United States District Court, N.D. Illinois
January 28, 2004.
HARRY EDELSON, Plaintiff,
RAYMOND K.F. CH'IEN, PETER YIP HAK YUNG, ASIA PACIFIC ONLINE LTD., and CHINADOTCOM CORPORATION, Defendants
The opinion of the court was delivered by: AMY J. ST. EVE, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff Harry Edelson has moved for a preliminary injunction based
on his Complaint for violations of Section 13(d) of the Securities
Exchange Act (the "Act").*fn1 15 U.S.C. § 78m(d) Plaintiff has also
moved for leave to amend his Complaint in response to Defendant's motion
to dismiss. For the reasons set forth below, Plaintiffs motion for
preliminary injunction is denied. Further, because Section 13(d) does not
provide a private cause of action for a Plaintiff such as Edelson, the
Court dismisses Count I of Plaintiff's Complaint and denies Plaintiffs
motion to file an Amended Complaint as to Counts I and n of the proposed
Amended Complaint. With regard to Count in of Plaintiff's proposed
Amended Complaint, Plaintiffs motion to amend is
Plaintiff Many Edelson is a shareholder and former director of
Defendant chinadotcom corporation ("Chinadotcom").*fn2 Chinadotcom is a
Cayman Islands corporation headquartered in Hong Kong. Chinadotcom is an
"integrated enterprise solutions company" publicly traded
through the NASDAQ stock market. Defendant Peter Yip is also a
shareholder of Chinadotcom, and is the company's Vice-Chairman and Chief
Executive Officer ("CEO"). Defendant Ch'ien is Executive Chairman of
Chinadotcom. Defendant Asia Pacific Online Limited ("APOL") is a Cayman
Islands corporation headquartered in the Cayman Islands. APOL is owned by
Yip's spouse and his children's trust. In turn, APOL owns a significant
amount of Chinadotcom stock.
At least as early as 2003, Edelson openly disagreed with Yip and Ch'ien
regarding the governance of Chinadotcom. In particular, Edelson alleges
that he questioned the motives of management in connection with a stock
repurchase program. In a series of board meetings and related email
correspondence, Edelson contends that he expressed concerns that the
stock repurchase represented a conflict of interest on the part of Yip
and Ch'ien, who had acquired stock at prices lower than the proposed
company buy-back. In an April 16, 2003, e-mail to Ch'ien, Edelson accused
Chinadotcom management of "bulldozing" the board of directors and cited
management's "defensive hostility" in the face of dissent.
Meanwhile, Chinadotcom was preparing to elect three directors, as the
terms of Edelson and two other directors would expire in 2003. The board
and management of Chinadotcom
nominated Edelson and the two other current directors for
re-election, giving notice of this nomination to the shareholders on May
22, 2003. The Board recommended to the shareholders that they vote in
favor of each re-election. Edelson, however, alleges that Yip and Ch'ien
were merely "lying in wait." Edelson's Complaint asserts that Yip and
Ch'ien "purported to concur with the Board's recommendation. . . ." but
then voted their shares against Edelson's election. (R. 18-1.Am.Compl.
1 ¶ 25.)
On June 17, 2003, a majority of the shares represented in the election
voted against Edelson. Edelson now blames his loss on the unforeseen
votes of Yip and Ch'ien. According to Edelson, his requests for more
detailed information about the election results have gone unheeded by
Chinadotcom. On October 15, 2003, Edelson filed this lawsuit. Plaintiffs
Complaint alleges that Defendants Yip and APOL violated Section 13(d) of
the Act by concealing their intention to affect the control of
Chinadotcom. In a separate count of the proposed Amended Complaint,
Plaintiff accuses Chinadotcom of a Section 13(d) violation for improperly
recognizing the votes of Yip and Ch'ien. Plaintiff also accuses
Defendants of tortious interference with prospective business advantage.
