In Roth v. Foris Ventures, LLC, Nos. 22-16632, 22-16633, 2023 U.S. App. LEXIS 30081 (9th Cir. Nov. 13, 2023), the United States Court of Appeals for the Ninth Circuit partially reversed the dismissal of a shareholder derivative suit seeking to recover disgorgement of short-swing profits under Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b). The three-judge panel held that the district court erred in holding that the company’s board was required to approve the stock sale transactions for the specific purpose of exempting it from Section 16(b) liability pursuant to Securities and Exchange Commission (“SEC”) Rule 16b-3(d)(1). The Court’s decision provides a board of directors with more latitude to approve securities transactions by Section 16 reporting persons without risk of liability under the short-swing profits rule.Continue Reading Ninth Circuit Provides Guidance on SEC Rule 16b-3 Short-Swing Profit Liability Exemption
In Anderson v. Magellan Health, Inc., No. 2021-0202, — A.3d —-, 2023 WL 4364524 (Del. Ch. July 6, 2023) (McCormick, C.), the Delaware Court of Chancery addressed the circumstances under which the Court will award a shareholder plaintiff attorneys’ fees in disclosure-based deal litigation. In particular, Anderson analyzed the history of disclosure-based deal litigation in Delaware and the Court’s evolving standard for awarding fees where shareholder action has caused a company to issue additional pre-merger disclosures “mooting” pending deal litigation. Prior to the decision in Anderson, the state of the law was unsettled. The first line of cases would award fees as long as the shareholder plaintiff secured additional disclosures that were “helpful” such that they provided “some benefit” to shareholders. The second line of cases, however, adopted a stricter standard requiring that the supplemental disclosures be “plainly material.” In an effort to combat the so-called “deal tax” associated with disclosure-based merger litigation, Anderson comes out in favor of the stricter standard. Going forward, the Court will only award disclosure-based mootness fees when the complaining shareholder obtains additional disclosures that are “plainly material” to the shareholders. Companies, boards and advisors engaging in M&A transactions should pay attention to this decision as it will weigh on the proper strategy for approaching a shareholder challenge to an M&A transaction. Continue Reading Delaware Court of Chancery Clarifies Heightened Standard for Recovery of Attorneys’ Fees in Disclosure-Based Deal Litigation
In Lee v. Fisher, No. 21-15923, 2023 U.S. App. LEXIS 13521 (9th Cir. June 1, 2023), the United States Court of Appeals for the Ninth Circuit, sitting en banc, affirmed the dismissal of a shareholder derivative complaint alleging, among other things, violations of Section 14(a) of the Securities and Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78n(a), and SEC Rule 14a-9, 17 C.F.R. § 240.14a-9 (collectively, the “Proxy Claims”), enforcing a forum-selection clause in the defendant company’s bylaws designating the Delaware Court of Chancery as the exclusive jurisdiction for adjudicating any derivative claims involving the company. By affirming the dismissal, the Ninth Circuit called into question whether the Proxy Claims were properly classified as derivative claims, noting that the Exchange Act’s antiwaiver provision was not triggered when the shareholder plaintiff could pursue the Proxy Claims directly in federal court. The Ninth Circuit’s decision creates a circuit split with the Seventh Circuit’s decision in Seafarers Pension Plan ex rel. Boeing Co. v. Bradway, 23 F.4th 714 (7th Cir. 2022), raising the specter that the United States Supreme Court eventually will weigh in on the issue.Continue Reading Ninth Circuit Enforces Delaware Forum Selection Clause to Affirm Dismissal of Derivative Claim for Alleged Violation of Section 14(a) of the Securities Exchange Act of 1934
