Undoubtedly, unsuspecting foreign corporations may find themselves having business connections in New York and subject to the jurisdiction of New York courts.
This blog post focuses on a recent decision by Hon. Andrew Borrock of the Commercial Division of the New York State Supreme Court for New York County in Matter of Renren, Inc. Derivative Litig. v. XXX, 67 Misc. 3d 1219(A), 2020 N.Y. Slip Op. 50588(U) (Sup. Ct., New York County May 20, 2020), where the Court denied Renren, Inc.’s motion to dismiss.
In its decision, the Court addressed, among other things, the reach of New York’s long-arm statute—CPLR 302. Specifically, whether the Court has personal jurisdiction over Renren, Inc. (“Renren”), a Cayman Islands company with its principal place of business in China. Renren, meaning “everyone” in Mandarin Chinese, is a social media platform in China similar to Facebook (which the Chinese government banned in 2009). Renren is listed on the New York Stock Exchange (“NYSE”) as American Depository Shares (“ADS”). For purposes of this blog post, only a cursory examination of the facts is necessary.
On July 19, 2018, the plaintiffs, minority shareholders of Renren, commenced a shareholder derivative action on behalf of Renren (click here for a link to the Consolidated Stockholder Derivative Complaint (the “Amended Complaint”)). The action is premised on an alleged scheme perpetrated by Renren’s chief executive officer and certain directors and controlling shareholders to defraud Renren and its minority shareholders in amounts alleged to be in excess of $500 million for their investment (Renren, Inc., 67 Misc. 3d 1219[A], at *1). The purported scheme, as distilled by the Court, involves Renren’s chief executive officer seeking to raise substantial sums in an initial public offering (IPO) on the NYSE “to capitalize on Facebook being banned in China. According to the Court, the CEO promised not to make investments that would make his company qualify as an investment company under the Investment Company Act of 1940, broke the promise, and then when the investments appreciated, tried to go private by making an ‘offensive and ludicrous’ offer [which was rebuked] so as to ‘enrich’ himself and certain other controlling shareholders of Renren []” (id. at *1). Allegedly, instead of structuring a deal for the benefit of all shareholders, the chief executive officer and controlling interests “structured a transaction through New York where they could loot the company based on a cooked ‘true value and fairness’ opinion of [one of the other defendants] with so many caveats that no reasonable Board member should have relied on it . . .” (id.).
Specifically, per the Amended Complaint, in 2011, Renren filed with the SEC to list its shares on the NYSE as ADS (id. at *3). Renren raised in excess of $777 million in its IPO (id. at *4). Pursuant to various controlling agreements (e.g., an Underwriting Agreement and a Deposit Agreement), Renren agreed to be bound by New York law and consented to the jurisdiction of the federal and state courts of the State of New York located in New York City (Renren, Inc., 67 Misc. 3d 1219[A], at *3-4). According to the decision, “as Renren’s viability as social media company grew increasingly dubious, [the chief executive officer], armed with a stockpile of cash from the IPO, [with the assistance of others], began looking to make Renren more profitable by investing substantial amounts of the IPO funds in various other companies; most significantly, a 21.06% interest in SoFi (id. at *4-5). Since SoFi holds a New York mortgage banker license, the New York State Department of Financial Services must approve any transaction concerning a change of control (id. at *5). Ultimately, Renren effectuated a spin-off to a subsidiary company, OPI, to hold Renren’s minority stakes in privately held companies pursuant to a Separation and Distribution Agreement in 2018 (id. at *5). As a result of this transaction, Renren’s shares suffered significant price dilution (id. at *9).
