In re Facebook, Inc., IPO Sec. & Derivative Litig.

• Decision Date: 13 February 2013
• Docket Number: Nos. 12 Civ. 4156,12 Civ. 7815.,12 Civ. 7553,MDL No. 12–2389.,12 Civ. 7549,s. 12 Civ. 4156
• Citation: 922 F.Supp.2d 445
• Parties: In re FACEBOOK, INC., IPO SECURITIES AND DERIVATIVE LITIGATION.
• Court: U.S. District Court — Southern District of New York

922 F.Supp.2d 445

In re FACEBOOK, INC., IPO SECURITIES AND DERIVATIVE LITIGATION.

MDL No. 12–2389.

Nos. 12 Civ. 4156, 12 Civ. 7549, 12 Civ. 7553, 12 Civ. 7815.

United States District Court,

S.D. New York.

Feb. 13, 2013.

Gregory Linkh, Esq., Michael M. Goldberg, Esq., Glancy Binkow & Goldberg LLP, Brian Philip Murray, Esq., Murray Frank LLP, New York, NY, Mark Robert Rosen, Esq., Stephen R. Basser, Esq., Barrack, Rodos & Bacine, Philadelphia, PA, for Plaintiff Edward Childs.

Joseph P. Guglielmo, Esq., Deborah Clark–Weintraub, Esq., Scott & Scott, New York, NY, Scott D. Egleston, Esq., Law Offices of Scott D. Egleston, North Miami Beach, FL, for Plaintiff Lidia Levy.

Shane Sanders, Esq., Brian J. Robbins, Esq., Felipe J. Arroyo, Esq., Gina Stassi, Esq., Robbins Arroyo, LLP, San Diego, CA, for Plaintiffs William Cole and Hal Hubuschman.

Andrew B. Clubok, Esq., Brant Warren Bishop, Esq., Elizabeth L. Deeley, Esq., James Francis Basile, Esq., Susan Elisabeth Engel, Esq., Kirkland & Ellis LLP, New York, NY, Richard D. Bernstein, Esq., Tariq Mundiya, Esq., Todd G. Cosenza, Esq., Elizabeth J. Bower, Esq., Willkie Farr & Gallagher LLP, Washington, DC, for the Facebook Defendants.

OPINION & ORDER

SWEET, District Judge.

Plaintiffs William Cole (“Cole”), Hal Hubuschman (“Hubuschman”) and Linda Levy (“Levy”) (collectively, the “Plaintiffs”) have moved to remand their shareholder derivative actions (the “Removed Actions”) ¹ to the Superior Court of the State of California, County of San Mateo (the “California State Court”), pursuant to 28 U.S.C. § 1447(c). Plaintiffs originally filed their respective complaints in the California State Court on behalf of shareholders, charging certain officers and directors of Facebook, Inc. (“Facebook” or the “Company”) (collectively, the “Facebook Defendants”) ² with breach of their fiduciary duties, waste of corporate assets and unjust enrichment. Facebook Defendants removed the Removed Actions to the Southern District of New York and Plaintiffs now move to remand the case back to California State Court.

Facebook Defendants contend that certain threshold grounds for dismissal should be considered before Plaintiffs' motions to remand. Facebook Defendants have accordingly moved to dismiss Plaintiffs' Removed Actions as well as Plaintiff Edward Childs' (“Childs,” together with the Plaintiffs, the “Derivative Plaintiffs”) derivative action ³ (together with the Removed Actions,the “Derivative Actions”) on the independent grounds of venue, standing and ripeness, pursuant to Rules 12(b)(1), 12(b)(3) and 12(b)(6) of the Federal Rules of Civil Procedure, and the standing and demand requirements of Rule 23.1 of the Federal Rules of Civil Procedure.

Upon the facts and conclusions set forth below, Facebook Defendants' threshold grounds for dismissal will be resolved first, and their motion to dismiss is granted on the basis of standing and ripeness, but denied as to venue. Having granted Facebook Defendants' motion to dismiss, the Plaintiffs' motions to remand are denied as moot.

I. Prior Proceedings and Facts

The facts and prior proceedings underlying this action are set out in this Court's May 9, 2012 Opinion, In re Facebook IPO Secs. & Derivative Litig., 899 F.Supp.2d 1374 (S.D.N.Y.2012), familiarity with which is assumed. Accordingly, only facts relevant to this action will be provided below.

The Derivative Actions arise out of events in connection with the May 18, 2012 initial public offering (“IPO”) of Facebook.

