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William Klawonn v. Ya Global Investments

December 6, 2010


The opinion of the court was delivered by: Chesler, U.S.D.J.


This matter comes before the Court on the motion to dismiss the Complaint for failure to state a valid claim for relief, pursuant to Federal Rule of Civil Procedure 12(b)(6), by Defendant YA Global Investments, L.P. ("YA Global.") For the reasons stated below, the motion will be granted.

In brief, the Complaint alleges that YA Global profited from trading the stock of NeoMedia Technologies, Inc. ("NeoMedia") in violation of § 16(b) of the Securities and Exchange Act of 1934. YA Global argues that the Complaint fails to state a valid claim under § 16(b) because it does not adequately allege that YA Global was a statutory insider subject to § 16 as an officer, director, or beneficial owner of more than 10% of the issuer's common stock during the relevant time period.

The Complaint sets forth at length the basis for Plaintiff's assertion that YA Global was the beneficial owner of more than 10% of NeoMedia's common stock. YA Global counters this by arguing as follows: "The problem with this argument is that the warrants, debentures and preferred stock at issue in this lawsuit all contained 'blocker' provisions that prevented YA Global from exercising its conversion rights if the exercise would take YA Global over the 10% threshold." (Def.'s Br. 1-2.)

The parties do not dispute that the Complaint refers to the relevant securities documents and that this Court may look to those documents in deciding a motion to dismiss. Nor do the parties dispute that every one of these documents contains a blocker provision that limited Plaintiff's beneficial ownership to approximately 4.9%.*fn1

Plaintiff responds with a number of unpersuasive arguments that attempt to defeat Defendant's attack on the sufficiency of the Complaint.

Plaintiff first argues that it has sufficiently alleged being a 10% beneficial owner because of §§ 6.1 and 7.2 of the Series C Stock Certificate. The Complaint states:

(c) The Certificate of Designation also provided that the Series C Stock had unrestricted voting rights based upon the amount of shares of Common Stock into which the Series C Stock was convertible by stating that: "The Series C Preferred Shares shall have voting rights on an as converted basis together with the Common Stock shareholders and as otherwise provided under the laws of the State of Delaware." Certificate of Designation § 6.l. These voting rights were not dependent upon any other right, preference or limitation contained elsewhere in the Certificate of Designation. See Certificate of Designation § 7.2. (Compl. ¶ 34(C).) At issue here is whether this Court will treat the assertion that the voting rights were unrestricted as a well-pleaded fact to be credited, or as an unsupported legal conclusion not to be credited.

Defendant makes two points which persuade this Court that the characterization of the voting rights as unrestricted is conclusory and not adequately supported by the Complaint. First, Defendant contends that the language of § 6.1, which gives voting rights on an "as converted basis," indicates that the owner of these shares could not have greater voting rights before conversion than he could after conversion, or, "as converted." Thus, the phrase "as converted" incorporates the restriction of the blocker provision. Second, Defendant contends that Plaintiff's reliance on § 7.2 is misplaced, given the full text of that section:

7.2. Severability of Provisions. If any right, preference or limitation of the Series C Preferred Shares set forth herein (as this resolution may be amended from time to time) is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other rights, preferences and limitations set forth in this resolution (as so amended) which can be given effect without the invalid, unlawful or unenforceable right, preference or limitation shall, nevertheless, remain in full force and effect, and no right, preference or limitation herein set forth shall be deemed dependent upon any other such right, preference or limitation unless so expressed herein.

(Compl. Ex. B.) As Defendant points out, the plain language of this provision limits its application to situations in which a provision has been found invalid or unlawful. It is not a general rule of construction for the Certificate: it would not appear to operate so as to prevent § 6.1 from incorporating the blocker provision.

Defendant has persuaded this Court that the characterization of the Series C Stock voting rights in paragraph 34(c) of the Complaint as unrestricted is not a well-pleaded factual allegation, and, for the purpose of this motion to dismiss only, it will not be credited as true. This does not constitute a ruling on the interpretation of the Series C Stock Certificate with any preclusive effect. This Court rejects Plaintiff's argument that he has sufficiently alleged 10% ownership based on paragraph 34(c) of the Complaint.

Plaintiff next argues that NeoMedia's defaults caused YA Global to become a 10% beneficial owner by August 17, 2006. Yet, as Defendant notes, Plaintiff concedes that, from August 17, 2006 "until at least the end of 2008, at which time the defaults were purportedly cured, YA was a 10% beneficial owner." (Pl.'s Opp. Br. 14.) As Defendant observes, given that the earliest date of any transaction complained of is November 20, 2009 (Compl. ¶ 70), the fact that Plaintiff had once been a 10% beneficial owner, but was no longer one at the time the transactions at issue occurred, would appear to be irrelevant to the question of whether Plaintiff was a 10% beneficial owner during the time period of interest. This Court finds that Plaintiff's default theory does not rescue the Complaint from its failure to sufficiently allege 10% beneficial ownership.

Plaintiff next contends that, pursuant to the creation of standby equity lines of credit, sufficient shares of stock were deposited into escrow, with no operative blocker provision, that Plaintiff became a 10% beneficial owner. As Defendant observes, the problem with this argument is that it relies on matters outside the Complaint: Plaintiff has not pointed to factual allegations in the Complaint which support this theory. As a ...

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