In Pino v. Cardone Capital, LLC, 2022 U.S. App. LEXIS 35278 (9th Cir. Dec. 21, 2022), the United States Court of Appeals for the Ninth Circuit (Lynn, J.) joined with the Eleventh Circuit in holding that a person may qualify as a statutory “seller” within the meaning of Section 12(a)(2) of the Securities Act of 1933 (the “Act”), 15 U.S.C. § 77l(a)(2), by promoting the sale of a security in mass communications made on social media. Online videos and social media posts may trigger liability because Section 12(a)(2) does not require that a solicitation be directed or targeted to a particular investor. The Ninth Circuit’s holding highlights the risk that investment companies and their advisers face if they promote or otherwise discuss the merits of securities offerings online.
Alejandro (“Alex”) Moreno is a partner in the Business Trial Practice Group in the Firm's San Diego office. He is the firm’s 2021 Leadership Council on Legal Diversity (LCLD) Fellow.
In SEC v. Rio Tinto PLC, No. 21-2042, 2022 U.S. App. LEXIS 19577 (2d Cir. July 15, 2022) (Jacobs, J.), the United States Court of Appeals for the Second Circuit declined to impose “scheme liability” under subsections (a) and (c) of the Securities & Exchange Commission Rule 10b-5 (17 C.F.R. § 240.10b-5) where the challenged conduct amounted solely to the making of a material misstatement or omission. The Rio Tinto decision is noteworthy because it limits the U.S. Supreme Court’s decision in Lorenzo v. SEC, 139 S. Ct. 1094 (2019) (blog article here), which potentially expanded “scheme liability” to defendants who may have been tangentially involved in the issuance of a misleading statement.…
Continue Reading Second Circuit Declines to Allow SEC Rule 10b-5 Claim for “Scheme Liability” to Proceed Where the Alleged Misconduct Amounted Only to the Making of Material Misstatements or Omissions
In Sirott v. Superior Court, 2022 Cal. App. LEXIS 389 (Cal. App. May 5, 2022), the First Appellate District of the California Court of Appeal (Humes, J.) analyzed the ownership requirements a plaintiff must satisfy to pursue derivative claims on behalf of a limited liability company. Under California Corporations Code § 17709.02 (“Section 17709.02”), a putative derivative plaintiff must show both “contemporaneous” and “continuous” ownership to proceed with a derivative lawsuit. Subject to certain statutorily defined exceptions, the contemporaneous ownership prerequisite requires the plaintiff to plead that it was a member of the limited liability company at the time of the transaction or any part of the transaction of which the plaintiff complains took place. The continuous ownership requirement, in turn, obligates the plaintiff to remain a member of the limited liability company through the conclusion of the litigation. In Sirott, the plaintiff’s derivative claims were properly ordered dismissed because the plaintiff lacked standing after it lost its interest in the limited liability company—i.e., the real party in interest with respect to the derivative claims. …
Continue Reading California Court of Appeal Clarifies that a Derivative Plaintiff Must Demonstrate Both “Contemporaneous” and “Continuous” Ownership to Maintain a Derivative Suit on Behalf of a Limited Liability Company
In Crest v. Padilla, No. 19STCV27561, 2022 WL 1565613 (Cal. Super. May 13, 2022), the Superior Court of California for the County of Los Angeles (Duffy-Lewis, J.) issued a…Continue Reading Los Angeles Superior Court Invalidates California Law Requiring Gender Diversity on Company Boards
In Crest v. Padilla, No. 20STCV37513 (Cal. Super. Apr. 1, 2022), the Superior Court of California for the County of Los Angeles (Green, J.) declared that Section 301.4 of the California Corporations Code is unconstitutional under the California state Constitution. Section 301.4 requires publicly held corporations which have their principal executive offices located in California to include “underrepresented communities” on their boards of directors. The trial court granted the taxpayer plaintiffs’ motion for summary judgment, concluding that the statute violated equal protection clause of the California Constitution. The court’s decision renders the constitutionality of Section 301.4 ripe for appellate review by the California Court of Appeal.
