Shareholder Representative Services LLC v. Sandoz Inc. et al

Filing 78

OPINION AND ORDER re: 56 MOTION to Dismiss the Second Amended Complaint filed by Sandoz Inc., 51 MOTION to Dismiss the Second Amended Complaint filed by Sandoz AG, Jeff George, Christina Ackermann, Sandoz International GmbH, 48 MO TION to Dismiss the Second Amended Complaint filed by Sandoz AG, Jeff George, Christina Ackermann, Sandoz International GmbH, 54 MOTION to Dismiss the Second Amended Complaint filed by Sandoz AG, Jeff George, Christina Ackermann, Sandoz International GmbH. The defendants March 27 motions to dismiss the Complaint are granted. The Complaint is dismissed without prejudice. The Clerk of Court shall close the case. (Signed by Judge Denise L. Cote on 8/7/2013) (tn)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
---------------------------------------X
:
SHAREHOLD REPRESENTATIVE SERVICES LLC :
suing on its own behalf and on behalf :
:
of the former shareholders of ORIEL
THERAPEUTICS, INC., in its capacity as :
:
Stockholders’ Representative,
:
Plaintiff,
:
:
-v:
:
SANDOZ INC., SANDOZ AG, SANDOZ
:
INTERNATIONAL GmbH, JEFF GEORGE, and
:
CHRISTINA ACKERMAN,
:
:
Defendants.
:
---------------------------------------X

12 Civ. 6154 (DLC)
OPINION AND ORDER

For Plaintiff:
Roger R. Crane
Brian Koosed
Phillip Rodgers
Molly Nixon-Graf
K&L Gates LLP
599 Lexington Avenue
New York, New York 10022
For Defendant Sandoz, Inc.:
Arthur E. Brown
Angela R. Vicari
Daphne Murdochowitz
Kaye Scholer LLP
425 Park Avenue
New York, New York 10022
For Defendants Sandoz AG, Sandoz International GmbH, Jeff George,
and Christina Ackerman:
Faith Gay
Michael Carlinsky
Corey Worcester
Quinn Emanuel Urquhart & Sullivan, LLP
New York, New York 10010
1

Lauren Weeman Misztal
Quinn Emanuel Urquhart & Sullivan, LLP
1299 Pennsylvania Avenue, Suite 825
Washington D.C. 20004
DENISE COTE, District Judge:
Shareholder Representative Services LLC (“SRS”) asserts a
host of claims, including claims of securities fraud under the
Securities Exchange Act of 1934, against the defendants on its
own behalf and on behalf of the former shareholders of a merged
company.

Each of the defendants has moved to dismiss SRS’s

complaint pursuant to Federal Rules of Civil Procedure 12(b)(1)
and 12(b)(6).

Because SRS lacked standing at the time this suit

was filed to assert the federal statutory claims upon which the
assertion of subject matter jurisdiction rests, the motions to
dismiss are granted and this action is dismissed without
prejudice.
BACKGROUND
The following facts are taken predominantly from the second
amended complaint (“Complaint”) and documents integral to it, and
are assumed to be true for the purposes of this Opinion.

When

relevant, references are also made to the original complaint
(“Original Complaint”) filed on August 10, 2012, and the first
amended complaint (“First Amended Complaint”) filed on November
13, 2012.
SRS is a stockholder representative that acts on behalf of
former shareholders of selling entities in connection with
2

mergers and acquisitions when merger agreements provide for
future contingent payments or indemnification obligations.

As

SRS explains, stockholder representatives play a useful role in
mergers and acquisitions by, among other things, alleviating the
logistical issues a potential buyer would face if required to do
business with hundreds of individual shareholders instead of a
single stockholder representative.

The defendants Sandoz Inc.,

Sandoz AG, and Sandoz International GmbH (“Sandoz International”)
are subsidiaries of nonparty Novartis, the world’s second largest
producer of generic pharmaceutical drugs.

Defendant Jeff George

(“George”) is the Chief Executive Officer of Sandoz AG, and
defendant Christina Ackermann (“Ackermann”) was, at relevant
times, the Global Head Legal & General Counsel for Sandoz AG.
Negotiations and 2010 Merger Agreement
The issues in the instant action arise out of a merger
agreement (the “Merger Agreement”) executed in April 2010, in
which Sandoz Inc. purchased Oriel Therapeutics, Inc. (“Oriel”), a
bio-pharmaceutical company, and the negotiations that preceded
the execution of the Merger Agreement.

