Delaware Supreme Court Reverses Chancery Court Decision Invalidating Governance Provisions of a Stockholder Agreement

Delaware Supreme Court Reverses Chancery Court Decision Invalidating Governance Provisions of a Stockholder Agreement

On January 20, 2026, the Delaware Supreme Court reversed a Chancery Court decision finding certain provisions of a 2014 stockholder agreement governing compensation, decision-making authority, and composition of a company board void on the basis that they were incompatible with the Delaware Code. The Delaware Supreme Court found that the challenged stockholder agreement provisions were merely voidable rather than void per se, rendering the plaintiff’s claims subject to the equitable defense of laches (which prohibits claims brought after an unreasonable delay that would unfairly prejudice a defendant). Accordingly, the Court reversed the Chancery Court’s decision granting summary judgment for the plaintiff and held that the plaintiff’s claims concerning the nearly nine-year old agreement were time-barred.

Defendant Moelis & Company (Moelis) conducted an IPO in November 2014, and shares of its Class A stock began to be publicly traded. In preparation for the IPO, Moelis engaged in a corporate restructuring that resulted in Moelis & Company Partner Holdings LP (Partner Holdings), controlled entirely by Kenneth Moelis, owning sufficient Class B stock to have a 96% voting interest in Moelis so long as certain conditions were met. Moelis also entered into a stockholder agreement with Partner Holdings, precluding Moelis’s board from performing any of 18 enumerated corporate governance actions without Partner Holdings’ approval. 

The plaintiff, a Class A Moelis stockholder since 2014, filed suit on behalf of a putative class of Class A stockholders in March 2023, arguing that these provisions were facially invalid and unenforceable because the provisions purportedly violated 8 Delaware Code § 141(a), which requires the appointment of directors to manage Delaware corporations and outlines their authority. The challenged provisions included a) a provision prohibiting the Moelis board from making certain fundamental decisions (i.e., taking on debt, issuing preferred stock, amending the charter, or removing or appointing officers) without Partner Holdings’ consent; b) a provision granting Partner Holdings substantial control over the compensation of the Moelis board, and allowing Partner Holdings to designate a majority of director nominees; and c) a provision compelling the Moelis board to staff board committees with Partner Holdings’ designees equal to the proportion of the board that was Partner Holdings’ designees. 

Moelis sought to dismiss, arguing that the doctrine of laches barred the case because the stockholder agreement was executed in 2014 and the plaintiff did not sue until 2023 (well after the three-year legal statute of limitations found in 10 Delaware Code § 8106, which the defendants asserted was analogous to the plaintiff’s equitable claims). The lower court rejected this argument, finding that if the challenged provisions of the stockholder agreement violated Section 141(a), they would be void and not subject to any equitable defenses, and finding that the harm from the violation was continuing which rendered laches inapplicable. As to the merits, the lower court also found in favor of the plaintiff, finding that the stockholder agreement was an “internal governance arrangement” subject to Section 141(a) and violated Section 141(a) because it improperly limited the managerial freedom of the Moelis board. 

Moelis appealed, and the Delaware Supreme Court overturned the lower court’s decision, finding that the stockholder agreement was voidable, rather than per se void, and could therefore be subject to equitable defenses. The Court reasoned that, to be void, the contractual terms in question must be contrary to public policy. To make this determination, the Court examined whether there were any other lawful means by which Moelis could have accomplished the desired governance arrangements contained in the challenged provisions of the stockholder agreement. Were this to be the case, the Court reasoned, even if the provisions did facially violate Section 141(a), the agreement would merely be voidable and subject to equitable defenses like laches. The Court concluded that Delaware law provides corporations with broad discretion to define and limit the authority and powers of the corporation, its directors, and stockholders, and thus the same results here could have been achieved by amending the charter or by other means, meaning the agreement was not void but merely voidable.

Accordingly, the Court next turned to the question of whether the equitable doctrine of laches barred the plaintiff’s complaint. First, it rejected the Chancery Court’s view that the arrangements in the stockholder agreement were a continuously occurring harm. The Court viewed the defendants’ entering into the stockholder agreement in 2014 as a discrete act which triggered the accrual of the plaintiff’s claims in 2014, finding that the defendants’ ongoing performance under the contract in the years following its execution was not a continuing harm as the plaintiff contended. The Court noted that the plaintiff’s claim rested on a single unlawful act (the execution of the purportedly facially invalid contract in 2014), and found that continued ill effects stemming from that single act without additional unlawful acts would not justify delaying the accrual of the plaintiff’s claims. 

