Second Circuit affirms district court’s dismissal of class action lawsuit alleging securities fraud against China-based real estate company because there was no falsehood | A&O Shearman

On June 10, 2024, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of a putative class action lawsuit brought by shareholders 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 that the Company made false and misleading statements and omissions to obtain approval for a private merger with a group of buyers consisting of the individual defendants. The district court granted the Company’s motion to dismiss. Review of the District Court’s Decision newThe court confirmed the finding that the plaintiffs had failed to identify a single criminal 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 made a tender offer to the Company to take the Company private, which was accepted by members of the Company’s board of directors who were not part of the takeover group. In advance of a shareholder vote, the Company published a proxy statement detailing, among other things, the Company’s future outlook and the Company’s plans after privatization (the “Proxy Statement”). Shareholders ultimately approved the merger in August 2016. Approximately two years later, the Company relisted on the Hong Kong Stock Exchange (“HSKE”).

Plaintiffs allege that the Company made various material misrepresentations and omissions in the proxy statement, namely that the proxy statement allegedly: (1) contained outdated corporate projections supplemented by newer, stronger projections that were omitted; and (2) misled investors as to the purpose of the merger and the Company’s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 U.S. District Court for the Southern District of New York dismissed the complaint, finding that plaintiffs failed to plausibly demonstrate the falsity of the alleged misrepresentations and omissions set forth in the complaint. In re E-House Secs. Litig.No. 20 Civ. 2943 (ER) (SDNY September 29, 2021). Judge Ramos granted the plaintiffs one final opportunity to amend, but the plaintiffs instead appealed Judge Ramos’ dismissal. On appeal, the court examined both categories of alleged false statements to determine whether the district court erred in finding that the plaintiffs had not adequately pleaded the false statements.

Review of plaintiffs’ allegations newthe court affirmed Judge Ramos’ dismissal of the lawsuit. The court first addressed plaintiffs’ claims that the company’s projections contained in the power of attorney had been artificially low and replaced with newer projections that allegedly supported a higher company valuation and thus a more lucrative stock price. The court ruled as a preliminary point that the plaintiffs’ failure to explain who had prepared these new projections, for what purpose they were prepared, and to whom they were provided rendered the plaintiffs’ claim moot. But even assuming that the plaintiffs could explain the creation of the allegedly stronger projections, the court found that the power of attorney contained express cautionary language that would have alerted the reasonable investor that the projections did not take into account events or circumstances that occurred after the projections were made. Finally, the court rejected plaintiffs’ claim that the company had an independent duty to disclose the allegedly newer projections under the “pure omission” theory, holding that after Macquarie Infrastructure Corp. v. Moab Partners LP601 US 257, 265 (2024), it is no longer a viable liability theory.

The Court next addressed the plaintiffs’ allegations that the proxy agent misled investors that the Company had no plans to materially change its corporate structure, when in fact the individual defendants had already developed plans to relist the Company on the HKSE prior to the completion of the merger. The Court rejected this theory, finding that it was significant that “virtually all” of the alleged statements relied upon by the plaintiffs to support the individual defendants’ plans to relist the Company had in fact occurred. after the merger. In addition, the proxy specifically stated that individual defendants “may develop proposals or plans” to relist the company or a substantial portion of its business “on another stock exchange.”

The court affirmed the plaintiffs’ rejection of the controller liability theory in light of the lack of a sufficiently alleged predicate violation.

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