Court Clarifies Record Date and Indicates Willingness to Approve Proposed Settlement in Renren Derivative Litigation
In our recent article What Rejected Renren Settlement Means for Investor Suits, we analyzed Justice Andrew Borrok’s decision rejecting a proposed $300 million settlement between Renren, Inc. (“Renren”) and minority shareholders in In re: Renren Inc. Derivative Litigation.[i] The article noted certain unresolved issues following Justice Borrok’s rejection of the settlement, including two issues that have been raised in recent rulings or filings: (1) the proper record date to be used to determine the minority shareholders who are entitled to potential recoveries, and (2) whether a prejudgment attachment order imposing restrictions on defendants’ transfer or sale of assets in an amount up to $560 million will remain in place.
Although the Court rejected the initial stipulation of settlement, there have been a number of recent developments relevant to a potential resolution of the litigation, including statements from Justice Borrok during a recent hearing indicating his willingness to approve a settlement based on certain revised terms. Justice Borrok has now modified his prior order setting April 29, 2018 as the record date to reflect that June 21, 2018—the date when the alleged unfair spin-off transaction closed—is the appropriate record date, and the Court has also resolved motions to intervene in light of that ruling. Plaintiffs have moved to renew and reargue their motion to approve the settlement, and Justice Borrok has entered an order to show cause setting a briefing schedule on the motion to renew. Separately, defendants have also moved to vacate or amend and suspend the attachment order. We discuss these developments below.
The Court Modifies the Record Date and Resolves Motions to Intervene
In a supplemental order dated March 9, 2022, Justice Borrok agreed with proposed intervenor CRCM Institutional Master Fund (BVI) Limited (“CRCM”) that June 21, 2018 should be set as the record date.[ii] As noted in our prior article, the derivative complaint in this action alleges that Renren’s controlling shareholders engaged in a self-dealing spin-off transaction that left minority shareholders with a Hobson’s choice between accepting an alleged inadequate cash dividend or participating in a private placement of certain shares on unfair terms to the minority shareholders.
Justice Borrok explained that, under Business Corporation Law § 626, a shareholder must have owned Renren shares at the time of the alleged injury to have standing to sue.[iii] When he previously considered the appropriate record date to determine the shareholders who are eligible to receive potential settlement proceeds, Justice Borrok found that the record date should be set for April 29, 2018, the day immediately preceding the announcement of the alleged unfair spin-off. However, Justice Borrok was persuaded by CRCM’s argument in its intervention papers that the alleged injury did not occur until the spin-off transaction closed in June 2018 and non-participating shareholders were paid an alleged inadequate dividend.[iv] In light of the modification of the record date, Justice Borrok granted defendants’ motion to dismiss to the extent of dismissing claims by shareholders who did not own shares as of the June 21, 2018 record date.[v]
In a decision dated March 28, 2022, Justice Borrok reaffirmed the June 21, 2018 record date and resolved certain motions to intervene.[vi] Justice Borrok explained that under both New York law and Cayman law, a shareholder must satisfy two requirements to have standing to maintain a derivative action: the shareholder must have (1) owned shares in Renren as of the June 21, 2018 record date, and (2) maintain continuous ownership and currently own shares in Renren.[vii] As to the latter requirement, Justice Borrok reasoned that a shareholder in a derivative action is “defending his own interests as well as those of the corporation,” and when a shareholder “voluntarily disposes of the stock, his rights as a shareholder cease.”[viii] Applying that standard, Justice Borrok denied motions to intervene filed by a number of shareholders who held Renren stock as of April 2018 but subsequently sold their shares and lack standing.[ix] Justice Borrok granted motions to intervene filed by Miao Cao and CRCM because each owned Renren shares as of the record date and are also current shareholders.[x]
The Court Indicates It Is Prepared to Approve a Settlement
The Court held a hearing on April 14, 2022 “to report back to the Defendants” about a meeting that the Court held with plaintiffs’ counsel and to “discuss a path forward in the case.”[xi] The Court explained that following discussions with plaintiffs’ counsel, it is now “prepared to approve a settlement” that “will provide for distribution of the settlement proceeds to the coalition shareholders based on their current holdings.”[xii] The Court noted that “[t]o the extent that there’s any unclaimed proceeds, they’ll be held for the statutory period of time and then they’ll be redistributed to the current shareholders” rather than returned to Renren.[xiii] Justice Borrok acknowledged that there will likely be objections to the approval of the proposed settlement even with revised terms, but stated that he is “prepared to approve the settlement over those objections.”[xiv]
With respect to plaintiffs’ request for an award of attorneys’ fees, the Court noted that it originally rejected the proposed settlement in part because the requested legal fees were excessive. The Court remarked that after reconsidering a proper legal fee award in this case, the “upper limit” of such an award should be 17.5% of the settlement amount, or approximately $52.5 million.[xv]