The underlying events

began in roughly July of 2009, when Oriel retained counsel to
advise it in connection with its potential sale to a third party.
The relevant negotiations began in December 2009, when Sandoz AG
sent Oriel’s counsel a “non-binding bid for the purchase of”
Oriel (“Offer Letter”).

The Offer Letter was signed by George

3

and Ackermann.

The telephone extensions for George and Ackermann

listed in the Offer Letter correspond to telephone numbers that
purportedly connect to offices at the headquarters of Sandoz
International.
As discussed at greater length below, the proposed sale of
Oriel involved the transfer and continued development of a
medication referred to in this Opinion as Drug X.

Thus, the

Offer Letter stated that Sandoz AG “believe[d] that Novartis’
Sandoz and Pharmaceutical divisions bring to the table several
key competencies and strengths that could prove critical to Oriel
in order to complete the technical development of its product and
establish viable commercial manufacturing operations.”

The Offer

Letter highlighted a German production facility known as
Aeropharm.

It stated:

In particular, Sandoz has recently invested over €50
Million to develop a state of the art Respiratory
manufacturing and Development Center in Rudsolstadt,
Germany [(“Aeropharm”)]. Additionally, Novartis Pharma
possesses a very deep knowledge in respiratory device
engineering and development and we plan to make those
resources available to Oriel as it further scales up
its manufacturing processes. Sandoz also plans to
leverage its extensive API sourcing and manufacturing
capabilities to enable Oriel to gain a greater
advantage in sourcing raw materials which we believe
could help reduce risk of API supply quality and
improve approval timelines.
According to the Complaint, the content of the Offer Letter
and “similar oral representations made by and on behalf of
Sandoz” convinced Oriel’s Board of Directors to pursue exclusive

4

negotiations with the Sandoz defendants.

On March 22, 2010,

while negotiations were ongoing, representatives of the Sandoz
defendants met with representatives of Oriel and certain Oriel
shareholders in New York City.

At the meeting, Daniel Salvadore,

Director of Strategy of Mergers and Acquisitions for Sandoz AG
told the Oriel representatives and certain Oriel shareholders
that “Aeropharm was a state of the art facility,” that Sandoz AG
had “invested 50 million Euros to make it state of the art,” and
that Sandoz AG “insisted on manufacturing and testing [Drug X] at
Aeropharm.”

The negotiations resulted in the execution of the

Merger Agreement, under which Sandoz Inc. agreed to pay the
shareholders of Oriel (“Shareholders”) upfront cash consideration
and additional cash consideration conditioned on attainment of
certain Milestone Events described in the Merger Agreement, in
exchange for their shares in Oriel.
The Milestone Events were keyed to certain development goals
for Drug X.

To understand these Milestone Events it is useful to

mention that Drug X is intended to be a generic equivalent of a
successful asthma drug (“Brand Name Drug”).

The Brand Name

Drug’s patent is set to expire at an unspecified time in the near
future and the Merger Agreement’s Milestone Events contemplate
that Sandoz Inc. will seek to have Drug X be the “first filed”
generic equivalent of Brand Name Drug.

Accordingly, the

Milestone Events involve the achievement of certain related

5

goals, including attainment of bio-equivalence between the Brand
Name Drug and Drug X, “demonstration that [Drug X] maintained
stability on store shelves over certain periods of time and under
certain conditions, and regulatory approval by the United States
Food and Drug Administration.”

It is alleged that several of the

requirements for achieving the Milestone Events are predicated on
Drug X being tested and produced at the Aeropharm facility in
Germany.
Role of SRS under the Merger Agreement
The Shareholders were represented in the merger by plaintiff
SRS.

The Merger Agreement provides that it is “made and entered

into” by Sandoz Inc., Oxford Merger Sub Corp. (“Oxford”), 1 Oriel,
and SRS, “solely as the Stockholders’ Representative.”

The

Merger Agreement provides that it is “enforceable by and inure[s]
solely to the benefit of the parties” to the Merger Agreement.
The Shareholders did not individually sign the Agreement.
Section 8.1 of the Merger Agreement describes the role of
SRS as the agent and attorney-in-fact of the Shareholders.