Believing that they were defrauded, the plaintiffs commenced suit. The plaintiffs specifically allege that the “tainted transaction involved Renren (i) spinning off its wholly-owned subsidiary, OPI (the “Separation”) . . . and distributed the shares of the subsidiary to certain [e]ligible [s]hareholders through a private offering (the “Private Placement”) . . . and (ii) allegedly paid a substantially diminished cash dividend to non-participating shareholders (the “Cash Dividend”, and together with the Separation and the Private Placement, the “Transaction”) . . . in a transaction approved by an allegedly interested Special Committee and deliberately structured through New York pursuant to a Deposit Agreement” (Renren, Inc., 67 Misc. 3d 1219[A], at *2-3 [internal quotations added). Renren moved to dismiss, inter alia, pursuant to CPLR 3211(a)(8)—lack of personal jurisdiction (id. at *1).
This blog post only focuses on the Court’s determination of Renren’s motion to dismiss for lack of personal jurisdiction.
In New York, “[a] court may exercise general jurisdiction over a defendant pursuant to CPLR 301 on all causes of action where the defendant’s ties to New York ‘are so ‘continuous and systematic’ as to render them essentially at home in the forum state” (Renren, Inc., 67 Misc. 3d 1219[A], at *10 citing Goodyear Dunlop Tires Operations, S.A. v Brown, 564 US 915, 919 [2011], quoting International Shoe Co. v Washington, 326 US 310, 317 [1945]). For individuals, general jurisdiction is based on the individual’s domicile (id.). But for corporations, general jurisdiction is based on “the place of incorporation and its principal place of business;” except in an “exceptional case” (id. citing Daimler AG v Bauman, 571 US 117, 137 and 138, n.19 [2014]). In Renren, the Court found that since Renren is a Caymans Island company with its principal place of business in China, it was not subject to the general jurisdiction of the New York Courts pursuant to CPLR 301 (id.).
However, the outcome was not the same for specific jurisdiction. Unlike general jurisdiction, “a court in New York may exercise personal jurisdiction over a non-domiciliary defendant where (i) the court has long-arm jurisdiction over the defendant under CPLR 302, and (ii) the exercise of such jurisdiction comports with due process (Renren, Inc., 67 Misc. 3d 1219[A], at *10 citing Williams v Beemiller, Inc., 33 NY3d 523, 528 [2019] [“If either the statutory or constitutional prerequisite is lacking, the action may not proceed”]). Justice Borrock goes on to explain that “long-arm or specific jurisdiction ‘is confined to adjudication of issues deriving from, or connected with, the very controversy that establishes jurisdiction” (id. citing Goodyear, supra, 564 US at 919); that “the suit must arise out of or relate to the defendant’s conduct with the forum” (id. citing Bristol-Myers Squibb Co. v Superior Ct. of Cal., San Francisco County, 137 S Ct 1773, 1780 [2017] [emphasis, internal quotation marks and citation omitted]). Judge Borrock explains that New York’s long-arm statute—CPLR 302—is a “single act statute, meaning that proof of one transaction in New York [be it through a transaction in person or through an agent] is sufficient to invoke jurisdiction, even though the defendant never enters New York, so long as the defendant’s activities here were purposeful and there is a substantial relationship between the transaction and the claim asserted” (id. citing Kreutter v McFadden Oil Corp., 71 NY2d 460, 467 [1988] [quotations omitted]).
Furthermore, in order to exercise personal jurisdiction over a non-domiciliary defendant, the Court must ensure that constitutional due process requirements of the “minimum contacts test” are met. “Due process requires that a defendant must have sufficient minimum contacts with New York such that the defendant should reasonably expect to be haled into court [in New York] (Renren, Inc., 67 Misc. 3d 1219[A], at *10 citing LaMarca v Pak-Mor Mfg. Co., 95 NY2d 210, 216 [2000], quoting World-Wide Volkswagen Corp. v Woodson, 444 US 286, 297 [1980]), and that requiring the non-domiciliary to defend the action in New York comports with ‘traditional notions of fair play and substantial justice’” (id. citing LaMarca, 95 NY2d at 216, quoting International Shoe Co., 326 US at 316). Justice Borrock averred that the question is “whether the defendant has purposefully availed itself of the privilege of conducting activities within the forum State” (id.). In making this determination, courts consider “the burden on the defendant, the forum State’s interest in obtaining the most efficient resolution of controversies, and the shared interest of the several States in furthering fundamental substantive social policies (id. citing Burger King Corp. v Rudzewicz, 471 US 462, 477 [1985]). “When the defendant is a foreign corporation, the court must consider the international judicial system’s interest in obtaining efficient and effective relief and the shared interests of the nations in advancing substantive policies (id. citing Asahi Metal Indus. Co. Ltd. v Super Ct of Cal., Solano County, 480 US 102, 115 [1987]).
