OBASI INVESTMENT LTD; JINGLI SHAO; ROBIN JOACHIM DARTELL; LIXIN WU; JASON HELTON; SEAN CARITHERS, individually and on behalf of all others similarly situated
TIBET PHARMACEUTICALS, INC; HONG YU; TAYLOR Z. GUO; SABRINA REN; WENBO CHEN; YOUHANG PEN; SOLOMON CHEN; ANDERSON & STRUDWICK INC; STERNE AGEE GROUP INC; HAYDEN ZOU; L. MCCARTHY DOWNS, III; ACQUAVELLA CHIARELLI SHUSTER BERKOWER & CO., L.L.P., HAYDEN ZOU; L. MCCARTHY DOWNS, III, Appellants
February 12, 2019
Appeal from the United States District Court for the District
of New Jersey (D.C. No. 2-14-cv-03620) District Judge: Hon.
John M. Vazquez
Neil Hartzell [Argued] Freeman Mathis & Gary Attorney for
Appellant L. McCarthy Downs, III
Michael P. Tremonte [Argued] Justin J. Gunnell Sher Tremonte
Attorneys for Appellant Hayden Zou
Laurence M. Rosen [Argued] Rosen Law Firm Keith R. Lorenze
Rosen Law Firm Attorneys for Appellees
Before: HARDIMAN, SCIRICA, and COWEN, Circuit
HARDIMAN, CIRCUIT JUDGE.
case comes to the Court as a certified interlocutory appeal.
The sole question presented is whether, under Section 11 of
the Securities Act of 1933, 15 U.S.C. § 77k, a nonvoting
board observer affiliated with an issuer's placement
agent is a "person who, with his consent, is named in
the registration statement as being or about to become a
director[ ] [or] person performing similar functions . . .
." Id. § 77k(a)(3).
think not. As required by the text of § 77k(a)(3), our
inquiry begins and ends with the registration statement's
description of the Defendants. We hold as a matter of law
that the Defendants' functions are not
"similar" to those that board directors perform, so
we will reverse the District Court's order and direct the
entry of summary judgment for the Defendants.
Pharmaceuticals, Inc. is a holding company. Through an array
of parent-subsidiary relationships and contractual rights,
Tibet "effectively control[led]" Yunnan Shangri-La
Tibetan Pharmaceutical Group Limited (Yunnan), an operating
company that manufactured and sold traditional Tibetan
medicines. Dartell v. Tibet Pharm., Inc., 2017 WL
1944106, at *2 (D.N.J. May 10, 2017). This case involves
Tibet's attempt to raise capital for those operations
through an initial public offering (IPO).
Zou was an early investor in Tibet and the sole director of
China Tibetan Pharmaceuticals Limited, a wholly owned
subsidiary of Tibet. Tibet's ability to control Yunnan
flowed through China Tibetan. In late 2009, Zou told L.
McCarthy Downs, III, a managing director at the investment
bank Anderson & Strudwick, Inc. (A&S), about Tibet.
The two discussed the prospect of a Tibet IPO, and A&S
later agreed to serve as Tibet's placement agent. Zou and
Downs then worked together to bring Tibet public. Tibet's
IPO registration statement became effective in late 2010.
Downs were neither signatories to the registration statement
nor named in it as directors of Tibet. Instead, they were
listed as nonvoting board observers chosen by A&S. Though
Zou and Downs would have no formal powers or duties, the
registration statement explained "they may nevertheless
significantly influence the outcome of matters submitted to
the Board of Directors for approval." App. 178.
turned out, the registration statement omitted material
negative information about Yunnan's finances. Yunnan had
defaulted on a loan from the Chinese government a few months
before Tibet's registration statement became effective
and that default led to a judgment that required repayment
within 60 days. Though the registration statement described a
"long term loan," it said nothing about the default
before Tibet filed its amended final prospectus, the Chinese
government froze all of Yunnan's assets. Tibet did not
disclose that either. The IPO closed soon thereafter, and
Tibet and its underwriters offered 3 million shares to the
public at $5.50 per share. But Yunnan still hadn't paid
what it owed, so the Agricultural Bank of China auctioned off
the company's assets. This prompted the NASDAQ to halt
trading in Tibet's stock, and its price plummeted.
sued Zou, Downs, Tibet, A&S, the IPO's auditor, and
several other Defendants on behalf of a class of stock
purchasers. As relevant to this certified interlocutory
appeal, Plaintiffs alleged Zou and Downs violated Section 11
of the Securities Act of 1933, 15 U.S.C. § 77k(a).