Plaintiff moved for a preliminary injunction requesting several types
of relief. In response, Defendant Chinadotcom argues, among other things,
that Section 13(d) does not provide a private cause of action for
Plaintiff in this case. The Court agrees.
I. Preliminary Injunction
To obtain a preliminary injunction, a party must first show (1) that it
has a reasonable likelihood of success on the merits of its underlying
claim; (2) that it has no adequate remedy at
law; and (3) that it will suffer irreparable harm without the
preliminary injunction. AM General Corp. v. DaimlerChrysler
Corp., 311 F.3d 796, 803-804 (7th Cir. 2002) (citing Anderson v.
U.S.F. Logistics (IMC), Inc., 274 F.3d 470, 474 (7th Cir. 2001) and
Re/Max North Central, Inc. v. Cook, 272 F.3d 424, 429-30 (7th
Cir. 2001)). If a Plaintiff meets those burdens, the court then must
consider any irreparable harm the preliminary injunction might impose
upon the party against whom the injunction is sought and whether the
preliminary injunction would harm or foster the public interest.
Id. If the moving party cannot show a likelihood of success on
the merits, a court may deny a motion for preliminary injunction without
further discussion. Id. at 830 (citing Platinum Home
Mortgage Corp. v. Platinum Fin. Group, Inc., 149 F.3d 722, 730 (7th
As discussed below, Plaintiff Edelson cannot show a likelihood of
success on the merits of his claim. Accordingly, the Court need not
address the other factors relevant to a preliminary injunction analysis.
II. Motion to Amend
Plaintiff also seeks to amend his Complaint. Courts generally address
motions to amend the pleadings under a fairly liberal standard. Jones
v. Hamelman, 869 F.2d 1023, 1026 (7th Cir. 1989). This standard,
however, does not guarantee a right to amend. If an amended complaint
would not survive a motion to dismiss or a motion for summary judgment,
then the amendment would be considered futile, and the Court will not
permit it for the sake of judicial efficiency. See Brunt v. Service
Employees Intern. Union, 284 F.3d 715, 720-21 (7th Cir. 2002)
("Because Appellants' amended complaint would not survive a motion to
dismiss, the amendment would be futile and the district court was well
within its discretion in refusing to grant leave to amend.").
With respect to a motion to dismiss for failure to state a claim, a
court will only grant such a motion if it appears beyond doubt that the
plaintiff cannot prove any facts that would support his claim for relief.
Fed.R.Civ.P. 12(b)(6); Delgado v. Jones, 282 F.3d 511, 515
(7th Cir. 2002). In assessing a motion to dismiss, the Court accepts as
true all well-pleaded factual allegations in the complaint, and also
draws all reasonable inferences from those facts in favor of the
plaintiff. First Ins. Funding Corp. v. Federal Ins. Co.,
284 F.3d 799, 804 (7th Cir. 2002) (citing Tobin for Governor v. Ill.
State Bd. of Elections, 268 F.3d 517, 521 (7th Cir. 2001)).
Plaintiff cannot satisfy his pleading requirements, however, by merely
attaching bare legal conclusions to narrated facts which fail to outline
the bases of their claims. See Perkins v. Silverstein, 939 F.2d 463,
466 (7th Cir. 1991); Strauss v. City of Chicago, 760 F.2d 765,
767-68 (7th Cir. 1985) (absence of facts supporting plaintiffs claim
renders allegations mere legal conclusions subject to dismissal).
I. Section 13(d) Disclosure
Section 13(d) of the Act*fn3 creates certain filing obligations for
any person who owns or acquires 5% or more of a class of publicly traded
securities. If such a person does not hold the
securities "for the purpose or effect of changing or influencing
the control of the issuer," then he need not file the comprehensive
Schedule 13D disclosures, and may file the simpler Schedule 13G instead.
