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John Stigi is a partner in the Business Trial Practice Group, leader of the firm's Securities Enforcement and Litigation Team, and Office Managing Partner of the firm's Century City office.

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. 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

On December 27, 2021, the California Court of Appeal issued two decisions addressing whether claims arising from statements made in filings with the Securities and Exchange Commission (“SEC”) fall within California’s statute designed to deter “strategic lawsuits against public participation,” or “SLAPPs,” arising from protected speech.  In Sugarman v. Benett, No. B307753, 2021 WL 6111725  (Cal. App. Dec. 27, 2021) (“Benett”), and Sugarman v. Brown, No. B308318, 2021 WL 6111718 (Cal. App. Dec. 27, 2021) (“Brown”), the Court held that state law claims arising out of disclosures in federal SEC filings may be subject to California’s anti-SLAPP statute, giving defendants a powerful tool to dispose meritless claims early in the process.

Continue Reading California Court of Appeal Holds that SEC Filings May Be Protected Activities Under Anti-SLAPP Statute

This December, the Delaware Supreme Court penned two decisions that shined the spotlight on purchase agreement provisions that are often afterthoughts in negotiations.  In Golden Rule Financial Corporation v. Shareholder Representative Services, No. 61, 2021, 2021 WL 5754866 (Del. Dec. 3, 2021) (ORDER), the Court reviewed the post-closing “true up” language and determined that “consistently applied” accounting principles in the post-closing true up does not necessarily mean “in the same manner as had been applied prior to closing.”  And in AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, –A.3d–, 2021 WL 5832875 (Del. Dec. 8, 2021), the Court confirmed what it means to operate a business in the ordinary course between signing and closing during a pandemic.  The Golden Rule and AB Stable decisions provide an insightful frame of reference for practitioners to rethink what these provisions mean and how they may want to recraft them to allocate risk as intended.

Continue Reading Delaware Supreme Court Shines Spotlight on Boilerplate Purchase Agreement Provisions

In United Food & Commercial Workers Union & Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, No. 404, 2020, — A.3d –, 2021 WL 3433261 (Del. Sept. 23, 2021), the Delaware Supreme Court adopted a new three-pronged test for determining whether pre-suit demand by a stockholder plaintiff would have been futile.  This new test builds up and refines the Aronson and Rales demand futility tests for derivative claims.  The Court’s decision comes on the heels of Brookfield Asset Mgmt. v. Rosson, where the Court clarified derivative standing by overruling the oft-criticized direct-and-derivative “dual-natured” claim under Gentile v. Rossette (see blog article here).  This decision is another step toward simplifying Delaware law with respect to derivative claims.

Continue Reading Delaware Supreme Court Adopts New Three-Prong Test for Demand Futility

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 Manti Holdings, LLC v. Authentix Acquisition Co., Inc., No. 354, 2020, 2021 WL 4165159 (Del. Sept. 13, 2021), the Delaware Supreme Court issued an important opinion affirming the use of stockholders agreements by and among Delaware corporations and its stockholders to waive stockholders’ rights of appraisal under Section 262 of the Delaware General Corporation Law.  The Manti Holdings decision further solidifies Delaware’s strong policy preference of freedom of contract and private ordering, and confirms that Delaware corporations can have its stockholders waive appraisal rights.  Note, however, that not every appraisal waiver may be valid.  It also raises the question of what other seemingly “mandatory” stockholder rights may be waived in documents that are not a charter or bylaw.

Continue Reading Delaware Supreme Court Affirms the Use of Stockholders Agreements to Waive Appraisal Rights

In Coster v. UIP Companies, Inc., No. 49-2020, 2021 WL 2644094 (Del. June 28, 2021), the Delaware Supreme Court reversed a Court of Chancery ruling, No. 2018-0440-KSJM, 2020 WL 429906 (Del. Ch. Jan. 28, 2020) (McCormick, V.C.), that members of a board of directors did not breach their fiduciary duties when they approved a transaction with an “inequitable purpose” because the process and substance of the transaction were “entirely fair” to the aggrieved stockholder.  The Court held that even though the board’s action passed Delaware’s rigorous “entire fairness” review, the Court of Chancery should have further considered whether the board acted for inequitable reasons or for the primary purpose of interfering with the stockholder’s statutory or voting rights.  As the Supreme Court explained, “inequitable action does not become permissible simply because it is legally possible.”  Coster provides an important reminder to board members that ensuring a transaction is “entirely fair” does not necessarily shield directors from liability if the directors acted in bad faith or for the “primary purpose of thwarting” a stockholder’s franchise rights.

Continue Reading Delaware Supreme Court Holds That Surviving “Entire Fairness” Review is Not Conclusive of a Breach of Fiduciary Duty Claim Where Directors Acted Inequitably

In Shareholder Representative Services LLC v. Albertsons Companies, Inc., 2021 WL 2311455 (Del. Ch. June 7, 2021), the Delaware Court of Chancery (Slights, V.C.) provided key guidance on mergers and acquisitions (“M&A”) earnout disputes regarding contractual earnout language, the applicability of the implied covenant of good faith and fair dealing, extra-contractual discussions and promises and post-closing behavior of the acquirer.  This opinion serves as a reminder to M&A transaction parties on important drafting concepts in earnouts, as well as how to conduct themselves during the negotiations and earnout period.
Continue Reading Delaware Court of Chancery Decision Provides Guidance on M&A Earnouts