The Court then concluded that the equities justified applying the doctrine of laches to bar the plaintiff from pursuing their equitable claims further, agreeing with the defendants that the analogous three-year legal statute of limitation had long passed. The Court found that this raised a presumption of prejudice against Moelis should the plaintiff’s equitable claims be allowed to move forward, which the plaintiff failed to rebut with any “unusual conditions or extraordinary circumstances.”

This case serves as a reminder of the broad discretion that Delaware grants corporations to determine how to structure their governance, including by delegating their powers to shareholders. Investors in Delaware corporations should be mindful that they have broad leeway to negotiate powers and rights to control decisions made by companies they invest in. And, conversely, if one investor does not negotiate for such rights, there is a risk that another will, and thus, material decisions may be controlled by that investor rather than the board traditionally tasked with such responsibilities. 

Second Circuit Affirms Dismissal of Channel-Stuffing Claims Against Autonomous Driving Technology Company

The US Court of Appeals for the Second Circuit affirmed the US District Court for the Southern District of New York’s dismissal of a putative securities class action against Mobileye Global Inc. and several executives, brought under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 15 of the Securities Act of 1933. The plaintiffs claimed that the autonomous driving technology company failed to disclose an alleged “channel-stuffing scheme” whereby customers agreed to minimum commitment contracts to purchase the company’s flagship computer chips in excess of actual demand so that Mobileye’s reported revenues were misleadingly attained by “cannibalizing future growth.” The Second Circuit affirmed that the plaintiffs failed to adequately allege any actionable claims.

The plaintiffs alleged that, as a result of purported channel stuffing, Mobileye misled investors by stating in its Form 10-K that shipments to customers would “depend upon market conditions.” The plaintiffs similarly alleged that statements by Mobileye executives during earnings calls about various performance measures, such as growth relative to prior guidance, were misleading because they attributed growth to “legitimate market demand.” However, Mobileye disclosed that it used minimum commitment contracts with some customers, including three major customers, and that those customers would likely utilize accrued inventory before placing new orders. While Mobileye did not disclose specific volumes or which products were subject to minimum commitment contracts, the Second Circuit held that the absence of such granular detail was not actionable because it did not render Mobileye’s statements misleading. The Second Circuit also held that the performance measures were not alleged to be false, and the statements were not misleading when read against the backdrop of specific risk disclosures in Mobileye’s Form 10-K that certain customers agreed to minimum commitment contracts and were expected to use accrued inventory before placing more orders.

The court also rejected allegations that Mobileye’s statements in quarterly earnings announcements that customers increased orders in 2021 and 2022 — in part to avoid parts shortages caused by COVID-19-related supply chain interruptions — were misleading. Rather, the court held that the plaintiffs did not provide any nonconclusory allegations supporting their assertion that customers’ excess inventories were caused primarily by Mobileye’s alleged channel-stuffing practices instead of customers’ purchasing decisions, minimum purchase obligations, and declining downstream market demand.

The court also held that a number of the challenged statements were nonactionable because they were forward-looking statements protected by the PSLRA safe harbor, including Mobileye’s statement that it expected customers to use the vast majority of their excess inventory in the first quarter of 2024, and that customer orders would normalize over the remainder of the year, while cautioning “there is no guarantee that they will do so.”

The plaintiffs also alleged that the defendants were liable for “scheme liability” based on the alleged channel-stuffing practices. The Second Circuit noted that scheme liability requires plaintiffs to allege “something beyond misstatements and omissions” that render the challenged conduct a scheme to defraud. The court held that the plaintiffs failed to do so, noting that minimum commitment contracts are not illegal and Mobileye properly disclosed their use of such contracts. Finally, the court held that the plaintiffs failed to allege an actionable omission under Item 303 of Regulation S-K, which requires disclosure of “known trends or uncertainties” reasonably expected to have a material “unfavorable impact” on revenues, and Item 105 of Regulation S-K, which requires disclosure of factors that make an investment in the offering “speculative or risky.” The court held that there was no such omission in light of the disclosures discussed above, and the plaintiffs’ contention that the offering documents should have described the precise volume of inventory buildup reflected a mere preference for more detailed disclosure, not an omission. This decision is a reminder that companies need not provide granular detail about contractual arrangements like minimum commitment contracts when disclosures adequately inform investors of business practices and related risks. And specific, carefully drafted risk disclosures can protect against liability.