On April 29, 2022, plaintiffs moved to renew and, in the alternative, reargue their motion to approve the October 7, 2021 settlement agreement, arguing that they have presented additional facts to address concerns that the Court raised sua sponte when it rejected the settlement. Under CPLR 2221(e)(2), a party may move for leave to renew a prior motion “based upon new facts not offered on the prior motion that would change the prior determination.” First, plaintiffs contend that the Court’s concerns over paragraph 33 of the proposed settlement—which provides for reversion of any remaining settlement funds to Renren following distributions to Renren’s minority shareholders—should be alleviated by new facts demonstrating that the portion of funds subject to reversion “should be tiny.”[xvi] Second, plaintiffs seek reargument on the issue of whether only current minority shareholders are entitled to recoveries. Plaintiffs reiterate their argument that “only a corporation’s present shareholders stand to benefit from derivative claims,” and that only current Renren shareholders “stand to benefit, indirectly or directly, from derivative claims brought on Renren’s behalf.”[xvii] Plaintiffs explain that the settlement would provide for pro rata distributions to all current minority shareholders—not just plaintiffs—except for defendants in this action and certain non-party directors and officers who plaintiffs allege “played a culpable role” in the unfair spin-off transaction.[xviii]
Plaintiffs’ counsel also submitted a revised application for an award of attorneys’ fees and expenses. Although Justice Borrok indicated at the April 14 hearing that the upper limit of a fee request in this case should be 17.5% of the settlement amount, plaintiffs’ counsel request an award of 22.5% of the settlement amount, or approximately $67.5 million.[xix] Plaintiffs argue that the Court should follow the common fund doctrine when determining the reasonableness of the fee award, which provides that attorneys’ fees should be awarded as a percentage of the amount recovered. Plaintiffs contend that a 22.5% fee “falls well within the range” of comparable fee awards in similar derivative actions and is appropriate given the complexity of the case and the extraordinarily large recovery.[xx]
The OPI Defendants Motion to Vacate or Amend the Attachment Order
On March 15, 2022, defendants Oak Pacific Investment, Renren Lianhe Holdings, and Renren SF Holdings, Inc. (the “OPI Defendants”) also moved to vacate or, in the alternative, amend and suspend the prejudgment attachment order imposing burdensome restrictions on defendants’ transfer or sale of assets.[xxi] The OPI Defendants explained that the attachment order required them to place up to $560 million of assets in escrow pending resolution of this lawsuit in addition to imposing numerous reporting obligations.[xxii] The purpose of the attachment order was to ensure that there would be sufficient assets to satisfy a potential judgment in this case. But in connection with the stipulated settlement that is now the subject of an appeal, the OPI Defendants deposited $288.5 million into a trust account which, when combined with the $11.5 million deposited on behalf of defendant Duff & Phelps, LLC, totals $300 million in an account that is outside of the OPI Defendants’ control.[xxiii] The OPI Defendants highlight that by plaintiffs’ own concessions in defending the settlement proposal, the settlement amount now held in trust is sufficient to satisfy plaintiffs’ best-case recovery of damages.[xxiv]
Under CPLR 2221(a), the Court has inherent power to set aside, correct or modify its own orders, and a change in circumstances may provide a basis for vacatur or modification of an order.[xxv] The OPI Defendants argue that the attachment order should be vacated because it is now unnecessary. The OPI Defendants note that they moved to dismiss claims alleging that they illicitly transferred assets at less than fair value to frustrate a future judgment.[xxvi] According to the OPI Defendants, if the Court grants those motions, the factual bases upon which the attachment order was entered “would completely dissipate.”[xxvii]
In the alternative, the OPI Defendants argue that the attachment order should be amended and suspended so long as the stipulation of settlement remains in effect pending appeal. The OPI Defendants reiterate that as long as the bulk of the $300 million remains in trust for a potential settlement, “no legitimate purpose is served by continuing to burden the OPI Defendants with all of the requirements” of the attachment order, including the requirement that $560 million be subject to restriction.[xxviii] By plaintiffs’ own admission, $300 million represents the maximum amount that plaintiffs could expect to recover even if they prevail on the merits of their claims. The OPI Defendants therefore request that the Court amend the attachment order to reduce the amount of assets subject to restriction to $288.5 million, eliminate certain reporting and notice requirements, and suspend the attachment order so long as the stipulation of settlement or a revised settlement agreement remains in place.[xxix]
Although the Court previously rejected the proposed settlement in this action, Justice Borrok’s remarks at the April 14 hearing indicate his willingness to approve a settlement structured to provide direct payments to current minority shareholders of Renren. In light of the history of the litigation over the propriety of the proposed settlement and the Court’s prior rulings on the derivative standing and attorneys’ fees issues, we will continue to follow the Court’s decisions on plaintiffs’ motion to renew and on plaintiffs’ revised application for an award of attorneys’ fees, as well as any appeals.
[i] In re Renren Inc. Derivative Litig., No. 653594/2018, 2021 BL 473940 (N.Y. Sup. Ct. Dec. 10, 2021).
[ii] In re Renren Inc. Derivative Litig., No. 653594/2018, 2022 BL 86345, at *2 (N.Y. Sup. Ct. Mar. 9, 2022).
[iv] Id. at *6.
[vi] In re Renren Inc. Derivative Litig., No. 653594/2018, 2022 BL 144802 (N.Y. Sup. Ct. Mar. 28, 2022).
[vii] Id. at *1-2.
[viii] Id. (quoting Independent Inv. Protective League v. Time, Inc., 50 N.Y.2d 259, 263 (1980)).
[ix] In re Renren Inc. Derivative Litig., No. 653594/2018, 2022 BL 144802, at *1.
[xi] NYSCEF Doc. No. 1010 at 7, In re Renren Inc. Derivative Litig., No. 653594/2018 (N.Y. Sup. Ct. Apr. 14, 2022).
[xii] Id. at 8.
[xiv] Id. at 9.
[xvii] Id. at 15, 19.
[xviii] Id. at 3-5, 18 n.15.
[xix] NYCSEF Doc. No. 1022 at 6, In re Renren Inc. Derivative Litig., No. 653594/2018 (N.Y. Sup. Ct. May 13, 2022).
[xx] Id. at 8.
[xxi] NYSCEF Doc. No. 973, In re Renren Inc. Derivative Litig., No. 653594/2018 (N.Y. Sup. Ct. Mar. 15, 2022).
[xxii] Id. at 4.
[xxiii] Id. at 5.
[xxiv] Id. at 6.
[xxv] Id. at 13.
[xxvi] Id. at 15.
[xxviii] Id. at 16.
[xxix] Id. at 17.