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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 Flood v. Synutra Int’l, Inc., No. 101, 2018, 2018 Del. LEXIS 460 (Del. Oct. 9, 2018), the Delaware Supreme Court (Strine, C.J.) held that a controlling stockholder who pursues a merger with the controlled company will have the benefit of business judgment review pursuant to Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), as long as the requisite procedural protections under MFW are put in place prior to the commencement of economic negotiations. In MFW, the Delaware Supreme Court created a framework through which a controlling stockholder could enter into a strategic transaction with the controlled company and still avail itself of the deferential business judgment standard of review. To have the business judgment standard apply, the transaction must be conditioned “ab initio” upon both (1) the approval of an independent, adequately-empowered Special Committee of the board of directors that fulfills its duty of care, and (2) the uncoerced, informed vote of a majority of the minority stockholders (the “MFW Procedural Protections”). Synutra arose from an issue left open in MFW regarding when the MFW Procedural Protections will be deemed to have been in place “ab initio.
Continue Reading Getting to Business Judgment in an Interested Transaction: Controlling Stockholder Must Put Procedural Protections in Place Prior to the Commencement of Economic Negotiations

In Parametric Sound Corp. v. The Eighth Judicial District Court of the State of Nevada, ___ P.3d ___, 2017 WL 4078845 (Nev. Sept. 14, 2017), the Nevada Supreme Court addressed the circumstances under which breach of fiduciary duty claims asserted in connection with a strategic transaction may be brought by shareholders directly (including in a class action) or must be bought derivatively, on behalf of the corporation. In reaching its decision, the Supreme Court expressly adopted the test articulated by the Delaware Supreme Court in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), and clarified prior ambiguities in Cohen v. Mirage Resorts, Inc., 119 Nev. 1, 62 P.3d 720 (2003). The Nevada Supreme Court thus held that whether a claim is direct or derivative turns on the following two questions: (1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually). Applying this test, the Court granted defendants’ petition for writ of mandate and directed the district court to dismiss the shareholder plaintiff’s direct, class claims for breach of fiduciary duty arising from the approval by the board of directors of Parametric Sound Corporation (“Parametric”) of a reverse triangular merger between a subsidiary of Parametric and VTB Holdings, Inc. (“Turtle Beach”). This decision provides much needed legal certainty in a jurisdiction seeking to expand its incorporations.
Continue Reading Nevada Supreme Court Adopts Delaware’s Tooley Test to Determine Whether Shareholder Claims are Direct or Derivative

In a shareholder derivative action, to survive a motion to dismiss for failure to plead facts showing demand futility, a derivative plaintiff must plead particularized facts showing either actual involvement by a majority of the board in illegal conduct or conduct amount to an intentional dereliction of duty. Illegal conduct at a company, untethered to board participation, is not enough. To the contrary, a board’s consideration of and remedial response to alleged illegal conduct inoculates the board from derivative liability even where a stockholder plaintiff alleges, with the benefit of hindsight, that a different course of action would have been more favorable for the company. In In re Qualcomm Inc. FCPA Stockholder Derivative Litig., No. CV 11152-VCMR, 2017 WL 2608723 (Del. Ch. June 16, 2017), the Delaware Court of Chancery rejected several conclusory arguments that illicit behavior by the company automatically supports an inference of director knowledge or involvement. The Qualcomm decision underscores that company directors should freely exercise their discretion when implementing remedial measures in response to company legal violations without fear that an enterprising set of plaintiff’s attorneys will use those remedial measures to bootstrap derivative liability on the directors.
Continue Reading Under Delaware Law, the Occurrence of Alleged Illegal Conduct at a Company Is Not Enough to Plead Demand Futility Sufficient to Give Stockholders Standing to Sue Derivatively

In Retail Wholesale & Department Store Union Local 338 Retirement Fund v. Hewlett-Packard Co., 2017 U.S. App. LEXIS 955 (9th Cir. Jan. 19, 2017), the United States Court of Appeals for the Ninth Circuit addressed for the first time whether an undisclosed violation of a company’s code of ethics can support a claim of securities fraud.  The Ninth Circuit held that general pronouncements that a company seeks to adhere to high ethical standards, despite the later revelation that the company’s chief executive officer failed to meet those standards, cannot support a claim.  The Court observed that in order to support a claim for securities fraud, a statement must be capable of being shown to be “objectively false,” and noted that general, aspirational statements about adhering to corporate ethical standards are akin to immaterial puffery.  A contrary result, the Court explained, would turn every instance of wrongdoing by corporate employees into a securities case.  This decision reconfirms the Ninth Circuit’s strict application of the heightened pleading standards applicable in securities cases.
Continue Reading Ninth Circuit Holds that Alleged Violations of Aspirational Corporate Conduct Standards Are Insufficient to State a Claim for Securities Fraud

Stockholder claims alleging wrongful dilution are typically considered to be derivative in nature.  Several decisions out of Delaware, however, have created exceptions to this general rule allowing stockholders to sue directly (rather than derivatively on behalf of the corporation) where, for example, a controlling stockholder authorizes a “disloyal expropriation” which reduces the economic value and voting power of the non-conflicted stockholders.  See, e.g., Gentile v. Rossette, 906 A.2d 91, 100 (Del. 2006); Gatz v. Ponsoldt, 925 A.2d 1265 (Del. 2007); Feldman v. Cutaia, 951 A.2d. 727 (Del. 2008).  In El Paso Pipeline GP Company, L.L.C. v. Brinckerhoff, No. 103, 2016, 2016 Del. LEXIS 653 (Del. Dec. 20, 2016), the Delaware Supreme Court declined to add to these exceptions and reaffirmed the general rule that dilution claims must be brought derivatively.  As a result, a derivative plaintiff losses his or her standing to pursue a dilution claim if the entity is acquired through a merger.
Continue Reading Delaware Supreme Court Confirms that Dilution Claims Typically Are Derivative and Are Extinguished After a Merger

