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In re Chinese-Manufactured Drywall Products Liability Litigation

United States District Court, E.D. Louisiana

April 21, 2017

IN RE CHINESE-MANUFACTURED DRYWALL PRODUCTS LIABILITY LITIGATION THIS DOCUMENT RELATES TO ALL CASES

         SECTION "L" (5)

          ORDER & REASONS

         Before this Court are four motions pursuant to Rule 12(b) of the Federal Rules of Civil Procedure seeking an order dismissing complaints against the Defendants for lack of personal jurisdiction and for insufficient process and service of process. Specifically, these motions are as follows: (1) Motion to Dismiss by China New Building Materials Group (“CNBM Group”), China New Building Materials Co. (“CNBM”), CNBMIT Co. Ltd. (“CNBMIT”), CNBM USA Corp. (“CNBM USA”), and United Suntech Craft, Inc. (“United Suntech”) (collectively, the “CNBM Entities”) (R. Doc. 19527); (2) Motion to Dismiss by Beijing New Building Materials Public Limited Company (“BNBM”) (R. Doc. 19646); (3) Motion to Dismiss by Beijing New Building Material Group (“BNBMG”) (R. Doc. 19664); and (4) Motion to Dismiss the State of Louisiana's Second Amended and Restated Petition by BNBM and BNBM Group (collectively, the “BNBM Entities”) (R. Doc. 19663). Having read the parties' briefs, evaluated the relevant jurisdictional discovery, reviewed the applicable law, and heard the parties on oral argument, the Court now issues this Order and Reasons.

         Table of Contents

         I. BACKGROUND .......................................................................................................... 3

         II. PROCEDURAL BACKGROUND .............................................................................. 4

         III. FACTUAL BACKGROUND ..................................................................................... 12

         A. The Corporate Structure of the CNBM Business Group .................................... 12

         1. CNBM Group's Role as Parent of the CNBM Business Group ...................... 12

         2. BNBM Group is a Minority Shareholder in CNBM ....................................... 13

         3. CNBM Group is a Shareholder in CNBM ....................................................... 15

         4. CNBMIT, CNBM USA, and United Suntech are companies within the CNBM Corporate Family. . ............ 16

         5. CNBM is a Majority Shareholder in BNBM ................................................... 17

         6. BNBM's Relationship with its Subsidiary Taishan ......................................... 19

         B. BNBM PLC's Contacts with Florida .................................................................. 27

         C. Defendant Entities' Response to the Instant Litigation ....................................... 32

         IV. IMPUTING TAISHAN'S FORUM CONTACTS TO PARENT CORPORATIONS FOR PURPOSES OF PERSONAL JURISDICTION ................................................ 36

         A. Standard of Review ............................................................................................. 37

         B. Legal Standards Governing Alter Ego Relationships ......................................... 38

         1. Choice of Law ................................................................................................. 40

         2. Chinese Company Law .................................................................................... 41

         3. Forum State Law ............................................................................................. 42

         C. Legal Standard Governing Agency Relationships .............................................. 46

         D. Imputation Analysis ............................................................................................ 49

         1. Chinese Cultural and Economic Context ......................................................... 50

         2. Analysis Under Florida Law ............................................................................ 54

         3. Analysis Under Virginia Law .......................................................................... 64

         4. Analysis Under Louisiana Law ....................................................................... 69

         V. PERSONAL JURISDICTION OVER BNBM BY VIRTUE OF ITS CONTACTS IN FLORIDA ................. 80

         A. Personal Jurisdiction Over a Foreign Defendant ................................................. 80

         B. Florida's Long-Arm Statute ................................................................................ 80

         1. BNBM's Business in the state ......................................................................... 81

         2. Tortious Acts within the State ......................................................................... 84

         3. Causing Injury in the State .............................................................................. 86

         C. Due Process Clause ............................................................................................. 86

         D. Minimum Contacts .............................................................................................. 87

         1. Specific Jurisdiction ........................................................................................ 88

         E. Cause of Action Arises from Minimum Contacts ............................................... 91

         F. Fair Play and Substantial Justice ......................................................................... 92

         VI. SERVICE OF PROCESS .......................................................................................... 95

         VII. CONCLUSION ......................................................................................................... 98

         I. BACKGROUND

         The present MDL litigation arises from alleged property damage and personal injuries sustained as a result of the presence of Chinese-manufactured drywall in homes and other buildings in a number of states. In the instant motions, Defendants are contesting personal jurisdiction and service of process. Defendants move to dismiss on the grounds that they do not have sufficient minimum contacts with the forum states to meet the long arm statutes or satisfy due process. Defendants contend they are not alter egos of Taishan and, thus, imputing jurisdiction is not justified. Against these contentions, Plaintiffs assert that there is substantial evidence that these foreign corporate entities acted as alter egos, agents, or within a single business enterprise, in unison with Taishan to sell defective drywall to American customers. It is the law of the case that personal jurisdiction has been established over Taishan. Chinese Drywall, 742 F.3d 576 & 753 F.3d 521. Therefore, the critical issue before this Court is whether the CNBM and BNBM Entities are alter egos or agents of Taishan or in a single business enterprise such that Taishan's contacts with the forum states, which were sufficient to establish personal jurisdiction, may be imputed to the CNBM and BNBM Entities.