Western District of Texas Dismisses Securities Fraud Claims Against Cybersecurity Company for Insufficient Scienter

The US District Court for the Western District of Texas dismissed a securities fraud complaint against cybersecurity company CrowdStrike Holdings, Inc. and its executives arising from a July 2024 software update that caused approximately 8.5 million computers to crash globally. CrowdStrike sells the Falcon cybersecurity platform, which updates automatically and remotely without customer intervention. A CrowdStrike update with a “bug” triggered an outage and caused mass disruption across various industries. Shortly thereafter, CrowdStrike’s stock value declined nearly 32%. The plaintiffs alleged violations of Section 10(b) and Rule 10b-5 of the Exchange Act based on statements about CrowdStrike’s software-testing processes and quality assurance practices, alleging that if CrowdStrike actually conducted the appropriate tests it claimed to perform, the issue would have been caught prior to the software update.

On the defendants’ motion to dismiss, the court systematically reviewed several categories of alleged misstatements, determining that all but two challenged statements were inactionable. In the first category, the plaintiffs alleged that the defendants claimed in CrowdStrike’s annual proxy statements that CrowdStrike’s “quality assurance team” was trained and equipped to assist with testing software updates. The court held that the plaintiffs took these statements out of context, as the statements about a “quality assurance team” were clearly limited to testing accessibility (e.g., for visually impaired users). The court found that no reasonable investor would have assumed CrowdStrike had a quality assurance team that tested software updates, calling the plaintiffs’ allegations “borderline sanctionable.”

The second category of statements the court addressed were about product usage. The court found that multiple statements on CrowdStrike’s website about product capabilities — including continuous integration and continuous delivery methodology, insecure code detection, and blue screen (i.e., crash) prevention — were nonactionable because the statements did not describe CrowdStrike’s internal software or development processes. For example, a statement concerning a particular software development method was pulled from an education article in a series called “Cybersecurity 101” and did not state that CrowdStrike used the method. 

Next, the court addressed statements about testing or software updates made during investor presentations and on CrowdStrike’s website. The court held that a statement that CrowdStrike “test[s] more than anyone else” was not misleading when viewed in context, as it was made during an investor presentation about preventing breaches, not about CrowdStrike’s software development practices or preventing crashes. Additionally, the court held that statements during an investor briefing that CrowdStrike’s product “doesn’t blue screen endpoints” were immaterial puffery, particularly given CrowdStrike’s detailed risk disclosures in annual reports warning of potential defects or errors that are not detected until after deployment. The court also held that a statement made in a CrowdStrike blog post that the company “always do[es] canary developments of new services before rolling out changes” was not misleading, in part because a reasonable investor would not interpret “new services” to include the Falcon update that caused the outage. 

The court found that the plaintiffs plausibly alleged two misleading statements regarding CrowdStrike’s compliance with regulatory requirements of the US Department of Defense and the Federal Risk and Authorization Management Program (FedRAMP). CrowdStrike represented on its website that it was “meeting the stringent requirements” of FedRAMP, and that its platform had been audited and validated against “some of the strictest security requirements in the world,” without specifying the level of requirements met by CrowdStrike. While it was “a close call,” the court found that the defendants’ statements did not make clear that CrowdStrike’s software was only meeting “moderate-level requirements,” rather than all of the requirements of FedRAMP. 

However, the court dismissed the claims nonetheless because the plaintiffs failed to plausibly allege a strong inference of scienter. The court held that the plaintiffs’ motive allegations were insufficient because allegations that the defendants sought to increase the stock price do not support scienter, absent other allegations such as evidence that the defendants sold shares. In addition, allegations from former employees warning about understaffing and quality issues were deemed too vague to support scienter because they were not specific enough to contradict the statements at issue or did not show that the defendants were aware of the information. Additionally, post-outage apologies and admissions that CrowdStrike “got this wrong” did not establish scienter, as such corporate “mea culpas” are insufficient standing alone, and the statements did not shed light on the defendants’ scienter at the time of the alleged misstatements. Reviewing the allegations holistically, the court concluded that any inference of scienter was less persuasive than the nonfraudulent alternative. 

