shane mcmahon reply in donoghue v. you on demand holdings, inc., 16-cv-1877 reply

8/18/2019 Shane McMahon reply in Donoghue v. YOU On Demand Holdings, Inc., 16-cv-1877 reply

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April 15, 2016

By ECF and E mai l

Peter N. Flocos

peter . f locos @klgates .com

T+1 212

536 4 25

F +1 212

536 39 1

Ho n. Andrew L. Carter

Uni ted Sta tes D ist ric t Court

Southe rn Dis tr ic t o f N ew Y ork

40 Fo ley Square

N ew Yo rk , N Y 10007

R e

Donoghue v YOU On Demand Holdings Inc. 16-cv-1877

Dear Judge Carter:

On behalf of our c l ients , YOU O n Dem and Holdings, Inc . , a Ne vada com pany ( Yo u On

Dem and or the Co mpany ) , and Shane McM ahon (col lec t ive ly De fendants ) , we write , in

acco rdance wi th the Co ur t 's ru les , to reques t a pre-mo t ion c onference to o b ta in l eave to f i le a

mo t ion to d i smiss the Co mplain t. The p la in t i ff , De borah Do noghue ( P la in t if f ) , has fa i led to

state a claim upon which rel ief can be granted under Sec t ion 16(b) of the Sec uri ties Exchange

Ac t of 1934 ( Sec t ion 16(b) ) and fa iled to fu l fi ll the p leading requirem ents o f a de r iva t ive

ac tion se t fo rth in Fed. R. Civ. P . 23.1 .

Summ ary of Facts

P lain t if f a tt empt s t o m anufac tu re a Se c t i on 16(b) c la im us ing a Co mpany approved ,

s tock-for-s tock e xchange devo id of any o ppor tuni ty for specula t ion or individua l prof it . This

co ncoc t ion fa i ls on the fa ce o f the a ll ega t ion s in the Co mpla in t, the doc um en t s r e fe r enced

there in, and legally required public disc losure docum ents f i led with the SEC.

On January 31 , 2014, Mr . McMaho n—a Co mpany d i rec tor , o f f icer , and shareholder—

co mp leted an exchange of preferred s tock with non-par ty C Me dia Limited ( C Me dia ) . In that

exchange , Mr . McM ahon gave C Media a number o f h i s Ser i e s A Pre fe r red Yo u On Dem and

sha re s in exchange fo r a numbe r o f Se r i e s E Pre f e rr ed Yo u On Demand sha re s h e ld by C

Media (the January Exchange ). The exchange took place pursuant to an Exchange

Agreem ent en t e red in to by and among the Com pany, Mr . McM ahon, and C Media to induce C

Media and o the r s t o co m ple t e a sub s tant ial inve s tm en t in the Co m pany . Bo th the Se r i e s A

Preferred shares , and the Series E Preferred shares , that were exc hanged were eac h conve rtible to

i

ongue v. Sanofi

No.

15-588-CV,

2016 WL 851797,

at *6 (2d Cir. Mar. 4, 2016) (publication

pending) (on mo tion to dismiss, court can cons ider SEC filings and docum ents know n to and relied on by

plaintiff).

K&L GATES LLP

599 LEXINGTON AVENUE NEW YORK NY 10022-6030

T 1 212 536 3900 F 1 212 536 3901 klgates.com



t h e s a me n u m b e r o f Y o u O n D e m a n d c o mm o n s h a r e s — n a me ly , 9 33 ,3 33 c o m mo n s h a re s ,

although no ac tual convers ion is alleged.

Subsequently, on May 22, 2014, the Shane B. McMahon Trust purchased 24,600

com mon share s of You On Demand ( the May Transac t ion ) .

On Se ptembe r 23, 2015, David Lopez—c ounse l for Plaint if f—sent a le t ter to the Y ou On

De mand Board. By this le t ter , Mr. Lope z claim ed the January Exchange and May Transact ion

consti tu ted a sale and purchase of Yo u On Dem and com mo n shares in violation o f Sec tion 16(b).