         Given the substantially similar nature of the arguments in the four pending motions, this Order & Reasons will analyze the four pending motions in the following manner. First, it will briefly summarize the procedural background of this litigation. Second, it will describe the factual background relevant to the personal jurisdiction arguments. Third, it will address the critical issue of whether Taishan's contacts with the forum states should be imputed to the CNBM and BNBM Entities. Fourth, it will address whether the BNBM Entities' contacts in Florida are sufficient to establish this Court's personal jurisdiction over the BNBM Entities. Finally, it will address the Defendants' insufficient service and service of process arguments.

         II. PROCEDURAL BACKGROUND

         From 2004 through 2006, the housing boom in Florida and rebuilding efforts necessitated by Hurricanes Rita and Katrina led to a shortage of construction materials, including drywall. As a result, drywall manufactured in China was brought into the United States and used to construct and refurbish homes in coastal areas of the country, notably the Gulf Coast and East Coast. Sometime after the installation of the Chinese drywall, homeowners began to complain of emissions of smelly gasses, the corrosion and blackening of metal wiring, surfaces, and objects, and the breaking down of appliances and electrical devices in their homes. In re Chinese-Manufactured Drywall Prod. Liab. Litig., 894 F.Supp.2d 819, 829 (E.D. La. 2012), aff'd, 742 F.3d 576 (5th Cir. 2014). Many of these homeowners also began to complain of various physical afflictions believed to be caused by the Chinese drywall. Accordingly, these homeowners began to file suit in various state and federal courts against homebuilders, developers, installers, realtors, brokers, suppliers, importers, exporters, distributors, and manufacturers who were involved with the Chinese drywall. Because of the commonality of facts in the various cases, this litigation was designated as multidistrict litigation. Pursuant to a Transfer Order from the United States Judicial Panel on Multidistrict Litigation on June 15, 2009, all federal cases involving Chinese drywall were consolidated for pretrial proceedings in MDL 2047 in the U.S. District Court, Eastern District of Louisiana.

         The Chinese drywall at issue was largely manufactured by two groups of defendants: (1) the Knauf Entities, and (2) the Taishan Entities. The litigation has focused upon these two entities and their downstream associates, and has proceeded on strikingly different tracks for the claims against each group as described below:

The Knauf Entities are German-based, international manufacturers of building products, including drywall, whose Chinese subsidiary, Knauf Plasterboard (Tianjin) Co., Ltd. ("KPT"), advertised and sold its Chinese drywall in the United States. The Knauf Entities are named defendants in numerous cases consolidated with the MDL litigation and litigation in state courts. The Knauf Entities first entered their appearance in the MDL litigation on July 2, 2009. See (R. Doc. 18). Thereafter, the Court presided over a bellwether trial in Hernandez v. Knauf Gips KG, Case No. 09-6050, involving a homeowner's claims against KPT for defective drywall. See (R. Doc. 2713). The Court found in favor of the plaintiff family in Hernandez, issued a detailed Findings of Fact and Conclusions of Law and entered a Judgment in the amount of $164, 049.64, including remediation damages in the amount of $136, 940.46, which represented a cost of $81.13 per square foot based on the footprint square footage of the house. See (R. Doc. 3012).

         Subsequently, the Knauf Entities entered into a pilot remediation program with the Plaintiffs' Steering Committee (“PSC”) in the MDL. This program was largely based upon the remediation protocol formulated by the Court from the evidence in Hernandez. The Knauf pilot remediation program is ongoing and has, at present, remediated more than 2, 200 homes containing KPT Chinese drywall using the same general protocol. At the Court's urging, the parties began working together to monetize this program and make it available to a broader class of plaintiffs.

         On December 20, 2011, the Knauf Entities and the PSC entered into a global, class Settlement Agreement (“Knauf Settlement Agreement”), which is designed to resolve all Knauf-related, Chinese drywall claims. See (R. Doc. 12061-5). In addition to the Knauf Settlement Agreement, numerous defendants in the chain-of-commerce with the Knauf Entities have entered into class settlement agreements, the effect of which settles almost all of the Knauf Entities' chain-of-commerce litigation. Although the Court occasionally must deal with settlement administration and enforcement issues, the Knauf portion of this litigation is largely resolved.

         The litigation against the Chinese entities has taken a different course. The Chinese Defendants in the litigation include the principal Chinese-based Defendant Taishan, namely, Taishan Gypsum Co. Ltd. (“TG”) and its wholly-owned subsidiary, Taian Taishan Plasterboard Co., Ltd. (“TTP”) (collectively “Taishan” or “Taishan Entities”). Other Chinese-based Defendants include the CNBM and BNBM Entities.

         The Court's initial inquiry regarding Taishan involved four cases in this MDL: (1) Germano v. Taishan Gypsum Co., Ltd., Case No. 09-6687; (2) The Mitchell Co., Inc. v. Knauf Gips KG, Case No. 09-4115; (3) Gross v. Knauf Gips KG, Case No. 09-6690; and (4) Wiltz v. Beijing New Building Materials Public Ltd., Co., Case No. 10-361. The first issues involving Taishan arose when Taishan failed to timely answer or otherwise enter an appearance in Mitchell and Germano, despite the fact that it had been properly served in each case. See (R. Doc. 52); (R. Doc. 1-7) (Case No. 09-6687). Thus, after an extended period of time, the Court entered preliminary defaults against Taishan in both of these cases. See (R. Docs. 277, 487).

