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Sinovac Biotech LTD v. 1Globe Capital LLC

United States District Court, D. Massachusetts

October 15, 2018

1GLOBE CAPITAL LLC, and THE CHIANG LI FAMILY, Defendants. 1GLOBE CAPITAL LLC, Third-Party Plaintiff/ Counter Claimant,
SINOVAC BIOTECH LTD., WEIDONG YIN, and NAN WANG, Counter Defendant/ Third-Party Defendants.



         In this case involving alleged securities fraud, defendant 1Globe Capital LLC (“1Globe Capital” or “defendant”) filed a counterclaim for securities fraud and abuse of process in April, 2018, and a motion for preliminary injunction in August, 2018. It seeks injunctive relief against plaintiff Sinovac Biotech Ltd. (“plaintiff” or “Sinovac”) and third party defendants Weidong Yin (“Yin”) and Nan Wang (“Wang”). According to 1Globe Capital, Yin is Sinovac's former chairman and corporate executive officer (“CEO”) and Wang is Sinovac's former corporate financial officer (“CFO”).

         1Globe Capital alleges that Sinovac, Yin and Wang violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder by illegally issuing company stock without notification to or permission from the legitimate board of directors. Pending before this Court is defendant's motion for a preliminary injunction, the subject of this memorandum, and plaintiff's motion to dismiss the counterclaim of defendant. For the reasons that follow, the motion for a preliminary injunction will be denied.

         I. Background

         Sinovac is a NASDAQ-listed publicly traded company that is incorporated in Antigua, West Indies, with its principal place of business in Beijing, China. Sinovac is a biopharmaceutical company that researches, develops, manufactures and commercializes vaccines. 1Globe Capital is a Delaware limited liability company with its principal place of business in Cambridge, Massachusetts. 1Globe Capital is one of the largest shareholders of Sinovac and owns 16.4% of Sinovac's outstanding common stock.

         A. History of Management and Alleged Corruption

         1Globe Capital claims that since at least 2016, Yin, Wang and other members of the board of directors (“the Old Board”) have sought to improperly maintain control over Sinovac. 1Globe Capital alleges that Yin and Wang and members of a buyer group they formed (“Management Buyout Consortium”) submitted a proposal to acquire all of Sinovac's shares at below market value. In response, a group of Sinovac investors together with Sinobioway, a large publicly traded Chinese company, arranged a counteroffer at a higher price per share.

         The Old Board then adopted a Rights Agreement in March, 2016, which 1Globe Capital maintains was designed to entrench the Old Board and to ensure that only the Management Buyout Consortium could acquire the company. 1Globe Capital claims that the Old Board used the Rights Agreement as a shield to prevent other investors from effectively mounting a competing bid. The Rights Agreement is governed by Delaware Law and its validity is the subject of ongoing litigation in both Delaware and Antigua.

         In December 2016, an online report disclosing Chinese court documents revealed that Yin and other Sinovac employees bribed multiple Chinese officials from 2002 to 2011 to get vaccine trials approved and distribution of vaccines permitted. The Securities and Exchange Commission and Department of Justice began an investigation into those potential violations of the Foreign Corrupt Practices Act.

         On June 26, 2017, Sinovac announced that it had entered into a definitive agreement in which the Management Buyout Consortium would acquire the company. Two days later, Sinobioway submitted a revised proposal to acquire Sinovac at a14.9% premium over the purchase price offered by the Management Buyout Consortium. The Old Board rejected Sinobioway's revised offer, citing concerns over Sinobioway's funding.

         B. Disputed Board Election

         On February 6, 2018, Sinovac held its annual general meeting. At that meeting, 1Globe Capital and a majority of the other shareholders voted to install a new slate of directors (“the New Board”). Despite that vote, the Old Board has refused to relinquish management and control of the corporation. Sinovac and the Old Board claim that the purported election of the New Board was invalid under Antigua law. Sinovac asserts that Antigua law requires shareholders to provide advance notice of their intent to seek replacement of the incumbent board of directors.

         C. Issuance of Additional Shares

         In March 2018, a month after the election of the New Board, Yin and Wang and members of the Old Board issued a large number of restricted shares to themselves.

         On July 2, 2018, the Old Board issued additional shares of Sinovac pursuant to a private investment in public equity (“PIPE”) transaction with private investors Vivo Capital, LLC (“Vivo Capital”) and Prime Success, L.P. (“Prime Success”). Sinovac claims that the PIPE transaction was approved unanimously by the Old Board with the assistance and advice of an independent financial advisor and legal advisor who advised that the consideration offered was fair to the corporation. 1Globe Capital alleges, however, that Vivo Capital and Prime Success were members of the Management Buyout Consortium who purchased the shares at a discounted price in a further attempt of management to buyout Sinovac at below market value. 1Globe Capital also alleges that this issuance was an attempt to dilute the voting interest of the shareholders who voted for the New Board.

         On July 3, 2018, Sinovac publicly announced that it had completed the PIPE transaction. Under the terms of the Securities Purchase Agreement (“the SPA”) governing the PIPE transaction, the transaction can be rescinded if a court of competent jurisdiction enters an order on the merits determining that the transaction documents were not duly authorized or approved by the board of directors or that the shares were not validly issued or sold.

         D. Alleged Violations

         On March 5, 2018, Sinovac filed a complaint in this District against 1Globe Capital and the Chiang Li family. Sinovac's complaint includes two counts: 1) violation of Section 13(d) of the Exchange Act against 1Globe Capital and 2) violation of Section 13(d) of the Exchange Act against the Chiang Li family. Sinovac claims that Section 13(d) required 1Globe Capital to give advance notice to Sinovac and to update their Schedule 13 beneficial ownership filings before voting to elect a new board of directors at the annual general meeting and that 1Globe Capital violated this disclosure requirement by failing to do so. 1Globe Capital's counterclaim includes five counts: 1) abuse of process against Sinovac, Yin and Wang; 2) securities fraud in violation of Section 10(b) of the Exchange Act and ...

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