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John M. Landry is a special counsel in the firm's Los Angeles office. He is a member of the firm's Business Trial Practice Group.

In Slack Technologies, LLC v. Pirani, No. 22-200, 2023 U.S. LEXIS 2301 (U.S. June 1, 2023), the Supreme Court of the United States (Gorsuch, J.) held that Section 11 of the Securities Act of 1933 (the “Securities Act”), 15 U.S.C. § 77k, requires plaintiffs to show that they purchased securities registered under the registration statement they seek to challenge, a requirement the Supreme Court referred to as “tracing.” In Slack, the public offering occurred under circumstances that did not allow the plaintiff or other purchasers to trace any security to the challenged registration statement. As a result, the Court vacated the decision of a panel of the United States Court of Appeals for the Ninth Circuit that had relieved plaintiff of a tracing obligation. The Supreme Court’s unanimous opinion confirms that courts must strictly enforce Section 11’s tracing requirement even when doing so precludes all purchasers in an offering from accessing Section 11’s liability provisions.Continue Reading United States Supreme Court Holds That Section 11 Plaintiffs Must Purchase Securities Issued Under the Registration Statement They Seek to Challenge

In Ford v. TD Ameritrade Holding Corp., 2021 U.S. App. LEXIS 12008 (8th Cir. Apr. 23, 2021), the United States Court of Appeals for the Eighth Circuit reversed a
Continue Reading Eighth Circuit Holds Rule 23(b)(3)’s Predominance Requirement Not Met in Securities Fraud Action Against Brokerage Firm

*October 16, 2019: Update On Caremark Claims Following the Delaware Supreme Court’s Decision in Marchand v. Barnhill

In In re Clovis Oncology, Inc., C.A. No. 2017-0222-JRS, 2019 Del. Ch. LEXIS 1293 (Del. Ch. Oct. 1, 2019), the Delaware Court of Chancery applied Marchand on a motion to dismiss and determined that the complaint adequately pled a Caremark claim against a biopharmaceutical company’s board of directors. The board allegedly ignored red flags indicating the company was not adhering to FDA-required protocols in its clinical trials for the only promising drug of three drugs it then had under development, causing the FDA to withhold approval. The resulting corporate “trauma” included a 70% market capitalization loss. Like the ice cream manufacturer in Marchand, the Chancery Court characterized the company as a “monoline company operat[ing] in a highly regulated industry,” where compliance with FDA-required protocols constitute an “intrinsically critical” business operation involving a “mission critical product.” Although it acknowledged that Caremark claims remain “among the hardest to plead and prove,” it noted that Caremark liability is more likely to attach when the alleged oversight failure concerns “compliance with positive law” as opposed to the “manag[ing] of business risk.” It portrayed Marchand as further “underscor[ing] the importance of the board’s oversight function when [a] company is operating in the midst of ‘mission critical’ regulatory compliance risk.” According to the Chancery Court, Marchand “makes clear” that, in such instances, “the board’s oversight function must be more rigorously exercised.”

Clovis provides a first glimpse at the Delaware Chancery Court’s reaction to the Delaware Supreme Court’s Marchand decision. Clovis confirms that, in complying with public health and safety regulations (including those governing clinical trials), a heightened level of oversight is expected, particularly when the oversight failure may result in trauma that is significant relative to the company’s overall operations.
Continue Reading Delaware Supreme Court Allows Caremark Claim to Proceed Against Directors of Ice Cream Manufacturer Following Listeria Outbreak

In Singh v. Cigna Corp., No. 17-3484-cv, 2019 U.S. App. LEXIS 6637 (2d Cir. Mar. 5, 2019), the United States Court of Appeals for the Second Circuit affirmed the dismissal of a class action complaint that purported to base a securities fraud claim upon alleged statements made by defendant Cigna Corporation (“Cigna” or the “Company”) about its efforts to comply with Medicare regulations. According to the complaint, the statements materially misled investors and, when news of regulatory non-compliance surfaced, the Company’s stock price declined. The Second Circuit held the statements to be only “generic” descriptions of the Company’s compliance efforts. The Court held that no reasonable investor would rely upon them as “representations of [the Company’s] satisfactory compliance,” and so they did not constitute material misstatements sufficient to support a securities claim.
Continue Reading Second Circuit Holds That Issuer’s Alleged Statements Concerning Its Regulatory Compliance Efforts Do Not Constitute Material Misstatements