This decision demonstrates that companies can publicly acknowledge shortcomings without creating liability to investors, and adequate risk disclosures can prevent would-be plaintiffs from taking statements out of context. At the same time, the decision suggests that statements on company websites could give rise to securities fraud. Companies should ensure all website content is carefully vetted by counsel.

Southern District of New York Dismisses Securities Fraud Claims Against Technology Company After Confidential Witnesses Recant Their Statements

On January 26, 2026, the US District Court for the Northern District of California dismissed with prejudice a putative securities class action filed by shareholders of Docusign, Inc., alleging that Docusign and certain of its officers violated Section 10(b) of the Exchange Act. This dismissal ends a four-year saga. The case was originally filed in 2022, and the defendants’ initial motion to dismiss was denied, in large part based on the allegations of confidential witnesses. The case proceeded to discovery, and a class of Docusign stockholders was certified. In discovery, two of plaintiffs’ confidential witnesses either outright recanted their statements or “clarified” the statements to the point that they no longer resembled the allegations in the complaint. The defendants sent a Rule 11 letter threatening sanctions if the plaintiffs did not amend their complaint to remove the confidential witnesses’ allegations. The plaintiffs complied and filed a new, 401-page complaint, which the court required the plaintiffs to streamline given its excessive length.

The plaintiffs’ final complaint alleged false or misleading statements: (1) suggesting that increased demand for Docusign’s eSignature product would continue after the COVID-19 pandemic abated; (2) supposedly underselling the threat of competition from another technology company; and (3) touting the promise of Docusign’s Contract Lifecycle Management (CLM) product. The court rejected all three categories and dismissed the case without further leave to amend.

First, the court found that the plaintiffs’ eSignature claims were fatally undermined by the very documents on which the plaintiffs were relying. The court noted that the revised complaint repeatedly mischaracterized the documents it cited, which did not support the plaintiffs’ allegations of falsity. The court did find that the plaintiffs adequately pled falsity as to one challenged statement: that the defendants were “not seeing any differences in churn rates.” However, the court dismissed the claims concerning that statement because the plaintiffs failed to allege that the defendant who made that statement knew about the alleged internal discussions about churn rates.

Second, the court found that the competition statements were not false or misleading in context: The defendants acknowledged that the competitor at issue tended to “compete on price,” which was consistent with the internal documents that the plaintiffs cited.

Third, the court found that the CLM statements were barred by the Exchange Act’s safe harbor for forward-looking statements. The statements (for example, that customers were ready “to reaccelerate with CLM” in future quarters) were clearly forward-looking, and they were accompanied by meaningful cautionary language (for example, that the company had seen CLM transactions slow down during COVID-19). 

This case is a reminder that losing an initial motion to dismiss is not the end of a securities class action. In this case, by aggressively exploring in discovery whether the plaintiffs’ confidential witnesses would back up the statements attributed to them in the complaint, the defendants were able to turn an initial loss into a victory.

District of New Jersey Dismisses Securities Fraud Claims Against Biopharmaceutical Company, Holding That the Company’s Optimistic Statements About Ongoing Patent Litigation Were Not Misleading Despite Ultimate Adverse Ruling

On February 6, 2026, the US District Court for the District of New Jersey dismissed with prejudice a securities fraud class action alleging that Pacira BioSciences, Inc. and certain of its directors and officers violated Section 10(b) of the Exchange Act. 

The case related to an underlying patent lawsuit concerning Pacira’s flagship product, EXPAREL, a nonopioid pain management therapy. In October 2021, a competitor submitted an Abbreviated New Drug Application to the Food and Drug Administration seeking approval to market a generic version of EXPAREL. In response, Pacira filed patent infringement litigation designed to prevent the generic from reaching the market. At a hearing to determine the scope and meaning of Pacira’s patent (known in patent law as a Markman hearing), the court overseeing the patent litigation rejected Pacira’s proposed interpretations of certain key patent terms. After the ruling, several senior executives at Pacira made public statements expressing continued confidence in Pacira’s patent rights and asserting that Pacira did not view generic competition as a material threat. Throughout, however, Pacira cautioned that the outcome of the patent litigation was uncertain. After a trial, the court in the patent case ruled that one of Pacira’s primary patents was invalid, and Pacira disclosed the adverse ruling that day. 