As recently as 2014, nearly 95% of all mergers of public companies valued at $100 million or more triggered stockholder class action litigation. Historically, a large number of merger-related stockholder litigation settled solely on the basis of supplemental proxy disclosures coupled with the payment of the plaintiff’s attorneys’ fees.  Such disclosure-based settlements have been criticized for providing little real benefit to stockholders and amounting to no more than a “deal tax” in favor of plaintiff’s lawyers, while at the same time threatening the loss of potentially valuable stockholder claims as a result of an overly broad release of defendants.  In In re Trulia Stockholder Litigation, 2016 Del. Ch. LEXIS 8 (Del. Ch. Jan. 22, 2016), the Delaware Court of Chancery (Bouchard C.) confirmed that the Court will be “increasingly vigilant in scrutinizing the ‘give’ and the ‘get’ of [disclosure based] settlements to ensure that they are genuinely fair and reasonable to the absent class members.”
Continue Reading Delaware Court of Chancery Increases Scrutiny on Disclosure-Only M&A Class Action Settlements

In Arduini v. Hart, 2014 WL 7156764 (9th Cir. Dec. 17, 2014), the United States Court of Appeals for the Ninth Circuit considered whether the doctrine of issue preclusion prevents a stockholder from relitigating a prior adverse determination concerning demand futility in derivative action brought by a different stockholder.  Applying Nevada law, the Court held that a subsequent stockholder cannot again litigate the issue of demand futility after prior adverse determination of the issue in an earlier derivative action concerning the same alleged wrongful conduct.
Continue Reading Ninth Circuit Holds that Under Nevada Law, a Prior Stockholder’s Litigation of Demand Futility Precludes Another Stockholder From Litigating Demand Futility In a Subsequent Derivative Action

In Houseman v. Sagerman, C.A. No. 8898-VCG, 2014 WL 1478511 (Del. Ch. Apr. 16, 2014), the Delaware Court of Chancery (Glasscock, V.C.) granted, in part, a motion to dismiss filed by certain directors and the financial advisor of Universata, Inc. (“Universata” or the “Company”) arising out of the Company’s merger with HealthPort Technologies, LLC (“HealthPort”).  The Court’s analysis serves as a reminder that a stockholder plaintiff must plead an “extreme set of facts” to support a claim for breach of fiduciary duty against a corporation’s directors arising out of allegations that the directors breached their duty of loyalty as a result of the process used to approve a strategic transaction.  Although the allegations suggested that Universata’s board of directors (the “Board”) did not conduct a “perfect” process, plaintiffs did not plead facts sufficient to show that the Board “utterly failed to undertake any action to obtain the best price for stockholders.”  As a result, the Court dismissed plaintiffs’ claim for breach of fiduciary duty.
Continue Reading Delaware Court of Chancery Underscores Heightened Pleading Standard Necessary to Support a Claim for Breach of Fiduciary Duty In Connection With a Merger

In In re Answers Corp. Shareholders Litigation, C.A. No. 6170-VCN, 2014 WL 463163 (Del. Ch. Feb. 3, 2014), the Delaware Court of Chancery (Noble, V.C.) granted summary judgment in favor of defendants in a stockholder class action for breach of fiduciary duty arising out of the merger of Answers Corporation (“Answers” or the “Company”) with AFCV Holdings, LLC (“AFCV”).  Because the undisputed material facts showed that a disinterested majority of the Board of Directors approved the transaction, plaintiffs were required to offer evidence that the Board consciously acted in bad faith or was controlled by an interested party to survive summary judgment.  Plaintiffs were unable to do so.  The Answers decision highlights the high burden stockholder plaintiffs face to proceed with breach of fiduciary duty claims where a merger is approved by an independent/non-controlled board, even where the sale process may have been flawed.  As the court explained, there is a vast difference between “a flawed inadequate effort to carry out fiduciary duties and a conscious disregard for them.”
Continue Reading Delaware Court of Chancery Grants Summary Judgment Dismissing Breach of Fiduciary Duty Claims In Absence of Evidence of Directors’ “Conscious Disregard” of Fiduciary Duties

In In re MFW Shareholder Litigation, C.A. No. 6566-CS, 2013 WL 2436341 (Del. Ch. May 29, 2013), the Delaware Court of Chancery analyzed one of the most important open questions of Delaware corporate law: whether it is possible for majority stockholders to structure a going private transaction to avoid “entire fairness” review by the Court and instead have the transaction be reviewed under the more deferential “business judgment” standard. After carefully considering precedent and scholarly commentary on this issue, the Court of Chancery concluded that majority stockholders sponsoring a going private transaction can obtain “business judgment” review of the transaction if:

Continue Reading Delaware Chancery Court Establishes Procedural Framework for Obtaining Business Judgment Review for Going Private Transaction Sponsored By Majority Stockholders