         Thereafter, the Court moved forward with an evidentiary hearing in furtherance of the Preliminary Default in Germano on the Plaintiffs' claimed damages. See (R. Doc. 502, 1223, 1258, 2380). At this hearing, the Plaintiffs presented evidence specific to seven individual properties, which served as bellwether cases. Following this hearing, which occurred on February 19 and 20, 2010, the Court issued detailed Findings of Fact & Conclusions of Law. See (R. Doc. 2380). On May 11, 2010, the Court issued a Default Judgment against Taishan in Germano, in favor of the Plaintiffs. (R. Doc. 3031). On the last day to timely do so, June 10, 2010, Taishan filed a Notice of Appeal of the Default Judgment in Germano and entered its appearance in Germano and Mitchell. (R. Docs. 3668, 3670).

         After TG entered its appearance in the MDL, it quickly sought to have the Final Default Judgment in Germano and the Preliminary Default in Mitchell vacated for lack of personal jurisdiction, as well as on procedural grounds. See (R. Docs. 5436, 5583). However, because of the pending appeal, this Court was without jurisdiction to address any motions filed by TG. See (R. Doc. 5504). Accordingly, TG sought and was granted by the Fifth Circuit, a stay of its appeal to allow this Court to provide an indicative ruling on TG's motions to vacate the preliminary default and default judgments. See (R. Doc. 5649). In response, this Court issued an order pursuant to Federal Rule of Civil Procedure 62.1 to allow it to consider TG's motions. See (R. Doc. 6101). In the fall of 2010, the Court directed the parties to commence the personal jurisdiction discovery necessary to resolve TG's motions to vacate. Sometime after the initial discovery, the parties agreed to expand the discovery beyond the Germano and Mitchell cases to other cases in which Taishan been served, including Gross and Wiltz.

         Formal personal jurisdiction discovery of Taishan began in October 2010. See, e.g., (R. Docs. 5839, 5840). Discovery has included the production of both written and electronic documents, as well as depositions of Taishan's corporate representatives, with each type of discovery proceeding in a parallel fashion. This discovery has often been contentious, requiring close supervision by the Court. The Court has presided over regularly-scheduled status conferences to keep the parties on track, and conducted hearings and issued rulings to resolve numerous discovery-related disputes. See, e.g., (R. Docs. 7136, 7511).

         The first Taishan depositions were held in Hong Kong on April 4-8, 2011. See (R. Docs. 8296, 8297). Thirteen attorneys traveled to Hong Kong and deposed the following three Taishan witnesses: (1) Jia Tongchun, General Manager, Director of Board of Directors, and five-percent owner of TG; (2) Peng Wenglong (a.k.a. Frank Clem), Manager of Foreign Trade Department of TG in 2005, salesperson at TTP from 2006-07, and current Manager of Foreign Trade Department at TG; and (3) Zhang Jianchun, Secretary of TG and TTP. See id.

         Upon return to the United States, several motions were filed seeking to schedule a second round of Taishan depositions as a result of problems during the depositions and seeking discovery sanctions against Taishan. See (R. Docs. 8685, 8695, 8755, 8758, 8768, 8792, 8805). Taishan opposed these motions. See (R. Docs. 8841, 8842). The Court, after reviewing the transcripts from the depositions, concluded that the “depositions were ineffective because of disagreement between interpreters, counsel, and witnesses, translation difficulties, speaking objections, colloquy among counsel and interpreters, and in general ensuing chaos.” See (R. Doc. 9107). Accordingly, the Court ordered the parties to move forward with further written discovery and to schedule a second-round of Taishan depositions, but this time with knowledgeable and prepared witnesses, a single translator, and Court supervision. See Id. The parties complied with the Court's orders and met regularly with the Court to resolve their further discovery disputes. See (R. Docs. 9524, 10092, 9649, 9944, 10007, 10216, 10269, 10799, 11175, 10804, 11138, 11192, 11326).

         The Court scheduled the second round of Taishan depositions for the week of January 9, 2012, in Hong Kong. See (R. Docs. 10804, 11138, 11192). The Court appointed a Federal Rule of Evidence 706 expert to operate as the sole interpreter at the depositions. See (R. Doc. 11533). Counsel for the interested parties and Judge Fallon traveled to Hong Kong for these depositions. The following witnesses were deposed or re-deposed: (1) Peng Wenglong (a.k.a. Frank Clem); (2) Jia Tongchun; (3) Che Gang (a.k.a. Bill Cher), Manager of International Trading for Taishan, salesperson at TG from 2001-06 and 2009-12, and salesperson at TTP from 2006-07; (4) Peng Shiliang, General Manager and Chairman of Board of Directors of TTP from 2006-09, employee of TTP, and Plant Manager of TG from 2009-12; and (5) Fu Tinghuan, Supervisor at TG, Deputy General Manager at TG, and Director of TTP. Because the Court was present at the depositions, objections were ruled upon immediately and the majority of problems which plagued the first round of depositions were absent. Also, the Court was able to observe the comments, intonation, and body language of the deponents. Upon return from Hong Kong, the parties informed the Court that minimal further discovery was necessary before briefing could be submitted on Taishan's personal jurisdiction challenges.

         In April 2012, Taishan filed various motions, including its motions to dismiss for lack of personal jurisdiction. On June 29, 2012, over three years since the creation of this MDL, and after a year-and-a-half of personal jurisdiction discovery on Taishan, the Court presided over a hearing on Taishan's motions. The Court coordinated its hearing with Judge Joseph Farina of the 11th Judicial Circuit Court of Florida, who had a similar motion involving Taishan's challenge to personal jurisdiction.

