Securities Regulation Daily Tender offer claims not domestic transactions, but reporting claim survives
Tuesday, March 31, 2020

Tender offer claims not domestic transactions, but reporting claim survives

By Rodney F. Tonkovic, J.D.

The defendants never corrected inaccurate representations about not soliciting U.S. investors, and this was sufficient to state a claim under Section 13(d).

A district court rejected tender offer-based claims on extraterritoriality grounds but found that a complaint stated a claim for Schedule 13D inaccuracies. The case involves two German companies, one of which made tender offers for the other. According to the complaint, contrary to the defendants' public representations, they were actively pressuring U.S. shareholders to sell their shares. The court concluded that allegedly false statements made in connection with the tender offer were beyond the territorial reach of the U.S. securities laws, but a claim was adequately stated for making false statements in a Schedule 13D report (Biofrontera AG v. Deutsche Balaton AG, March 27, 2020, Preksa, L.).

Tender offer. Biofrontera AG is a German company, headquartered in Germany, and its ordinary shares trade on a German exchange. The defendants are a collection of German-based related entities beneficially owned by Wilhelm Konrad Thomas Zours, a German citizen. According to Biofrontera, Zours and defendant Deutsche Balaton AG have repeatedly tried to gain control of Biofrontera without obtaining a controlling stake in the company.

In February 2018, Biofrontera's American Depository Shares first started trading on NASDAQ. According to the complaint, while Biofrontera was running a roadshow in the U.S., Zours published a letter on Deutsche Balaton's website making false statements about the legality of the IPO's pricing and about the accuracy of statements made by Biofrontera officers. Zours published another letter after the IPO closed making additional false statements. Biofrontera claims that Zours intended to derail the roadshow and depress Biofrontera's share price, allowing Zours to make a tender offer at an artificially low price.

Deutsche Balaton announced a tender offer on March 16, 2018, but the offer did not move forward because it did not comply with German law. A second tender offer was announced in May 2018, and another occurred in May 2019. While the tender offers flatly stated that only ordinary shares would be accepted and that U.S. investors would not be targeted, the defendants actively solicited U.S. investors to exchange their ADSs for ordinary shares and then tender them to the defendants.

Failure to disclose alleged. Biofrontera claimed that the defendants failed to disclose on their Schedule 13D that they were targeting U.S. investors and buying ADSs in connection with the tender offer. The defendants ultimately disclosed that the 2019 tender offer was being made to U.S. investors in an amendment in June 2019. Biofrontera contended that these belated disclosures did not cure the prior failure to disclose that the U.S. investors were being solicited.

Jurisdiction. The defendants first moved to dismiss for lack of personal jurisdiction. Biofrontera maintained that specific jurisdiction existed based on several contacts with the U.S., including the filing of reports with the SEC and the fact that U.S. investors participated in the tender offers. The defendants countered that the SEC filings were insufficient to confer jurisdiction and that there was no evidence that U.S. investors were targeted. The court ultimately decided that discovery was necessary to assess the extent of the defendants' contacts with the U.S. and denied the motion without prejudice.

Morrison issue. The court then found that Biofrontera's tender offer-related claims under Exchange Act Section 14(e) and Rule 14e-5 failed because they sought an extraterritorial application of the securities laws. The court explained that the claims involved tender offers for Biofrontera's common stock, which trades on a German exchange—ADS holders could only participate by converting their ADS to ordinary shares and then selling those shares on the German exchange. And, the fact that the investors may have converted ADSs into Biofrontera shares in the U.S. proved nothing about where they incurred irrevocable liability, the court said. The court accordingly dismissed the tender offer claims.

Beneficial ownership reporting. Finally, the court found that the complaint adequately pleaded a violation of Section 13(d) based on the defendants' inaccurate representations about staying away from U.S. investors. The defendants did not move to dismiss this claim on extraterritoriality grounds, arguing instead that the claim was otherwise defective. Biofrontera said that the defendants failed to timely file their Schedule 13D disclosure upon hitting the reporting threshold. The court concluded that quick corrective disclosures cured many of the issues with the earlier filings, but never corrected inaccurate representations about staying away from U.S. investors; this was sufficient to state a claim under Section 13(d).

The case is No. 18 Civ. 5237.

Attorneys: Aaron Fong Jaroff (McGuireWoods LLP) for Biofrontera AG. Daniel J. Delaney (Faegre Drinker Biddle & Reath LLP) for Deutsche Balaton AG., DELPHI Unternehmensberatung AG., VV Beteiligungen AG., ABC Beteiligungen AG., Deutsche Balaton Biotech AG and Wilhelm Konrad Thomas Zours.

Companies: Biofrontera AG; Deutsche Balaton AG; DELPHI Unternehmensberatung AG; VV Beteiligungen AG; ABC Beteiligungen AG; Deutsche Balaton Biotech AG

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