In Pino v. Cardone Capital, LLC, 2022 U.S. App. LEXIS 35278 (9th Cir. Dec. 21, 2022), the United States Court of Appeals for the Ninth Circuit (Lynn, J.) joined with the Eleventh Circuit in holding that a person may qualify as a statutory “seller” within the meaning of Section 12(a)(2) of the Securities Act of 1933 (the “Act”), 15 U.S.C. § 77l(a)(2), by promoting the sale of a security in mass communications made on social media. Online videos and social media posts may trigger liability because Section 12(a)(2) does not require that a solicitation be directed or targeted to a particular investor. The Ninth Circuit’s holding highlights the risk that investment companies and their advisers face if they promote or otherwise discuss the merits of securities offerings online.Continue Reading Ninth Circuit Holds that Social Media Posts May Give Rise to “Seller” Liability Under Section 12(a)(2) of the Securities Act of 1933
In ZF Micro Solutions, Inc. v. TAT Capital Partners, Ltd., 2022 WL 4090879 (Cal. App. Aug. 8, 2022), the Fourth Appellate District of the California Court of Appeal decided, as a matter of first impression, that a non-derivative breach of fiduciary duty cause of action seeking compensatory damages was legal rather than equitable, and therefore required a jury trial as a matter of law. The Court arrived at its conclusion by evaluating the right and relief requested. In so doing, the Court concluded that because the claim at hand exhibited all the characteristics of a cause of action at law, it was legal, rather than equitable, and should have been tried to a jury.Continue Reading California Court of Appeal Holds that a Corporation’s Direct Cause of Action for Breach of Fiduciary Duty is Legal Rather than Equitable, Requiring a Trial by Jury
In SEC v. Rio Tinto PLC, No. 21-2042, 2022 U.S. App. LEXIS 19577 (2d Cir. July 15, 2022) (Jacobs, J.), the United States Court of Appeals for the Second Circuit declined to impose “scheme liability” under subsections (a) and (c) of the Securities & Exchange Commission Rule 10b-5 (17 C.F.R. § 240.10b-5) where the challenged conduct amounted solely to the making of a material misstatement or omission. The Rio Tinto decision is noteworthy because it limits the U.S. Supreme Court’s decision in Lorenzo v. SEC, 139 S. Ct. 1094 (2019) (blog article here), which potentially expanded “scheme liability” to defendants who may have been tangentially involved in the issuance of a misleading statement.Continue Reading Second Circuit Declines to Allow SEC Rule 10b-5 Claim for “Scheme Liability” to Proceed Where the Alleged Misconduct Amounted Only to the Making of Material Misstatements or Omissions
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
In Sciabacucchi v. Salzberg, No. 346, 2019, 2020 WL 1280785 (Del. Mar. 18, 2020), the Delaware Supreme Court reversed a Delaware Court of Chancery (Laster, V.C.) decision declaring invalid a federal forum selection provision in a Delaware corporation’s charter or bylaws. The federal forum selection provision was intended to require claims by investors under the Securities Act of 1933 (“1933 Act”) to be brought solely in federal court, thereby avoiding the likelihood of defending duplicate, concurrent state and federal court 1933 Act claims. The Delaware Supreme Court’s decision provides clear guidance to companies preparing for securities offerings for implementing a tool to limit the cost of defending duplicative 1933 Act litigation.
Continue Reading Delaware Supreme Court Confirms That Federal Forum Provision Is Facially Valid, Reversing Court of Chancery
In Jensen v. iShares Trust, 2020 Cal. App. LEXIS 61 (Cal. App. Jan. 23, 2020), a rare state court decision addressing claims under the Securities Act of 1933 (“1933 Act”), the California Court of Appeal rejected plaintiffs-appellants’ attempt to evade the “tracing” requirement under Section 11, 15. U.S.C. § 77k, which provides standing only to those plaintiffs who can trace their shares purchased in a secondary market transaction to an initial offering made under a misleading registration statement. Appellants argued that they were not subject to the tracing requirement because the respondent, an open-end management investment company, also was governed under the Investment Company Act of 1940 (“ICA”), 15 U.S.C § 80a, et. seq., which appellants argued extends standing to purchasers no matter how or from whom their shares were purchased. The Court rejected the argument, unequivocally reaffirming that the 1933 Act is focused only on initial public offerings and other primary market transactions, and so any claims brought thereunder must satisfy its strict standing (i.e., tracing) requirements.
Continue Reading California State Court Declines to Expand Standing for Claims Under 1933 Act