Posts in Derivative Claims

Court Of Chancery Lifts Stay

In re Molycorp Inc. Shareholder Derivative Litigation, C.A. 7282-VCN (May 12, 2014)

This decision clearly explains when a derivative suit should be stayed in favor of securities litigation elsewhere. The general rule is that when the derivative suit depends on the outcome of the securities litigation because it seeks recovery of the damages to be paid for a securities law violation, the derivative suit should be stayed.  Of course, when the derivative suit is not dependent on the securities litigation outcome, the stay should be lifted.

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District Court Dismissed Derivative Suits Under Delaware Law

New Jersey Building laborers Pension Fund v. Ball, D. Del. No. 11-1153-LPS-SRF (March 13, 2014) and Freedman v Mulva,  D.Del., No. 11-686-LPS-SRF (March12, 2014)

In these 2 decisions, the U.S. Magistrate shows a sound understanding of Delaware corporate law. She recommends the dismissal of these 2 derivative suits under Rule 23.1 because the complaints do not show the directors were disqualified from considering a demand they sue.  The directors' interest in a compensation plan that was only currently applicable to employees did not make them interested under Delaware law.

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Court Of Chancery Explains Scienter Requirement In Insider Trading Claim

Silverberg v. Gold, C.A. 7646-VCP (December 31, 2013)

Under Delaware law, a so-called Brophy claim seeks to recover the profits made by trading on insider information. Showing that material insider information was available is not too hard.  What is harder is showing the intent to use that information, the scienter requirement.  After all, an insider may trade for a variety of reasons, such as a favorable public announcement of good future prospects.  Here the Court explains, in the context of a motion to dismiss, how to interpret the circumstances surrounding insider trades to find that they were done with the intent to benefit from the insider information.  Among the key facts are the timing of the trades in reference to obtaining the information, the failure to disclose the insider information until after the trades are completed, and the size of the trades in comparison to any prior trading.

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Supreme Court Explains Merger Effect On Derivative Claims

Arkansas Teacher Retirement System v. Countrywide Financial Corp, No. 14, 2013 (September 10, 2013)

When does a derivative suit survive a merger?  This decision says "not very often."   There seems to be two rules at play here. First, when the merger's sole purpose is to eliminate the standing of the derivative plaintiff, then the derivative suit may continue.  Second, the merger may be attacked when it is an "inseparable" part of a fraud alleged as part of a direct pre-merger suit.  Note the word "direct."  A direct claim is not a derivative claim, but instead alleges wrongs for which the plaintiff may recover for herself.  Hence, even if the merger is cast as part of some fraud inseparable from pre-merger acts, a derivative suit will not survive the merger just for that reason.

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Court Of Chancery Again Explains Demand Excused Rules

In Re China Automotive Systems Inc. Derivative Litigation, C.A. 7145-VCN (August 30, 2013)

The rules for determining when demand on the directors is excused apply even to Chinese-based companies despite their bad press.  This decision in a direct and clear way spells out when demand is not excused.  For example, merely being on the audit committee does not mean a director faces a serious risk of personal liability for auditing mistakes.  More "red flags" are required.

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District Court Follows Carsanaro

Fares v. Lankau, No. 12-1381-SLR (August 15, 2013)

This federal decision follows the recent Chancery explanation of the Gentile doctrine that permits a direct claim for equity dilution.  In short, the dilution can be by paying too little cash for the additional shares and the so-called "controlling" stockholder requirement for the buyer can be satisfied by a group of buyers operating though their elected directors that are a majority of the board.

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District Court Upholds Option Complaint

Halpert v Zhang, C.A. 12-1339-SLR (August 1, 2013)

This federal decision illustrates when a complaint does state a proper derivative claim because it alleges that a majority of the Board violated a clear restriction on its right to award stock options. Such violations of an option plan are akin to violations of the law that are almost always beyond the business judgment of the directors to do.

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Federal Court Upholds Option Timing Complaint

Ausikaritis v. Kiani, No. 12-1175-SLR (D. Del. July 16, 2013)

When stock options are awarded may be important to their actual value.  Get an option when the market price is in the toilet and you will do better when the market turns than with an option granted at the top of the market.  But is option grant timing itself actionable?  This decision says that it is and that a complaint that alleges such timing may withstand a motion to dismiss.

