Rubenstein v. Ishizuka

Background

Mark Rubenstein brought a shareholder derivative action for the benefit of Next Meats Holdings, Inc. He alleged that Koichi Ishizuka and White Knight Co., Ltd. were statutory insiders who owned more than 10% of Next Meats’ common stock. Next Meats was named as a nominal defendant, meaning it was included as the company that would benefit from any recovery.

The First Amended Complaint alleged that White Knight sold 461,714 restricted shares on May 24, 2022, for $0.85 per share. On November 22, 2022, White Knight purchased 8,229,451 shares from Ryo Shirai and 112,863,282 shares from Hideyuki Sasaki for $0.001 per share. Rubenstein alleged that these transactions produced approximately $391,995 in short-swing profits recoverable under Section 16(b) of the Securities Exchange Act of 1934. Section 16(b) requires certain corporate insiders to return profits from a purchase and sale, or sale and purchase, of the issuer’s securities within less than six months, regardless of intent.

The defendants moved to dismiss the First Amended Complaint, arguing that applying Section 16(b) would be impermissibly extraterritorial, that the court lacked personal jurisdiction, and that venue was improper.

Extraterritorial Application of Section 16(b)

The court treated the extraterritoriality issue as a failure-to-state-a-claim question under Federal Rule of Civil Procedure 12(b)(6). Applying the Supreme Court’s framework for determining when the federal securities laws apply outside the United States, the court considered two possible bases: whether the securities traded on a domestic exchange and whether the challenged transactions were domestic transactions.

First, the court held that Next Meats’ shares did not satisfy the domestic-exchange test. Although the First Amended Complaint alleged that the shares were traded or listed on domestic exchanges, a public filing with the Securities and Exchange Commission showed that the shares were quoted on the OTC Markets Group’s Pink Open Market. The court held that over-the-counter trading is not trading on a securities exchange and therefore did not satisfy the first part of the test.

Second, the court held that the complaint did not plausibly allege domestic transactions. Under the applicable test, a transaction may be domestic if the parties incurred irrevocable liability in the United States or if title transferred in the United States. The court found no facts indicating that the parties became irrevocably bound in the United States; it appeared undisputed that the contractual steps occurred in Japan.

The complaint also lacked facts showing where title transferred. Rubenstein relied primarily on the fact that Next Meats’ transfer agent had a New Jersey mailing address and recorded the purchases in its records. The court held that recording a transaction in a transfer agent’s books is only an administrative indication of ownership, not itself a transfer of title. The complaint did not allege that contract negotiations, agreements, performance, payment, or another identifiable transaction step occurred in the United States. The court therefore concluded that neither part of the domestic-transaction test was satisfied.

Personal Jurisdiction and Venue

Although the court dismissed the claim on Rule 12(b)(6) grounds, it also addressed personal jurisdiction and venue. The court held that Rubenstein made the required initial showing that personal jurisdiction existed over both defendants. The court relied on Next Meats’ status as a U.S. corporation, its products’ availability in U.S. retail locations, its Securities and Exchange Commission registration and filings, its over-the-counter trading in the United States, the defendants’ roles as corporate insiders, and the ownership of some shares by U.S. shareholders.

The court also found that exercising personal jurisdiction would not be unreasonable and that Rubenstein adequately alleged that Next Meats transacted business in New York, making venue proper under the Exchange Act. These conclusions did not affect the dismissal because the complaint failed to state a claim under Section 16(b).

Disposition

The court granted the defendants’ motion to dismiss the First Amended Complaint under Rule 12(b)(6) for failure to state a claim on which relief could be granted. The court directed the Clerk of Court to close the case. The opinion does not state that the dismissal was with or without prejudice.