Visionchina Media Inc. v. S'holder Representative Servs., LLC

Decision Date11 June 2013
Citation2013 N.Y. Slip Op. 04298,109 A.D.3d 49,967 N.Y.S.2d 338
PartiesVISIONCHINA MEDIA INC., et al., Plaintiffs–Appellants, v. SHAREHOLDER REPRESENTATIVE SERVICES, LLC, et al., Defendants–Respondents, NIFSMBC–V2006S1 Investment Limited Partnership, et al., Defendants. Shareholder Representative Services, LLC, et al., Plaintiffs–Respondents–Appellants, v. VisionChina Media Inc., et al., Defendants–Appellants–Respondents. Shareholder Representative Services, LLC, et al., Plaintiffs–Respondents, v. VisionChina Media Inc., et al., Defendants–Appellants.
CourtNew York Supreme Court — Appellate Division

OPINION TEXT STARTS HERE

Arnold & Porter, LLP, New York (Charles G. Berry, Stewart D. Aaron and Ian Jay of counsel), for appellants/appellants-respondents.

Cahill Gordon & Reindel LLP, New York (Thomas J. Kavaler of counsel), for respondents/respondents-appellants.

Mintz & Gold LLP, New York (Steven G. Mintz and Terence W. McCormick of counsel), for Oak Investment Partners XII, Limited Partnership, respondent/respondent-appellant.

Akin Gump Strauss Hauer & Feld LLP, New York (David M. Zensky and Brian T. Carney of counsel), for Gobi Partners, Inc., Gobi Fund, Inc., and Gobi Fund II, L.P., respondents/respondents-appellants.

Spears & Imes LLP, New York (Linda Imes and Charlita Mays of counsel), for Sierra Ventures, IX, LP, respondent.

DAVID FRIEDMAN, J.P., LELAND G. DeGRASSE, ROSALYN H. RICHTER, PAUL G. FEINMAN, JJ.

FEINMAN, J.

In 2010, VisionChina Media, Inc. (VisionChina) and its wholly owned subsidiary Vision Best Limited (collectively, the buyers) acquired their then competitor, nonparty Digital Media Group Company Limited (DMG), from that company's shareholders and/or officers (the sellers). VisionChina is one of the largest out-of-home digital mobile television advertising networks in the People's Republic of China (PRC). It uses digital mobile technology to deliver advertising content to displays on public transportation systems across that country. DMG operated a digital media advertising network, and sold advertisements on a network of television screens across public transportation systems throughout the PRC.

Merger negotiations first commenced in 2008, but were unsuccessful because the buyers believed DMG, which had never turned a profit, was overpriced. They recommenced in the summer of 2009 when the buyers received oral representations that DMG had significantly improved its financial condition. On September 26, 2009, the buyers entered into a letter of intent to purchase, with the closing to occur on October 15, 2009, subject to a 21–day due diligence period. During due diligence, the buyers were provided with DMG's audited financial statements for the years 2006 through 2008. They were also given unaudited financial statements for January 1, 2009 to August 31, 2009 (the Management Accounts). The audited statements confirmed that DMG had never made a profit, and the Management Accounts bore out the sellers' representations that in 2009 there was increasing net income and decreasing losses. The buyers were also told that by September DMG had met or exceeded its costs, and that this upward trend would continue into the fourth quarter, the industry's peak season.

The Management Accounts and the oral representations were allegedly material in the buyers' decision to acquire DMG. The parties entered into an agreement on October 15, 2009, when they were provided with the unofficial September 2009 figures showing greater net revenues than expenses. The closing date was November 16, 2009; on this date the parties signed an Amended and Restated Agreement and Plan of Merger, wherein on January 2, 2010 (the Effective Time), DMG would be merged into one buyer's wholly owned subsidiary, and the buyers would acquire all of DMG's assets, including all electronicallystored data. The buyers could terminate the agreement prior to the Effective Time if “any of the representations and warranties [of the sellers] herein become untrue or inaccurate....”

The buyers covenanted that on the closing date, they would deposit $29,350,000 and shares into escrow as the “Effective Time Escrow Amount,” which would be released at the Effective Time. They further covenanted that at the Effective Time, they would issue and deliver to the sellers $100 million as initial consideration, consisting of cash and shares, and that on the next two anniversaries of the closing date, two deferred payments of another $30 million each comprised of cash and shares would be delivered. Of the initial consideration, the buyers would deposit nearly $50 million and shares into three separate escrow accounts, including an Indemnity Escrow Fund, and a segregated expense fund. Any amounts not subject to indemnity obligations would be disbursed to the shareholders after the first anniversary date.