It

provides, in part:
By virtue of the adoption of this Agreement and/or the
cancellation by a Former Holder of Company Options or
Company Warrants in exchange for Merger Consideration,
Option Consideration or Warrant Consideration pursuant
to this Agreement, the Former Holders irrevocably
nominate, constitute and appoint Shareholder
1

Oxford was a merger subsidiary created by Sandoz Inc. for
purposes of the merger. Following the close of the merger,
Oxford ceased to exist and Oriel became a wholly-owned subsidiary
of Sandoz Inc.
6

Representative Services LLC as the agent and true and
lawful attorney-in-fact of the Former Holders
(“Stockholders’ Representative”) to take any and all
actions and make any and all decisions required or
permitted to be taken or made by the Stockholders’
Representative under this Agreement or the Escrow
Agreement, including the exercise of the right to . . .
(iv) agree to, negotiate, enter into settlements and
compromises of and comply with court orders with
respect to claims for indemnification made by Parent
under Section 7 or disputes regarding Section 1.7
[Sandoz Inc.’s obligation to use Diligent Efforts to
achieve Milestone Events]; and (v) take all actions
necessary or appropriate in the good faith judgment of
the Stockholders’ Representative for the accomplishment
of the foregoing. The power of attorney granted in
this Section 8.1 is coupled with an interest and is
irrevocable. . . . From and after the Effective Time, a
decision, act, consent or instruction of the
Stockholders’ Representative shall be final, binding
and conclusive upon each Former Holder. . . .
(Emphasis supplied.)

A “Letter of Transmittal” executed by the

Shareholders, through which the Shareholders agreed to the terms
of the Merger Agreement and surrendered their shares in Oriel,
similarly described SRS’s role:
By signing and submitting this Letter of Transmittal,
the undersigned hereby (a) irrevocably nominates
constitutes and appoints Shareholder Representatives
Services LLC as the agent and true and lawful attorneyin-fact of the undersigned (the “Stockholders’
Representatives”) to take any and all actions and make
any and all decisions required or permitted to be taken
or made by the Stockholders’ Representative under the
Merger Agreement or the Escrow Agreement. . . . (b)
agrees that the power of attorney granted hereunder is
coupled with an interest and is irrevocable. . . . From
and after the Effective Time, the undersigned agrees
that a decision, act, consent or instruction of the
Stockholders’ Representative shall be final, binding
and conclusive upon the undersigned. . . .
(Emphasis supplied.)

7

The Merger Agreement also contemplates that SRS will enforce
Sandoz Inc.’s obligation to use “Diligent Efforts” to attain the
Milestone Events that would trigger the Milestone payments
described above.

Section 7.1(f) of the Merger Agreement outlines

a dispute resolution process to be followed when SRS believes
that Sandoz Inc. is not using “Diligent Efforts” to achieve the
Milestone Events.

It provides:

If [SRS] in good faith believes that [Sandoz Inc.] is
not using the Diligent Efforts required hereby to
fulfill any of the Milestone Events, then [SRS] may
provide [Sandoz Inc.] with written notice thereof. If
such notice is given, [Sandoz Inc.] agrees that it will
designate representatives, including at least one
officer with operating responsibility for the [Drug X]
Product, to meet with [SRS] within 45 days from the
date of such notice to address in good faith [SRS’s]
belief that [Sandoz Inc.] is not using such Diligent
Efforts and any steps that can be taken to cure any
breach of such covenant. . . . If the participating
parties fail to resolve the issues within 60 days after
such notice, then [SRS], on behalf of the Earnout
Participants, may assert any claims against [Sandoz
Inc.] arising from breach of such covenant.
Under the Merger Agreement, SRS was entitled to receive
$185,000 as compensation for its services.
SRS has already received this compensation.

It is undisputed that
In addition, the

Merger Agreement and Letter of Transmittal provide that Sandoz
Inc. will make a $250,000 payment to SRS for inclusion in a
“Reserve Amount” deposited in a U.S. Bancorp account upon the
achievement of each Milestone Event 1 and Milestone Event 2.
After SRS’s $185,000 compensation has been paid, the Reserve
Amount is to be used by SRS
8

to fund any out-of-pocket costs and expenses incurred
by the Stockholders’ Representative in connection with
actions taken by the Stockholders’ Representative
pursuant to the terms of the Merger Agreement
(including the hiring of legal counsel and the
incurring of legal fees and costs.). . . .
To the extent the funds in the Reserve Amount are not used, the
remaining funds are distributed to the Shareholders.
Events Following Closing of Merger
The merger closed on June 1, 2010.

The Complaint alleges

that, following the closing of the merger, it became evident that
Aeropharm was not in fact “a state of the art facility ready to
receive the equipment necessary to manufacture and test [Drug
X].”

SRS’s first notice of this fact came in September 2010,

when Sandoz Inc. sent a report to SRS indicating that Sandoz Inc.
was investigating production of [Drug X] at facilities other than
Aeropharm.

