Barilli v. Sky Solar Holdings, Ltd.

• Decision Date: 23 May 2019
• Docket Number: No. 17 CV 4572-LTS-DCF,17 CV 4572-LTS-DCF
• Citation: 389 F.Supp.3d 232
• Parties: Andrew BARILLI and Ronald Pena, Individually and on Behalf of All Others Similarly Situated, Plaintiffs, v. SKY SOLAR HOLDINGS, LTD., Weili Su, Jianmin Wang, Yi Zhang, Xiaoguang Duan, Hao Wu, Dongliang Lin, Rorth Capital Partners, LLC, and Northland Securities, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

389 F.Supp.3d 232

Andrew BARILLI and Ronald Pena, Individually and on Behalf of All Others Similarly Situated, Plaintiffs,

v.SKY SOLAR HOLDINGS, LTD., Weili Su, Jianmin Wang, Yi Zhang, Xiaoguang Duan, Hao Wu, Dongliang Lin, Rorth Capital Partners, LLC, and Northland Securities, Inc., Defendants.

No. 17 CV 4572-LTS-DCF

United States District Court, S.D. New York.

Signed May 23, 2019

Andrew Eugene Lencyk, Robert Craig Finkel, Wolf Popper LLP, Joseph Alexander Hood, II, Jeremy Alan Lieberman, Pomerantz LLP, New York, NY, Fei-Lu Qian, Saxena White P.A., White Plains, NY, for Plaintiffs.

Anthony B. Ullman, Dentons US LLP, Roger Allen Cooper, Jared Mitchell Gerber, Russell A. Mawn, Cleary Gottlieb Steen & Hamilton LLP, New York, NY, for Defendants.

MEMORANDUM OPINION AND ORDER

LAURA TAYLOR SWAIN, United States District Judge

Andrew Barilli and Ronald Pena ("Plaintiffs") bring this action against Sky Solar Holdings, Ltd. ("Sky"), Roth Capital Partners, LLC ("Roth"), and Northland Securities, Inc. (together the "Underwriter Defendants"), Weili Su, Jainmin Wang, Yi Zhang, Xiaoguang Duan, Hao Wu, and Dongliang Lin (collectively, the "Defendants"), asserting claims for violations of section 11 of the Securities Act of 1933 ("the Securities Act"), 15 U.S.C. § 77k ("Section 11"), section 15 of the Securities Act, 15 U.S.C. § 77o ("Section 15"), section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b) ("Section 10(b)") and 17 C.F.R. § 240.10b-5 ("Rule 10b-5"), and section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a) ("Section 20(a)"). (Second Consolidated Amended Class Action Complaint (the "SAC"), Docket Entry No. 56.) Defendants Sky, Wang, and the Underwriter Defendants (the "Moving Defendants") move to dismiss the SAC pursuant to Federal Rule of Civil Procedure 12(b)(6). (Docket Entry No. 65.)

The Court has jurisdiction of this action pursuant to 28 U.S.C. section 1331 and 15 U.S.C. sections 77v and 78aa.

The Court has considered the parties' submissions carefully and, for the following reasons, grants the Moving Defendants' motion to dismiss the SAC.

BACKGROUND I.

The following facts are alleged in the SAC and are taken as true for the purpose of resolving the Moving Defendants' motion to dismiss.

Sky is a solar power company incorporated in the Cayman Islands with its principal place of business in Hong Kong. (SAC ¶ 27.) Founded in 2009 by Su, Sky began by developing and selling solar power systems to operators, which would generate revenues by selling electricity to power grid operators. (Id. ¶¶ 28, 57.) In 2013, Sky began to shift its business model away from developing solar projects for sale in favor of becoming an independent power producer ("IPP"), which would develop solar projects and operate them, producing revenue through the sale of electricity to grid operators. (Id. ¶ 58.)

Su was Sky's largest shareholder, as well as its CEO, and executive director, controlling 49.5% of Sky's voting shares as of 2014. (SAC ¶¶ 28, 83-84.) Prior to founding Sky, Su had worked in the solar power industry since 2005, founding several companies that developed and constructed solar power projects. (Id. ¶ 79.) Prior to and throughout his tenure with Sky, Su has had an interest in or affiliation with 37 companies, including many in the solar power sector in China. (Id. ¶ 87-90.) From 2011 through June 2014, various Chinese courts entered at least seven judgments against him for a cumulative liability of $44 million for avoiding civil debt. (Id. ¶¶ 77, 92.)

A confidential witness, who apparently did not reveal himself until after the First Amended Complaint ("FAC," Docket Entry No. 34) was filed, informed Plaintiffs that, in January 2011, Su engineered a transaction to transfer the stock held indirectly by Sky's predecessor in Sky Solar Deutschland GmbH ("SSD") to Minquan Fu, a close associate who was the managing director of another Sky subsidiary, for one euro, in exchange for a waiver of receivables, purportedly to reduce Sky's "net liabilities and focus its resources and working capital on geographic areas." (SAC ¶¶ 94, 96-98; Prospectus at F-65.) The confidential witness asserts that Fu then transferred the stock to other Sky subsidiaries and that the transaction was engineered to avoid creditors. (SAC ¶¶ 96, 99.) On November 18, 2010, the confidential witness, who was at the time a managing director of SSD, confronted Su about the propriety of the transaction. (SAC ¶¶ 102-106.) The confidential witness asserts that Su cheated him out of his ownership interest in Sky. (Id. ¶ 107.)

