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JLI Invest S.A. v. Computershare Trust Co., N.A.

United States District Court, D. Massachusetts

September 13, 2016

JLI INVEST S.A., and LIN INVEST S.A., Plaintiffs,
v.
COMPUTERSHARE TRUST COMPANY, N.A., et al. Defendants.

          MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO STAY

          ALLISON D. BURROUGHS U.S. DISTRICT JUDGE

         Plaintiffs, who were former shareholders of a biotechnology company, allege that the Defendants wrongfully escheated their shares to the state of Delaware, on the erroneous assumption that Plaintiffs' shares had been abandoned. Before the Court is Defendants' Motion to Stay this action, pending the resolution of a related litigation filed in the state of Delaware. [ECF No. 35]. Defendants urge the Court to stay this case based on the abstention doctrines set forth in Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976); Burford v. Sun Oil Co., 319 U.S. 315 (1943); and/or Railroad Commission of Texas v. Pullman Co., 312 U.S. 496 (1941). For the reasons set forth in this Memorandum and Order, Defendants' Motion is DENIED without prejudice to renew after the close of discovery.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         A. Facts Alleged in the Complaint

         Plaintiffs JLI Invest S.A. (“JLI”) and LIN Invest S.A. (“LIN”) (together, “Plaintiffs”) are Belgian entities with principal places of business in Brussels. JLI is 99.99% owned by Dr. Gilles Gosselin and 0.01% by Dr. Jean Louis Imbach. LIN is 99.99% owned by Dr. Imbach, and 0.01% by Dr. Gosselin.

         In 1997, Dr. Gosselin and Dr. Imbach headed a research team that synthesized a new Hepatitis B drug. The following year, Dr. Imbach, Dr. Gosselin, and others founded a biopharmaceutical company called Idenix Pharmaceuticals, Inc. (“Idenix”), to develop the drug in collaboration with Novartis Pharma AG and other entities. Plaintiffs allege that Drs. Gosselin and Imbach were key participants in Idenix's business and were well known to Idenix senior management, including top executives and directors.

         Idenix was organized as a Delaware corporation, with a principal place of business in Cambridge, Massachusetts. LIN owned 320, 000 shares of Idenix, and JLI owned 240, 000 shares. Plaintiffs allege, upon information and belief, that they were among the largest Idenix shareholders, and that Idenix was aware that Dr. Gosselin and Dr. Imbach had created JLI and LIN to hold their shares in the company. Plaintiffs contend that at all relevant times, they had physical possession of their stock certificates.

         Beginning in 2005, Defendant Computershare[1] acted as Idenix's stock transfer agent. In addition to providing transfer agent services, Computershare also agreed to provide services related to the escheatment of Idenix's abandoned or unclaimed securities. Those services included, for example, locating lost shareholders, communicating with shareholders to prevent escheatment of shares, and determining whether any Idenix shares had been abandoned. Plaintiffs contend that, as shareholders of Idenix, they were the third party beneficiaries of Computershare's agreement with Idenix.

         Plaintiffs further allege that at all relevant times, both Computershare and Idenix had written records of Plaintiffs' mailing addresses in Brussels. They also contend that Idenix periodically communicated with and sent correspondence to Plaintiffs regarding their shares, and that no such correspondence sent to Plaintiffs was ever returned to Idenix or Computershare as undeliverable.

         Under Delaware's state escheat statute, holders of unclaimed or abandoned property subject to Delaware's jurisdiction are required to report and remit such property to the State of Delaware. See 12 Del. C. §§ 1199, 1201. Plaintiffs allege that in November 2008, Computershare, acting as Idenix's agent, erroneously reported to the State of Delaware that Plaintiffs' 560, 000 shares of Idenix had been “abandoned” and constituted “unclaimed property.” On January 2, 2009, Computershare escheated Plaintiffs' shares to the State of Delaware. Neither Computershare nor Idenix attempted to contact Plaintiffs prior to escheating their shares, despite the fact that Idenix and Computershare had been in regular contact with Plaintiffs on other matters. Nor did the State of Delaware contact Plaintiffs to inform them that their shares were about to be, or had been, escheated.

         Plaintiffs did not learn that their shares had been escheated until March 30, 2011, after Plaintiffs made inquiries to Computershare about their stock. According to Plaintiffs, Computershare and Idenix attempted to justify the escheat by pointing to a June 30, 2008 amendment to the Delaware Escheats Law, see 12 Del. C. § 1198(9), which changed the rules governing the report and escheat of unclaimed property. Plaintiffs argue that Computershare and Indenix's interpretation of these amendments is incorrect, and that their escheat of Plaintiffs' shares was done unlawfully and in bad faith. They allege that neither Computershare nor Idenix ever contacted Plaintiffs to alert them of a change in Delaware's unclaimed property laws that would result in the automatic escheat of shares unless immediate action were taken. In fact, Plaintiffs allege that Computershare sent periodic securities account statements to them and other shareholders, which affirmatively stated that “No action on your part is required, unless you wish to deposit your existing certificates, sell or request a certificate, or transfer your book-entry shares.” See Complaint [ECF No. 10] (“Compl.”) ¶ 53. Plaintiffs also allege, on information and belief, that Computershare did not begin including any type of disclosure to shareholders regarding the potential escheat of shares until 2014, long after Plaintiffs' shares had been escheated.