In respo nse, my law f irm wrote o n behalf of Mr. McMaho n to Mr. Lopez on Oc tober 16, 2015 to

clarify his misperception of the January Exchange. That letter explained that the January

Exchange was an exchange o f preferred shares of exact ly equivalent value in shares of com mo n

s toc k, tha t no o ther value was e xchanged , and tha t Mr . McM ahon in no way prof i t ed from the

t ransac t ion . In o ther wo rds , i t was com munica ted tha t there w as no s a le upon which to e nforce

Section 16(b).

Rathe r than acce pt our explanation of the m at ter , Plaint iff f iled this act ion on M arch 4,

2016. In her Com pla in t , P la in t i f f a l leges tha t Mr. McM ahon dispose d for va lue 7 ,000,000

shares o f Ser ies A Prefer red S tock of Yo u On D em and on January 31 , 2014 and subsequen t ly

purchased 24,600 shares o f You On D em and com mo n shares on May 22, 2015,

in violat ion o f

Section 16(b).

Sum m ary of Arguments

Defendants will move to dism iss on the following grounds:

First

t h e Janua ry Exchange doe s no t c o ns t i tu t e a s a l e f o r Se c t i on 16(b) purpos e s .

Under the doctr ine of eco nom ic equivalence, a s tock-for-s tock exchange is not a sale for the

purposes of Sec t ion 16(b) i f (1) the securi t ies e xchanged are ec ono mical ly equivalent as def ined

in the case law, and (2) the ins ider ' s inves tm ent pos i t ion in the i s suer i s unchange d by the

transaction.

Hayes v. Sampson

N o. 79 CIV. 3754, 1980 WL 1460, a t *4 (S.D.N .Y. N ov. 18 ,

1980);

see also Blau v. Lamb

363 F.2d 507, 522 (2d Cir. 1966). Characteristics o f the sec urities

such as differences in voting power, greater dividends, marketability, etc., are generally

i rre levant for purposes of this analysis ; rather , the value m easured for equivalence i s ref lec ted in

the abil ity of the Pre ferred [ to be] imm ediately co nver t ible into [] Co m mo n.

Lamb 363 F.2d

at 522. Similarly, an insider 's unchang ed investm ent pos i t ion is manifest w hen the insider doe s

not inc rease or dec rease h is inves tm ent in the under lying secur i ty , but s imply [exchange s]

differen t forms of the sam e par t i c ipa t ion .

Id.

a t 523 . The Janu ary Exchange sa t i s f ie s both

requiremen ts : it was a s tock-for-s tock e xchange o f pre fe rred shares , each se t co nver t ib le to

933,333 com mo n shares , which d id no t a lt e r Mr . McMaho n 's inves tme nt posi t ion as o wne r of

Yo u On Dem and preferred shares co nvertible to 933,333 com mo n shares .

2

laintiff's claim wo uld fail based o n the May

22 2015

date pleaded in the Com plaint, because

that date is outside of the six-month window applicable under Section 16(b). This letter will assume for

the sake o f argument that the May

22 2015

date is a typographical error and that Plaintiff intended to

plead May 22 2014

instead.

Apri l 15, 2016



Second,

even assum ing for the sake o f argument tha t the January Exchange i s a sa le ,

Plaint iff has fai led to al lege a sale and purchase that can be paired for Sec t ion 16(b) purpose s.

An act ion under Sec t ion 16(b) requires proo f that a bene f icial ow ner, direc tor , or off icer of a

secur i ty is suer prof i ted f rom any sa le and purchase [] of

any equity security

of such i ssuer

within a six-month period. 15 U.S.C. § 78p(b) (emphasis added);

see also Donoghue v.

Patterson Cos.

990 F . Supp. 2d 421, 422 (S.D.N .Y. 2013). The Se co nd Circui t has express ly

he ld tha t Co ngress ' s use of the s ingular t e rm `any equi ty secur i ty ' suppor t s an infe rence tha t

t ransact ions involving

different

equi ty secur i t ies cannot be pai red under § 16(b).

Gibbons v.

