection with a merger agreement between the former shareholders of an entity that was acquired by one of the defendants, Sandoz Inc., in 2010. Because stockholder representatives like SRS are regularly involved in M&A activity, the decision to dismiss SRS’s complaint in its entirety for lack of standing is likely to have broad implications for other stockholder representatives wishing to pursue litigation on behalf of former shareholders in federal court.

The merger agreement was signed by SRS on behalf of the shareholders, expressly granted SRS the right to “assert any claims” on behalf of the shareholders, and named SRS as the shareholders’ agent and attorney in fact. The court’s ruling dismissing the claims hinged on the fact that SRS failed to allege that it suffered an injury-in-fact at the time it filed the complaint and sought instead to raise the injuries and legal rights of the former shareholders. Significantly, the court found that neither the original complaint nor the two amended complaints, which SRS filed after it obtained claim assignments from some of the former shareholders, identified a concrete and particularized injury that was suffered by SRS as opposed to its clients. Rather, as the court acknowledged, SRS’s role in the underlying events concerning the merger, and at the time it first filed the lawsuit, “was that of ‘agent and true and lawful attorney-in-fact’” for the former shareholders—a role that, “without more, d[id] not convert the injuries allegedly suffered by the Shareholders into SRS’s own injuries.” Shareholder Representative Services LLC v. Sandoz Inc., et al., No. 12-cv-6154 (DLC), Opinion & Order at 18-19 (S.D.N.Y. Aug. 7, 2013) (citing W.R. Huff Asset Mgmt. Co. v. Deloitte & Touche LLP, 549 F.3d 100, 107-08 (2d Cir. 2008)). The court rejected SRS’s contention that the former shareholders’ post-filing assignment of their claims to SRS cured any standing defects that may have existed when it first filed the case because, among other reasons, Federal Rules of Civil Procedure 17(a)(3) and 15(c) permit an amended complaint to relate back to the original filing of the complaint. The court ruled that neither 17(a)(3) nor 15(c) concern jurisdiction and they cannot create a basis for standing where it otherwise would not exist. Moreover, because SRS invoked jurisdiction based on a federal question, the court found that SRS’ failure to establish constitutional standing necessarily meant that the court lacked jurisdiction to entertain not only SRS’s federal securities claims, but also its pendant state law claims. As such, the court dismissed the complaint in toto.

The decision is significant because it deals with an increasingly common question in litigation that arises out of mergers: namely, what must a stockholder representative do in order to secure standing to act on behalf of the former shareholders by whom it is retained? This case is, as far as we are aware, the first to address that question and the court unequivocally signaled that neither a contractual provision allowing the stockholder representative to bring the claim, the plaintiff’s status as an attorney-in-fact, nor a post-filing assignment is sufficient to create constitutional standing. Rather, in order to establish standing to pursue federal and state law claims in federal court, stockholder representatives like SRS must demonstrate that they personally suffered an injury-in-fact and had some financial stake in the stockholders’ claims that are plead in the complaint at the time the complaint is filed.