         On September 4, 2012, this Court issued a 142-page Order regarding Taishan's motions in Germano, Mitchell, Gross, and Wiltz, in which the Court denied the motions to dismiss, and held that it maintained personal jurisdiction over Taishan. In re: Chinese-Manufactured Drywall Products Liability Litigation, 894 F.Supp.2d 819 (E.D. La. 2012). The Court also ruled that Taishan was operating as the alter ego of TG. The Court certified an interlocutory appeal and the Fifth Circuit granted permission to appeal. In January and May of 2014, two different panels of the Fifth Circuit affirmed this Court's ruling and held that this Court maintained personal jurisdiction over Taishan and TTP. In re: Chinese-Manufactured Drywall Products Liability Litigation, 753 F.3d 521 (5th Cir. 2014); In re: Chinese-Manufactured Drywall Products Liability Litigation, 742 F.3d 576 (5th Cir. 2014). The time for writs of certiorari passed and the issue of personal jurisdiction over Taishan became firmly settled.

         On June 20, 2014, the Court ordered Taishan to appear in open court on July 17, 2014 to be examined as a judgment debtor. (R. Doc. 17774). Taishan failed to appear for the July 17, 2014 Judgment Debtor Examination and the Court held Taishan in contempt and ordered that Taishan pay $15, 000.00 in attorney's fees to Plaintiffs' counsel; that Taishan pay $40, 000.00 as a penalty for contempt; that Taishan, and any of its affiliates or subsidiaries be enjoined from conducting any business in the United States until or unless it participates in this judicial process, and if Taishan violates the injunction, it must pay a further penalty of 25% of the profits earned by the Company or its affiliate who violate the Order for the year of the violation. (R. Doc. 17869).

         On July 23, 2014, Plaintiffs filed their Omnibus Motion for Class Certification pursuant to Rule 23(b)(3). (R. Doc. 17883). Taishan did not appear and, on September 26, 2014, this Court certified a class of “[a]ll owners of real properties in the United States, who are named Plaintiffs [in the various MDL complaints] asserting claims for remediated damages arising from, or otherwise related to, Taishan drywall.” See (R. Doc. 18028 at 34-35).

         Taishan entered an appearance with the Court in February 2015 and, to satisfy the contempt, Taishan paid both the sum of $15, 000 in attorney's fees to Plaintiffs' counsel and the contempt penalty of $40, 000 in March 2015. (R. Doc. 18764). On March 17, 2015, the Court ordered Taishan and the BNBM and CNBM Entities to participate in expedited discovery related to “the relationship between Taishan and BNBM/CNBM, including whether affiliate and/or alter ego status exists.” (R. Doc. 17869). The instant motions are directly concerned with this relationship.

         Most recently, in March 2016, this Court granted CNBM Group's Motion to Dismiss, finding it was an “agent or instrumentality of a foreign state” within the meaning of the Foreign Sovereign Immunities Act and therefore outside the jurisdiction of this Court. 28 U.S.C. § 1603(b). The Court determined that the tortious activity exception did not apply, because the alleged tortious conduct did not occur within the United States. 28 U.S.C. § 1605(a)(5). Further, the Court found that the commercial activity exception did not apply in this case, as CNBM Group did not directly manufacture, inspect, sell, or market drywall in the United States. Because Plaintiffs failed to present evidence sufficient to overcome the presumption that CNBM Group was entitled to independent status for purposes of the FSIA, the Court granted the Motion and dismissed CNBM Group from the present litigation. See (R. Doc. 20150).

         III. FACTUAL BACKGROUND

         A. The Corporate Structure of the CNBM Business Group

         1. CNBM Group's Role as Parent of the CNBM Business Group

         At the top of the CNBM Corporate family tree is CNBM Group, a state-owned entity organized under the laws of the People's Republic of China. CNBM Group is-and was, at the time this suit was filed-directly and wholly owned by the state. See Cao Decl. ¶¶ 3-6. CNBM Group conducts no business in the United States, and does not itself manufacture, produce, market, distribute, ship or sell any building products or construction materials, including drywall. Id. ¶ 9. Since 2005, CNBM Group has been a controlling shareholder of BNBM Group by directly and/or indirectly holding 100% of BNBM Group's shares. See Zhao Dep. at 385:4-24 [MTD Ex. 5]. Beginning in 2005, CNBM Group was the sole shareholder of BNBM Group, directly holding 100% of BNBM Group's stock. See 2005 CNBM Annual Report at 8. On December 31, 2005, CNBM Group transferred 25% of its equity holding in BNBM Group to CNBM Import and Export, another wholly-owned subsidiary of CNBM Group. See 2005 BNBM Group Auditor's Report at 6 [MTD Ex. 17]. Thereafter, CNBM Group continued to maintain total ownership of BNBM Group's stock, although the percentages of CNBM Group's direct holdings of BNBM Group's shares, and the corresponding percentages of its indirect holdings, have shifted over the years. No entity in which CNBM Group is directly invested, including BNBM Group, is directly engaged in any aspect of the drywall business.

         As the ultimate parent, CNBM Group acts as the strategic center for the business conglomerate in four primary aspects: (1) strategy management - CNBM Group “guides all subsidiaries to strictly adhere to the Group Corporation's determined strategy on business activities, to ensure the realization of the Group Corporation's strategic goals”; (2) decision making management - “exercises the decision making power as the fund contributor on major issues such as its subsidiaries' investment and financing, restructuring, etc.”; (3) resource management - “coordinates and integrates various domestic and overseas resources…”; and (4) culture management - “guides subsidiaries…[in] forming a set of unified enterprise culture values within [CNBM Group].” See [MTD Ex. 57].