Pacira’s stock price fell after the trial result was announced, and stockholders brought suit. They alleged that Pacira’s senior executives misled investors by underselling the threat posed by the patent litigation and potential generic competition, in particular after the Markman hearing. The court rejected this theory for multiple reasons.

First, the court found that the plaintiff failed to plead an actionable misstatement. The majority of the statements at issue were assessments of the ongoing patent litigation. As such, they were either opinions or forward-looking statements. The plaintiff did not adequately allege that Pacira’s executives subjectively disbelieved their optimistic opinions and predictions about the patent litigation. The court further held that executives did not have any obligation to hedge their optimism based on the Markman hearing, reasoning that the securities laws “do not require issuers like Defendants to characterize interim rulings or to concede defeat before a court has issued a ruling on the actual issue in the case.” The defendants repeatedly disclosed the existence of the patent litigation and the uncertainty of the outcome; moreover, the ruling on the Markman hearing was public and accessible to any investor who might care to read it and draw their own opinions about what it meant for the litigation going forward. Similarly, the defendants’ optimistic statements about the threat of generic competition were forward-looking and classic corporate “puffery.” 

The court also found that the alleged misstatements were not material or made with scienter. Pacira’s repeated disclosures of the risk associated with the patent litigation provided adequate notice to investors, even without specific disclosure of the Markman hearing. Moreover, the plaintiffs’ scienter theory made little sense: They contended that the defendants knew about and hid the allegedly devastating impact of the Markman hearing. But again, the result of the Markman hearing was public, so there was no way the defendants could hide it. The more compelling explanation was that the defendants honestly believed their optimistic opinions. 

This decision underscores that securities laws do not obligate public companies to provide investors with a running commentary on every development in pending litigation, nor is it securities fraud for executives to share honestly held optimism about the outcome of litigation — provided there is adequate disclosure of the risks involved. Issuers involved in ongoing patent and other litigation should work with counsel to craft litigation risk disclosures that clearly communicate the existence and uncertainty of litigation.

Sixth Circuit Affirms Dismissal of Suit Against Life Sciences Company, Holding That Optimistic Statements About Regulatory Compliance and Litigation Risk Are Nonactionable

On February 24, 2026, the US Court of Appeals for the Sixth Circuit affirmed the dismissal of a securities class action against Sotera Health Company and other parties under Section 10(b) of the Exchange Act and Sections 11 and 12(a)(2) of the Securities Act. The securities class action related to underlying regulatory and legal proceedings concerning ethylene oxide gas (EO), which a Sotera subsidiary uses to sterilize pharmaceutical products. The Sixth Circuit concluded that Sotera did not make any actionable statements about the regulatory and litigation risks surrounding EO.

EO can increase the risk of cancer in humans, subjecting Sotera to regulatory requirements and lawsuits. In 2018, a report published by the Environmental Protection Agency stated that people living near facilities that use EO had among the highest cancer rates in the country. That prompted hundreds of plaintiffs to file suit against Sotera. 

In November 2020, Sotera went public. Its IPO prospectus disclosed the EO lawsuits, warned that additional suits were likely, stated there was “no assurance” it would prevail, and cautioned that adverse judgments could have a material adverse effect on its business. While the prospectus touted Sotera’s “strong track record in highly regulated markets” and said that “we consistently meet and outperform” applicable standards, it also warned that Sotera “may not at all times be in full compliance” and had “experienced instances of emissions exceeding applicable standards.” 

After the IPO, Sotera experienced mixed results in the tort cases. In 2022, two cases went to trial. One resulted in a $350 million judgment, and the other returned in a full defense verdict. In January 2023, plaintiffs filed a securities class action, alleging that Sotera made false and misleading statements about its regulatory compliance and litigation prospects, alleging that Sotera had a longstanding history of downplaying the risks of EO and operating without adequate safety procedures. 