On February 1, 2012, in preparation for its IPO, Facebook filed a Form S–1 Registration Statement with the U.S. Securities Exchange Commission (the “SEC”). Facebook subsequently amended the registration statement several times, including on February 1, and April 23, 2012, before filing their final Form S–1/A on May 16, 2012 (the “Registration Statement”).⁴ The Registration Statement expressed caution about revenue growth due to a rapid shift by users to mobile devices, stating that,

Based upon our experience in the second quarter of 2012, to date, the trend we saw in the first quarter of [daily active users] increasing more rapidly than the increase in number of ads delivered has continued. We believe this trend is driven in part by increased usage of Facebook on mobile devices where we have only recently begun showing an immaterial number of sponsored stories in News Feed, and in part due to certain pages having fewer ads per pages as a result of product decisions,

(Clubok Decl. 11/14/12, Ex. E at 57; see also Childs Compl. ¶ 28, Levy Compl. ¶ 47).

On May 15, 2012, General Motors announced that it was pulling its advertising business from Facebook, stating that Facebook ads were less effective than other forms of advertising. (Childs Compl. ¶ 29). According to the Derivative Plaintiffs' complaints, despite such negative news, Facebook's final Registration Statement stated that the Company, “in consultation with the underwriters,” had increased the IPO price range from between $28 and $35 to between $34 and $38 per share. (Cole Compl. ¶ 47).

In early May 2012, Facebook and its underwriters, including three lead underwriters, Morgan Stanley & Co. LLC (“Morgan Stanley”), J.P. Morgan Securities, LLC (“JP Morgan”), and Goldman, Sachs & Co. (“Goldman Sachs”) (collectively, the “Lead Underwriters”), participated in an IPO roadshow to provide potential investors with information about Facebook. On May 18, 2012, the Company filed a Form 424(b)(4) Prospectus (the “Prospectus”) with respect to the IPO (together with the Registration Statement, the “Offering Documents”). The Prospectus warned investors that, Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results....

We generate a substantial majority of our revenue from advertising. The loss of advertisers, or reduction in spending by advertisers with Facebook, could seriously harm our business.

(Clubok Decl. 12/5/12, Ex. 3; see also Levy Compl. ¶¶ 48, 49).

On May 18, 2012, the Company offered 421 million shares of Facebook common stock to the public at $38.00 per share on the NASDAQ stock exchange, thereby valuing the total size of the IPO at more than $16 billion.

On May 19, 2012, the day after the IPO, Reuters reported that Facebook “altered its guidance for research earnings last week, during the road show, a rare and disruptive move.” ⁵

On May 21, 2012, The New York Times reported that “[r]ivals involved in the Facebook underwriting process say that Morgan Stanley exerted an enormous amount of control over important aspects of the process” and “ignored some input about pricing.” ⁶ However, the article also stated that “others involved in the underwriting say that Morgan Stanley and other advisers held thousands of conversations with potential investors on what was a fair level, and that the $38 price was justified.” ⁷

Then, on May 22, 2012, prior to the start of trading, Reuters revealed that the Lead Underwriters had cut their earnings forecasts for the Company prior to the IPO, but that it was “unclear whether Morgan Stanley only told its top clients about the revised view or spread the word more broadly.” ⁸ That day, Facebook stock closed at $31.00 per share, which was 18.42% below the IPO price.

On May 22, 2012, Facebook's Restated Certification of Incorporation (the “Certificate”) was filed with the Delaware Secretary of State. The original certificate of incorporation (the “Original Certificate”) had been filed in Delaware under the corporate name TheFacebook, Inc. on July 29, 2004. The Certificate contained some amendments to the Original Certificate, including Article IX, which contained a “Choice of Forum” provision, stating:

Unless the corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for (1) any derivative action or proceeding brought on behalf of the corporation, (2) any action asserting a claim of breach of a fiduciary duty owed by, or other wrongdoing by, any director, officer, employee or agent of the corporation to the corporation or the corporation's stockholders, (3) any action asserting a claim arising pursuant to any provision of the General Corporation Law or the corporation's Restated Certificate of Incorporation or Bylaws, (4) any action to interpret, apply, enforce or determine the validity of the corporation's Restated Certificate of Incorporation or Bylaws or (5) any action asserting a claim governed by the internal affairs doctrine, in each such case subject to said Court of Chancery having personal jurisdiction over the indispensible parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the corporation shall be deemed to have notice of and consented to the provisions of this ARTICLE IX.

(Clubok Decl. 11/14/12, Ex. B at Art. IX).

Three out of four of the Derivative Actions were originally filed in the California State Court.⁹ According to the Derivative Plaintiffs' complaints, Facebook's executives selectively disclosed to the Lead Underwriters that certain negative trends were causing the Company's revenues to fall short of earlier estimates for the second quarter of 2012 during the roadshow. The Lead Underwriters allegedly, in turn, reduced their own earnings forecasts for the Company, and conveyed this information to a select group of potential investors, but not to the public at large.

The Derivative Plaintiffs maintain that the Facebook Defendants failed to disclose that the Company was, at the time of the IPO, experiencing a reduction in revenue growth due to an increase of users of its Facebook application and website through mobile devices rather than a traditional personal computer. (Cole Compl. ¶ 45, Levy Compl. ¶ 49). Th...