In 2008, Su supervised the largest solar project in Spain through Sky Global, a predecessor of Sky. (Id. ¶¶ 142, 145.) According to Plaintiffs' confidential witness, who worked for Su on the project, €30 million went missing from Sky Global's accounts and a subsequent 2010 investigation concluded that two of Sky Global's local partners had diverted this money through fraudulent means. (Id. ¶¶ 146-47.) The confidential witness asserts that, after this incident, Sky and other companies associated with Su were no longer able to secure construction financing from banks. (Id. ¶ 148.) Sky was only able to secure financing through vendors that produced low quality solar modules that were used to construct the projects, resulting in Sky's subsequent sale of low-quality solar projects. (Id. ¶¶ 148-49)

Prior to November 2014, Sky began developing solar projects in Japan and started to develop such projects in Chile. (Id. ¶¶ 13, 17, 73, 193.) Following the meltdown of the Fukushima Daiichi nuclear power plant, Japan engaged in an effort to decrease its reliance on nuclear energy in favor of a diverse group of other sources, including solar power. (Id. ¶ 168.) The Japanese government enacted the Act on the Purchase of Renewable Energy Sourced Electricity by Electric Utilities, which introduced a program of feed-in-tariffs ("FIT") in July 2012 that subsidized the generation of electricity from renewable sources through surcharges on electricity customers. (Id. ¶¶ 169, 181 (citing Daniel Cusick, "Power Companies in Japan Move to Restrict Solar," Scientific American, E&E News (October 2, 2014) ("Cusick Article"), available at https://www.scientificamerican.com/article/power-companies-in-japan-move-to-restrict-solar/ (last visited May 22, 2019)).) The first iteration of this subsidy was set at 40 yen/kilowatt hour and spurred the private sector to build 11,000¹ MW of solar generation between 2012 and September 2014, with an additional 72,000 MW of capacity in development as of October 2014. (Id. ) Japan's Ministry of Economy, Trade and Industry ("METI") lowered the FIT rate to 36 yen/kilowatt hour in 2013 and 32 yen/kilowatt hour in April 2014. (Id. ) In September 2014, five of Japan's 10 utility companies suspended consideration of procurement of electrical power from renewable sources. (Id. ¶ 170; see also Cusik article.) In addition to these developments, other trends were undermining the market for solar power in Japan, including: (1) a sudden glut of solar power generation projects, which were being developed too rapidly and were also using up too much of Japan's open spaces² ; (2) the inability of the Japanese power transmission grids to accommodate the increased generation of solar power;³ (3) government policy, embodied in the April 2014 Strategic Energy Plan, to diversify Japanese power generation capabilities with a greater emphasis on nuclear and coal-fueled plants in order to provide a more stable and economical power supply, (SAC ¶¶ 176-180); and (4) increasing concern about funding the FIT payments through burdensome surcharges on the end-user of the electricity.^{4 ,5} (Id. ¶¶ 181-83.)

Plaintiffs allege that FIT rates in the Japanese market continued to fall, and that these reductions were enacted in a manner intended to apply the lower rates to projects that were in the pipeline and dissuade solar builders from seeking quick approval to lock in a favorable FIT rate while delaying construction in anticipation of falling construction costs. (SAC ¶ 185(c).) Plaintiffs allege that this dynamic had the effect of incentivizing Sky to accelerate construction, forsaking probable future reductions in construction costs, to secure favorable FIT rates before they were further reduced, but Plaintiffs do not allege that such acceleration actually occurred. (Id. )

In Chile in 2014, grid access for solar power providers was restricted due to increased solar production in that country, thus limiting the number of new solar projects that could be undertaken.⁶ A report on the trends to expect in 2015 noted that, in 2016, the lack of grid capacity would limit new solar projects.⁷ Specifically, Sky sought to build projects in northern Chile, where the power grid was not connected to the grid serving the more populous central region of the country. (SAC ¶¶ 197, 202.) In 2016, the general manager for Accoina SA's Chile energy unit stated that this situation, arising from a lack of grid capacity, was expected. (Id. ¶ 201 (quoting Dezem Article).) Plaintiffs further allege that electricity prices in Chile were depressed due to oversupply. (Id. ¶ 196.)

On April 15, 2014, Sky filed its first draft registration statement, including a draft prospectus, with the SEC in connection with an initial public offering ("IPO") of American Depositary Shares ("ADS"). (SAC ¶ 66.) The registration statement and prospectus were amended five times; the final registration and prospectus, dated November 13, 2014⁸ (the "Prospectus," Docket Entry No. 66-2), was filed on November 14, 2014. (Id. ¶ 68.)

In its third draft of the registration statement, Sky contemplated offering 12.5 million ADSs at a maximum price of $12 per ADS, with an overallotment option for 1,875,000 shares, which would raise approximately $121.9 million dollars. (Id. ¶ 70; Registration Statement Form F-1, Amendment 3, Docket Entry No. 66-3, at 48.) Due to lower than anticipated demand, Sky offered,...