Malone 703

F .3d 595 , 600 (2d Ci r. 2013) ( sa le o f p re fe r r ed Se r i e s C s to ck co u ld no t b e

matched with purchase of preferred Series A stock). Although

Gibbons

involved non-

convert ible preferred shares , the court 's interpre ta t ion of the s ta tute 's plain language applies

equa l ly t o th is c a s e . P la in t if f ha s a ll eged that Mr . McM ahon d i spos ed fo r va lue Se r i e s A

Preferred

shares v ia an exchange for Ser ie s E P re fe rred Shares , and subsequent ly purchased

common

shares . As these are

different

equity securi t ies under

Gibbons,

they cannot be paired for

purposes o f a Sec tion 16(b) ac tion, particular given that no co nvers ion of the preferred s tock into

com mo n shares is alleged.

Third,

even assum ing for the sake of argument that the January Exchange is a sale , i t i s

exem pt under SEC regula tions . By regula t ion , [a] t ransac t ion . . . tha t e f fec t s on ly a change in

the form of bene f ic ia l ownership wi thou t c hanging a person ' s pecuniary in teres t in the subjec t

equ i ty s e cu r i t ie s sha l l be exem pt from s e c t i on 16 o f the Ac t . 17 C .F .R . § 240 .16a-13. The

January Exchange w as such a t ransac t ion: i t invo lved a t rade of d i f fe rent

types

of preferred

Company shares

—i.e.,

different types of o wnership—througho ut which each par ty maintained a

right to convert into 933,333 You On Demand common shares. While the form of Mr.

McM ahon 's benef ic ia l ow nersh ip changed—nam ely, f rom P re fe rred A shares to P re fe rred E

shares— his underlying right to 933,333 Yo u On Dem and com mo n shares remained the same .

Fourth

P la in t i ff has no t sa t i s f ied the pleading requirem ents o f a de r iva t ive ac t ion . A

dist r ic t co ur t prope rly dismisse s a Sect ion 16(b) com plaint that fail s to plead with part iculari ty

that the bo ard 's refusal of [plaint iff 's Se ct ion 16(b)] demand was wro ngful .

Levner v. Prince

Alwaleed,

61 F .3d 8, 8-9 (2d Cir. 1995);

see also

F ed. R. Civ . P . 23 .1(b) (3). Al though so me

co ur t s have ques t ioned w he ther the pleading requirem ents Rule 23 .1 apply to Sec t ion 16(b)

ac t ions , the Seco nd Circui t has not revis i t ed i t s a ff irmance in

Levner.

Thus, co nsi s t en t wi th

derivat ive sui t pleading principles, to prope rly bring a Sect ion 16(b) act ion whe re dem and was

made o n the board, plaint iff mus t plead facts support ing a plausible inference that the board 's

decision not to take ac t ion was a resul t of gross negl igence.

Espinoza ex rel. JPMorgan Chase

Co. v. Dimo n,

807 F .3d 502, 506 (2d Cir . 2015) (applying D elaware law);

cf

Shoen v. SAC

Holding Corp.

137 P .3d 1171, 1179-81 (Ne v. 2006) (look ing to De laware law for p leading

standard on derivative demand requirement). Here, Plaintiff sent the Company s Board a

dem and le t t e r on Sep tem ber 23, 2015; how ever , P la in ti ff s imply a ll eges in the C om plain t tha t

Yo u On Dem and denied tha t a v io la tion had taken p lace . Co mpl .

1

10. This bare al legat ion

does no t speak to , and the Co mplain t does no t address , how o r why the Board 's dec i s ion no t to

take ac tion w as the result of gro ss negligence . The refore , the Co mplaint is fac ially insuffic ient .

3

3

imilarly, Plaint iff u tterly fai ls to al lege that the act ion is not a col lusive one to c onfer

jurisdiction that the court wo uld otherwise lack as required by Rule 23.1(b)(2).

3

April 15, 2016



Based on th e fo rego ing , De fendan t s reque s t l e ave t o m ove t o d i smi s s th e c a s e in i t s

ent i re ty wi th prejudice . I f the Co urt denies Defendant ' s request for leave to mo ve to dism iss the

case , then w e respec t ful ly reques t tha t the Co ur t gran t the De fendan t ten days f rom the t ime of

the Co urt 's denial to answ er the Co mplaint .

Best regards,

Pe te r N . F locos

cc: avid Lopez, Esq. (by ECF and Email)

4

Apri l 15, 2016

shane mcmahon reply in donoghue v. you on demand holdings, inc., 16-cv-1877 reply

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