SEC Rule 13d-l(c). If, however, the person intends to change or influence
control of the issuer, SEC Rule 13d-1(e)(1) requires that person to file
a Schedule 13D disclosing such intentions. Moreover, that person is
precluded from voting or directing the voting of the described securities
for ten days after the Schedule 13D is filed. SEC Rule 13d-l(e)(2).
Plaintiff seeks to enforce Section 13(d) and the accompanying SEC rules
against Defendants Yip, APOL, and Chinadotcom. Reasoning that Yip never
made the requisite Schedule 13D disclosure when he allegedly intended to
remove Plaintiff from the board, Plaintiff contends that Section 13(d)
and the SEC rules preclude Yip from voting his Chinadotcom shares.
Accordingly, Plaintiff argues, Chinadotcom should have ignored Yip's
improper votes. Defendant responds by meeting Plaintiff at the threshold
of his argument. Defendant contends that Section 13(d) does not provide a
private cause of action for Plaintiffs such as Edelson.
II. Implied Private Causes of Action under Section 13(d)
In this case, Edelson attempts to enforce Section 13(d) as a
stockholder and former director of Chinadotcom. He argues that he is
entitled, as a shareholder, to a private right of action under Section
13(d). Defendant argues that the Seventh Circuit has recognized a right
of action on the part of issuer corporations, but not for former
directors who are also stockholders. The Court agrees that Section 13(d)
does not grant a private right of action in this case.
A. Implied Causes of Action Are Not Favored
It is undisputed that the express language of Section 13(d) does not
provide a private cause of action by any person. The parties dispute
whether or not a suit by Edelson is impliedly
allowed under this law. A party attempting to assert an implied
right of action must overcome the "strong presumption [that] exists
against the creation of an implied private right of action. . . ."
Endsley v. City of Chicago, 230 F.3d 276, 281 (7th Cir. 2000).
Nevertheless, "[a]lthough implied causes of action have fallen into
disfavor, the Supreme Court has not yet forbidden them." Knapp v.
Eagle Prop. Mgmt. Corp., 54 F.3d 1272, 1277 (7th Cir. 1995). In the
law of implied private causes of action, Cort v. Ash,
422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975), is a seminal case. In that
case, the Court established a four-factor test for determining whether a
private right of action is implied.*fn4 The Cort test, however,
has "fallen under severe criticism" by the Supreme Court, and may no
longer stand as the test for implied rights of action. Mallet v. Wis.
Div. Of Vocational Rehab., 130 F.3d 1245, 1249 (7th Cir. 1997);
see also Touche Ross & Co. v. Redington, 442 U.S. 560, 575,
99 S.Ct. 2479, 2489, 61 L.Ed.2d 82 (1979); Indiana Nat'l
Corp., 712 F.2d at 1182.
Retreating from the full Cort v. Ash test, the Supreme Court
has focused primarily on legislative intent to analyze potential implied
rights of action. Mallet, 130 F.3d at 1249 (citing Suter v.
Artist M., 503 U.S. 347, 364, 112 S.Ct. 1360, 1370, 118 L.Ed.2d 1
(1992)). "Without evidence of congressional intent to imply a private
right of action, we will not address the remaining Cort factors
because the plaintiff will have failed to show any ability to shift the
presumption against its creation." Mallet, 130 F.3d at 1249. The
threshold inquiry for an
implied right of action, therefore, is to determine whether
Congress intended to provide one "in light of the statute's language,
structure, and legislative history." Id.
B. No Implied Cause of Action Exists for Plaintiff
Beginning with the plain language of the statute, Plaintiff does not
contend that any portion of the text of Section 13(d) implies legislative
intent to provide a private cause of action. Absent evidence of an
implied right of action in the plain language, the Court must address the
statute's structure and history under the dictates of Mallet.
The Seventh Circuit analyzed implied private rights of action and
Section 13(d) in the Indiana National case. Indiana Nat'l
Corp., 712 F.2d at 1182, In that case, an issuer corporation sued a
group of investors, alleging that the investors filed a Schedule 13D that
was misleading in several respects. In the district court, the defendants
successfully argued that the plaintiff, as issuer of the stock, had no
standing to assert a claim under Section 13(d) of the Act. Id.
