Jing v. Weyland Tech, Inc.

Decision Date15 June 2017
Docket NumberCIVIL ACTION NO. 17-446
PartiesJING JING v. WEYLAND TECH, INC., et al.
CourtU.S. District Court — District of Delaware
MEMORANDUM

KEARNEY, J.

Shareholders claiming a company violated Delaware securities registration and transfer statutes must plead the specific violation of the statute. A statute identifies the exact claim and, absent pleading of the claim, we cannot assume or infer facts based upon conclusions. When, as here, Plaintiff shareholder alleges a Delaware corporation failed to remove a restrictive legend on her stock certificate violative the Delaware Code, the shareholder must specifically plead she presented the certificate to the corporation or transfer agent. The shareholder admits she did not plead this element but asks we infer the presentment. We cannot fairly infer this required element of her claim. As the shareholder failed to specifically plead presenting her security necessary to impose a duty on the corporation to register the transfer of her stock, we must dismiss her Complaint without prejudice to be promptly amended to meet the statutory prerequisites so long as counsel can do so under Fed. R. Civ. P. 11.

I. Alleged facts.

In April 2016, Duan Jing Jing bought 800,000 shares of Delaware corporation Weyland Tech, Inc. ("Weyland")1 from Ms. Lee Gaik Hong.2 Weyland issued stock Certificate Number 1397 to memorialize the purchase.3 The certificate included a restrictive legend preventing the shares from being sold.4 To sell the shares, Weyland must remove the restrictive legend.5 Weyland, through its CEO, said it would attempt to remove the restrictive legend and re-issue the shares as non-restricted after a mandatory holding period.6

In March 2017, Ms. Jing Jing sought to remove the restrictive legend.7 Ms. Jing Jing's attorney, Matheau Stout, sent a Rule 144 opinion letter to the transfer agent, Nevada Agency and Transfer Company ("Transfer Company").8 Attorney Stout provided the documents required under Rule 144 of the Securities Act of 1933.9

Weyland declined to remove the restrictive legend from the certificate.10 It cited a complaint from a foreign court ("the Singapore Complaint") claiming the shares originally issued to Ms. Lee Gaik Hong had been canceled.11 This cancellation in turn rendered Ms. Jing Jing's ownership invalid, because she purchased her shares from Ms. Lee Gaik Hong.12 If true, Attorney Stout agreed the removal of the restrictive legend would be improper.13 He offered to withdraw his request to have the legend removed if Weyland could support its allegations.14

Weyland did not provide documents to support the Singapore Complaint.15 Nor did Weyland oppose Attorney Stout's Rule 144 opinion letter.16 Weyland did issue an 8-K,17 which mentioned the Singapore Complaint, but Ms. Jing Jing found the 8-K did not sufficiently support those claims.18 Despite Ms. Jing Jing's multiple attempts, Weyland and the Transfer Companyrefused to remove the restrictive legend.19

II. Analysis

Following a month of failed attempts to remove the restrictive legend, Ms. Jing Jing sued Weyland and the Transfer Company under §§ 8-401, 403, and 407 of the Delaware Code.20 Section 8-401, which describes an issuer's duty to register the transfer of securities, applies to the removal of a restrictive legend because a removal is deemed a registered transfer.21 Section 8-407 extends the issuer's duty to transfer agents.22 Section 8-401(b) provides liability "if an issuer is under a duty to register a transfer" and either refuses or causes unreasonable delay.23 Under § 8-403(b), if there is an adverse claim regarding the security (e.g. the Singapore Complaint), the issuer is allowed to refuse to register transfer for a reasonable period while it investigates the adverse claim, but this time period is not to exceed thirty days.24

Ms. Jing Jing alleges Defendants violated § 8-401 by not removing the restrictive legend when they had a duty to do so. She argues Defendants cannot use the Singapore Complaint as a justification for refusal under § 8-403(b) because the period the statute provided to substantiate the adverse claim had expired.25 Ms. Jing Jing also alleges Defendants caused tortious interference with business advantage by prohibiting her from selling her shares.26 She alleges conversion because Defendants exercised improper control over her shares.27 She seeks a mandatory injunction requiring Defendants to remove the restrictive legend.28

