Category

Derivative Litigation

11 April 2022

Securities Litigation Against Life Sciences Companies: Eleven Takeaways from 2021

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Securities class actions against life sciences companies are almost always second-order problems.  The first-order problem is a business or regulatory setback that, when disclosed by the company or a third party, is followed by a stock price drop.  Following the decline, plaintiffs’ class-action attorneys will search the company’s previous public statements in search of inconsistencies between past positive comments and the current negative development.  In most cases, plaintiffs’ attorneys will seek to show that any arguable inconsistency amounts to fraud—that is, they will claim that the earlier statement was knowingly or recklessly false or misleading.  Where a company makes the challenged statement in a public offering document (that is, a registration statement or prospectus), plaintiffs need only show that the statement was materially false or misleading, not that it was made with scienter, i.e., the requisite state of mind.

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02 March 2022

Best Practices for Minute-Taking: Three Lessons from Recent Caremark Decisions

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As has been frequently noted on this page, the Delaware Supreme Court’s landmark 2019 decision, Marchand v. Barnhill, marked the beginning of a series of cases in which Delaware courts refused to dismiss shareholder derivative actions alleging oversight breaches—so-called Caremark claims, which are often quoted as “possibly the most difficult theory in corporat[e] law” on which to bring a successful lawsuit. Typically following a books and records demand, these cases shine a spotlight not only on the oversight that boards perform, but also on the manner in which that oversight is documented in a company’s formal records. This post reviews, from a corporate record-keeping perspective, themes drawn from a selection of recent cases in which Delaware courts permitted cases to proceed on Caremark theories and implications for best practices in light of these themes. (more…)

26 January 2022

Caremark’s Comeback Includes Potential Director Liability in Connection With Data Breaches

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A Caremark­-based claim against a board of directors alleging a failure to monitor corporate operations has been said to be “the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” or at least to withstand a motion to dismiss.  Yet, Caremark has taken on renewed importance — as noted by this blog — following recent high-profile successes on duty-to-oversee claims, most notably in Marchand v. Barnhill in 2019 and In re Boeing in September 2021, and recent shareholder lawsuits alleging that data breach- and cybersecurity-related failures would have been preventable were it not for oversight failures by corporate officers and directors, are being plead asserting Caremark claims. (more…)

20 January 2022

Seventh Circuit Says Delaware Companies May Not Bar The Door To Federal Court For Federal Proxy Fraud Derivative Claims

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I.        Introduction

The Seventh Circuit recently issued an important decision holding that an exclusive forum provision in a company’s bylaws requiring that all derivative actions be brought in Delaware Chancery Court is unenforceable as applied to derivative cases brought under the federal proxy laws. On its face, Seafarers Pension Plan v. Bradway seems to foreclose the use of exclusive forum provisions for claims for which there is exclusive federal jurisdiction. As the Seventh Circuit notes, that would seem to be consistent with both federal proxy fraud law, which forbids contractual waivers of compliance with the law, as well as Delaware state law. But as discussed below, there is reason to believe that the decision may not be the last word on the topic, and, indeed, that it could end up before the U.S. Supreme Court. (more…)

16 December 2021

The Refined Demand Futility Standard Takes Shape

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Over the past several months, a number of decisions released by the Delaware courts have begun to grapple with the new Zuckerberg three-part demand futility standard announced by the Delaware Supreme Court in September. Many cases spotlight the need to assess demand futility on a director-by-director basis. But at least one recent decision has highlighted another aspect of the test, and instead turns on the need to assess demand futility on a transaction-by-transaction basis. In In re Vaxart, Inc. Stockholder Litigation, Vice Chancellor Fioravanti dismissed several claims from a shareholder derivative suit purportedly filed on behalf of Vaxart, Inc. because the plaintiffs failed to allege that a majority of the directors received a material personal benefit or faced a substantial likelihood of liability from the specific transaction that would have been the subject of the pre-suit demand. (more…)

29 November 2021

Chancery Court Issues Rare Finding of Wrongful Refusal of Demand – Followed By A Reminder of Why Such Findings Are So Uncommon

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On October 29, 2021, the Delaware Court of Chancery issued a rare opinion holding that plaintiffs had succeeded in pleading that a board of directors wrongfully had refused their demand to pursue certain claims. Following short on its heels on November 8, 2021 was another decision illustrating why such opinions are so rare, and the high burden plaintiffs must meet in order adequately plead wrongful refusal. (more…)

22 November 2021

No Strict Liability for Improper Share Repurchases or Payment of Dividends: Directors Are “Fully Protected” if They Rely in Good Faith upon Corporate Records, Officers, or Experts

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In re the Chemours Company Derivative Litigation, Vice Chancellor Glasscock recently wrestled with an apparent conflict between two provisions of the Delaware General Corporation Law (DGCL)—and chose the path that protects directors. Vice Chancellor Glasscock refused to hold directors strictly liable for negligent stock repurchases or dividends—which would be inconsistent with Delaware’s general limitation on director liability solely to damages for gross negligence (unless exculpated) or loyalty breaches—and instead enforced an “incongruent” provision that accords directors protection where they rely on corporate records, officers, or experts with respect to corporate surplus available to repurchase shares or issue dividends. (more…)

13 October 2021

Delaware Chancery Court Affirms Importance of Director Oversight in Wake of Boeing Crashes

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Two years ago the Delaware Supreme Court, in Marchand v. Barnhill, allowed Caremark claims to proceed against a group of directors in connection with a listeria outbreak at their company’s ice cream manufacturing plants. Applying Caremark — often quoted as “possibly the most difficult theory in corporat[e] law” — the court determined the board failed to implement reasonable oversight and monitoring on “mission critical issues.” There, food safety was “mission critical.” Since Marchand¸ courts have applied these principles to, among other cases, a biopharmaceutical company’s failure to comply with FDA regulations and an auto parts company’s failure to properly monitor its financial reporting.  Now, the Delaware Chancery Court has provided another guidepost, this time in the aerospace industry, finding that certain of Boeing’s stockholders adequately pled Caremark claims against Boeing’s Board. (more…)

06 October 2021

Delaware Supreme Court Clarifies the Standards for Demand Futility

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A pair of opinions released by the Delaware Supreme Court in a single week have revisited longstanding precedent governing shareholder suits that claim corporate wrongdoing. As discussed in a companion post on this blog, the first of those opinions, Brookfield Asset Management Inc. v. Rosson, restricted the ability of shareholders to bring direct claims under certain circumstances, instead forcing them to pursue more procedurally challenging derivative suits. In the second case, United Food & Commercial Workers Union & Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, the Delaware Supreme Court adopted a new three-part demand-futility test that clarifies the standard shareholders must meet to file such derivative suits, without first taking their complaints to the company’s board of directors. (more…)