In Varjabedian v. Emulex Corp., No. 16-55088, 2018 U.S. App. LEXIS 10000 (9th Cir. Apr. 20, 2018), the United States Court of Appeals for the Ninth Circuit split from the Second, Third, Fifth, Sixth and Eleventh Circuits to hold that the liability standard for challenging alleged misstatements or omissions in connection with a tender offer under Section 14(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78n(e), is mere negligence, not fraudulent intent or scienter. The district court had granted defendants’ motion to dismiss plaintiff’s Section 14(e) claim for failure to plead facts showing scienter. The Ninth Circuit, however, reversed and remanded to allow the district court to consider the sufficiency of the complaint under a negligence standard. This is the first instance in which a Court has allowed a Section 14(e) claim to proceed without a showing of scienter.
Continue Reading Ninth Circuit Splits From Other Circuits, Holding That a Negligence Standard Applies to a Claim Challenging Tender Offer Disclosures Under Section 14(e)

In Nguyen v. Barrett, C.A. No. 11511-VCG, 2016 WL 5404095 (Del. Ch. Sept. 28, 2016) (Glasscock, V.C.), the Delaware Court of Chancery dismissed an amended complaint seeking damages for alleged disclosure violations in connection with a tender offer that had already closed.  The Chancery Court’s opinion demonstrates the challenges plaintiffs face when they pursue non-exculpated disclosure claims for damages post-closing.  It also shows that these challenges increase when the disclosure claims were previously pled but not pursued at the preliminary injunction stage — a time when the Chancery Court is still in a position to ensure stockholders are provided sufficient information to cast an informed vote.  The Court confirmed that the preferred practice is for plaintiffs to pursue disclosure claims at that earlier stage.
Continue Reading Delaware Court of Chancery Dismisses Post-Closing Disclosure Claims for Damages, Cautioning That Such Claims Are Best Pursued Pre-Closing

In two recent decisions, City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. Comstock, C.A. No. 9980-CB, 2016 Del. Ch. LEXIS 133 (Del. Ch. Aug. 24, 2016) (Bouchard, C.) (“Comstock”), and Larkin v. Shah, C.A. No. 10918-VCS, 2016 Del. Ch. LEXIS 134 (Del. Ch. Aug. 25, 2016) (Slights, V.C.), the Delaware Court of Chancery addressed the salutary effect of stockholder approval on the standard of review to be applied when evaluating damages claims in post-closing merger litigation.  The Delaware Supreme Court first recognized this effect in Corwin v. KKR Financial Holdings, LLC, 125 A.3d 304, 309 (Del. 2015), holding that “[w]hen a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies.”  But, since Corwin, the precise meaning of the phrase “not subject to the entire fairness standard” — and thus the scope of Corwin’s holding — had not been addressed.  Comstock and Larkin do so, with Larkin extending Corwin’s holding the furthest.  Larkin declares that fully informed, uncoerced stockholder approval changes the standard of review in post-closing litigation to the more deferential business judgment rule in all instances save one:  when the presence of a controlling stockholder triggers entire fairness review, in which case the entire fairness standard remains applicable.
Continue Reading Delaware Court of Chancery Addresses the “Cleansing Effect” of Stockholder Approval In Post-Closing M&A Damages Actions

In In re Zagg Inc. Shareholder Derivative Action, No. 15-4001, 2016 U.S. App. LEXIS 11095 (10th Cir. June 20, 2016), the United States Court of Appeals for the Tenth Circuit held that stockholders of a Utah-based, Nevada corporation, who failed to make pre-suit demand that the corporation’s board of directors cause the corporation to file claims against past and present directors (including one-half of the corporation’s board of directors), could not litigate those claims derivatively.  The Court rested its decision on Nevada’s exculpation statute, Nev. Rev. Stat. § 78.138(7), which protects directors and officers of Nevada corporations from personal liability to the corporation when the statute’s requirements are met.  According to the Court, the complaint did not plead a non-exculpated claim, and so did not show that the current directors faced a risk of liability sufficient to render them self-interested such that a pre-suit demand on the board would have been futile.  Hence, the lack of pre-suit demand required dismissal.  The decision confirms the extensive personal liability protection Nevada affords officers and directors of Nevada corporations.  It also illustrates how, by broadly limiting director and officer liability, Nevada further allocates to boards of directors (as opposed to stockholders) the power to control the corporation’s decision to litigate.
Continue Reading Tenth Circuit Upholds Nevada Law By Denying Stockholders Standing to Bring Claims on Behalf of Nevada Corporation