On appeal, the Seventh Circuit considered the narrow issue of whether an
issuer corporation has an implied right of action under Section 13(d).
To answer this question, the court pointed to the Supreme Court's
opinion in Cannon v. University of Chicago, 441 U.S. 677,
694-703, 99 S.Ct. 1946, 1956-61, 60 L.Ed.2d 560 (1979). Addressing
implied rights in Title DC of the Education Amendments of 1972, the
Supreme Court noted that Title IX had been patterned after Title VI of
the Civil Rights Act of 1964, which had been construed by the courts as
creating a private right of action. Id. The Supreme Court
presumed that Congress was aware of the judicial decisions finding an
implied right of action in Title VI, and therefore found that Congress
must have intended to provide the same right in Title DC. Id. at
696-99. Using this reasoning, the Seventh Circuit noted that not only was
13(d) modeled on a statute in which courts had already found a
right by implication (Section 14(a) of the Act, 15 U.S.C. § 78n), but
Section 13(d) had itself been amended after courts had found an
implied right of action without excluding such implication.
Indiana Nat'l, 712 F.2d at 1183.
The Seventh Circuit's opinion includes a detailed analysis of the
legislative history of Section 13(d), finding that "the purpose of the
Williams Act was to insure that public shareholders facing a tender offer
or the acquisition by a third party of a large block of shares possibly
involving a contest for control be armed with adequate information about
the qualifications and intentions of the party making the offer or
acquiring the shares." Id. (citing Rondeau v. Mosinee Paper
Corp., 422 U.S. 49, 58, 95 S.Ct. 2069, 2075-76, 45 L.Ed.2d 12
(1975)). "It is, of course, clear from the legislative history that
Section 13(d) was not intended to protect incumbent management or to
discourage takeover bids. . . . Its sole purpose was the protection of
shareholders." Indiana Nat'l, 712 F.3d at 1185. Based on its
analysis of the legislative history of Section 13(d), the Seventh Circuit
found that the statute included an implied private cause of action for
issuer corporations, who may "in this respect and for this limited
purpose . . . act on the shareholders' behalf in bringing a suit for
injunctive relief until an accurate Schedule 13(d) is filed."
Two cases in distant districts> are also informative on this issue.
See Nowling v. Aero Serv. Int'l, Inc., 752 F. Supp. 1304 (E.D.
La. 1990); Mates v. N. Am. Vaccine, Inc., 53 F. Supp.2d 814 (D.
Md. 1999). The plaintiff in Nowling was a shareholder and former
president and CEO of the defendant corporation. Nowling
752 F. Supp. at 1313. Holding that the plaintiff had no standing to sue under
Section 13(d), the court noted the legislative intent to protect
and remarked that the plaintiff in that case "cannot simply be
looked upon as a shareholder . . ." when he was president and CEO of the
company. Id. The court noted that Section 13(d) was intended to
protect the investing public, and not "ex-presidents or ex-board members
who want to get back at their previous co-fiduciaries for disagreements
or squabbles lost along the way."*fn5 Id.
In Mates, the District Court in Maryland addressed the
question of whether Section 13(d) provided a private right of action to a
former director of a corporation. The court considered whether the former
director could be distinguished from the plaintiff in Nowling in
that the Mates plaintiff did not have access to the relevant
information in that case. Mates, 53 F. Supp.2d at 825. The
Mates court ultimately found that the former director did have
access to the relevant information, but also pointed out that the main
thrust of the plaintiffs suit was brought "in her individual capacity as
a former board member, and not as a shareholder." Id. Finding
that the former director did not have standing under Section 13(d), the
court noted that the legislative history of the law showed an intent to
protect "unsuspecting investors, and not well-informed members of
management who can adequately protect their own interests." Id.