         Plaintiffs also contend that when Computershare finally informed them, in March of 2011, that their shares had been escheated, the information Computershare communicated was incorrect. Specifically, Computershare erroneously reported that Plaintiffs' shares had been escheated to the Commonwealth of Massachusetts. As a result of this misinformation, Plaintiffs expended substantial time, effort, and expense in trying to determine the whereabouts of their shares.

         After Plaintiffs learned that their shares had actually been escheated to the State of Delaware, they filed a claim with the Delaware Office of Unclaimed Property (“DOUP”) in September 2012. The DOUP requested documentation from Plaintiffs, which they provided in October and December of 2012.

         Around the same time period, Plaintiffs requested documentation from Computershare and Idenix, including proof that their shares had been escheated. Computershare and Idenix did not immediately respond to Plaintiffs' requests, and were delinquent in providing the requested assistance. As a result, Plaintiffs were not able to obtain proof that their shares had been escheated to Delaware until May 2014.

         In October 2014, Plaintiffs further learned that the State of Delaware had liquidated their shares. Delaware reported that it had sold the shares in a series of transactions between March 24, 2009, and April 6, 2009, shortly after the shares were escheated. JLI's shares were sold for $726, 792.00, and LIN's shares were sold for $969, 059.75.[2]

         Plaintiffs allege that these amounts do not reflect, and are in fact substantially lower than, the true value of Plaintiffs' shares, because at the time the shares were liquidated, very few investors were buying or selling Idenix stock. As proof that their shares were undervalued at the time of liquidation, Plaintiffs note that in June 2014, Idenix entered into an agreement with Defendant Merck & Co., Inc. (“Merck”), under which Merck would acquire Idenix for $24.50 per share in cash. Plaintiffs allege that had their shares not been wrongfully escheated, they would have been eligible to participate in-and would have participated in-this tender offer. The tender offer was completed on August 4, 2014, at which time all existing Idenix shares were cancelled and converted into the right to receive cash, equal to the $24.50 per share offer. Plaintiffs contend that if their shares had not been escheated, LIN would have received $7, 840, 000 for its 320, 000 shares and JLI would have been entitled to receive $5, 880, 000 for its 240, 000 shares pursuant to the Merck tender offer.

         B. Plaintiffs' Administrative Appeal before the Delaware Tax Appeal Board

         Since learning that their shares had been escheated to Delaware, Plaintiffs have been pursuing a claim before the DOUP. In March 2015, Plaintiffs submitted a completed claim form, which requested that the DOUP provide Plaintiffs with their 560, 000 shares of Idenix stock, or the current fair market value thereof, which-based on the Merck tender offer-is $13, 720, 000.

         On March 31, 2015, the DOUP informed Plaintiffs that while it would not pay them the requested $13, 720, 000, it would refund Plaintiffs in the amount of $1, 695, 851.75, which represented the actual proceeds earned through the 2009 sale of Plaintiffs' Idenix stock. Plaintiffs accepted a check under protest, and the State of Delaware agreed that Plaintiffs' acceptance of these funds would not prejudice their rights to pursue their claims for the remainder.

         Under Delaware law, a property owner dissatisfied with the determination of its claim by the Delaware State Escheator may appeal that determination to the Delaware Tax Appeal Board (the “TAB”). See 12 Del. C. § 1146(b). Accordingly, on July 28, 2015, Plaintiffs filed a Petition with the TAB, challenging the Delaware State Escheator's determination that Plaintiffs were only entitled to the $1, 695, 851.75 in proceeds from the 2009 sale of their stock. See Declaration of Savvas A. Foukas [ECF No. 37] (“Foukas Decl.”), Ex. C. The Petition, which names only the Delaware State Escheator as a defendant, asserts eleven claims for relief, including that the Escheator violated the Delaware Escheats Law; the federal common law; Plaintiffs' due process rights under the United States Constitution and the Delaware state constitution; the Takings Clauses of both constitutions; the federal Commerce Clause; and the Friendship, Establishment and Navigation Treaty between the United States and Belgium (the “FEN Treaty”). See id. The Petition further alleges that the State Escheator is liable for negligence and conversion. In addition to damages, Plaintiffs request injunctive and declaratory relief.

         At the present time, discovery in the TAB proceeding appears to be complete, and the parties are currently briefing the matter. See Joint Status Report [ECF No. 58]. Briefing will be complete on October 28, 2016, and the TAB is expected to issue a decision sometime thereafter. See id. After the TAB renders a decision, either party may appeal that decision to the Delaware Court of Chancery. See 12 Del. C. § 1146(c).

         C. The Delaware Chancery Lawsuit

         Separate and apart from their claim before the TAB, Plaintiffs filed an additional lawsuit in the Delaware Court of Chancery on July 9, 2015. See Foukas Decl., Ex. A (the “Chancery action”). The defendants in the Chancery action are several Delaware state officials in their individual and official capacities. See id.

         Count I of Plaintiffs' complaint alleges that the Defendants violated the Delaware Escheats law because, inter alia, (1) Plaintiffs' shares were not “lost or abandoned”; (2) the law does not permit the escheat of foreign-owned shares; (3) defendants retroactively applied the 2008 amendment to the Esc*heat Law to Plaintiffs; (4) defendants were not acting in good faith when they liquidated Plaintiffs' shares; (5) defendants failed to publish the fact that Plaintiffs' shares had been escheated, and failed to pay Plaintiffs fair market value for their property; and (6) defendants unduly delayed in processing Plaintiffs' claims with respect to their shares, and provided Plaintiffs with false or incorrect information.

         In Count II, Plaintiffs allege that the escheat of their shares violated the federal common law, which prevents ...


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