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In Re: Groupon Derivative Litigation

July 31, 2012

IN RE: GROUPON DERIVATIVE LITIGATION


The opinion of the court was delivered by: Judge Joan H. Lefkow

OPINION AND ORDER

This is a consolidated shareholder derivative action brought on behalf of nominal defendant Groupon, Inc. ("Groupon" or "the company") against certain executive officers and members of its board alleging breach of fiduciary duty and abuse of control.*fn1 Also pending in this district is a class action brought against Groupon, certain executive directors, board members and underwriters alleging various securities law violations. (In re Groupon, Inc. Securities Litigation, Case No. 12-CV-2450). Defendants in the derivative action have moved to stay proceedings pending the resolution of the related securities case. For the reasons set forth herein, their motion (#51) will be granted in part and denied in part.

LEGAL STANDARD*fn2

"[T]he power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants[.]" Landis v. N. Am. Co., 299 U.S. 248, 254, 57 S. Ct. 163, 81 L. Ed. 153 (1936); see Tex. Indep. Producers & Royalty Owners Ass'n v. EPA, 410 F.3d 964, 980 (7th Cir. 2004). In deciding whether to grant a stay, courts will "balance the competing interests of the parties and the interest of the judicial system." Markel Am. Ins. Co. v. Dolan, 787 F. Supp. 2d 776, 779 (N.D. Ill. 2011) (citing Landis, 299 U.S. at 254--55 (The court "must weigh competing interests and maintain an even balance.")). Courts generally consider three factors when determining whether to grant a stay: (1) whether a stay will simplify the issues in question and streamline the trial; (2) whether a stay will reduce the burden of litigation on the parties and on the court; and (3) whether a stay will unduly prejudice or tactically disadvantage the non-moving party. See, e.g., Genzyme Corp. v. Cobrek Pharm., Inc., No. 10 CV 112, 2011 WL 686807, at *1 (N.D. Ill. Feb. 17, 2011); Tap Pharm. Prods., Inc. v. Atrix Labs., Inc., No. 03 C 7822, 2004 WL 422697, at *1 (N.D. Ill. Mar. 3, 2004). "[I]f there is even a fair possibility that the stay . . . will work damage to some one else," the party seeking the stay "must make out a clear case of hardship or inequity in being required to go forward." Landis, 299 U.S. at 255; see, e.g., Helferich Patent Licensing, LLC v. N.Y. Times Co., Nos. 10-cv-4387, 11-cv-6914, 11-cv-7189, 11-cv-7395, 11-cv-7607, 11-cv-7647, 2012 WL 1813665, at *1 (N.D. Ill. May 8, 2012); Itex, Inc. v. Mount Vernon Mills, Inc., No. 08 CV 1224, 2010 WL 3655990, at *2 (N.D. Ill. Sept. 9, 2010); Se-Kure Controls, Inc. v. Vanguard Prods. Grp., Inc., No. 02 C 3767, 2009 WL 5174701, at *1 (N.D. Ill. Dec. 18, 2009); Pfizer Inc. v. Apotex Inc., 640 F. Supp. 2d 1006, 1007 (N.D. Ill. 2009).*fn3 The court has broad discretion in exercising its authority to stay. Trippe Mfg. Co. v. Am. Power Conversion Corp., 46 F.3d 624, 629 (7th Cir. 1995).

BACKGROUND*fn4

I. The Parties

Plaintiff Theresa Monturano ("plaintiff") brings this suit derivatively on behalf of nominal defendant Groupon. Monturano is, and was at all relevant times, an owner and holder of Groupon common stock.

Nominal defendant Groupon is a corporation founded in 2008 and incorporated under the laws of Delaware with its principal office in Chicago. Groupon serves as a local commerce marketplace, connecting merchants to consumers by offering goods and services at a discount price via the Internet and email promotions.

The individual defendants are eight current or former executive officers and/or members of Groupon's board of directors. These individuals include: Eric P. Lefkofsky, co-founder and executive chairman; Bradley A. Keywell, co-founder and director since 2008;*fn5 Andrew D. Mason, founder, chief executive officer, and director since 2008; Peter J. Barris, director since 2008; Kevin J. Efrusy, director since 2009; Mellody Hobson, director before Groupon's initial public offering ("IPO") on November 4, 2011; Theodore J. Leonsis, director since 2009; and Howard Schultz, director since 2011 (collectively "the individual defendants") (collectively with Groupon "defendants").

II. The Derivative Action

On April 5, 2012, plaintiff Monturano filed the first of six derivative actions against Groupon and the individual defendants based on events surrounding the company's IPO on November 4, 2011. These cases were subsequently consolidated under the caption In re Groupon Derivative Litigation. (See order at Case No. 12-CV-2507, Dkt. #45.) Plaintiff alleges that the individual defendants breached their fiduciary duties (Count I) and abused their control (Count II) by permitting Groupon to function with deficient accounting controls thereby harming the company. These deficient controls came to light in the months proceeding and immediately following Groupon's IPO. The company filed its Form S-1 Registration Statement ("registration statement") with the Securities and Exchange Commission ("SEC") on June 2, 2011. Between that date and the date the company went public, it was forced to amend its SEC filings on two separate occasions.

The first amendment occurred on August 10, 2011, after it was discovered that the company's registration statement contained an unconventional non-GAAP accounting metric that permitted Groupon to exclude substantial expenses and allowed it to show a positive operating income metric even though it was not profitable. The second amendment occurred on September 23, 2011, after the SEC forced Groupon to restate its revenue for the first half of 2011 from $1.5 billion to $688 million. Despite these amendments, Groupon went public as scheduled, selling 35 million shares at $20 per share.

Approximately three months later, Groupon released its first set of financial results, reporting a net loss of $42.7 million for the fourth quarter and a $350.8 million net loss for the full year 2011. On March 30, 2012, Groupon issued a press release revising its fourth quarter revenue downward by $14.3 million and, according to The Financial Times, admitted that it had identified a material weakness in its internal accounting controls. On this news, Groupon's stock dropped $3.10 to close at $15.28 per share on April 2, 2012. The next day, the ...


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