(citing Piper v. Chris-Craft Indus., Inc., 430 U.S. 1, 28-29,
97 S.Ct. 926, 942-43, 51 L.Ed.2d 124 (1977)).
By his own account, Edelson was an active member of the Chinadotcom
board of directors, hi that role, he was privy to meetings that were not
attended by common shareholders. Plaintiffs Complaint centers around
Defendants' alleged misrepresentation in connection with the election of
board members. Had he known that Defendants were planning to remove him,
Edelson contends, he would have solicited proxies from the
shareholders at large to prevent his ouster from the board. Plaintiff has
alleged that such solicitation would likely result in his re-election.
Although Plaintiff complains that key information was withheld from him,
he falls short of showing that he is a member of the class that Section
13(d) was intended to protect.
Edelson's Complaint defines four types of injury that he claims to have
sustained as a result of Defendants' alleged Section 13(d)
violation.*fn6 Of these four injuries, only one relates to his role as a
shareholder: Edelson claims to have been disenfranchised by Defendants
because he, and other shareholders, did not know the election was
contested. Edelson does not, however, contend that he refrained from
voting his shares in reliance on the Defendants' representations. As a
shareholder, then, it appears that Edelson would have done nothing
differently had he known of the Defendants' alleged scheme. Rather, he
contends that he would have sought proxies in order to offset Yip's large
voting blocks. Although Plaintiff claims to have been disenfranchised, he
does not claim that his votes were not cast and counted. His injury,
therefore, appears to be more appropriately viewed as an injury to a
former director and not to a shareholder. As such, Edelson's claim is not
impliedly allowed by Section 13(d).
This result is in line with the reasoning of the Seventh Circuit in the
Indiana National case. That opinion merely recognized a private
right of action on the part of issuer corporations.
This Court declines to extend the ruling of the Seventh Circuit and
create a new cause of action under Section 13(d) for former directors
whom management has ousted. If there is a spectrum of shareholder
sophistication, with "unsuspecting investors" on one end, and
`Veil-informed members of management who can adequately protect their own
interests" on the other, then Edelson certainly lies closer to management
than to the common shareholder. See Mates, 53 F. Supp.2d at
825. Because the legislature did not intend former directors to wield
Section 13(d) on their own behalf, Plaintiffs Count I is dismissed and
Plaintiff's motion to amend is denied with respect to Counts I and II.
III. Tortious Interference
Plaintiff seeks to amend his claim of tortious interference with
prospective business advantage against Defendants Yip and Ch'ien to add
Defendant Chinadotcom.*fn7 Plaintiffs allegations against Chinadotcom
focus on a subsequent lawsuit brought by Chinadotcom against Edelson in
Hong Kong and a related press release issued by Chinadotcom. Plaintiff
alleges that he had a reasonable expectation to be nominated to the
boards of additional entities. Because of the damage to his reputation
caused by Defendants' alleged activities, Plaintiff asserts that
Defendants have interfered with this expectation. Defendant
Chinadotcom*fn8 argues that under
New Jersey law a tortious interference claim based on the filing of
a lawsuit would fail under a Rule 12(b)(6) motion to dismiss.*fn9
Further, Chinadotcom argues that the doctrine of forum non
convenient would also require the dismissal of such a claim. Because
these claims would fall prey to dismissal motions, Chinadotcom argues
that the Court should not allow their addition to Plaintiffs Complaint.
