Securities Litigation

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In Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL, 2018 WL 6719718 (Del. Ch. Dec. 19, 2018), the Delaware Court of Chancery (Laster, V.C.) held that a forum-selection provision in a Delaware corporation’s charter or bylaws which purported to govern external investor claims not involving the internal affairs of the corporation are not authorized under Delaware law. Thus, the Court declared ineffective a provision in a certificate of incorporation requiring any claim brought against it under the Securities Act of 1933 (“1933 Act”) to be filed in federal court. This decision clarifies the limits on the scope of forum selection provisions enacted by Delaware corporations.
Continue Reading Delaware Court of Chancery Declares Ineffective Exclusive Federal Forum Provision for 1933 Act Claims

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 O’Donnell v. AXA Equitable Life Insurance Co., No. 17-cv-1085, 2018 WL 1720808 (2d Cir. Apr. 10, 2018), the United States Court of Appeals for the Second Circuit reversed an order dismissing a variable annuity policyholder’s putative class action against AXA Equitable Life Insurance Company (“AXA”) as precluded by the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C. § 78bb(f). Plaintiff alleged that AXA breached its contractual duties by employing a new strategy for its variable annuity policies without obtaining proper approval from the New York State Department of Financial Services (“DFS”). AXA allegedly misled the regulator by failing to adequately inform and explain the significance of the changes to its insurance product in documentation submitted to DFS. The Court held that because the plaintiff and putative class members were unaware of the defendant’s alleged misrepresentation to DFS, the misrepresentation could not have been “in connection with” a purchase or sale of securities, and thus could not be governed by SLUSA. This decision establishes important limits on SLUSA preclusion and the scope of the United States Supreme Court’s seminal SLUSA decision, Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006).
Continue Reading Second Circuit Limits Reach of SLUSA Preclusion in State Law Variable Annuity Class Action

In Apple Inc. v. Superior Court, No. H044133, 2017 WL 6275830 (Cal. App. Dec. 11, 2017), the California Court of Appeal, Sixth District, considered whether a plaintiff asserting a shareholder derivative lawsuit must plead demand futility with respect to the board of directors in place at the time of the filing of the amended complaint or the initial complaint, when the composition of the board has changed in the interim. The Court of Appeal, following the rule enunciated by the Delaware Supreme Court in Braddock v. Zimmerman, 906 A.2d 775 (Del. 2006), concluded that pleading of demand futility must be assessed with respect to the board of directors in place at the time the amended complaint is filed. This decision reflects the tendency by California courts to look to Delaware corporate law on issues related to shareholder derivative litigation.
Continue Reading California Court of Appeal Holds that Demand Futility Must be Reassessed at Time of Filing of Amended Complaint

In Waggoner v. Barclays PLC, No. 16-1912 (2d Cir. Nov. 6, 2017), the United States Court of Appeals for the Second Circuit, in a Rule 10b-5 securities fraud action, affirmed the district court’s order granting class certification and, in the process, made a number of significant rulings including concluding that direct evidence of price impact is not always necessary to demonstrate market efficiency and confirming that defendants seeking to rebut the fraud-on-the-market presumption must do so by a preponderance of evidence. The decision will potentially make it easier for securities fraud plaintiffs seeking class certification to demonstrate market efficiency, including, for example, when the securities at issue are not traded on national exchanges.
Continue Reading Second Circuit Affirms Class Certification Holding that Direct Evidence of Price Impact is Not Always Necessary to Demonstrate Market Efficiency

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 Stadnick v. Vivint Solar, Inc., 2017 WL 2661597 (2d Cir. June 21, 2017), the United States Court of Appeals for the Second Circuit affirmed the dismissal of claims for violations of Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, arising out of Vivint Solar, Inc.’s (“Vivint”) 2014 initial public offering (“IPO”). Plaintiffs, citing Shaw v. Digital Equipment Corp., 83 F.3d 1194 (1st Cir. 1996), alleged that Vivint was obligated to disclose in its registration statement financial information for the quarter ending one day before the IPO because the company’s performance in that quarter constituted an “extreme departure” from previous performance, even though Securities & Exchange Commission (“SEC”) Regulation S-X, 17 C.F.R. § 210.3-12(a), (g), requires a registrant to update financial statements only if they are more than 135 days old from the effective date of the IPO. The Second Circuit declined to adopt the First Circuit’s “extreme departure” test, and instead followed its own “long-standing test for assessing the materiality of an omission of interim financial information . . . set forth in DeMaria v. Andersen,” 318 F.3d 170 (2d Cir. 2003), to hold that a reasonable investor would not view the omission of the quarterly financial information at issue as significantly altering the “total mix” of information made available. This decision reflects a split in the Circuits regarding the duty to disclose interim financial information in IPO registration statements.
Continue Reading Second Circuit Rejects First Circuit’s “Extreme Departure” Test for Assessing Materiality of an Alleged Omission of Interim Financial Information From Registration Statement

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

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