         CNBM Group issues technical safety codes to its gypsum plasterboard enterprises, and assigns BNBM with specific responsibility “for drafting of the code.” See [MTD Ex. 68]. CNBM Group's policies control the “safety technology of gypsum plasterboard enterprises, ” and are mandatory in nature. Id. CNBM also requires that its subsidiaries complete annual Comprehensive Risk Management Reports “stating what are the risks for [the particular] year, what are the things that need to be done and how to prevent.” See Taishan's 2011 Risk Management Report.

         CNBM Group provides training to the middle- and senior-level leaders of BNBM Group, CNBM, BNBM, and Taishan. In 2011, CNBM Group held a three-day course for “people in charge of a functional department in the headquarters of the Group Corporation and the people of a higher level, and the personnel who come from a subsidiary (group) company or a research institute but are managed by the Group Corporation or are subject to the pre-placement archival management.” See [MTD Ex. 74]. Taishan's Chairman Jia Tongchun was directed by BNBM to attend this course. Id.

         2. BNBM Group is a Minority Shareholder in CNBM

         In 1996, with the investment of CNBM Group, BNBM Group became a wholly state-owned limited liability company. In 1997, seeking to raise public capital for its drywall manufacturing business, BNBM Group formed BNBM PLC (“BNBM”), a public company listed on the Shenzen stock exchange. After BNBM was formed, BNBM Group stopped manufacturing drywall and BNBM became the sole manufacturer of Dragon Brand drywall. BNBM Group continued to operate in other sectors of the building materials market.

         As part of the 2004 corporate restructuring in preparation for CNBM's public offering (discussed in more detail below), BNBM Group transferred its 60.33% equity interest in BNBM to CNBM. In consideration, BNBM Group acquired a minority interest in CNBM. See 2005 BNBM PLC Annual Report. Thus, BNBM Group no longer had any direct ownership in BNBM at the time BNBM acquired its ownership interest in Taishan. At present, BNBM Group owns approximately 27.5% of CNBM. See 2014 CNBM Annual Report.

         The CNBM Articles of Association limit BNBM Group's power as a stockholder. Many important business decisions must be decided by a “special resolution, ” which requires “more than two-thirds of the voting rights represented by the shareholders.” See Articles of Association of CNBM, January 17, 2014, at 32, Art. 8.16. Such decisions include increasing or decreasing capital, issuing stock, warrants, or similar securities, issuing bonds, engaging in mergers, undergoing dissolution or liquidation, amending the articles of association, or taking other actions “likely to have a material impact” on the company. Id. at 34, Art. 8.23. BNBM Group is also precluded from assuming management of CNBM. “Unless prior approval is obtained at a general meeting” of the shareholders, “the Company shall not enter into any contract with any persons other than Directors, supervisors, general managers and other senior management members pursuant to which such person shall be responsible for managing the whole or any part of the Company's business.” Id. at 27, Art. 8.3. As a 30% stockholder of CNBM, BNBM Group may not exercise its voting rights “in a manner prejudicial to the interests of all or some of the shareholders of the Company.” Id. at 25, Art. 7.5.

         3. CNBM Group is a Shareholder in CNBM

         Like its parent (CNBM Group), CNBM is not directly engaged in the manufacture or sale of building materials. It is a holding company with investments in other Chinese entities engaged in various businesses related to the building industry, including cement, fiberglass, solar energy, lumber, steel, and drywall. CNBM does not manufacture, produce, market, distribute, ship or sell any drywall. See Chang Decl. ¶ 3. On March 28, 2005, CNBM was converted into a publicly traded joint stock limited company on the Hong Kong Stock Exchange (“HKSE”), with CNBM Group and several wholly-owned CNBM Group subsidiaries possessing approximately 95% of the share capital of CNBM immediately prior to the Global Offering. See Global Offering at 153 [MTD Ex. 38]. To accomplish this Public Offering, CNBM Group executed a reorganization of its subsidiaries aimed to “position the Company [CNBM], then a wholly-owned subsidiary of [CNBM Group] as the holding company” of its building materials products and engineering services businesses. Id. at 89.

         The conversion of CNBM into a publicly listed company on the HKSE shifted CNBM Group's ownership of share capital in CNBM. CNBM Group “is deemed to own the shares directly held by BNBM Group, CNBM Import & Export, and Building Materials Academy.” See 2006 CNBM Annual Report at 45 n.1. Thus, by virtue of its shareholdings, after completion of the Global Offering, CNBM Group directly and indirectly held 60.34% of CNBM's total share capital, making CNBM Group the “controlling shareholder” of CNBM.[1] Id. at 43-45. Following the Global Offering, CNBM Group's direct and indirect ownership in CNBM's shares has declined slightly.[2] However, it continued to control the highest percentage of CNBM's total shares, and consequently, has been and remains the “Controlling Entity” of CNBM.[3] That said, over half the shares of CNBM are owned by public investors. See 2014 CNBM Annual Report.

         CNBM Group and CNBM share common employees. Since 2005, Song Zhiping has been the Chairman of CNBM Group and the Chairman and Executive Director of CNBM.[4] See [MTD Ex. 1]. Zhou Guoping is the Chief Economist for CNBM Group and, since 2005, a Supervisor for CNBM. Id. Additionally, Chang Zhangli is the Vice President and Executive Director of CNBM and has been a Secretary to the Board for CNBM since 2005.[5] Id.

