The case involved cross-motions for summary judgment filed by Plaintiffs Lei Li, Strong Wealth Investment Limited, and Pacific Smile Limited against Defendants ArcSoft, Inc. and its CEO Michael Deng. Also before the Court was Deng’s motion to exclude expert testimony of David M. Locala.
Deng served as the Chief Executive Officer and board member of ArcSoft, where Plaintiffs owned stock until October 2017. At that time, a buyout occurred, led by Deng’s majority-owned entity. Prior to the buyout, Deng and Dismissed Plaintiff Marc Chan had phone conversations about ArcSoft’s health and the pursuit of a buyer. The nature and timing of these calls were disputed. On September 18, 2017, Deng emailed Chan a preview of documents for shareholder approval of the buyout. The next day, an email sent to shareholders, including Chan, contained Deng’s signature block along with a copy of merger agreement and Shareholder Consent Form (Information Statement). The Information Statement disclosed his conflict of interest. Plaintiffs signed consent forms shortly after.
Defendants did not provide financial information or disclose deals with mobile phone developers to the Plaintiffs. On September 22, 2017, an “ArcSoft Restructuring Agreement” with corporate entities, including a major Chinese entity called Huatai, was executed by the Defendants. Among other things, the agreement provided that Huatai would obtain a large minority stake in post-buyout ArcSoft. The buyout was finalized on September 26, 2017. In July 2019, ArcSoft’s new parent company went public. Plaintiffs filed a complaint in April 2023, alleging Fraud, Breach of Fiduciary Duty, and Breach of Contract. They sought damages, damages not less than $300 million, punitive damages, rescission, restitution, a constructive trust over Deng’s Chinese company shares, and costs of the suit.
The Defendants sought to exclude portions of the expert testimony and report provided by the Plaintiff’s expert, David Locala.
Plaintiffs had engaged Locala to offer expert testimony on how a reasonable investor typically values an investment in a private technology company and the crucial information for deciding to sell shares. Additionally, Locala was expected to opine on whether certain information known by ArcSoft during the 2017 buyout would have been important to a reasonable investor considering approval of the proposed buyout and dissenters’ rights, and whether disclosing this information aligned with industry customs.
Defendants argued for the exclusion of Locala’s testimony, contending he lacked qualification to opine on what a “reasonable investor” would consider relevant. Alternatively, they claimed his opinions were unreliable and intruded on the jury’s role.
Plaintiffs countered by asserting that Locala’s education and experience qualified him to testify on the importance of information to a reasonable investor, emphasizing the reliability of his testimony. They argued that expert testimony on this matter was admissible.
Investment Analysis Expert Witness
David M. Locala holds a Master in Business Administration degree, with distinction, from Harvard Business School and a Bachelor of Science degree in Commerce, with Distinction, with a concentration in Finance from the McIntire School of Commerce at the University of Virginia. He has over 30 years of experience as an investment banker and has significant experience advising technology companies on acquisitions, sales, divestitures, and minority stake investments. He has worked as a Global Head of Technology M&A at Citigroup Global Markets Inc. He holds the following Financial Industry Regulatory Authority (“FINRA”) licenses: Series 7 – General Securities Representative; Series 63 – Uniform Securities Agent – State Law; and Series 24 – General Securities Principal. Over the last thirty years, Locala advised on over 100 announced mergers and acquisitions of both public and private companies.
Discussions by the Court
Defendants contended that David Locala was unsuitable to testify about the “reasonable investor” due to his background advising sophisticated companies and working at large investment banks. They emphasized Locala’s lack of prior testimony as an expert witness. According to the Defendants, Locala’s expertise lay in mergers and acquisitions, particularly in the processes employed by investment banks to value companies and issue fairness opinions. The central argument posited by the Defendants was that Locala’s extensive qualifications made him ill-suited to opine on what factors retail investors might find crucial in making investment decisions, given his background primarily with top investment banks rather than “average, individual investors.”
Plaintiffs countered that Locala’s Series 7 license and thirty-plus years of experience equipped him to discuss investments with various types of investors, asserting that his expertise extended beyond large investment banks. They emphasized that, based on Locala’s testimony, ordinary investors and investment banks generally considered the same information important.
The Court sided with Plaintiffs, stating that an expert could be qualified based on training and experience exceeding the common knowledge of an average layperson. They deemed Locala qualified due to his extensive relevant experience and education, as well as his training in advising individual investors through his Series 7 license. The Court concluded that the combination of Locala’s training and experience rendered him qualified as an expert.
Defendants asserted that even if Locala was considered qualified, the lack of a clear connection between his qualifications and his opinions on “reasonable investors” made his testimony unreliable. They referenced the Ninth Circuit’s decision in United States v. Sayre, 434 Fed. Appx. 622, 624 (9th Cir. 2011), where an expert’s testimony relying on personal knowledge and experience was affirmed for exclusion. Defendants urged the Court to follow this precedent, emphasizing that Locala’s opinions lacked substance as he admitted that information he deemed important might be considered unimportant by a reasonable investor. They also contested Locala’s opinion, claiming he overlooked Plaintiffs’ deposition testimony and improperly discounted deposition statements from other former ArcSoft shareholders.
Plaintiffs argued that education and experience alone are sufficient to qualify an expert on materiality, referencing the case In re Twitter Inc. Sec. Litig., Case No. 16-cv-05314-JST (N.D. Cal. Apr. 20, 2020) for support. They cited this case to highlight that, when testimony is grounded in knowledge and experience, the individual expert’s relevant background carries more weight in the reliability inquiry than the methodology or theory applied. The Court noted that there is no definitive checklist or test for assessing reliability and emphasized its broad latitude in determining reasonable measures of reliability in a given case. Quoting Daubert, it stated that expert opinion is considered reliable if the knowledge underlying it has a reliable basis in the knowledge and experience of the relevant discipline.
