Matter of Renren Inc. Derivative Litig. v. XXX

Matter of Renren Inc. Derivative Litig. v. XXX

Opinion

The following e-filed documents, listed by NYSCEF document number (Motion 021) 758, 759, 760, 761, 762, 763, 764, 765, 766, 767, 768, 769, 770, 771, 772, 773, 774, 777, 778, 779, 780, 781, 782, 783, 784, 785, 786, 787, 788, 810, 811, 812, 813, 814, 815, 816, 817, 818, 819, 820, 821, 822, 823, 824, 825, 826, 827, 828, 829, 830, 831, 832, 833, 834, 835, 836, 837, 838, 839, 840, 842, 843, 844 were read on this motion to/for COMPROMISE.

Upon the foregoing documents and for the reasons set forth on the record (12.9.21), the motion must be denied. The proposed settlement can not be approved as a settlement to a derivative action structured with direct payments to certain minority shareholders but excluding relevant injured minority shareholders. The plaintiffs are certain of the minority shareholders that are entitled to payment and can not exclude them from the settlement. Plaintiff counsel's argument that only his clients and not all of the minority shareholders who were harmed should be paid fails. In a derivative action, a shareholder [*3]  sues on behalf of all effected shareholders — here the minority shareholders. Having undertaken to claim on behalf of all minority shareholders, the plaintiffs may not limit the rewards reaped by this action to themselves. Allowing plaintiffs to do this would, in effect, provide a windfall to the company as to the other minority shareholders. This is antithetical to the concept of the derivative action that the plaintiffs brought. Thus, the settlement as structured is not fair and reasonable to the effected shareholders and when taken as a whole is "so unfair on its face to preclude judicial approval" (Benedict v Whitman Breed Abbott & Morgan, 77 AD3d 870, 872, 910 N.Y.S.2d 474 [2d Dept 2010], citing Zerkle v Cleveland Cliffs Iron Co., 52 FRD 151, 159 [SD NY 1971], quoting Glicken v Bradford 35 FRD 144, 151 [SD NY 1964]; see Mathes v Roberts, 85 FRD 710, 713 [SD NY 1980]; Trainor v Berner, 334 F Supp 1143, 1149 [SD NY 1971]).

It does not matter that this lawsuit was brought as a derivative action. The nature of the action goes to standing, not the substantive basis for the claim. Here, the substantive basis of the claim was breach of fiduciary duty and fraud on the minority. This requires the court to set a record date to determine the identity of the minority shareholders who were allegedly defrauded. Those shareholders are the record shareholders at the close of business on April 29, 2018 (the Record Date), i.e., the day before the spin-off transaction was announced. These are [*4]  the  [**2]  shareholders who were given the "Hobson's choice" (NYSCEF Doc. No. 405 ¶ 10) that forms the basis for this litigation when Renren's most valuable assets were allegedly siphoned off and it is irrelevant whether they have sold their shares. The harm caused to their investment was immediate and at the time of the announcement because the market is efficient. Investors who purchased shares after the Record Date or who increased their positions during the pendency of this litigation, on the other hand, knew exactly what they were purchasing and can not profit by allocating to themselves the damages due to those harmed.

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