In a subsequent report of January 11, 2011, Sandoz

Inc. informed SRS that it would not be manufacturing [Drug X], at
least initially, at Aeropharm.
The Complaint alleges that despite the fact that the Merger
Agreement set September 30, 2011 as the deadline for satisfying
the bio-equivalency and stability standards set forth in
Milestone Event 1, Sandoz did not begin installing the necessary
manufacturing equipment at Aeropharm until April 2011, was still
installing equipment as of December 2011, and had not commenced
manufacturing at scale as of June 28, 2012.

In addition,

although the Milestone Events are framed in terms of three
9

different dose strengths for Drug X, Sandoz Inc. has unilaterally
decided to focus on a single dose strength.

In sum, as a result

of the defendants’ misrepresentations, the Complaint alleges, the
Shareholders were induced to sell their Oriel securities at
artificially deflated prices.

Furthermore, as a result of Sandoz

Inc.’s failure to use diligent efforts to achieve the Milestone
Events, the Shareholders will be deprived of the Milestone
payments they would have otherwise received.
PROCEDURAL HISTORY
SRS filed its Original Complaint on August 10, 2012.

The

Original Complaint indicated that SRS filed suit in its own name,
but “on behalf of the former shareholders of Oriel Therapeutics,
Inc.”

On October 22, Sandoz Inc. filed a motion to dismiss the

Original Complaint, challenging SRS’s standing to sue on behalf
of the Shareholders.

Following this motion, SRS obtained

assignments from some, but not all, of the Shareholders. 2
Pursuant to the assignments, some of the Shareholders agreed to
[i]rrevocably, [sic] convey, transfer, assign and grant
to Shareholder Representative Services LLC as
Stockholders Representative pursuant to the Agreement
and Plan of Merger executed as of April 10, 2010 . . .
and Stockholders Representative Agreement executed as
of May 19, 2010 . . . for purposes of collection, all
of Assignors’ right, title and interest in and to all
claims other than contractual claims to receive
Contingent Payments under the Merger Agreement . . .
including, but not limited to, all common law fraud,
misrepresentation and negligent misrepresentation
2

The Complaint indicates that the assignment agreement is dated
November 9, 2012. The assignment agreement and accompanying
signature pages provided to the Court, however, are undated.
10

claims, federal securities fraud claims and state
securities fraud claims of Assignors . . . against
Sandoz Inc., Sandoz AG, Sandoz International GmbH, Jeff
George and Christina Ackerrnann [sic] . . . alleged or
to be alleged in the action pending in the United
States District Court for the Southern District of New
York
(Emphasis supplied.)

As demonstrated by the language of the

assignments, the assigning Shareholders did not assign their
contractual claims to receive contingent payments under the
Merger Agreement.

Pursuant to a Remittance Agreement between SRS

and the same Shareholders, SRS agreed to remit “all sums,
proceeds, money and other consideration obtained by it in
connection with the enforcement and collection of the assigned
claims.”
On November 13, SRS filed its First Amended Complaint, which
indicated that SRS sought to sue “on its own behalf and on behalf
of the former shareholders of Oriel Therapeutics, Inc.”

On

January 1, 2013, this case was reassigned to this Court.

At the

initial pretrial conference held on January 24, the defendants
again raised the issue of SRS’s standing to sue.

In particular,

defendants raised the issue of whether plaintiff’s post-filing
receipt of assignments cured a lack of standing that existed at
the commencement of the action.

In light of these issues, the

plaintiff was instructed to inform the Court by February 1
whether it intended to withdraw the present action and commence a
new action.

By letter dated February 1, SRS advised that it had

11

decided not to commence a new action but that it would instead be
filing a second amended complaint.

Accordingly, the plaintiff

filed the Complaint on March 5, 2013.
The Complaint alleges that SRS has standing to sue on the
basis of its role under the Merger Agreement as stockholders’
representative and on the basis of its assignments from some of
the Shareholders.

The Complaint raises eleven causes of action:

(1) violation of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5; (2) violation of Section 20(a) of the
Securities Exchange Act; (3) breach of the Merger Agreement; (4)
breach of the implied obligation of good faith and fair dealing;
(5) common law fraud; (6) violation of North Carolina Securities
Act § 78A-56 against Sandoz AG, Sandoz International, George, and
Ackermann; (7) violation of North Carolina Securities Act § 78A56 against Sandoz Inc.; (8) violation of California Corporate
Securities Law § 25501 against Sandoz AG, Sandoz International,
George, and Ackermann; (9) negligent misrepresentation; (10)
equitable fraud; and (11) unjust enrichment. 3

Notably, the

Court’s subject matter jurisdiction over this case, if it exists,
is grounded in 28 U.S.C. § 1331, also known as federal question
jurisdiction.