In In re Appraisal of Dell Inc., No. 9322 VCL, 2016 Del. Ch. LEXIS 81 (Del. Ch. May 31, 2016) (Laster, V.C.), the Delaware Court of Chancery determined that the fair value of the common stock of Dell Inc. (“Dell” or the “Company”) as of the effective date of a 2012 management buyout (“MBO”) was $17.62 per share, or $3.74 per share more than the merger consideration of $13.75 per share plus a $0.13 special dividend.  Although Dell’s directors properly discharged their fiduciary duties, and the sale process included a go-shop period that triggered a bidding contest, according to the Court, the MBO underpriced the Company by more than $5 billion.  Notably, the factors responsible for this divergence included limitations inherent in any MBO-driven sale process.  The Court relied entirely on a discounted cash flow (“DCF”) analysis to determine fair value.  The decision likely will further increase the frequency in which stockholders of Delaware corporations pursue statutory appraisal rights, particularly in the MBO context.
Continue Reading Delaware Chancery Court Rejects MBO Merger Price as Best Evidence of Fair Value in Appraisal Proceeding

In IBEW Local 98 Pension Fund v. Best Buy Co., Inc., No. 14-3178 (8th Cir. Apr. 12, 2016), the United States Court of Appeals for the Eighth Circuit held, in a Rule 10b-5 securities fraud action, that the district court incorrectly analyzed the price-impact evidence submitted by defendants to rebut the fraud-on-the-market presumption of reliance that plaintiffs had invoked to satisfy Rule 23(b)(3)’s predominance requirement.  Two years ago, the U.S. Supreme Court, in Haliburton Co. v. Erica P. John Fund, Inc., 134 S.Ct. 2398, 2414-16 (2014) (Halliburton II), recognized a defendant’s right to rebut the presumption using price-impact evidence at the class-certification stage.  Based on Haliburton II, the majority panel determined that defendants had submitted “overwhelming” evidence that the alleged misstatement caused no stock price inflation.  The panel rejected plaintiffs’ theory that the misstatement could nevertheless have “maintained” the stock’s already-inflated price at the allegedly inflated level.  The decision importantly limits the fraud-on-the-market presumption to cases in which the alleged misstatement is the independent cause of new or additional stock price inflation.
Continue Reading Eighth Circuit Reverses District Court for Ignoring Price-Impact Evidence That Rebutted the Fraud-on-the-Market Presumption and Defeated Class Certification

A ruling last fall by the Delaware Chancery Court has prompted a wave of 8 Del. C. § 220 books and records inspection demands on (and threatened litigation against) Delaware corporations that have entered into credit agreements containing so-called “dead hand proxy put” provisions.  A “dead hand proxy put” provision allows the corporation’s lenders to demand immediate payment of all outstanding debt if, within a specified measuring period, a majority of incumbent board members is replaced in a threatened or actual contested election.  In Pontiac General Employees Retirement System v. Healthways, Inc., C.A. No. 9789-VCL (Del. Ch. Oct. 14, 2014) (transcript ruling), the Court declined to dismiss a breach-of-fiduciary-duty challenge to a “dead hand proxy put,” even where the exercise of the provision was not imminent.  The Court held that the complaint adequately alleged facts showing the provision had caused a present injury to the corporation’s stockholders by deterring a possible stockholder-led proxy contest.  Other than the facts alleged, the ruling left uncertain the attendant circumstances needed to state a mature “dead hand proxy put” claim.  As a result, all public company boards with credit agreements containing “dead hand proxy puts” now face Section 220 books and records inspection demands, and potential litigation.
Continue Reading “Dead Hand Proxy Puts” Garner Increased Stockholder Scrutiny In Delaware