11 imposes near-strict liability for untruths and omissions
made in a registration statement. See In re Suprema
Specialties, Inc. Sec. Litig., 438 F.3d 256, 269 (3d
Cir. 2006). Unlike antifraud cases, a § 11 plaintiff
need not allege scienter, reliance,  or loss causation. See
In re Constar Int'l Inc. Sec. Litig., 585 F.3d 774,
782-783 (3d Cir. 2009); In re Morgan Stanley Info. Fund
Sec. Litig., 592 F.3d 347, 359 (2d Cir. 2010). Congress
imposed this in terrorem liability on those best
positioned to ensure accurate disclosure. In re Lehman
Bros. Mortg.-Backed Sec. Litig., 650 F.3d 167, 181 (2d
Cir. 2011) (citing Herman & MacLean v.
Huddleston, 459 U.S. 375, 381- 82 & n.13 (1983)).
§ 11 is such strong medicine, and to meet its purpose of
enforcing accurate registration statement disclosure, it
applies only to limited and enumerated categories of
defendants. See Herman & MacLean, 459 U.S. at
381-82; Lehman Bros., 650 F.3d at 185 ("It is
precisely because § 11 'gives rise to liability more
readily,' however, that it is [sic] applies 'more
narrowly' than § 10(b)." (quoting Morgan
Stanley, 592 F.3d at 359-60)). Among those defendants is
"every person who, with his consent, is named in the
registration statement as being or about to become a
director, person performing similar functions, or
partner." 15 U.S.C. § 77k(a)(3).
District Court, finding there were material issues of fact
about whether Zou and Downs had been named as people
"performing similar functions to a director,"
Dartell, 2017 WL 1944106, at *12, denied summary
judgment. At the outset, the Court held that only the
Defendants' description in the registration statement
itself is relevant to the inquiry. Turning to the merits, the
Court observed Zou and Downs were named in the registration
statement as about to become "board observers"
appointed by Tibet's placement agent. In a section titled
"Relationship with our Placement Agent," the
registration statement describes their role:
will have an ongoing relationship with our Placement Agent
that may impact our shareholders' ability to impact
decisions related to our operations.
In connection with this offering, we have agreed to allow our
Placement Agent to designate two non-voting observers to our
Board of Directors until the earlier of the date that: (i)
the investors that purchase shares in this offering
beneficially own less than five percent (5%) of our
outstanding shares; or (ii) the trading price per share is at
least [$24 per share] for any consecutive 15 trading day
period. Although our Placement Agent's observers will not
be able to vote, they may nevertheless significantly
influence the outcome of matters submitted to the Board of
Directors for approval.
App. 178; see App. 230.
acknowledging that Zou and Downs would not be able to vote,
the District Court observed "they may nevertheless
significantly influence the outcome of matters submitted to
the Board of Directors for approval." Dartell,
2017 WL 1944106, at *10. In the Court's view, because Zou
and Downs had the power to "influence," this meant
they "arguably had more influence than any individual
board member, who could only cast a single vote."
Id. "The Court's only hesitation" in
denying summary judgment was that the registration statement
used the word "may" rather than "shall"
or "will." Id. at *11. That meant it
"was not necessarily mandatory that the Board Observers
exercise their 'significant influence.'"
Id. Still, the Court determined that whether Zou and
Downs were covered by § 11 was a jury question.
Downs moved for certification of that order under 28 U.S.C.
§ 1292(b). The District Court granted the motion,
finding the underlying legal question-whether Zou and Downs
could be liable under § 11-met the requirements of
§ 1292(b). First, the District Court found the question
was a controlling question of law, because its conclusion
would create reversible error if we disagreed on appeal.
Second, the District Court found there was substantial ground
for difference of opinion, despite the question being one of
first impression in the courts of appeals, because
"Section 11 is narrowly construed" and reasonable
jurists could therefore disagree with its conclusion.
Dartell v. Tibet Pharm., Inc., 2018 WL 994896, at *5
(D.N.J. Feb. 21, 2018). Finally, the Court thought an
interlocutory appeal would materially advance the ultimate
termination of the litigation, because it had already granted
summary judgment for Zou and Downs on all counts save the one
alleging § 11 liability. If we disagreed with the
District Court, the litigation would thus be at an end. So
the District Court certified the following question:
Can Defendants be potentially liable under Section 11 of the
Securities Act of 1933, each as a "person performing
similar functions" to a director, in light of
Defendants' role as board observers who could (but did
not necessarily have to) significantly influence the outcome
of matters submitted to the board of directors for approval?