The Original Complaint had also identified federal

question jurisdiction as the basis for this Court’s subject
matter jurisdiction over the lawsuit and had also pleaded
violations of the federal securities laws.

12

DISCUSSION
The defendants move to dismiss the Complaint on the ground
that the plaintiff does not have Article III standing to sue, and
thus this Court does not have subject matter jurisdiction over
this case.

In addition, the defendants contend that the

Complaint should be dismissed for failure to state a claim.
Because the Complaint must be dismissed for lack of subject
matter jurisdiction, this Opinion does not address whether any of
the causes of action in the Complaint state a claim.
“Determining the existence of subject matter jurisdiction is
a threshold inquiry and a claim is properly dismissed for lack of
subject matter jurisdiction under Rule 12(b)(1) when the district
court lacks the statutory or constitutional power to adjudicate
it.”

Morrison v. Nat'l Austl. Bank Ltd., 547 F.3d 167, 170 (2d

Cir. 2008) (citation omitted).

On a motion to dismiss for lack

of subject matter jurisdiction pursuant to Rule 12(b)(1), “[t]he
plaintiff bears the burden of proving subject matter jurisdiction
by a preponderance of the evidence.”

Aurecchione v. Schoolman

Transp. System, Inc., 426 F.3d 635, 638 (2d Cir. 2005).

In

reviewing such a motion, the court “must accept as true all
material factual allegations in the complaint, but [is] not to
draw inferences from the complaint favorable to plaintiffs.”
J.S. ex rel. N.S. v. Attica Cent. Schs., 386 F.3d 107, 110 (2d
Cir. 2004) (citation omitted).
3

In addition, a district court may

The Original Complaint raised the same eleven causes of action.
13

consider evidence outside the pleadings to resolve the motion to
dismiss for lack of subject matter jurisdiction.

Morrison, 547

F.3d at 170.
Article III, Section 2 of the United States Constitution
limits the jurisdiction of the federal courts to actual cases and
controversies.

See Sprint Comm. Co., L.P. v. APCC Servs., Inc.,

554 U.S. 269, 273 (2008).

One component of this limitation is

the requirement that a plaintiff suing in federal court have
standing to sue.

Lance v. Coffman, 549 U.S. 437, 439 (2007).

It

is now well-established that
[t]he irreducible constitutional minimum of standing
contains three elements: (1) there must be an ‘injury
in fact,’ -- an invasion of a legally protected
interest which is (a) concrete and particularized, and
(b) actual or imminent, not conjectural or
hypothetical; (2) there must be a causal connection
between the injury and the conduct complained of; and
(3) it must be likely, as opposed to merely
speculative, that the injury will be redressed by a
favorable decision.
Port Washington Teachers’ Assn. v. Board of Educ. Of Port
Washington, 478 F.3d 494, 498 (2d Cir. 2007) (citation omitted).
With respect to the first element of constitutional standing, the
“minimum requirement for an injury-in-fact is that the plaintiff
have legal title to, or a proprietary interest in, the claim.”
W.R. Huff Asset Mgmt. Co. v. Deloitte & Touche LLP, 549 F.3d 100,
108 (2d Cir. 2008).
To determine whether a plaintiff has standing to sue, the
court “must look to the facts and circumstances as they existed
14

at the time [the] suit was initiated.”

Etuk v. Slattery, 936

F.3d 1433, 1440-41 (2d Cir. 1991) (standing).

“Events occurring

after the filing of the complaint cannot operate so as to create
standing where none previously existed.”

City of Hartford v.

Towns of Glastonbury, 561 F.2d 1042, 1051 n.3 (2d Cir. 1977) (en
banc).

This approach is consistent with courts’ treatment of

other aspects of subject-matter jurisdiction as well.

Cf. Group

Dataflux v. Atlas Global Group, L.P., 541 U.S. 567, 568, 570-74
(2004) (diversity jurisdiction).
A plaintiff must demonstrate standing for each claim and
form of relief sought.
225 (2d Cir. 2010).

Carver v. City of New York, 621 F.3d 221,

In other words, “with respect to each

asserted claim, a plaintiff must always have suffered a distinct
and palpable injury to [it]self.”

Mahon v. Ticor Title Ins. Co.,

683 F.3d 59, 64 (2d Cir. 2012) (emphasis and citation omitted).
The Complaint raises eleven causes of action.

The fact that the

claims arise from a common set of facts does not relieve the
plaintiff of its obligation to demonstrate constitutional
standing to sue for each one.