The sellers warranted that both the audited financial statements and the Management Accounts were “true and complete” and prepared in accordance with industry standards (GAAP). Between the closing date and the Effective Time, sellers covenanted not to “transfer or dispose of ... any property, rights, businesses or assets (including Intellectual Property).” They would make reasonable efforts to provide a report by the accounting firm of Ernst & Young (E & Y report) concerning the Management Accounts by December 31, 2009. In the event they did not, the buyers could retain $2 million in the Indemnity Escrow Fund until receipt of the E & Y report.

The sellers would indemnify the buyers for any losses arising from their representations and warranties, upon a “claim notice” made by the buyers no later than November 16, 2010. This was the buyers' sole remedy after the January 2, 2010 Effective Date. The maximum shareholder liability for claims of breach of contract and fraud would be based on the number of shares held.

According to the sellers' complaint and the buyers' corresponding answer with defenses and counterclaims, the buyers timely funded the various escrow accounts, and at the Effective Time the buyers authorized the release of $100 million in initial consideration. The E & Y report was provided to the buyers a week early, nine days before the Effective Time. The E & Y report showed that DMG's revenue for the first eight months of 2009 was considerably lower, and its losses considerably higher, than the sellers had orally represented and as stated in the Management Accounts, and that DMG was on a downward trend. Nonetheless, the merger was completed on January 2, 2010. No later than April 2010, when the computer servers were physically transferred from the former DMG's custody to the buyers' custody, the buyers discovered that the electronic data stored on the former DMG servers had been wiped clean, and were not recoverable.

On November 16, 2010, the buyers served a claim notice that DMG's accounts receivable and other revenues had been overstated, as revealed in the E & Y report, and that the Management Accounts had not been prepared, as warranted, in accordance with GAAP. They claimed $2,785,633 in losses. No claims of fraud or breach of contract as to the lost data were made. The buyers did not make the first $30 million deferred payment on November 16, 2010, and did not pay the second in 2011.

Notwithstanding the fact that the parties' principal places of business are in China, as is that of DMG, pursuant to the choice of law and forum selection clauses of the merger agreement, the buyers and the sellers commenced separate lawsuits in New York. The buyers' complaint alleged four causes of action: fraudulent inducement, breach of contract, unjust enrichment, and a declaration that the sellers were not entitled to any further payments. The sellers' complaint alleged breach of contract and anticipatory breach of contract among other claims. In the latter action, the buyers' answer included five counterclaims, four mirroring those in their complaint and another alleging breach of contract based on the missing electronic files.

As the result of several motions and cross motions, and to the extent relevant here, the motion court granted the sellers' pre-answer motion to dismiss the buyers' complaint except for their breach of contract claim based on the accounts receivable discrepancies, and also the buyers' identical counterclaims in the sellers' action. The sellers were denied summary judgment on their complaint's first two causes of action alleging breach of contract for the buyers' failure to pay the two deferred payments in 2010 and 2011. They were granted two orders of attachment, totaling $60 million; the orders were subsequently confirmed. The buyers' fifth counterclaim in the sellers' action, for breach of contract based on failure to turn over the electronic data, was dismissed as time-barred but later reinstated under the doctrine of equitable recoupment as an affirmative defense to the sellers' claims of breach of contract. The buyers' cross motion to vacate or modify the previous orders, or for a hearing on the amount of the undertaking, was denied, although the court sua sponte directed the sellers to deposit $500,000 in addition to the $500,000 undertaking they initially posted. The buyers were directed by order entered about August 13, 2012, to transfer $60 million in U.S. currency or “readily convertible” currency, by August 21, 2012, into the ultimate care of the New York City Sheriff's office, or to “provide such other security as [the sellers] may consent to in writing.”

These appeals and cross appeals followed. We agree with the motion court that, except for the buyers' breach of contract claim based on the accounts receivable discrepancies, the buyers' complaint should be dismissed, as should the buyers' counterclaims premised on the same theories in the sellers' action. We reverse the motion court's orders to the extent they denied the sellers summary judgment on their claims for the deferred payments. In our view, the two attachments were...

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