In South v. Baker, C.A. No. 7294-VCL, 2012 Del. Ch. LEXIS 229 (Del. Ch. Sept. 25, 2012), the Delaware Court of Chancery adopted a rebuttable presumption of inadequate representation when a stockholder asserts a “Caremark claim” without first investigating the claim using Section 220 of the Delaware General Corporation Law (“Section 220”), a statute allowing under certain conditions stockholder inspection of the corporation’s books and records.  Because the dismissal of a stockholder’s derivative action due to inadequate representation has no preclusive effect on the litigation efforts of other stockholders, the court in South adopted and applied the presumption to ensure that its order dismissing with prejudice plaintiffs’ inadequately pled complaint would not bar other stockholders of the corporation (who had properly opted to use Section 220 rather than sue in the first instance) from later pursuing the same claim on behalf of the corporation.Continue Reading Delaware Chancery Court Holds That a Stockholder Inadequately Represents a Corporation in Derivative Litigation When He or She Files a Caremark Claim Without First Making a Section 220 Books and Records Demand

In Louisiana Municipal Police Employees’ Retirement System v. Lennar Corp., C.A. No. 7314-VCG, 2012 WL 4760881 (Del. Ch. Oct. 5, 2012), the Delaware Court of Chancery, on a motion for summary judgment, rejected a stockholder’s demand under Section 220 of the Delaware General Corporation Law (“Section 220”).  Section 220 provides that a stockholder in a Delaware corporation may, under certain conditions, request and cause the corporation to make available for inspection certain books and records, provided the demand has a proper purpose and some credible basis exists for suspecting mismanagement, waste, or wrongdoing.  In this instance, although the court found the purpose of the demand — investigation of the corporation’s compliance with labor law — to be proper, it held that the evidence presented did not amount to a credible showing that legitimate issues of mismanagement existed to warrant an investigation.Continue Reading Delaware Chancery Court Rejects Stockholder’s Section 220 Books and Records Demand Based Upon Failure to Demonstrate “Credible Basis” for Inspection

In In re Rigel Pharmaceuticals, Inc. Securities Litigation, No. 10-17619, 2012 WL 3858112 (9th Cir. Sept. 6, 2012), the United States Court of Appeals for the Ninth Circuit held that disagreements between plaintiffs and defendants over statistical methodology and study design are insufficient to allege a materially false statement for purposes of pleading a securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and Securities & Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. The Ninth Circuit held that merely because the statistical methodology chosen — and disclosed — by the defendant may not have been the best or most acceptable methodology, use of such an allegedly less-than-optimal methodology does not render statements about the results of the methodology false or misleading for purposes of stating a claim. This is a decision of first impression for the Ninth Circuit.Continue Reading Ninth Circuit Holds that Allegations a Defendant Should Have Used a Different Statistical Methodology During Drug Trials is not Sufficient to Allege Falsity Under Section 10(b) and Rule 10b-5

By Jennifer Redmond and Jonathan Sokolowski

In Fillpoint, LLC, v. Maas, Case No. G045057, 2012 Cal. App. LEXIS 914 (Cal. App. Aug. 24, 2012), the California Court of Appeal for the Fourth District recently refused to enforce a covenant not to compete against the former employee and selling shareholder of a video game company. The Court determined that half of a two-part noncompete agreement entered into in the context of the sale of a business was unenforceable, despite the exception for such covenants found in California Business and Professions Code Section 16601 (“Section 16601”). This case answers what had previously been an open question under California law: whether an acquiring company can obtain a non-compete that begins to run upon termination of employment (as opposed to or in addition to a non-compete that begins to run upon closing) from a shareholder who becomes an employee of the buyer. See Hilb, Rogal & Hamilton Ins. Servs. v. Robb, 33 Cal. App. 4th 1812 (1995) (enforcing a noncompete agreement against a selling shareholder that commenced at termination of employment, without any discussion or analysis of whether using termination of employment as the trigger for a noncompete violates Section 16601).Continue Reading California Court of Appeal Refuses to Enforce Non-Compete Against Selling Shareholder

In Yudell v. Gilbert, 2012 WL 3166788 (N.Y. App. Div. 1st Dep’t Aug. 7, 2012), the Appellate Division of the New York Supreme Court, First Department, abandoned its prior ad hoc approach to determining whether a stockholder’s claim is “direct” (i.e., on behalf of the stockholder personally) or “derivative” (i.e., on behalf of the corporation as a whole), and held that the test applied by the Delaware Supreme Court in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), provides the appropriate analysis for resolving this inquiry. Under the Tooley test, the court must consider (i) who suffered the alleged harm (the corporation or the stockholder) and (ii) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders individually). If the court determines that the corporation suffered the alleged harm and would receive the benefit of any remedy sought in the stockholder’s claim, then the claim must be brought derivatively, on behalf of the corporation, and is subject to the pre-suit demand requirement. Although the court’s decision appears to provide greater clarity to this often vexing issue under New York law, Delaware cases applying the test show that Tooley is far from the last word on the subject.Continue Reading New York Appellate Court Adopts Delaware Supreme Court’s Tooley Test For Determining Whether a Stockholder’s Claim Is Direct or Derivative

In In re Boston Scientific Corp. Securities Litigation, 2012 WL 2849660 (1st Cir. July 12, 2012), the United States Court of Appeals for the First Circuit affirmed the dismissal of a securities class action lawsuit against Boston Scientific Corporation (the “BSC”). The Court held that the alleged misstatements or omissions were not sufficiently material to support a claim under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and that the complaint’s allegations failed to meet the heightened requirements for pleading scienter under the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 (“Reform Act”). In so holding, the First Circuit reconfirmed that the federal securities laws do not impose an affirmative duty on management to disclose all information that might affect the price of a company’s stock.Continue Reading First Circuit Upholds Dismissal of Securities Fraud Action Based Upon Immateriality of Allegedly Omitted Information

In Analytical Surveys, Inc. v. Tonga Partners, L.P., 2012 WL 1970389 (2d Cir. June 4, 2012), the United States Court of Appeals for the Second Circuit addressed (among other things) the scope of two exceptions that apply to liability for short-swing profits under Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b): the exception for derivative securities that do not have a fixed price and the exception for securities acquired in connection with a “debt previously contracted.” The Court concluded that the exception for derivative securities that do not have a fixed price does not apply to hybrid securities exercised at a floating price and that the “debt previously contracted” exception only applies to “mature debts.”Continue Reading Second Circuit Addresses Hybrid Convertible Securities and the “Debt Previously Contracted” Exceptions to Section 16(b) of the Securities Exchange Act of 1934