DaimlerChrysler Corp v. Cuno, 547

U.S. 332, 352 (2006).
The plaintiff asserts that subject matter jurisdiction
exists over this action as a result of federal question
jurisdiction, pursuant to 28 U.S.C. § 1331.

Only two of the

Original Complaint’s claims present federal questions.

15

For the

remaining claims, the plaintiff sought to invoke the Court’s
supplemental jurisdiction pursuant to 28 U.S.C. § 1367.

As a

result of these circumstances, if the plaintiff is unable to
establish constitutional standing to assert violations of the
federal securities law claims -- the claims on which the Court’s
original jurisdiction is predicated -- the only remaining claims
would be plaintiff’s state law claims.

Where a court determines

that “there [is] no original federal subject matter jurisdiction
over the suit,” it cannot “exercise supplemental jurisdiction”
over state law claims.

See Nowak v. Ironworkers Local 6 Pension

Fund, 81 F.3d 1182, 1187 (2d Cir. 1996).

Accordingly, if the

plaintiff did not have standing to assert the federal securities
law claims when it filed this lawsuit, there is no original
federal subject matter jurisdiction over the suit, and thus no
ability to exercise supplemental jurisdiction over plaintiff’s
state law claims. 4
It is undisputed that the assignments executed by some of
the Shareholders granted SRS legal title to those Shareholders’
non-contract claims.

Because a plaintiff’s standing to sue is

assessed based on facts existing at the time of filing suit,
however, SRS’s post-filing receipt of assignments does not cure

4

In contrast, where a court dismisses the claims over which it
had original jurisdiction for failure to state a claim pursuant
to Federal Rule of Civil Procedure 12(b)(6), it retains
discretion to exercise supplemental jurisdiction over the state
law claims. A dismissal for lack of constitutional standing,
however, is a dismissal for lack of subject-matter jurisdiction.
16

the standing defect that existed when this action commenced.
Conolly v. Taylor, 27 U.S. 556, 565 (1829) (“Where there is no
change of party, a jurisdiction depending on the condition of the
party is governed by that condition, as it was at the
commencement of the suit.”).
SRS argues that Federal Rules of Civil Procedure 17(a)(3)
and 15(c) permit a plaintiff who did not originally have standing
to cure the standing defect by obtaining assignments from the
owners of the claims, amending the complaint to reflect the
assignments, and having the amended complaint relate back to the
original filing of the complaint.
these procedural rules.

SRS misconstrues the import of

Federal Rule of Civil Procedure 17(a)(3)

provides that a court
may not dismiss an action for failure to prosecute in
the name of the real party in interest until, after an
objection, a reasonable time has been allowed for the
real party in interest to ratify, join, or be
substituted into the action. After ratification,
joinder, or substitution, the action proceeds as if it
had been originally commenced by the real party in
interest.
Fed.R.Civ.P. 17(a)(3).

Rule 17 says nothing about the

jurisdiction of this Court; its sole concern is the naming of the
proper party as plaintiff.

Lincoln Prop. Co. v. Roche, 546 U.S.

91, 90 (2005); Oscar Gruss & Son, Inc. v. Hollander, 337 F.3d
186, 193-94 (2d Cir. 2003).

Moreover, “Rule 17(a), like all

rules prescribed by the Supreme Court, may not abridge, enlarge,
or otherwise modify substantive rights. . . . It therefore cannot
17

provide an independent basis for standing.”

In re Bernard L.

Madoff Inv. Sec. LLC., -- F.3d --, 2013 WL 3064848, *14 n.25 (2d
Cir. June 20, 2013); see also Zurich Ins. Co. v. Logitrans, Inc.,
297 F.3d 528, 531-32 (6th Cir. 2002).

The same is true of

Federal Rule of Civil Procedure 15(c), which provides that “an
amendment to a pleading relates back to the date of the original
pleading when . . . the amendment changes the party or the naming
of the party against whom the claim is asserted.”
15(c).

Fed.R.Civ.P.

Accordingly, because SRS’s post-filing receipt of claim

assignments from some of the Shareholders cannot cure any
standing defect that existed at the time SRS filed suit, this
Opinion proceeds to consider whether SRS had standing to sue when
it filed suit on August 10, 2012.
At the time SRS filed its Original Complaint it had not
personally suffered an injury-in-fact.

It sought instead to

raise the injuries and legal rights of the Shareholders.