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Court Of Chancery Upholds Caremark Complaint

In re China Agritech Inc. Shareholder Derivative Litigation, C.A. 7163-VCL (May 21, 2013)

One of the harder aspects of practicing Delaware corporate law is dealing with all the decisions. This is an excellent summary of current Delaware law on Rule 23.1, Caremark and a lot of other aspects of Delaware law that are implicated by derivative complaints.  It is also yet another example of a Chinese-based entity whose controllers seem to have no concern about compliance with our law.

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Court Of Chancery Explains When Board Must Respond To Demand

Rich v. Chong, C.A. 7616-VCG  (April 25, 2013)

The rules governing when a demand on a board to file suit is excused are well known.  Less well known is what happens when a demand is made and nothing happens.  This decision explains that the failure to even respond is itself evidence that the board cannot be trusted to fairly evaluate the need to sue.  While each such case turns on its own facts, this decision is an excellent summary of Delaware law on when a Caremark claim is well pled to excuse demand.

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Supreme Court Reverses Important Decision Giving Delaware Primacy

Pyott v. Louisiana Municipal Police Employees' Retirement System, No. 380, 2012 (April 4, 2013)

In a major decision, the Delaware Supreme Court dismissed a derivative suit on the basis that a prior dismissal of essentially the same suit by a different stockholder barred the Delaware litigation.  This reverses the Court of Chancery that held the suit might proceed despite the dismissal of the other litigation by a Federal Court in California.

Pyott may have major implications for derivative litigation, at least when multi-state cases are filed. Defendants may be expected to race to file motions to dismiss in what they see as the most favorable jurisdiction or in those cases where they see less formidable opponents.

It is also noteworthy that the Supreme Court rejected any presumption that a "fast filer" is an inadequate plaintiff.

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Court Of Chancery Explains The Gentile Case

Carsanaro v. Bloodhound Technologies, Inc., C.A. 7301-VCL (March 15, 2013)

This is a major decision.  For some time lawyers have struggled to understand when a claim is derivative or direct. The distinction is important if for no other reason than derivative claims may be mooted by a merger that eliminates the plaintiff as a stockholder with standing to sue.  Under the Delaware Supreme Court's Gentile decision, some claims alleging a wrongful stockholder dilution may be direct, derivative or both.  Which ones qualify?  This decision answers that question with a thoughtful analysis that is useful in dealing with other factual patterns besides the controlling stockholder that was involved in Gentile.

This decision is also important for its holding that when a stockholder consents to any corporate action by a written consent form that refers to other documents that define the transaction consented to, the other documents must be given to the consenting stockholder for her consent to be effective.

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Court Of Chancery Applies McWane Doctrine

In re Diamond Foods Inc. Derivative Litigation, C.A. 7657-CS (February 28, 2013)

Under the McWane doctrine, a Delaware court will dismiss  a case if another proceeding filed elsewhere is more advanced and will provide complete relief for any valid claim.  As this decision illustrates, while Delaware does not too often apply McWane, it will do so when it is the plaintiff in the Delaware litigation who has chosen to first seek relief in another state's court. The lesson is to not treat the Delaware court as your second choice.

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Court Of Chancery Explains The Gentile Doctrine

In re Nine Systems Corporation Shareholders Litigation, C.A. 3940-VCN (February 28, 2013)

When is a claim that stockholders were wrongly diluted by the issuance of stock a derivative claim and not a direct claim?  Under the Gentile rule, such a claim is derivative unless the dilution was done to benefit a controlling stockholder of a control group.  Determining when several stockholders constitute a "group" for this purpose is not easy.  Just acting together is not enough. This decision explains what else is required, such as acting to carry out a preconceived goal.

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Court Of Chancery Requires Effective Pre-Suit Investigation

South v. Baker, C.A. 7294-VCL (September 25, 2012)

Many lawyers believe that it may be okay to file suit and do an investigation of the facts later through discovery. Not so in some derivative litigation. This decision explains what pre-suit investigation is required to sustain a derivative suit alleging a Caremark claim.  It is required reading for its detailed review of the current law.

Briefly, at least when a Caremark claim is asserted, it is almost mandatory that a Section 220 action to inspect the corporation's records be done before filing suit.  Absent that inspection, a plaintiff better have a very good factual basis to allege that the directors violated their duty to oversee their company's compliance with the law.

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