A. The Litigation Privilege is Inapplicable
Chinadotcom claims that New Jersey law provides a litigation privilege
that protects litigants from being sued for tortious interference based
on statements made during a proceeding, hi a single footnote, Defendant
argues, without providing any authority, that "[b]ecause the filing of
the lawsuit is immunized, Edelson cannot be heard to complain that the
issuance of a press release discussing this litigation a matter
of public record and of concern to its shareholders is actionable
conduct on chinadotcom's part." Plaintiff, on the other hand, responds
that Chinadotcom's press release concerning its Hong Kong lawsuit is not
governed by the litigation privilege cited by Chinadotcom.*fn10 The
While it is true that statements made during litigation are protected
from defamation and tortious interference suits, the same is not true for
out-of-court statements made about litigation. "A full, fair and accurate
report of a judicial proceeding is qualifiedly privileged, although the
report contains matters that would otherwise be defamatory and
actionable, and no action will lie therefor except on proof of malice in
making it." Cappello v. Scott, 274 N.J. Super. 282, 284,
644 A.2d 102, 103 (NJ. Super. A.D. 1994). In New Jersey, a
tortious-interference plaintiff must show: "(1) that it had a reasonable
expectation of an economic advantage; (2) that was lost as a direct
result of defendants' malicious interference; and (3) that it suffered
losses thereby." M. Eagles Tool Warehouse, Inc. v. Fisher Tooling
Co., Inc., 205 F. Supp.2d 306, 320 (D.N.J. 2002). Plaintiff has plead
these elements in connection with the press release issued by
Chinadotcom. With respect to this claim, Chinadotcom has not shown that
under no set of facts would plaintiffs allegations entitle him to relief.
Pope v. Smith-Rothchild Financial Co., No. 03 C 3335, 2003
WL 22889377, *2 (N.D. Ill. Dec. 8, 2003); see Henderson v.
Sheahan, 196 F.3d 839, 846 (7th Cir. 1999); Kennedy v. National
Juvenile De. Ass'n, 187 F.3d 690, 695 (7th Cir. 1999). Plaintiffs
claim of tortious interference against Chinadotcom would therefore
survive dismissal, and this Court will not bar amendment based
on Defendant's Rule 12(b)(6) objection.
B. Forum Non Convenient Does Not Prevent
Turning to Defendant's second objection, "[a] forum non
conveniens analysis takes place in two steps. First, the court must
determine whether an adequate alternative forum is available; second, it
must weigh several private and public interest factors related to the
proper location for the litigation." Zelinski v. Columbia 300,
Inc., 335 F.3d 633, 643 (7th Cir. 2003); see Hyatt Int'l Corp.
v. Coco, 302 F.3d 707, 718 (7th Cir. 2002). The movant must overcome
presumption in favor of the plaintiffs choice of forum. See Wilson v.
Humphreys (Cayman) Ltd., 916 F.2d 1239, 1245 (7th Cir. 1990).
While Defendant can show that Hong Kong is an adequate alternative
forum for the remaining claim, its arguments in favor of public and
private interests cannot overcome the strong presumption that Illinois is
the appropriate forum. Defendant argues that this claim will turn on
issues of Hong Kong law because it is intertwined with the Hong Kong
action against Edelson. Tortious interference claims based on Defendants*
press release or the activities that supported Plaintiffs purported
Section 13(d) claim are not contingent on the outcome of any Hong Kong
court proceeding,*fn11 It is not clear, therefore, that Hong Kong has
any superior public interest in hearing this dispute.
Similarly, the private interests of the litigants do not outweigh the
presumption in favor of Illinois. The Plaintiff is a United States
citizen whose choice of venue is entitled to deference. Although
Defendant Chinadotcom operates in Hong Kong, it is incorporated in the
Cayman Islands. Yip and Ch'ien are residents of Hong Kong, but there has
been no showing that continuing this proceeding in Illinois would have
any adverse effect on them. In sum, the private interests of the
litigants weigh in favor of keeping the lawsuit in Illinois. Defendant's
forum objections fail, and Plaintiff's motion to amend his Complaint is
granted with respect to his claim against Chinadotcom for tortious
interference with prospective business relations.
Plaintiffs motion for preliminary injunction is denied. Plaintiffs
motion for leave amend his Complaint is granted in part and denied in
part. Count I of the original Complaint is dismissed. Plaintiff can amend
his Complaint consistent with this opinion with respect to proposed Count