         4. CNBMIT, CNBM USA, and United Suntech are companies within the CNBM Corporate Family.

         CNBMIT is a Chinese entity that acts as an import and export agent for Chinese companies. See Chaun Decl. ¶ 6. CNBMIT has never manufactured, produced, marketed, distributed, shipped or sold drywall in either China or the United States. However, it does conduct some of its import and export business in the United States. CNBMIT has an office in the United States from which it “promotes Chinese building material and machinery and establishes a distribution network in North America. With a localized professional sales team and matured sales channels, [CNBMIT] has become an important supplier of building materials and machinery in the USA and North American markets.” See CNBMIT webpage, “CNBMI USA” Tab, available at http://www.cnbmit.com/en/overseas/Detail.aspx?MenuID=050602 (last visited 2/22/2016).

         CNBM USA and United Suntech were registered business entities located in California from 2005 to 2009. CNBM USA was established in 2006 as the United States branch of CNBM Group, and tasked with the mission to distribute CNBM products throughout the United States. To develop business in the United States, CNBM USA emphasized the fact that the “CNBM has become the largest building supplier in China…[and] will improve our market share and become one of the largest building supply companies known throughout the world.” See CNBM USA “Building a Mutually Rewarding Partnership” Powerpoint dated 4/2/2007 [MTD Ex. 163]. In 2011, immediate ownership of CNBM USA was transferred to an intermediary entity, CNBM International. Id.

         CNBMIT and United Suntech are subsidiaries of CNBM Investment.[6] CNBM Investment (f/k/a BND) was majority-owned by BNBM until December 2007, when BNBM's Board of Directors announced a resolution on transferring its 80% share ownership in BND to CNBM. See 12/7/2007 BNBM Announcement of Final Resolution of the 30th Interim Meeting of the 3rd Session of Board of Directors [MTD Ex. 262]. In addition to the 80% share acquisition, CNBM acquired the remaining 20% of equity shares from China Fiberglass, making CNBM Investment a wholly-owned subsidiary of CNBM by 2008. See 2008 CNBM Annual Report at 59.

         5. CNBM is a Majority Shareholder in BNBM

         BNBM is a subsidiary of CNBM, which, as discussed above, is itself a subsidiary of CNBM Group via direct and indirect equity interest. In each of BNBM's annual reports from 2005 to 2014, CNBM is defined as BNBM's “Controlling Shareholder” and CNBM Group is defined as its “Actual Controller.”[7] In June 2006, CNBM Group paid for a “share conversion of BNBM stock in order to transfer 45, 630, 000 of CNBM's non-tradeable BNBM shares into tradable shares. See 2006 CNBM Annual Report at 101 n. (a). As a result of this share conversion, CNBM directly held 52.40% equity interest in BNBM, which it retained through 2013. See 2007 CNBM Annual Report at 10, 17 & 113; 2013 BNBM Annual Report at 53. From 2005 to 2010, CNBM held between 60.33% and 52.40% direct ownership interest in BNBM's shares; and, CNBM Group, by virtue of its direct and indirect ownership in CNBM, held between 41.16% and 23.11% indirect ownership interest in BNBM. Additionally, from 2005 through 2015, among the top ten shareholders of BNBM, CNBM has been the only shareholder with a 5% or higher stake in BNBM. See 2005-2014 BNBM Annual Reports.

         Because its stock is listed on the Hong Kong Stock Exchange, CNBM is subject to the rules and regulations of the Exchange. Under HKSE rules, CNBM Group is a “Close Associate” of CNBM, which in turn is a “Close Associate” of BNBM, which is a “Close Associate” of Taishan, meaning that each company is able to “exercise or control the exercise of 30% . . . or more of the voting power at general meetings, or to control the composition of a majority of the board of directors and any subsidiary of this other company.” See Keyes Dep. at 39:2-21 [MTD Ex. 40]; HKSE Rules, Chapter 1 [MTD Ex. 42]. Further, under HKSE Rules, CNBM Group is the “Controlling Shareholder”[8] of CNBM; CNBM is a “Substantial Shareholder”[9] of BNBM and BNBM is a “Substantial Shareholder” of Taishan. See Keyes Dep. at 48:16-19; 74:13-79:20. Additionally, CNBM, BNBM, and BNBM Group have shared the same accounting firm. CNBM has used the accounting firm of Baker Tilley Hong Kong Ltd. since 2010; BNBM Group has used the same firm since 2012 and BNBM has used Baker Tilley since 2013.

         6. BNBM's Relationship with its Subsidiary Taishan

         BNBM manufactures building materials, including drywall, in China. BNBM is a public company traded on the Shenzhen Stock Exchange, with over 21, 000 shareholders. It is a majority shareholder in Taishan. See 2014 BNBM PLC Annual Report. BNBM neither created nor incorporated Taishan. Taishan began as a separate and independent manufacturer of drywall. When BNBM first purchased shares, Taishan already had revenues of RMB 48.2 million. See 2005 Asset Appraisal Report [BNBM Ex. 8]. BNBM acquired its equity stake in Taishan in two separate actions. BNBM paid fair value to acquire its interest in Taishan, subject to a third-party audit and asset valuation process. See Yang Decl. ¶ 8. In March and April 2005, BNBM entered into a Share Subscription Agreement to purchase 65, 362, 500 shares of Taishan, representing 42% of the registered capital of the company. See March 19, 2005 Share Subscription Agreement [MTD Ex. 126]. The subscription price paid by BNBM was approximately RMB 117.65 million. Id. A professional third-party appraisal of the value of Taishan confirmed the adequacy of the purchase price with reference to the net asset value of Taishan. See 2005 Asset Appraisal Report [BNBM Ex. 8]. Taishan's shareholders and BNBM's Board of Directors voted on and approved the acquisition in compliance with each company's articles of association.

