Court Opinion

ID: 4288
Source: CourtListenerOpinion
Date Created: 2010-04-24 19:38:39+00
Date Added: 2024-06-11T16:43:37.946819
License: Public Domain

09-0868-cv
           Donoghue v. Local.Com Corporation

                                    UNITED STATES COURT OF APPEALS
                                          F OR T HE S ECOND C IRCUIT

                                                   SUMMARY ORDER

R ULINGS   BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT .    C ITATION TO SUMMARY ORDERS FILED AFTER J ANUARY 1, 2007,
IS PERMITTED AND IS GOVERNED BY THIS COURT ’ S    L OCAL R ULE 32.1 AND F EDERAL R ULE OF A PPELLATE P ROCEDURE 32.1. I N A
BRIEF OR OTHER PAPER IN WHICH A   LITIGANT CITES A SUMMARY ORDER , IN EACH PARAGRAPH IN WHICH A CITATION APPEARS , AT LEAST
ONE CITATION MUST EITHER BE TO    THE F EDERAL A PPENDIX OR BE ACCOMPANIED BY THE NOTATION : “( SUMMARY ORDER ).” A PARTY
CITING A SUMMARY ORDER MUST SERVE A COPY OF THAT SUMMARY ORDER TOGETHER WITH THE PAPER IN WHICH THE SUMMARY ORDER IS
CITED ON ANY PARTY NOT REPRESENTED BY COUNSEL UNLESS THE SUMMARY ORDER IS AVAILAB LE IN AN ELECTRONIC DATABASE WHICH
IS PUBLICLY ACCESSIBLE WITHOUT P AY MENT OF FEE    ( SUCH   AS THE DATABASE AVAILABLE AT HTTP :// WWW . CA 2. USCOURTS . GOV /).
IF   NO COPY IS SERVED BY REASON OF THE AVAILABILITY OF THE ORDER ON SUCH A DATABASE , THE CITATION MUST INCLUDE REFERENCE
TO THAT DATABASE AND THE DOCKET NUMBER OF THE CASE IN WHICH THE ORDER WAS ENTERED .

             At a stated Term of the United States Court of Appeals
           for the Second Circuit, held at the Daniel Patrick Moynihan
           United States Courthouse, 500 Pearl Street, in the City of
           New York, on the 9 th day of December, two thousand and nine.

           Present: ROBERT D. SACK,
                    BARRINGTON D. PARKER,
                    RICHARD C. WESLEY,
                             Circuit Judges.
           __________________________________________________

           DEBORAH DONOGHUE,

                           Plaintiff-Appellant,

                   - v. -                                                      (09-0868-cv)

           HEARST COMMUNICATIONS, INC.,

                           Defendant-Cross-Claimant-Appellee,

           LOCAL.Com CORPORATION,

                    Cross-Claim-Defendant. *
           __________________________________________________

           *
              The Clerk of the Court is respectfully directed to amend the official
           caption in this action to conform to the caption in this summary order.
     For Appellant:              DAVID LOPEZ, Law Office of David
                                 Lopez, Esq., Southampton, New
                                 York (Daniel Eugene Doherty, Law
                                 Offices of Daniel E. Doherty,
                                 Overland Park, Kansas, on the
                                 brief).

     For Appellee                ALAN MANSFIELD, Greenberg,
     Hearst Communications,      Traurig, LLP, New York, New
     Inc.:                       York.

     For Local.Com               JONATHAN L. FRIED, Kramer Levin
     Corporation:                Naftalis & Frankel LLP, New
                                 York, New York.

          Appeal from the United States District Court for the
     Southern District of New York (Sand, J.).

 1       UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED,

 2   AND DECREED that the February 2, 2009 amended order of the

 3   United States District Court for the Southern District of

 4   New York is AFFIRMED.

 5       Plaintiff filed this derivative action on behalf of

 6   Local.Com Corporation (“Local.Com”) under section 16(b) of

 7   the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b),

 8   seeking to require Hearst Communications, Inc. (“Hearst”) to

 9   disgorge short-swing profits that Hearst allegedly earned as

10   a result of a series of transactions that culminated on

11   August 1, 2007.   Hearst cross-claimed against Local.Com,

12   pleading claims for breach of contract, breach of warranty,

13   and unjust enrichment.

                                   2
 1       The United States District Court for the Southern

 2   District of New York (Sand, J.) granted summary judgment in

 3   favor of Hearst and subsequently dismissed Hearst’s cross-

 4   claims as moot.    Plaintiff appeals.    We presume the parties’

 5   familiarity with the underlying facts, the procedural

 6   history of the case, and the issues on appeal.

 7       We review de novo a grant of summary judgment.

 8   Loeffler v. Staten Island Univ. Hosp., 582 F.3d 268, 274 (2d

 9   Cir. 2009).    “Congress enacted § 16(b) ‘[f]or the purpose of

10   preventing the unfair use of information’ by corporate

11   insiders trading securities issued by the company . . . in

12   which they hold a significant ownership interest.”      Bruh v.

13   Bessemer Venture Partners III L.P., 464 F.3d 202, 205 (2d

14   Cir. 2006) (quoting 15 U.S.C. § 78p(b)).      Section 16(b) only

15   applies to individuals who are “presumed to have access to

16   inside information.”    Foremost-McKesson, Inc. v. Provident

17   Sec. Co., 423 U.S. 232, 243 (1976).      More specifically, as

18   relevant here, the statute prohibits short-swing

19   transactions by “beneficial owner[s] of more than 10 percent

20   of any class of [non-exempt] equity security” of the issuer

21   in question.    15 U.S.C. § 78p(a)(1).