Plaintiffs demonstrated that Locala’s expertise surpassed that of the expert witness in the Sayre case. In the Sayre case, the Defendants asserted the reliability of the witness’s testimony based on his experience as a teacher and in the field. The Court, however, found that Sayre did not provide sufficient details about the witness’s education, training, or experience. In contrast, Plaintiffs established that Locala had decades of relevant experience, held a relevant license, and possessed relevant education, reinforcing the reliability of his opinions.
The Court determined that the case involving Twitter is more comparable to the present situation. In the Twitter case, an expert’s testimony on what disclosures would have mattered to investors was allowed, relying on experience and training rather than a specific methodology. The Court rejected the Defendants’ attempt to distinguish the cases based on the expert in the Twitter case being an adjunct professor with thirty years of experience in securities valuation and analysis, while David Locala, the expert in this case, had three decades of experience in mergers and acquisitions but was not an adjunct professor. The Court found this difference to be inconsequential, emphasizing the comparability of their years of experience. Locala’s report, grounded in his extensive experience and document review, was deemed sufficiently reliable for admissibility, and objections to his assumptions were considered matters of weight rather than admissibility.
Defendants argued that Locala’s testimony would improperly intrude on the jury’s role, asserting that the concept of a “reasonable investor” falls within the jury’s ordinary understanding. They contended that allowing expert testimony on this matter would overstep and mislead the jury.
The Court rejected the Defendants’ argument, stating that they misinterpreted a quote from the Sayre case. The Court clarified that Sayre did not address whether expert testimony on how reasonable investors consider information is appropriate. It maintained that Locala’s expert opinion could assist the jury in understanding the impact of information on a reasonable investor’s decision-making process. It also noted that, as the jury could comprehend the concept of a reasonable investor, there was minimal risk of confusion.
Defendants contended that Locala’s opinions constituted legal conclusions due to his use of the term “materiality,” which is a judicially defined term. Generally, expressing legal opinions as an expert is impermissible. However, the Court acknowledged that a witness can assist the jury in understanding facts even if couched in legal terms. The Court agreed that the terms “material” and “materiality” might confuse the jury on the legal standard for an element of the fraud, deceit and concealment claim. However, Plaintiffs agreed to instruct Locala to avoid using the word “material” in his testimony, addressing the concern.
The Court reiterated that issues related to credibility assessments or the consideration of relevant testimony could be addressed through cross-examination and did not warrant the exclusion of Locala’s testimony.
Moving to the cross-motions for summary judgment filed by the Plaintiffs and the Defendants, the key issues raised in the Plaintiffs’ motion were whether the Defendants ArcSoft and its CEO Michael Deng had a duty to disclose all material information when soliciting the Plaintiffs’ approval for ArcSoft’s buyout, and whether the Defendants breached that duty. The Plaintiffs also sought rulings that Deng owed them fiduciary duties which he breached. In their cross-motion, the Defendants argued that a California statute bars the Plaintiffs’ claims for damages and that the Plaintiffs cannot prove causation.
The Court found that Deng had a duty to disclose material information to the Plaintiffs when soliciting their consent to the buyout. It granted summary judgment in part to the Plaintiffs, finding Deng breached his duty by failing to provide certain 2017 quarterly financial statements. However, questions of material fact remained regarding other omitted information. The Court also found Deng owed fiduciary duties to the Plaintiffs but said the jury must decide if he breached those duties.
The Court rejected the Defendants’ argument that a “drag-along” provision in a voting agreement barred the Plaintiffs’ claims. It also said the Plaintiffs do not need to prove they could have stopped the buyout vote. Instead, there were fact issues on whether the Plaintiffs could show causation and damages.
On the contract claim, the parties disputed whether the Plaintiffs properly complied with notice procedures and whether ArcSoft breached an investor rights agreement. The Court found fact questions remained on whether both parties either performed or waived certain requirements under the contract. Thus, neither side obtained summary judgment on the breach of contract claim.
Defendants claimed that California Corporations Code Section 1312 prohibited the Plaintiffs from pursuing damages after the buyout in its motion for summary judgment.
The Court agreed with Plaintiffs that California courts recognize a non-statutory exception to Section 1312 in the event of fraud where the facts underlying the claims were unknown to the Plaintiffs at the time of the transaction.
Held
The Court issued several rulings in the legal case. It denied the Defendant’s motion to exclude the expert testimony of Plaintiff’s expert David M. Locala. Plaintiffs’ partial summary judgment was granted in part and denied in part. Defendants’ motion for summary judgment was denied due to remaining factual questions. The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.
Key Takeaways
The Plaintiffs retained David M. Locala as an expert witness to provide opinions on what information a reasonable investor would consider important when deciding whether to sell their shares, and whether certain information known by Arcsoft at the time of the 2017 buyout should have been disclosed. Locala has over 30 years of experience in mergers and acquisitions.
The Defendants filed a motion to exclude Locala’s testimony, arguing he was not qualified to opine on what a “reasonable investor” would find material. They also challenged the reliability of his opinions. However, the Court found Locala was qualified based on his extensive relevant experience, training, and education. The Court also held his testimony was sufficiently reliable to be admissible, noting that the Defendants’ objections regarding his assumptions and failure to consider certain testimony go to the weight of the evidence rather than admissibility.
The Court rejected the argument that Locala’s testimony would not assist the jury, finding it could help determine the importance of each piece of information to a reasonable investor’s decision-making. Thus, the Court denied the motion to exclude Locala’s expert testimony and report.
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