         CNBM's August 2008 Announcement regarding BNBM's acquisition of a controlling interest in Taishan states the following as the reason for the purchase:

Following BNBM's acquisition of the 42% equity interest of Taihe, the Company [CNBM] has become the largest producer of gypsum boards in the PRC. The acquisition has also enhanced the Company's ability to serve a broader base of customers. The directors of the Company believe that the Acquisition will enable CNBM Group to further enhance its competitiveness and consolidate the leading position in the PRC gypsum board market as it will participate more actively in the daily operations and management of Taihe with a view to improving its profitability.

See CNBM Announcement: “Connected Transaction Acquisition” [MTD Ex. 13].

         Taishan's articles of incorporation were amended as part of the transaction. See Articles of Incorporation [BNBM Ex. 10]. In addition to providing minority stockholder protections, the articles were amended to provide for a seven person Board of Directors (four nominated by BNBM). Id. at Art. 67. The Taishan Board was later downsized to five directors, with three BNBM designees.

         In 2006, BNBM acquired an additional, indirect 23% equity interest in Taishan through the purchase of one of Taishan's shareholders, Taian Donglian Investment Trade Co., Ltd. (“Donglian”). See Song Dep. at 51:20-52:2 [MTD Ex. 36].[10] The acquisition left BNBM with 65% equity interest in Taishan. See Yang Decl. ¶ 8 [BNBM Ex. 3]. Taishan's Chairman and General Manager Jia Tongchun (who was also Deputy General Manager and Director of BNBM from 2005-2012) personally retained 5% equity ownership in Taishan, and was the majority shareholder and legal representative of an investment company, which owned 14% of Taishan's equity shares. See 8/28/2006 Connected Transaction Announcement at ¶ 000011-12 [MTD Ex. 127].

         Under Chinese law, BNBM is the “controlling shareholder” of Taishan.[11] As such, it exercises a certain degree of authority over Taishan. On October 16, 2007, BNBM issued an inter-company special inspection report on the management and control of its branches and subsidiaries. See BNBM's Report on Management and Control of its Branches and Subsidiaries, 10/16/07 [MTD Ex. 75]. The report specified Taishan as a “controlled subsidiary, ” and stated that BNBM (1) “strictly followed the relevant regulations to conduct management and control of the daily operation and important activities of the branches and subsidiaries” and (2) “emphasized and strengthened the control of its controlled subsidiaries' related party transactions, outside guarantees, usage of financing funds, major investments, information disclosure and other activities.” Id.

         BNBM unifies auditing and financial control and administration of Taishan and its other subsidiaries. BNBM's audit committee, which serves under BNBM's Board of Directors, also conducts annual financial audits of Taishan. See 11/28/2009 “Letter of Communication and Confirmation about the Audit Schedule for the 2009 Financial Statements.” BNBM and Taishan shared the same external auditing firm between 2006 and 2010. Also, Taishan must submit monthly, quarterly, and yearly budget plans and financial reports to BNBM. Notably, however, Chinese accounting and exchange rules require BNBM to consolidate its financial reporting with Taishan, because it holds a majority of Taishan's stock. See Accounting Standards No. 33 at Art. 47 [BNBM Ex. 47].[12] Additionally, BNBM and Taishan prepare separate audited financial statements, maintain separate books and records, file separate tax returns, and maintain separate bank accounts. See Chen Tr. at 596:3-11; 600:3-8 [BNBM Ex. 2].

         BNBM guarantees loans that Taishan receives from third-party banks and Taishan is prohibited from requesting guarantees from any companies other than BNBM. See Chen Dep. at 363:18-23 [MTD Ex. 77]. At the beginning of 2006, BNBM's Board approved guarantees for Taishan with eight banks. See BNBM Announcement of Final Decision of the 15th Meeting of the 3rd Session of the Board of Directors, 1/23/06 [MTD Ex. 146]. In June of 2007, BNBM provided a guarantee for a capital expenditure proposed by Taishan to finance the “technological transformation of the original gypsum board production line” of Taishan. See BNBM Announcement of the Resolution of the Final Resolution of the 25th Interim Meeting of the 3rdSession of the Board of Directors, 6/15/2007 [MTD Ex. 138]. BNBM's General Manager Chen Yu confirmed that “from 2005 through 2014, there are . . . substantial guarantees, provided to Taishan each and every year in order for Taishan to maintain its profitability and business interest.” See Chen Dep. at 363:18-23. Additionally, BNBM approves all of Taishan's loan increases. However, BNBM does not finance Taishan's operations by providing non-repayable funds; it has never paid for Taishan's debts, losses, or expenses and it has not made any direct loans to Taishan.

         BNBM exercises a high degree of control over Taishan's operational management. After Taishan's Board of Directors passes certain resolutions that require significant capital expenditures, Taishan must seek approval from BNBM-its controlling shareholder-regarding those resolutions. See Shandong Taihe Dongxin 3rd Meeting of the 3rd Board of Directors, 4/15/2006 [MTD Ex. 132]. BNBM requires that its subsidiaries report their board resolutions, shareholder meeting resolutions, and other important documents and financial statements to the relevant departments within BNBM. With regard to the resolutions, BNBM's relevant departments will “conduct analyses and researches (sic), raise questions and give suggestions, and protected [BNBM's] interest to the maximum.” See 10/16/2007 Special Inspection Report. With regard to Taishan's financial statements, BNBM's relevant departments will “conduct analyses and researches (sic), so as to timely grasp the production and operation situation and financial situation and to raise relevant disposal opinions at proper timing, to ensure profit realization and risk control of the equity investments.” Id.

