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Rubin v. Reinhard

March 25, 2009

BARRY RUBIN, AN INDIVIDUAL ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED AND DERIVATIVELY ON BEHALF OF ARTES MEDICAL, INC., PLAINTIFF,
v.
CHRISTOPHER J. REINHARD; DOUGLAS ABEL; JOHN R. CONSTANTINO; TODD C. DAVIS; BEVERLY A. HUSS; LON E. OTREMBA; ROBERT B. SHERMAN; MICHAEL K. GREEN; DIANE S. GOOSTREE; PETER C. WULFF; DAREN J. BARONE; AND DOES 1-20, DEFENDANTS, AND ARTES MEDICAL, INC. NOMINAL DEFENDANT.



The opinion of the court was delivered by: Hayes, Judge

ORDER

The matters before the Court are the motion to dismiss (Doc. 11) filed by Defendants and the motion to remand (Doc. 20) filed by Plaintiff.

BACKGROUND

On September 4, 2008, Plaintiff Barry Rubin filed a shareholder derivative suit against the present and former officers and directors of Artes Medical, Inc. (the Company) in the Superior Court of California for the County of San Diego. (Notice of Removal ¶ 1.)

On October 2, 2008, Plaintiff filed a first amended complaint in the state court adding a class action claim against the Director Defendants for breach of fiduciary duty. (First Amended Complaint ¶¶ 83-91, 95-101.) The members of the putative class are holders of the Company's common stock. (Id. ¶ 83.) Excluded from the class are the Defendants and "all persons who acquired ARTES common shares pursuant to the private placement of common stock and related warrants on September 26, 2008." (Id.) The class claim alleges that the Director Defendants breached their fiduciary duties to the shareholders in the class by issuing the private placement of over 3 million shares of common stock and related warrants to "hand picked friends of the Director Defendants" in order to dilute the shareholders' voting rights at the Annual Meeting scheduled to take place on October 31, 2008. (Id. ¶ 97.) The second, third, and fourth causes of action are derivative claims on behalf of the Company for breach of fiduciary duty to the Company (Id. ¶¶ 102-108), breach of the duty of loyalty to the Company (Id. ¶¶ 109-118), and waste of corporate assets (Id. ¶¶ 119-122). The first amended complaint seeks declaratory relief, injunctive relief, compensatory damages, and exemplary damages. (Id. at 26-28.)

Nominal Defendant Artes Medical, Inc. (the Company) is a publicly traded company focused on developing, manufacturing and commercializing a new category of aesthetic injectable products for the dermatology and plastic surgery markets. (Id. ¶ 2.) Plaintiff Barry Rubin is an owner of the Company's common stock. (Id. ¶ 52.) Defendants Christopher Reinhard, Douglas Abel, John Constantino, Todd Davis, Beverly Huss, Lon Otremba, Robert Sherman, Michael Green, Diane Goosetree, Peter Wulff, and Daren Barone are current and former officers and directors of the Company (Director Defendants). (Id. ¶¶ 54-64.)

Plaintiff alleges that on August 11, 2008, Michael Shack, a shareholder of the Company, filed a proxy solicitation with the SEC soliciting proxies to replace to board members whose terms had expired, remove three current board members and elect five new board members to the Company's Board of Directors. (Id. ¶ 21.) Plaintiff alleges that Shack's proxy solicitation stated that "the Company's poor financial performance, lack of expressed business plan, and questionable changes to key personnel are impairing the Company's ability to maximize value for all shareholders.'" (Id.)

Plaintiff alleges that on August 29, 2008, the Director Defendants filed a proxy solicitation on behalf of the Company with the SEC. (Id. ¶ 22.) Plaintiff alleges that the Director Defendants notified the Company's shareholders that they did not intend to have the Shack proposals brought before the Company's upcoming Annual Meeting on October 30, 2008 "because [the Director Defendants] thought the notice was not sufficient." (Id.)

Plaintiff alleges that on September 26, 2008, the Company issued 3,233,045 shares of its common stock and related warrants to private investors through a private placement financing. (Id. ¶23.)

On October 6, 2008, Plaintiff filed an ex parte application for a temporary restraining order in the state court. (Notice of Removal Ex. 2.) The application for a temporary restraining order sought to enjoin any shares issued in connection with the Company's September 26, 2008 private placement from voting at the Company's annual shareholder meeting scheduled for October 31, 2008. (Id. at 1.)

On October 6, 2008, before the state court issued a ruling on Plaintiff's application for a temporary restraining order, Defendants removed the first amended complaint to the United States District Court for the Southern District of California pursuant to the removal provision of the Securities Litigation Uniform Standards Act of 1998 (SLUSA), 15 U.S.C. § 77p(c). (Notice of Removal ¶¶ 7-20.)

On October 7, 2008, Plaintiff filed an application for issuance of a preliminary injunction in federal court. (Doc. 2.) The application sought an order from this Court enjoining the newly issued shares from voting at the upcoming shareholders meeting. Defendants filed an opposition to the application for a preliminary injunction and Plaintiff filed his reply. (Docs. 7, 9.)

On October 29, 2008, the parties appeared for oral argument on the preliminary injunction before the Court. On the same day, the Court issued a written opinion denying Plaintiff's application for a preliminary injunction. (Doc. 19.)

On October 24, 2008, Defendants filed a motion to dismiss the first amended complaint on the grounds that the first amended complaint failed to adequately allege (1) facts showing that he has standing to proceed derivatively on behalf of the Company and (2) facts sufficient to state a claim upon which relief may be granted. (Doc. 11.) Plaintiff ...


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