Biofrontera AG v. Deutsche Balaton AG

Background

Biofrontera AG alleged that Deutsche Balaton AG, Delphi Unternehmensberatung AG, VV Beteiligungen AG, ABC Beteiligungen AG, Deutsche Balaton Biotech AG, and Wilhelm Konrad Thomas Zours misled Biofrontera investors to facilitate tender offers for Biofrontera stock. Biofrontera asserted claims under Sections 13(d), 14(e), and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 14e-5. It also asserted common-law claims for libel, trade libel, and tortious interference with a prospective business opportunity.

Biofrontera’s ordinary shares traded on a German stock exchange, while its American depositary shares traded on NASDAQ. The 2018 and 2019 tender offers sought ordinary shares rather than the American depositary shares, although holders of those depositary shares could participate by converting them into ordinary shares. Biofrontera alleged that the defendants nevertheless solicited at least one investor located in the United States and made inaccurate statements in their required reports to the Securities and Exchange Commission.

The defendants moved to dismiss under Federal Rules of Civil Procedure 12(b)(1), 12(b)(2), 12(b)(6), and 9(b). The court addressed personal jurisdiction, the federal securities claims, and the common-law claims.

Personal Jurisdiction

The defendants argued that exercising personal jurisdiction over them would violate due process. Biofrontera relied on the defendants’ Securities and Exchange Commission filings, their alleged contact with a New York fund manager, allegedly misleading letters posted on a German website, and the ability of U.S. investors to participate in the tender offers after converting their depositary shares.

The court found disputed factual questions about whether the defendants solicited U.S. investors and whether they directed the website letters at U.S. investors. Because those facts could affect the minimum-contacts and reasonableness parts of the personal-jurisdiction analysis, the court ordered jurisdictional discovery. It denied the motion to dismiss for lack of personal jurisdiction without prejudice to renewal after that discovery. The court also rejected the defendants’ argument that it should consider only contacts existing when the original complaint was filed, rather than contacts alleged in the amended complaint.

Section 14(e) and Rule 14e-5 Claims

The court granted the motion to dismiss Biofrontera’s claims under Section 14(e) and Rule 14e-5. Applying the Supreme Court’s limitation on the territorial reach of the Exchange Act, the court held that the claims concerned tender offers for ordinary shares traded on a German exchange, not transactions in securities listed on a U.S. exchange. The fact that the ordinary shares could be obtained by converting American depositary shares traded on NASDAQ did not make the tender-offer transactions domestic.

The court also held that Biofrontera had not plausibly alleged domestic transactions because it did not show that the defendants incurred irrevocable liability in the United States or that title passed there when investors tendered the ordinary shares. The Section 14(e) and Rule 14e-5 claims therefore sought an impermissible application of U.S. securities law outside the United States.

Section 13(d) Claim

The court did not dismiss Biofrontera’s Section 13(d) claim in its entirety. Section 13(d) requires investors who acquire more than 5 percent of a company’s equity securities to file a Schedule 13D report and to amend it when material facts change. Biofrontera alleged that the defendants filed late and made inaccurate or incomplete disclosures concerning their solicitation and purchases from U.S. investors, the 2018 tender offer, and the 2019 tender offer’s claimed exemption from certain U.S. tender-offer rules.

The court held that some alleged defects concerning the 2019 tender offer were cured by prompt amended filings, making those aspects of the claim moot. It also rejected Biofrontera’s theory that the defendants filed the form needed for the 2019 tender offer’s exemption too late, because the May 29 announcement was only a proposal for regulatory approval, not the tender offer itself. The defendants filed the required form on the next business day after the German regulators approved the offer.

However, the court held that Biofrontera adequately stated a Section 13(d) claim based on the 2018 tender offer. The defendants’ filings allegedly stated that the offer was not directed at or available to U.S. investors, while Biofrontera alleged that the defendants were soliciting at least one U.S. investor. The defendants never corrected those statements before the offer closed. The court also declined to dismiss the claim based on international comity because the German proceedings described by the defendants did not appear to involve the same questions about compliance with U.S. securities laws.

Section 20(a) Claim

The court granted the motion to dismiss Biofrontera’s Section 20(a) control-person claim against Mr. Zours. A control-person claim requires a primary securities-law violation, control of the primary violator, and culpable participation in the violation. The Section 14 portion failed because Biofrontera had not adequately alleged a primary Section 14 violation. Although Biofrontera had adequately alleged a primary Section 13(d) violation, it had not alleged that Mr. Zours culpably participated in it.

Common-Law Claims and Disposition

The court held that German law governed Biofrontera’s claims for libel, trade libel, and tortious interference with a prospective business opportunity. The court relied on the parties’ German nationality, the publication of the statements on a German website, and the relationship of the statements to efforts to increase holdings in a German company. The court found the New York contacts comparatively negligible.

The court did not decide whether those claims were adequately pleaded under German law. It deferred ruling on the defendants’ motion as to the common-law claims and ordered supplemental briefing because the parties had provided too little material concerning the requirements of German law.

In conclusion, the court granted the defendants’ motion to dismiss as to the Section 14(e), Rule 14e-5, and Section 20(a) claims and otherwise denied it. The court directed the parties to propose a schedule for jurisdictional discovery and supplemental briefing on the German-law issues. Judge Loretta A. Preska directed the Clerk of Court to close the open motion.