Francisco v. Abengoa, S.A.

Decision Date21 August 2020
Docket Number15 Civ. 6279 (ER)
Citation481 F.Supp.3d 179
Parties Michael FRANCISCO, individually and on behalf of all others similarly situated, Plaintiff, v. ABENGOA, S.A., Santiago Seage, Manuel Sanchez Ortega, Barbara Zubiria, and Ignacio Garcia Alvear, Defendants.
CourtU.S. District Court — Southern District of New York

Adam M. Apton, Levi & Korsinsky, LLP, New York, NY, for Plaintiff.

Richard Francis Hans, Jr., Jeffrey David Rotenberg, Marc Aaron Silverman, DLA Piper US LLP, Timothy E. Hoeffner, McDermott Will & Emery, New York, NY, for Defendant Abengoa, S.A.

Joseph S. Allerhand, Stephen Alan Radin, Weil, Gotshal & Manges LLP, New York, NY, for Defendant Manuel Sanchez Ortega.

Richard A. Rosen, Edward Charles Robinson, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Defendants Canaccord Genuity Inc., HSBC Securities (USA) Inc., Societe Generale.

Richard A. Rosen, Paul Weiss, New York, NY, for Defendant Merrill Lynch International.


Ramos, D.J.:

Lead Plaintiffs Jesse and Arlette Sherman and plaintiff PAMCAH-UA Local 675 Pension Fund (collectively, "Plaintiffs"), bring this federal securities class action against Abengoa S.A. ("Abengoa"); Manuel Sanchez Ortega, Abengoa's former Chief Executive Officer ("CEO"); Christopher Hansmeyer, the duly authorized representative for Abengoa in the United States; and HSBC Securities (USA) Inc., Banco Santander S.A., Canaccord Genuity Inc., Merrill Lynch International, and Société Générale, investment banks that served as underwriters for Abengoa's United States offering (together, the "Underwriter Defendants"). Plaintiffs seek to pursue remedies under Sections 11 and 15 of the Securities Act of 1933 (the "Securities Act"), as well as under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5, promulgated thereunder. Plaintiffs bring their Securities Act claims on behalf of purchasers of Abengoa ADSs pursuant or traceable to Abengoa's public offering on October 17, 2013. They bring their Exchange Act claims on behalf of purchasers of Abengoa's American Depositary Shares ("ADSs") between October 17, 2003 and August 3, 2015 (the "Class Period").

Before the Court are three motions to dismiss Plaintiffs’ Second Amended Complaint, filed by Abengoa, Doc. 115, Sanchez Ortega, Doc. 113, and the Underwriter Defendants, Doc. 109. Defendants also jointly request oral argument. Doc. 136. For the following reasons, the motions to dismiss are GRANTED, and the request for oral argument is dismissed as moot.

A. Factual Background

Abengoa, founded in 1941, is an engineering and clean technology company headquartered in Spain. Doc. 88 ¶¶ 20, 40–41. Sanchez Ortega served as Abengoa's CEO from March 2010 until his resignation on May 19, 2015, and Hansmeyer was its duly authorized representative in the United States. Id. ¶¶ 21–22. This action relates to Abengoa's October 17, 2013 public offering on the NASDAQ Global Select Market (the "NASDAQ") for €517.5 million, which the Underwriter Defendants underwrote, and to the subsequent series of events culminating in the company's filing for insolvency and bankruptcy. Id. ¶¶ 24, 227–38. Lead Plaintiffs Jesse and Arlette Sherman and Plaintiff PAMCAH-UA Local 675 Pension Fund purchased Abengoa's ADSs during the Class Period. Id. ¶ 19. Specifically, the Shermans began trading Abengoa ADSs beginning November 18, 2014, Doc. 7, Ex. 1, and PAMCAH-UA Local 675 Pension Fund first purchased Abengoa ADSs on April 6, 2015, Doc. 12, Ex. 1. The following facts are taken from Plaintiffs’ Second Amended Complaint and are assumed to be true for purposes of the instant motions.

1. The Offering

On October 4, 2013, in preparation for the offering, Abengoa filed a Registration Statement with the SEC on Form F-1, offering U.S. investors Class B shares in the form of ADSs, each of which represented the right to receive five Class B shares. Id. ¶ 46. The Underwriter Defendants helped to draft and disseminate the Registration Statement, and Sanchez Ortega and Hansmeyer signed it. Id. ¶¶ 21–26.