The US District Court for the Northern District of Ohio dismissed the claims, and on appeal, the Sixth Circuit affirmed. Starting with the Exchange Act claims, the Sixth Circuit found no actionable misstatements. The plaintiffs challenged broad statements projecting optimism about Sotera’s regulatory compliance, but these were not statements of verifiable fact susceptible to challenge under the securities laws. Rather, they were classic examples of corporate “puffery” and immaterial opinions, which investors know not to rely upon. These statements were appropriately hedged by warnings that Sotera might not always be in compliance. Moreover, the plaintiffs could not identify any specific regulation or permit that Sotera ever violated. Similarly, Sotera’s cautious optimism about the pending tort litigation was immaterial because the company never guaranteed litigation success or immunity from litigation. Further, statements about Sotera’s litigation prospects were protected forward-looking statements accompanied by extensive cautionary language that success in the litigation could not be assured.

For substantially the same reasons, the Sixth Circuit affirmed dismissal of the Securities Act claims. The court held that because the Securities Act claims substantially overlapped with the Exchange Act claims, they “sounded in fraud” and were thus subject to the heightened pleading requirements of Federal Rule of Civil Procedure 9(b). Under that standard, Sotera’s optimistic statements about regulatory compliance were not actionable given its “litany” of risk disclosures.

This case is another reminder that companies facing ongoing litigation and regulatory scrutiny are allowed to express cautious optimism about those issues, provided they make specific disclosures about the risks and challenges involved.

Northern District of California Allows Suit Against Software Company to Proceed, Finding Statements About Revenue Guidance Misleading Based on Former Employee Statements

On February 23, 2026, the US District Court for the Northern District of California granted in part and denied in part a motion to dismiss, allowing a securities fraud class action to proceed against Five9, Inc. and certain current and former executives alleging violations of Section 10(b) of the Exchange Act in connection with Five9’s decision to lower its revenue guidance in mid-2024.

Five9 sells subscription-based software, including artificial intelligence products, that allow customers to run remote, cloud-based call centers. In February 2024, Five9 issued revenue guidance projecting 16% annual growth, including accelerated growth during the second half of 2024. In June 2024, Five9 reaffirmed the guidance. In August 2024, however, Five9 reduced its revenue guidance to 12.2% and no longer predicted acceleration in the second half. Five9 explained that sales had been slower than expected due to poor execution and customer budget constraints. 

After the guidance reduction was announced, Five9’s stock price declined. Stockholders brought suit, alleging that Five9’s executives knew in February 2024 that they could not meet the revenue guidance due to known challenges facing the business. While the court dismissed many of the alleged misstatements, it allowed the case to proceed as to statements reaffirming guidance in June 2024.

The court dismissed the statements from February 2024 initially announcing the guidance because the plaintiffs failed to allege particularized facts showing the guidance was false when issued. The plaintiffs relied on confidential witnesses who claimed that, in 2023, senior executives were concerned about meeting guidance. But the court held that what happened in 2023 was not evidence that executives did not honestly believe in February 2024 they could achieve the guidance for 2024. And, while some witnesses allegedly reported internal concerns about expected performance in 2024, that did not establish that the 2024 guidance failed to adequately reflect those concerns.

The June 2024 statements reaffirming the guidance were a different story. The court found sufficient allegations that, by June, senior executives were aware of facts seriously undermining the guidance. Confidential witnesses allegedly reported that, at internal meetings in April and May, executives admitted the business was underperforming due to the same factors (macroeconomic “headwinds” and poor sales) that led to the guidance reduction in August. By June, the company began implementing “tighten-the-belt measures” such as budget cuts. The court found it was misleading to reaffirm the guidance without disclosing these challenges. In addition, the court concluded that the plaintiffs mounted an adequate challenge to statements downplaying the impact of macroeconomic factors on customer demand, given internal reports that such “headwinds” were already materializing. The court found that the plaintiffs adequately alleged scienter for these claims, given alleged confidential witness reports that senior executives attended meetings where these challenges were discussed and otherwise had access to relevant information, which was central to the business.

Revenue guidance is typically difficult to challenge as securities fraud, given the strong protections afforded to forward-looking statements. But as this case reinforces, plaintiffs may be able to state a viable claim for securities fraud based on reductions to revenue guidance when they can show, based on internal witnesses and documents, that executives knew the guidance had become unattainable. Thus, it is important to announce reductions to guidance as soon as such knowledge (or reason to know) accrues.