Continue Reading Los Angeles Superior Court Invalidates California Board Diversity Statute, Rendering It Ripe for Review by the California Court of Appeal
In Tola v. Bryant, No. 16150, 2022 Cal. App. LEXIS 241 (Cal. App. Mar. 24, 2022), the First Appellate District of the California Court of Appeal applied Delaware’s new formulation of the test for determining whether a stockholder has standing to assert derivative claims on behalf of a company. Under the test articulated by the Delaware Supreme Court in United Food & Commercial Workers Union v. Zuckerberg, 262 A.3d 1034, 1058 (Del. 2021), a stockholder of a Delaware corporation has standing to assert derivative claims when the stockholder can plead particularized facts, on a director-by-director basis, demonstrating that at least half of the board in place at the time the complaint is filed:…
Continue Reading California Court of Appeal Addresses Derivative Standing and Failure of Oversight Claims Under Delaware Law
In Brookfield Asset Mgmt. v. Rosson, No. 406, 2020, 2021 Del. LEXIS 291 (Del. Sept. 20, 2021), the Delaware Supreme Court held that claims for wrongful equity dilution may be pursued only derivatively on behalf of the corporation and not directly. Brookfield is noteworthy because it overruled Gentile v. Rossette, 906 A.2d 91 (Del. 2006), which previously permitted stockholder plaintiffs to assert direct claims for equity dilution where a controlling stockholder orchestrated a dilutive equity issuance that expropriated both economic value and voting power from the minority stockholders. The Delaware Supreme Court revisited the Gentile rule, in part, because it conflicts with the simple test for determining whether a claim is direct or derivative established in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004). Under Tooley, a court must determine whether a claim is direct or derivative based solely upon the answer to the following questions: (1) who suffered the alleged harm (the corporation or the stockholders, individually)?; and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)? Applying Tooley, the Delaware Supreme Court held that a claim for wrongful equity dilution is clearly derivative irrespective of whether shares were issued to a controlling stockholder as part of the dilutive transaction. In the sixteen years since the Delaware Supreme Court decided Gentile, the decision was subject to a steady drumbeat of criticism and proved difficult to apply, which warranted the Court’s reconsideration of Gentile. …
Continue Reading Delaware Supreme Court Holds that Equity Dilution and Expropriation Claims May Only Be Brought Derivatively, Overruling Prior Precedent
In Ocegueda v. Zuckerberg, No. 20-CV-04444, 2021 WL 1056611 (N.D. Cal. Mar. 19, 2021), the United States District Court for the Northern District of California became the first court…
Continue Reading Facebook Defeats Shareholder Suit Challenging Alleged Failures In Its Diversity and Inclusion Practices
Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220 (“Section 220”), permits a stockholder of a Delaware corporation to inspect corporate books and records upon a showing of a proper purpose. The Delaware courts have long urged stockholders to avail themselves of Section 220 — the “tools at hand” — to inspect relevant corporate documents before commencing plenary derivative litigation. See, e.g., Grimes v. Donald, 673 A.2d 1207, 1216 & n.11 (Del. 1996). Perhaps as a result of stockholders heeding this advice, recent years have seen an increase in litigation arising out of Section 220 demands, with corporations pursuing various objections and defenses to resist inspection. In AmerisourceBergen Corp. v. Lebanon County Employees’ Retirement Fund, 2020 WL 7266362 (Del. Dec. 10, 2020), the Delaware Supreme Court (Traynor, J.) weighed in on and ultimately rejected two objections commonly proffered by corporations who seek to limit or resist Section 220 stockholder inspection demands. The Court held that (i) it is not necessary for a stockholder to specify the “ultimate objectives” of the investigation in the stockholder’s Section 220 demand; and (ii) a stockholder is not required to establish that the alleged corporate wrongdoing would be judicially “actionable” in order to obtain corporate records under Section 220. This decision of the Delaware Supreme Court provides essential guidance to Delaware corporations and practitioners on the full panoply of issues related to Section 220 demands.
Continue Reading Delaware Supreme Court Provides Important Guidance Regarding Section 220 Demands, Rejecting Several Limiting Principles Frequently Offered By Corporations Resisting Stockholder Inspection Demands
In In re WeWork Litigation, 2020 Del. Ch. LEXIS 270 (Del. Ch. Aug. 21, 2020) (Bouchard, C.), the Delaware Court of Chancery considered an issue of first impression: Does the management of a Delaware corporation have the unilateral authority to preclude a director from obtaining the corporation’s privileged information? The Court held it cannot. The directors of Delaware corporations are entitled to share in legal advice the corporation receives and, subject to limited exceptions not at issue in WeWork, cannot be prevented from accessing the corporation’s privileged information.
Continue Reading Delaware Court of Chancery Clarifies that Management Cannot Unilaterally Curtail a Director’s Access to Corporation’s Privileged Information
In Juul Labs, Inc. v. Grove, 2020 Del. Ch. LEXIS 264 (Del. Ch. Aug. 13, 2020) (Laster, V.C.), the Delaware Court of Chancery held that the “internal affairs doctrine” bars a stockholder of a Delaware corporation headquartered in a foreign jurisdiction from seeking to inspect corporate books and records pursuant to the statutory law of that foreign jurisdiction. The stockholder is limited instead to the inspection rights and remedies under Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220. This decision has the potential to provide greater certainty to Delaware corporations headquartered in other states that Delaware law will govern all aspects of stockholders’ rights, although it remains to be seen whether the courts of those other states will enforce Delaware law in a similarly limiting fashion.
Continue Reading Delaware Court of Chancery Applies the Internal Affairs Doctrine to Deny Stockholder Inspection Rights Under a Foreign State’s Law