Neither

the Original Complaint nor the Complaint identifies a concrete
and particularized injury that SRS has suffered as a result of
the defendants’ actions.

SRS had no financial stake in the

Shareholders’ claims and suffered no economic injury as a result
of defendants’ actions.

Its role in the underlying events, and

at the time of this action’s commencement, was that of “agent and
true and lawful attorney-in-fact” for the Shareholders.

This

role, without more, does not convert the injuries allegedly

18

suffered by the Shareholders into SRS’s own injuries.

See W.R.

Huff Asset Mgmt. Co., 549 F.3d at 107-08.
At bottom, the Original Complaint alleges two types of
injuries that followed from defendants’ conduct. 5

First -- with

respect to the securities law claims -- the Original Complaint
alleges that the defendants’ material misrepresentations or
omissions regarding the readiness of Aeropharm induced the
Shareholders to sell their shares in Oriel for artificially low
prices.

Second, the Original Complaint alleges that due to

Sandoz Inc.’s failure to use diligent efforts to achieve the
Milestone Events, the Shareholders will not receive the Milestone
payments they would have otherwise received.
Any injuries that resulted from this course of conduct were
injuries to the Shareholders, not to SRS.

The only shares

tendered to Sandoz Inc. in connection with the merger were the
shares owned by the Shareholders.

It is the Shareholders who

were allegedly defrauded by the defendants’ misrepresentations,
and the Shareholders who will not receive the Milestone payments
they might have received if Sandoz Inc. had used diligent efforts
to achieve the Milestone Events.

Nothing in the Merger Agreement

or Transmittal Letter assigned the Shareholders’ claims to SRS.
Instead, these documents merely designate SRS as the
Shareholders’ agent and attorney-in-fact.

5

Because SRS had no

This description of injury is consistent with that alleged in
the second amended complaint as well.
19

legal title to and no proprietary interest in the Shareholders’
claims, it did not satisfy the injury-in-fact requirement at the
time it commenced this action, and had no standing to raise the
Shareholders’ securities law claims on their behalf.
SRS makes roughly five arguments in support of its standing
to sue.

First, it argues that it is standard practice for a

shareholder representative to act on behalf of the former
shareholders of the selling entity where a merger agreement
provides for future contingent payments and/or indemnification
obligations.

It would be inefficient and even unfeasible, it

claims, for potential buyers of companies to do business with
each individual shareholder.

But, the convenience of having a

single shareholder representative sue on behalf of all former
shareholders does not relieve SRS of the obligation to satisfy
the irreducible minimum of constitutional standing.

In any

event, the constitutional standing requirement does not vitiate
the utility of such arrangements since a shareholder
representative who has received claim assignments from
shareholders has standing to assert the assigned claims.

Cf.

Sprint Comm. Co., L.P, 554 U.S. at 285.
Next, SRS claims that because the Merger Agreement
explicitly empowers SRS to “assert claims on behalf of” the
Shareholders, SRS must have standing to sue.

This argument

confuses contractual authorization to sue with constitutional

20

standing requirements.

Article III, Section 2 requires a

plaintiff to demonstrate that it personally suffered or will
imminently suffer an injury in fact.

A principal may authorize

its agent to sue on the principal’s behalf, but this
authorization does not vest the agent with legal title to, or a
proprietary interest in the principal’s claims.
Asset Mgmt. Co., 549 F.3d at 107-08.

See W.R. Huff

Contractual authorization

to sue -- when unaccompanied by a transfer of legal title or
proprietary interest in a claim -- is akin to a grant of
“consent” to a plaintiff’s standing to sue.

But, it is a long

established principle that “parties may not confer subject matter
jurisdiction on the court by consent.”

United States v. 27.09

Acres of Land, 1 F.3d 107, 111 (2d Cir. 1993) (citation omitted).
The fact that Sandoz Inc. and the Shareholders agreed that SRS
was authorized to assert claims arising out of the Merger
Agreement is insufficient to confer constitutional standing on
SRS to raise the Shareholders’ claims.
Next, SRS points out that the Merger Agreement is
“enforceable by and inure[s] solely to the benefit of” the
parties to the Merger Agreement, and that while SRS is a party to
the Merger Agreement, the Shareholders are not.

In a similar

vein, SRS points to Section 8.11 of the Merger Agreement in which
it was “agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement.”

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Because the Shareholders were not themselves parties to the
Merger Agreement, SRS argues, the Merger Agreement bars them from
suing in their own names to enforce the Merger Agreement. 6
Assuming without deciding that SRS’s position as counterparty to
the Merger Agreement is sufficient to vest it with constitutional
standing to sue for breach of the Merger Agreement, this provides
no basis to find that SRS has standing to assert the
Shareholders’ federal securities law claims.

