Enzo Biochem, Inc. v. Harbert Discovery Fund, LP

Background

Enzo Biochem, Inc. sued Harbert Discovery Fund, LP and other defendants under Section 14(a) of the Securities Exchange Act and Rule 14a-9. After the court previously granted in part and denied in part the defendants’ motion to dismiss Enzo’s claims, Harbert Discovery Fund, LP and Harbert Discovery Co-Investment Fund I, LP—together, HDF—filed an answer with six counterclaims against Enzo and several individual directors.

HDF’s counterclaims arose from a contested 2019 board election. HDF alleged that Enzo made misleading proxy statements, including a January 28, 2020 statement that the company intended to delay its annual meeting until February 25. HDF alleged that Enzo instead convened and immediately adjourned the meeting on January 31, after giving shareholders little notice, allowing the company additional time before the election. HDF also alleged that Enzo and its directors made other misleading statements about HDF and its nominees.

The six counterclaims were: a claim under Section 14(a) and Rule 14a-9 concerning allegedly misleading proxy statements; a controlling-person claim under Section 20(a) against individual directors; and four New York fiduciary-duty claims concerning the proxy contest, the treatment of HDF’s nominees, Enzo’s lawsuit, and the board’s rejection of Rabbani’s resignation.

Legal Standards and Jurisdiction

Enzo moved to dismiss under Federal Rules of Civil Procedure 12(b)(1), 12(b)(6), and 23.1. Rule 12(b)(1) concerns subject-matter jurisdiction; Rule 12(b)(6) tests whether a pleading states a legally sufficient claim; and Rule 23.1 imposes procedural requirements for shareholder derivative actions. The court held that it had federal-question jurisdiction over the Exchange Act claims and supplemental jurisdiction over the New York claims, and therefore denied the motion insofar as it relied on Rule 12(b)(1).

The court also held that HDF’s Section 14(a) counterclaim was timely. Because the counterclaims were compulsory—that is, they arose from the same transaction or occurrence as Enzo’s claims—the court treated Enzo’s complaint date as tolling the applicable limitations period.

Section 14(a) Counterclaim

HDF identified five groups of allegedly misleading statements. The court held that HDF plausibly alleged loss causation for all of them, meaning some loss and a connection between the alleged misstatements and that loss. HDF alleged that it incurred unnecessary expenses responding to Enzo’s statements and fighting a proxy contest that Enzo’s conduct prolonged.

HDF plausibly alleged transaction causation, however, only for the statement that Enzo intended to delay the annual meeting. Transaction causation requires a connection between the alleged proxy violation and the transaction that caused the claimed harm. The court found a plausible connection between the delay statement and the January 31 meeting’s convening and adjournment because HDF alleged that the statement caused HDF and other shareholders not to attend, making the adjournment possible.

The court found no sufficient connection between the other alleged statements and the February 25 board election. The HDF nominees won that election, and HDF did not provide non-conclusory allegations showing that those statements affected the election itself rather than merely causing pre-election expenses. The court therefore did not address whether those other statements were materially misleading.

The court concluded that HDF plausibly alleged that the delay statement was materially misleading. A statement is material if a reasonable shareholder would likely consider it important in deciding how to vote. At the pleading stage, the court would not choose between Enzo’s plausible interpretation that “delay” meant “adjourn” and HDF’s plausible interpretation that no January 31 vote would occur. Count One therefore survived to the extent it relied on the delay statement.

Section 20(a) Counterclaim

The court also allowed Count Two to proceed against Rabbani, Weiner, Hanna, Perlysky, and Fischer. A Section 20(a) controlling-person claim requires a primary violation, control of the primary violator, and culpable participation in the violation. The court found that HDF plausibly alleged a primary Section 14(a) violation and alleged more than merely that the individual defendants were officers or directors. HDF alleged that they had access to the proxy materials, participated in drafting or formulating the statements, and supported measures connected to the annual meeting.

New York Fiduciary-Duty Counterclaims

The court dismissed Counts Four, Five, and Six for lack of standing. Under New York law, a shareholder generally may not personally pursue a claim for harm suffered by the corporation. Such a claim is derivative and must satisfy special procedural requirements. Counts Four and Six concerned alleged harm from interference with HDF’s nominees and from the board’s handling of Rabbani’s resignation. The court held that any resulting harm would be shared by the corporation and its shareholders generally, making those claims derivative.

Count Five concerned Enzo’s decision to bring the lawsuit. Although HDF plausibly alleged that it suffered monetary harm by defending the action, it did not show that Enzo violated a duty owed independently to HDF rather than duties owed to shareholders generally. The court therefore held that HDF lacked standing to pursue Count Five. The court added that, even if HDF had standing, the claim would also fail under the business-judgment rule because HDF’s allegations of bad faith were conclusory and speculative.

The court allowed Count Three to proceed. That claim alleged that Rabbani, Weiner, Hanna, Perlysky, and Fischer used deceptive methods to delay the annual meeting for self-serving purposes. The court held that the right to cast an informed vote belongs directly to individual shareholders, so the alleged injury was direct rather than merely corporate. It further held that HDF plausibly alleged a breach of New York fiduciary duties of honesty and fair dealing.

Disposition

The court granted in part and denied in part Enzo’s motion to dismiss the counterclaims. It granted the motion as to Counts Four, Five, and Six, and denied the motion as to Counts One, Two, and Three. The court directed the Clerk of Court to terminate the motion.