         For example, Taishan's Board of Directors needed to get the approval of BNBM before it could build additional factories. See Chen Dep. at 345-46, 349. BNBM invested in the construction of drywall factories, plants, and gypsum board production lines by offering guarantees to Taishan. BNBM tracked its investments made in Taishan's production lines through weekly reports. See “Rectification Status on the Inversion of Procedure in the Fixed Investment Projects of the Stock Company” [MTD Ex. 137]. Taishan also had to seek approval from BNBM regarding the design, quality, technology, and processes of drywall production. See 4/15/2006 Taishan Board of Directors Resolutions (requiring shareholder [BNBM] approval of gypsum board factory construction projects with specifications for production).

         In 2005, the Taishan shareholder meeting resolved that: (1) if any Taishan subsidiary must have more than two shareholders, BNBM will purchase 5% of equity shares; and (2) for any Taishan subsidiary to be established in the future, if the subsidiary must have more than two shareholders, BNBM will hold 20% interest of equity shares. See 6/26/2005 Resolution of the 4th Extraordinary General Meeting of Shareholders [MTD Ex. 129]. Notably, this resolution was implemented to accommodate the Chinese Company Law requirement that limited liability subsidiaries have more than one shareholder. See Jia Tr. 758:21-760:16. Following the adoption of this resolution, BNBM became a co-owner in three different Taishan drywall manufacturing subsidiaries. In 2007, BNBM acquired a 30% equity interest in a fourth Taishan subsidiary; the reason for the acquisition was for “CNBM Group to benefit from the synergy between BNBM and Taishan, increase its competitiveness and consolidate its leading position in the gypsum board market . . . ” See 4/13/2007 CNBM Announcement at 2, 7. Additionally, in 2008, to “ensur[e] the on-going and stable supply of raw materials to Taishan Gypsum for production of paperbacked plasterboards, ” BNBM added ownership in a fifth Taishan subsidiary when it and Taishan jointly established Taihe Decoration. 6/30/2008 BNBM Announcement of the 3rdSession; BNBM Annual Report at 42.

         In October, 2015, CNBM made a public announcement that as a result of an agreement between BNBM and Taishan's minority shareholders, “BNBM will directly and indirectly hold 100% equity interest in Taishan Gypsum. . . . Both BNBM and Taishan will remain as subsidiaries.” See 10/13/2015 CNBM Announcement: Acquisition of Equity Interest in Taishan Gypsum Through Share Issuance of BNBM.

         Since 2005, BNBM Directors and Officers have maintained voting control over Taishan's Board of Directors. See, e.g., 4/23/07 BNBM Reply on Inquiry Letter about 2006 Annual Report Verification. Seven BNBM directors/officers have served in concurrent positions at Taishan. See Summary Chary of Overlapping Executives and Officers [MTD Ex. 1]. However, Chairman Jia, who was Taishan's General Manager before BNBM acquired an interest in the company, was the only BNBM director who also served as a Taishan executive. Id. From 2005 to 2009, Wang Bing was the General Manager and a Director of BNBM while contemporaneously a Director of Taishan (a position he still holds today).[13] Id. That said, Mr. Wang testified that if an issue arose with BNBM and Taishan, he recused himself from voting on Taishan's Board of Directors. See Wang Tr. at 281:18-24, 284:2-7, 291:4-12 [BNBM Ex. 38]. Similarly, from 2005 to 2009, Cao Jianglin was the Chairman of BNBM & Secretary to the Party Committee of BNBM, while contemporaneously serving as Chairman of the Supervisory Committed of Taishan.[14] As with Mr. Wang, Mr. Cao did not serve in any executive role during his time as Chairman of BNBM and he recused himself from voting on Taishan's board of directors on any issue involving BNBM. Id.

         Notwithstanding the foregoing, Taishan is a successful and autonomous company. Prior to BNBM first investing in 2005, Taishan had a 58.4% share of the Chinese low-cost drywall market, was the largest producer of gypsum board in China in terms of production capacity, and made RMB 58, 000 in net profits. See Deal Decl., Table 18 [BNBM Ex. 11]. Taishan's revenues have continued to grow since 2005. In each year since BNBM invested in Taishan, Taishan's annual net revenues and profit margins have exceeded BNBM's. See Gordon Decl. ¶ 55-59 [BNBM Ex. 12]. In 2014, Taishan's revenue was over 5.5 billion yuan. Id. Figure 1. By contrast, BNBM's revenue was approximately 2.789 billion. Taishan is not undercapitalized. At least since BNBM's acquisition of its interest in Taishan, Taishan has complied with Chinese corporate legal requirements, such as holding shareholder and board of director meetings and obtaining corporate authorizations for major transactions. See Chen Decl. ¶ 11 [BNBM Ex. 67]. Taishan conducts periodic meetings of the board of directors and stockholders, and obtains required corporate authorizations for major transactions.

         BNBM also complies with corporate governance requirements. Taishan's finances and accounting functions operate independently of BNBM. See Yang Decl. ¶¶ 11-16; Chen Tr. 596:3-11. Each company is responsible for its own debts, liabilities and losses. See Chen Tr. 600:3-8. BNBM and Taishan manage and use their assets separately. They have never had joint bank accounts. See Yang Decl. ¶ 11. Neither can access the other's bank accounts. Id. ¶ 14, 15. They have never had common accounting books. Id. ¶ 12.[15] While BNBM guaranties working capital lines for Taishan, BNBM has never had to perform on these guarantees. See “Draft Public Announcement on the External Guarantees for the Year ...


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