Order at 2, No. 2-14-cv-03620 (D.N.J. Feb. 21, 2018), ECF No.
313. We granted Zou and Downs's timely Petition for
Permission to Appeal and now reverse.
Securities Act does not define "director," so we
turn to dictionary definitions from the time Congress enacted
the statute. See New Prime Inc. v. Oliveira, 139
S.Ct. 532, 539 (2019). "Director" could mean
"[o]ne who . . . directs, rules, or guides; a guide, a
conductor; 'one that has authority over others; a
superintendent; [or] one that has the general management of
design or work.'" Director, Oxford English
Dictionary 392 (1st ed. 1933). Or, in a more specialized
sense related to business organizations, it could mean
"[a] member of a board appointed to direct or manage the
affairs of a commercial corporation or company."
Id.; see Directors, Black's Law
Dictionary 581 (3d ed. 1933) (defining "director"
as a "person[ ] appointed or elected according to law,
authorized to manage and direct the affairs of a corporation
§ 77k(a)(3) also lists "partner[s]" (in
context, another business organization title) and because
§ 77k(a) lists other statutory defendants by technical
titles ("underwriters" for example), it seems clear
enough Congress meant "director" in the second,
specialized sense. See Yates v. United States, 135
S.Ct. 1074, 1085 (2015) ("[A] word is known by the
company it keeps."); Bradley v. United States,
410 U.S. 605, 609 (1973) ("[T]he law uses familiar legal
expressions in their familiar legal sense." (quoting
Henry v. United States, 251 U.S. 393, 395 (1920))).
the text of the Securities Act, the Exchange Act definition
of director-which uses the phrase "director of a
corporation"-reinforces our conclusion. See 15
U.S.C. § 78c(a)(7) ("The term 'director'
means any director of a corporation or any person performing
similar functions with respect to any organization, whether
incorporated or unincorporated."). So does Securities
Act Regulation C, which defines "director" the same
way. 17 C.F.R. § 230.405.
functions, then, typify directorship? "The whole of the
directors collectively form the board of directors."
Directors, Black's Law Dictionary 581 (3d ed.
1933). Acting as a board, directors are the corporation's
agents. 2 Fletcher Cyc. Corp. § 507 (Sept. 2018 update);
4 Fletcher Cyc. Corp. § 2261 (1918). The board manages
the corporation's affairs by: (1) selecting senior
officers; (2) controlling executive compensation; (3)
delegating administrative authority to officers; (4) making
high level corporate policy; (5) deciding financing and
capital allocation; and (6) supervising the "welfare of
the whole enterprise." 2 Fletcher Cyc. Corp. § 505
(Sept. 2018 update); see 4 Fletcher Cyc. Corp.
§§ 1729, 1961, 1966 (1918); Blasband v.
Rales, 971 F.2d 1034, 1044 (3d Cir. 1992). Directors owe
duties of reasonable care and loyalty. 3 Fletcher Cyc. Corp.
§ 990 (Sept. 2018 update); see 4 Fletcher Cyc.
Corp. § 2261 (1918) ("[W]hether or not directors
and other corporate officers are strictly trustees, there can
be no doubt that their character is that of a fiduciary so
far as the corporation and the stockholders as a body are
concerned."). And if shareholders are unhappy with
directors, they can vote them out for any reason (or no
reason). 3 Fletcher Cyc. Corp. § 357.20 (Sept. 2018
update). At the most basic level, directors are thus defined
by their formal power to direct and manage a corporation, and
the responsibilities and duties that accompany those
as the term is used in § 77k(a)(3), is most aptly
defined as "[h]aving a marked resemblance or likeness;
of a like nature or kind." Similar, Oxford
English Dictionary 59 (1st ed. 1933). True, there are varying
degrees of likeness that might be described as
"similar." See In re Bernard L. Madoff Inv.
Sec. LLC, 773 F.3d 411, 419 (2d Cir. 2014) ("In
ordinary usage, the word 'similar' means 'having
characteristics in common,' or 'alike in substance or
essentials.'" (quoting Webster's New Int'l
Dictionary 2120 (3d ed. 1993))); Ayes v. U.S. Dep't
of Veterans Affairs, 473 F.3d 104, 108 (4th Cir. 2006)
("Although the term 'grant' is not defined in
the statute, the use of the word 'similar' limits the
universe of 'grants' to . . . only grants bearing a