Defendants move to dismiss for failure to state a claim.29 They argue Ms. Jing Jing fails to allege she presented her security, and presenting the security is required to impose a duty on an issuer to register transfer.30 Because she did not allege she presented her security, she cannotallege they violated §§ 8-401 and 407.31 If they did not violate the statute, Defendants argue finding liability for tortious interference with prospective business advantage, conversion, and granting an injunction to compel them to transfer must also be dismissed.32

Ms. Jing Jing argues she alleged presenting the security because she alleged she is eligible to have the restrictive legend removed.33 She argues we should infer compliance with the statute's requirements from her alleged eligibility to have the legend removed.34

A. Ms. Jing Jing does not state a claim for violations of §§ 8-401 and 407.

Under § 8-401(a), "[i]f a certificated security in registered form is presented to an issuer with a request to register transfer ... the issuer shall register the transfer as requested" as long as various preconditions are met. Ms. Jing Jing possesses a certificated security.35 Because her security is certificated, the statute requires her to do two things to impose a duty on Defendants to register the transfer: (1) she must present her certificated security, and (2) she must accompany the security with a request to register the transfer. Under § 8-401(b), the issuer will only face liability if it had "a duty to register a transfer" and it refused to do so or unreasonably delayed.

1. Presenting the security is required by § 8-401 and 8-403.

Presenting the certificated security is not a technicality. In a registered transfer involving the removal of a restrictive legend, new shares free of the restrictive legend would issue.36 Without presenting the security, duplicate shares would exist, and the issuer would be liable for litigation arising out of both the re-issued shares and the old shares.37 "Perhaps the most obvious requirement that must be satisfied before the issuer's duty to register a transfer arises, is that thecertificate be presented."38

Presenting the security is a requirement for finding a duty to register transfer under § 8-401.39 "The issuer has a duty to register a transfer of shares that are presented to the issuer in registered form together with a request to register the transfer."40 The issuer only "has a duty to register a transfer ... upon satisfaction of several conditions including presentation of the security."41 When plaintiff "has not presented the security in registered form to [the issuer], there is no duty on the issuer to register a transfer."42

We are not persuaded by Kolber v. Body Central Corp, where the court held "[t]he only 'essential first step' that had to occur before the restrictive legend could be removed was that a Rule 144 opinion letter had to be provided to the transfer agent."43 The context in Kolber is distinguishable because the issuer consented to remove the restrictive legend, and in fact supplied the Rule 144 opinion letter, while the plaintiffs argued more requirements needed to be met. The court sought to clarify the issue: after receipt of a Rule 144 opinion letter, an issuer is free to waive any other requirement in § 8-401 and proceed with removal of the restrictive legend, regardless of whether it is under a duty to do so.44

2. Ms. Jing Jing does not allege facts sufficient to show Defendants violated §§ 8-401 and 8-407.

To allege liability under § 8-401 and 407, Ms. Jing Jing needs to show Defendants, having been presented with a certificated security and a proper request to register transfer, failed or refused to do so. As plead, she alleges only making a proper request to register transfer through Attorney Stout's Rule 144 opinion letter. A proper request by itself does not trigger a requirement for the issuer to register the transfer. If the issuer never had a duty to register thetransfer, it is not liable for failing or refusing to do so.45

Ms. Jing Jing pleads, in purely conclusory fashion, her eligibility to have the restrictive legend removed means she must have complied with the statute.46 Because she complied, she argues, Defendants' refusal to remove her restrictive legend violates § 8-401.47 Under Ashcroft v. Iqbal, however, "recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice."48 All reasonable inferences must be made for Ms. Jing Jing, but we do not infer compliance with the statute's requirements from her alleging eligibility to have the restrictive legend removed.49 Without alleging she presented the security, alleging eligibility is "a formulaic recitation of the elements of a cause of action,"50 and as such is "not entitled to the assumption of truth."51

Without alleging she presented her certificated security, Ms. Jing Jing cannot claim Defendants violated §§ 8-401 and 407, because an issuer's duty to register transfer arises only if "a certificated security in registered form is presented to an issuer with a request to register transfer." We dismiss her claim for a violation of §§ 8-401 and 8-407.

B. Ms. Jing Jing does not state a claim for tortious interference with prospective business advantage.

Ms. Jing Jing also alleges tortious interference with prospective business advantage because Defendants' failure to remove the restrictive legend delayed her sale of the shares and will cause her to lose money if the share price declines.52...

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