22       The material facts are not in dispute.      In February

                                    3
 1   2007, Hearst obtained a series of convertible notes and

 2   warrants from Local.Com.   Pursuant to the agreement relating

 3   to the transaction, Local.Com was prohibited from issuing

 4   additional securities for ninety days.    After that

 5   transaction, Hearst was the beneficial owner of more than

 6   10% of Local.Com’s securities.    During July 2007, Hearst

 7   converted its notes and sold some of Local.Com’s stock to

 8   the public.   Following those sales, so long as Hearst

 9   retained an ownership interest in Local.Com of greater than

10   10%, it was prohibited from reaping short-swing profits

11   relating to Local.Com’s securities for at least six months.

12   See 15 U.S.C. § 78p(b).

13       On July 31, 2007, Local.Com’s Board of Directors

14   approved a “Securities Purchase Agreement” (the “SPA”) with

15   a group of investors (the “private placement investors”),

16   which governed a private placement of securities that

17   Local.Com had decided to issue in order to raise additional

18   capital.   Local.Com also entered into a consent agreement

19   with Hearst that would allow it to conduct the issuance.

20   However, because of the number of shares involved in the

21   private placement, the effect of the offering, once

22   completed, would be to dilute Hearst’s interest in Local.Com

                                   4
 1   below 10% and to take it outside the ambit of section 16(b).

 2          Pursuant to the SPA, the private placement was to close

 3   on August 1, 2007.         As of 4:06 p.m. on that day, the private

 4   placement investors had wired the full value of the purchase

 5   price of the securities directly into a bank account

 6   controlled by Local.Com. 1         At 4:32 p.m., Local.Com filed a

 7   Form 8-K relating to the private placement with the

 8   Securities and Exchange Commission.              The parties agree for

 9   purposes of this appeal that, pursuant to the consent

10   agreement between Hearst and Local.Com, the filing of the

11   Form 8-K triggered a deemed purchase by Hearst of

12   Local.Com’s securities.

13          The central issue is therefore whether the securities

14   that Local.Com issued in the private placement diluted

15   Hearst’s ownership interest below section 16(b)’s 10%

16   threshold prior to 4:32 p.m. on August 1, 2007.                 The

17   district court held that the privately placed shares were

18   issued and outstanding as of 4:06 p.m., the time that

19   Local.Com took control over the proceeds of the offering.

20          Plaintiff seeks to attribute error to that conclusion

21   by arguing that the private placement shares were not

     1
         All times discussed herein are provided in Eastern Standard Time.

                                            5
 1   outstanding upon Local.Com’s receipt of the payment because

 2   there were unsatisfied conditions precedent to the

 3   completion of the issuance.          Specifically, plaintiff argues

 4   that the consummation of the offering was conditioned upon

 5   the filing of the Form 8-K and the delivery of the stock

 6   certificates to the private placement investors. 2

 7         Simply put, we find these contentions unavailing.

 8   First, plaintiff has not identified any authority, under New

 9   York or Delaware law, that persuades us that the stock

10   certificates had to be delivered to the private placement

11   investors before the shares from the offering could be

12   considered “outstanding” for purposes of section 16(b).

13   Indeed, there is ample authority suggesting that the

14   contrary is true.       See, e.g., Joseph E. Seagram & Sons, Inc.

15   v. Conoco, Inc., 519 F. Supp. 506, 513 (D. Del. 1981); U.S.

16   Radiator Corp. v. New York, 208 N.Y. 144, 149 (N.Y. 1913).

17   Second, none of the provisions in the SPA upon which

18   plaintiff relies created conditions precedent to Local.Com’s

19   performance under the agreement.            Rather, section 7 of the

20   SPA set forth a series of (waivable) preconditions to the

     2
        As stated above, the Form 8-K was filed with the SEC at 4:32 p.m. The
     record is less clear as to the time by which the stock certificates were
     delivered to the private placement investors, but there is no dispute that the
     delivery was completed at some point after 4:32 p.m. on August 1, 2007.

                                           6
 1   onset of the private placement investors’ payment

 2   obligations, which were included in the agreement for “each

 3   [private placement investor’s] sole benefit.”

 4       In the absence of any legal or contractual limitation

 5   on Local.Com’s obligation to issue the shares, the private

 6   placement investors obtained an ownership interest in those

 7   shares once Local.Com assumed control over the proceeds of

 8   the private placement.   Plaintiff has not challenged the

 9   district court’s reasoning that the private placement

10   investors’ resulting interest was sufficient to consider the

11   shares to be outstanding at that time.    Therefore, the

12   district court did not err by holding that, as of 4:06 p.m.

13   on August 1, 2007, Hearst’s interest in Local.Com had been

14   diluted below 10%, and that Hearst was not subject to

15   section 16(b) at the time of its 4:32 p.m. “purchase.”

16       We have considered plaintiff’s remaining arguments and

17   find them to be without merit.    Accordingly, the February 2,

18   2009 amended order of the district court is hereby AFFIRMED.
19
20
21                               For the Court
22                               Catherine O’Hagan Wolfe, Clerk
23
24
25                               By: ______________________
26

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