Using the foregoing principles, Justice Borrock determined that the plaintiffs made out a prima facie showing that the Court has personal jurisdiction over Renren pursuant to CPLR 302(a)(1).
Specifically, the Court found that the IPO in and of itself was insufficient to confer long-arm jurisdiction, but “taken together with the factual allegations concerning Renren’s New York contacts,” was sufficient for personal jurisdiction (id. at *12). Also, that the OPI Separation transaction “had an articulable nexus to New York and that the claim that Renren turned itself into a de facto venture capital fund using IPO proceeds and then siphoned off its investments to OPI, directly related to the Separation (id.).
Other factors that assisted the Court in its determination were the agreements relating to the IPO and the Transaction which required notices and payments to be sent into New York (e.g., the Separation Agreement required Renren to send an instruction letter to Citibank in New York, the Offering Circular required shareholders to send election forms to Renren’s counsel’s office in New York, the Deposit Agreement governing the Cash Dividend was governed by New York law, and the parties chose New York as the forum).
Importantly, the Court noted that the Court of Appeals has recognized that a party’s “intentional use of a bank account in New York in connection with a transaction supports personal jurisdiction pursuant to CPLR 302(a)(1) (id. at *13 citing Rushaid v Pictet & Cie, 28 NY3d 316, 325-328 [2016]).
Renren contended, inter alia, that neither CPLR 302 nor any other statute allows for jurisdiction over a foreign corporation in a shareholder derivative action (id. at *16). The Court aptly dismissed Renren’s contention as it ignored Business Corporation Law 626—which provides, in pertinent part: “An action may be brought in the right of a domestic or foreign corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates” (BCL 626[a]) (id.).
Moreover, the Court determined that since Renren’s IPO raised $777 million using New York’s capital markets, used such funds for investments and not Renren, and improperly divested such investments through the Separation under New York law, sufficient minimum contacts with New York existed to find that the exercise of personal jurisdiction over Renren comports with due process (id.).
With respect to the reasonableness of jurisdiction, the Court found that Renren failed to meet its burden (id. at *17). Specifically, the Court found that given Renren’s contacts with New York, Renren could foresee litigating an action in New York and the same would not be unduly burdensome (id.). The Court noted that Renren utilized New York counsel (Skadden, Arps, Slate, Meagher & Flom) for past New York related activities (id.), and further, a majority of the witnesses to the transactions at issue are citizens of the United States or are incorporated or have a principal place of business in New York (id.). Finally, the Court reiterated New York’s “strong interest” in adjudicating cases such as Renren, Inc. in New York’s Courts because New York has a “strong interest in maintaining and fostering its undisputed status as the preeminent commercial and financial nerve center of the Nation and the world” (id. citing Ehrlich-Bober & Co. v Univ. of Houston, 49 NY2d 574, 581 [1980] [internal quotations omitted]).
All of these contacts with New York allowed the Court to deny Renren’s motion to dismiss on jurisdictional grounds.
Bottom line:
A foreign entity planning to do business in New York, even for a “New York minute,” should be forewarned that it could unwittingly be subject to personal jurisdiction of New York Courts if it is not deliberate in preparing to undertake a transaction in New York, the commercial and financial nerve center of the United States and the world.