A plaintiff must

establish its standing to sue for each claim it asserts and SRS
fails to explain how its role as contractual counterparty to the
Merger Agreement vests it with standing to raise the
Shareholders’ federal securities law claims.
Next, SRS claims that it has suffered an injury-in-fact
because, as a result of Sandoz Inc.’s failure to use diligent
efforts to achieve Milestone Events 1 and 2, it will not receive
the $250,000 payments it would have received upon the
satisfaction of each event.

Upon closer consideration, however,

this alleged “financial injury” is revealed to be no more than a

6

In further support of its argument that its role as
counterparty to the Merger Agreement vests it with a kind of
interest sufficient to substantiate its constitutional standing
to sue, SRS cites Global Aerospace, Inc. v. Platinum Jet mgmt,
LLC, 488 Fed.App’x 338, 340-41 (11th Cir. 2012). In Global
Aerospace a managing agent for a pool of three insurance
companies was found to have standing to sue for a declaration of
non-coverage and breach of an insurance policy, in part because
the managing agent had signed the insurance contract in its own
name. Id. at 340-41. Global Aerospace is an unpublished
Opinion. Pursuant to Eleventh Circuit rules such Opinions are
“not considered binding precedent,” but “may be cited as
22

byproduct of the present litigation.

The Merger Agreement does

require Sandoz Inc. to pay SRS $250,000 upon achievement of
Milestone Events 1 and 2.

Each such payment is added to a

“Reserve Amount,” which is deposited by SRS in a U.S. Bancorp
account.

Under the Merger Agreement SRS is

entitled to recover, from the Reserve Amount . . . any
out-of-pocket costs and expenses incurred by the [SRS]
in connection with actions taken by [SRS] pursuant to
the terms of this Agreement (including the hiring of
legal counsel and the incurring of legal fees and
costs). . . . Compensation of $185,000 to [SRS] for its
services shall be paid from the Reserve Amount.
Neither the Original Complaint nor the second amended complaint
alleges that SRS has incurred any costs or expenses that would
need to be paid out of the Reserve Amount.

In the absence of any

costs or expenses, SRS has no entitlement to the funds in the
Reserve Amount and the funds are disbursed to the Shareholders.
Of course, it is possible that SRS has incurred costs and
expenses in order to pursue this litigation -- a fact not alleged
in the Original Complaint or the second amended complaint.

It is

well-established, however, that “a plaintiff cannot achieve
standing to litigate a substantive issue by bringing suit for the
cost of bringing suit.”

Steel Co. v. Citizens for a Better

Environment, 523 U.S. 83, 107(1998).

Thus, the legal fees and

costs SRS may have incurred in pursuing the instant litigation
are insufficient to confer standing to sue.

persuasive authority.”

11th Cir. R. 36-2.
23

Finally, SRS claims that its role as stockholder
representative entitles it to the narrow exception to the injuryin-fact requirement articulated in W.R. Huff Asset Management Co.
v. Deloitte & Touche LLP.

In W.R. Huff Asset Management Co., an

investment advisor sought to sue on behalf of its investor
clients for the defendant’s alleged securities law violations.
W.R. Huff Asset Mgm’t Co., 549 F.3d at 104.

The court first

concluded that the advisor had not suffered an injury-in-fact.
It recognized, however, there are a “few well-recognized,
prudential exceptions to the ‘injury-in-fact’ requirement,” when
a plaintiff “can demonstrate (1) a close relationship to the
injured party and (2) a barrier to the injured party’s ability to
assert its own interests.”

Id. at 109.

For example,

courts historically have permitted trustees to bring
suits to benefit their trusts; guardians ad litem to
bring suits to benefit their wards; receivers to bring
suit to benefit their receiverships; assignees in
bankruptcy to bring suit to benefit bankrupt estate;
and executors to bring suit to benefit testator
estates.
Id. at 109-10 (citation omitted).

Even if this list of special

relationships may be read as commentary on the requirements for
Article III standing, the stockholder representative-stockholder
relationship is not the type of relationship that should
similarly entitle the stockholder representative to bring suit to
benefit its clients.

In sum, SRS has not satisfied Article III’s

requirements of standing.

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CONCLUSION
The defendants’ March 27 motions to dismiss the Complaint
are granted.

The Complaint is dismissed without prejudice.

Clerk of Court shall close the case.
Dated:

New York, New York
August 7, 2013

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The