At the time of the offering, Abengoa was comprised of 532 subsidiaries, 17 associates, and 34 ventures, and was operating in over 70 countries. Id. ¶ 41. Because Abengoa engaged in large engineering and construction projects throughout the world, cash flow and liquidity were highly material to investors. Id. ¶ 42. Abengoa used two types of debt: recourse debt and non-recourse debt. Id. ¶ 43. Recourse debt—also referred to as "corporate debt"—was guaranteed by Abengoa. Id. Non-recourse debt, which was used to finance specific projects, was guaranteed by the assets and cash flows of the "project companies" formed to carry out those projects. Id. In other words, non-recourse debt was not secured by Abengoa in the event of a default. Id. The company's recourse debt was subject to a debt ratio covenant with its lenders. Id. ¶ 44. As per the covenant, Abengoa was required to maintain a "leverage" ratio of debt-to-earnings before interest, taxes, depreciation and amortization ("EBITDA") below 3.0x until December 30, 2014, and below 2.5x thereafter. Id. ¶¶ 3, 44.

As is relevant to the instant action, the Registration Statement made representations about Abengoa's cash flow and liquidity, its debt usage and financing for long-term projects, and its accounting policies. Id. ¶¶ 52–58; 103–111. According to the Registration Statement, as of June 30, 2013, Abengoa had recourse debt of €5,252 million, non-recourse debt of €5,297.6 million, and €3,221.7 million in cash equivalents and short-term financial investments, resulting in a total net debt (including other loans and borrowings) of €7,327.9 million. Id. ¶ 103. The Registration Statement also contained the following language regarding its operations for financing construction projects:

We have successfully grown our business while seeking to enforce strict financial discipline to maintain our strong liquidity position. As of June 30, 2013, we had cash and cash equivalents and short-term financial investments of €3,222 million, which we believe are sufficient to satisfy our short-term liquidity needs. This strong cash position also assists in bidding for large projects ....
* * *
While we generally seek to maintain a balance of non-recourse debt and corporate debt to encourage financial discipline, the majority of our capital expenditures are financed by non-recourse debt and funding, when applicable, from partners in a particular project. We incur corporate debt to finance our investments, acquisitions and general purpose requirements. Our corporate debt has the benefit of upstream guarantees from our operating subsidiaries which are subject to debt/EBITDA ratios as discussed above. The funding of our corporate capital expenditure is covered by existing cash and corporate EBITDA generation. We incur non-recourse debt on a project-by-project basis, and we do not commit to any projects that we have been awarded prior to securing long-term financing.

Id. ¶¶ 52, 105 (emphasis in the complaint). It also contained the following statement regarding Abengoa's "percentage-of-completion" accounting policy:

Revenue from construction contracts is recognized using the percentage-of completion method for contracts whose outcome can be reliably estimated and it is probable that they will be profitable. When the outcome of a construction contract cannot be reliably estimated, revenue is recognized only to the extent it is probable that contract costs incurred will be recoverable.
As described in Note 2.26.b) to our Annual Consolidated Financial Statements and our Interim Consolidated Financial Statements, the percentage of completion is determined at the date of every consolidated statement of financial position based on the actual costs incurred as a percentage of total estimated costs for the entire contract.
Revenue recognition using the percentage-of-completion method involves the use of estimates of certain key elements of the construction contracts, such as total estimated contract costs, allowances or provisions related to the contract, period of execution of the contract and recoverability of the claims. We have established, over the years, a robust project management and control system, with periodic monitoring of each project. This system is based on the long-track experience of the Group in constructing complex infrastructures and installations. As far as practicable, we apply past experience in estimating the main elements of construction contracts and rely on objective data such as physical inspections or third parties [sic ] confirmations. Nevertheless, given the highly tailored characteristics of the construction contracts, most of the estimates are unique to the specific facts and circumstances of each contract.

Id. ¶¶ 57, 110 (emphasis in complaint).

On October 16, 2013, Abengoa filed a Prospectus, which formed part of the Registration Statement and increased the offering from 182,500,000 shares to 250,000,000, as well as set the price of each ADS at $12.18. Id. ¶ 47. On October 17, 2013, the company went public in the United States and began selling its ADSs on the NASDAQ exchange. Id. ¶ 48. Abengoa realized €517.5 million in gross proceeds from the offering, or roughly $703.8 million. Id. ¶ 49. Abengoa represented that it intended to use the proceeds from the offering to repay €347 million in corporate debt maturities due in 2013. Id. ¶ 50.

2. Positive Financial Reports

After the offering, Abengoa made several reports of positive financial results. On November 11, 2013, Abengoa reported its financial results for the nine months ending September 30, 2013. Id. ¶ 112. It reported that its EBITDA had risen 29% year-over-year and that Abengoa was accelerating its deleverage targets. Id. At subsequent conference calls, Sanchez Ortega reiterated these results and remarked positively on the company's financial position, leverage, cash flow, and EBITDA. Id. ¶¶ 113–117. Abengoa's...

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