In Anderson v. Magellan Health, Inc., No. 2021-0202, — A.3d —-, 2023 WL 4364524 (Del. Ch. July 6, 2023) (McCormick, C.), the Delaware Court of Chancery addressed the circumstances under which the Court will award a shareholder plaintiff attorneys’ fees in disclosure-based deal litigation. In particular, Anderson analyzed the history of disclosure-based deal litigation in Delaware and the Court’s evolving standard for awarding fees where shareholder action has caused a company to issue additional pre-merger disclosures “mooting” pending deal litigation. Prior to the decision in Anderson, the state of the law was unsettled. The first line of cases would award fees as long as the shareholder plaintiff secured additional disclosures that were “helpful” such that they provided “some benefit” to shareholders. The second line of cases, however, adopted a stricter standard requiring that the supplemental disclosures be “plainly material.” In an effort to combat the so-called “deal tax” associated with disclosure-based merger litigation, Anderson comes out in favor of the stricter standard. Going forward, the Court will only award disclosure-based mootness fees when the complaining shareholder obtains additional disclosures that are “plainly material” to the shareholders. Companies, boards and advisors engaging in M&A transactions should pay attention to this decision as it will weigh on the proper strategy for approaching a shareholder challenge to an M&A transaction. Continue Reading Delaware Court of Chancery Clarifies Heightened Standard for Recovery of Attorneys’ Fees in Disclosure-Based Deal Litigation
Alejandro (“Alex”) Moreno is a partner in the Business Trial Practice Group and the Office Managing Partner of the Firm's San Diego office. He is the firm’s 2021 Leadership Council on Legal Diversity (LCLD) Fellow.
In Lee v. Fisher, No. 21-15923, 2023 U.S. App. LEXIS 13521 (9th Cir. June 1, 2023), the United States Court of Appeals for the Ninth Circuit, sitting en banc, affirmed the dismissal of a shareholder derivative complaint alleging, among other things, violations of Section 14(a) of the Securities and Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78n(a), and SEC Rule 14a-9, 17 C.F.R. § 240.14a-9 (collectively, the “Proxy Claims”), enforcing a forum-selection clause in the defendant company’s bylaws designating the Delaware Court of Chancery as the exclusive jurisdiction for adjudicating any derivative claims involving the company. By affirming the dismissal, the Ninth Circuit called into question whether the Proxy Claims were properly classified as derivative claims, noting that the Exchange Act’s antiwaiver provision was not triggered when the shareholder plaintiff could pursue the Proxy Claims directly in federal court. The Ninth Circuit’s decision creates a circuit split with the Seventh Circuit’s decision in Seafarers Pension Plan ex rel. Boeing Co. v. Bradway, 23 F.4th 714 (7th Cir. 2022), raising the specter that the United States Supreme Court eventually will weigh in on the issue.Continue Reading Ninth Circuit Enforces Delaware Forum Selection Clause to Affirm Dismissal of Derivative Claim for Alleged Violation of Section 14(a) of the Securities Exchange Act of 1934
This article was originally published in Law360 on April 14, 2023.
Providing legal advice to business entities raises important issues regarding the application of attorney-client privilege between the entity and its directors. Delaware’s approach to corporate privilege springs from the recognition that corporate directors and the corporation they control are deemed “joint clients” of legal advice received while the directors form part of the board.Continue Reading Protecting Privilege in Case of a Dispute with Former Director
In In re McDonald’s Corp. Stockholder Derivative Litigation, No. 2021-0324 (Del. Ch. Jan. 26, 2023), the Delaware Court of Chancery (Laster, V.C.) held that officers of a Delaware corporation are subject to a fiduciary duty of oversight as articulated in In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996). In doing so, the Court allowed stockholder derivative plaintiffs to proceed with oversight claims against the company’s former Global Chief People Officer, who allegedly presided over a corporate culture that condoned sexual harassment. The decision builds on Delaware jurisprudence to extend the duty of oversight to officers, not just directors, who will in most instances form part of the vanguard with respect to company efforts to implement effective reporting systems and/or to report on and respond to red flags regarding potential misfeasance at the company.Continue Reading Delaware Court of Chancery Holds that Officers of a Delaware Corporation Are Subject to Fiduciary Duty of Oversight
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.Continue Reading Ninth Circuit Holds that Social Media Posts May Give Rise to “Seller” Liability Under Section 12(a)(2) of the Securities Act of 1933
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