Securities Snapshot January 28, 2020

Southern District of New York Allows Shareholder Claim Against CBS to Proceed Based on Statement by Les Moonves

Summary

Southern District of New York Allows Shareholder Claim Against CBS to Proceed Based On Single Statement By Les Moonves; Delaware Court of Chancery Grants Stockholders Access to Books and Records of Distributor of Opioid Pain Medication; Delaware Supreme Court Affirms Dismissal Of Derivative Lawsuit Concerning Uber’s Acquisition of Ottomotto; Eastern District of New York Dismisses Securities Class Action Complaint against Tax Preparation Company.

On January 15, 2020, the Southern District of New York held in Construction Laborers Pension Trust for Southern California v. CBS Corp. et al. that a Section 10(b) suit brought by CBS shareholders could survive a motion to dismiss on the basis of a statement by Les Moonves, but granted the motion to dismiss as to other statements that were allegedly misleading. Plaintiffs alleged that Moonves stated that the #MeToo movement was “a watershed moment” and that “it’s important that a company’s culture will not allow for this. . . . There’s a lot we’re learning. There’s a lot we didn’t know.” According to plaintiffs, Moonves made the statement despite knowing about his own history of sexual misconduct and the risk it posed to CBS’s future success. Plaintiffs also alleged that the defendants made other allegedly misleading statements, including statements about the efforts to prevent workplace sexual harassment, and statements in the company’s business conduct statement about “zero tolerance” for harassment.

The district court held that, of the challenged statements, only Moonves’s statement was actionable. The district court reasoned that Moonves’s statement implied that he had not known about CBS’s problems. While acknowledging it was a “very close case,” the district court reasoned that “it is barely plausible that a reasonable investor would construe [Moonves’s] statement as implicitly representing that he was just learning of problems with workplace sexual harassment at CBS.” The district court also found that the context of #MeToo “explains why Moonves would have known that his statement was misleading and significant,” as it “changed the risks to a company of having a CEO with an unsavory past.” With respect to the other alleged statements, including CBS’s business conduct statement and statements about efforts to prevent workplace harassment, the district court found that they were not material, not false or misleading, and/or puffery.

Delaware Court of chancery Grants Stockholders Access to Book and Records of Distributor of Opioid Pain Medication

On January 13, 2020, in Lebanon County Employees’ Retirement Fund et al. v. AmerisourceBergen Corp., the Delaware Court of Chancery ordered AmerisourceBergen Corporation, “one of the world’s largest wholesale distributors of opioid pain medication,” to provide plaintiff stockholders with books and records about the company’s compliance with opioid drug distribution controls. Plaintiffs “are investigating whether the firm engaged in wrongdoing in connection with the distribution of opioids.” Plaintiffs sought to inspect AmerisourceBergen’s books and records pursuant to Section 220 of the Delaware General Corporation Law, and AmerisourceBergen rejected plaintiffs’ request because “plaintiffs lacked a proper purpose, and alternatively, the scope of the requested inspection was overly broad.” Plaintiffs filed suit and, following a trial on a paper record, the court concluded that “plaintiffs have proven that they have proper purposes to conduct an inspection, and they have established their right to inspect what this decision refers to as Formal Board Materials” (i.e., “board-level documents that formally evidence the directors’ deliberations and decisions and comprise the materials that the directors formally received and considered”).

The court found that plaintiffs had established two proper purposes for their books and records demand. First, “plaintiffs have shown by a preponderance of the evidence that there is a credible basis to infer that AmerisourceBergen possibly violated the Controlled Substances Act [i.e., the Comprehensive Drug Abuse Prevention and Control Act of 1970]” because “in this case, the flood of government investigations and lawsuits relating to AmerisourceBergen’s opioid-distribution practices is sufficient to establish a credible basis to suspect wrongdoing warranting further investigation.” The court explained that, “generally speaking, when a corporation has suffered a trauma, and when there is a credible basis to suspect that the corporation has violated positive law or government regulations, then some level of investigation is warranted.” Second, “plaintiffs seek to investigate issues of director disinterestedness and independence, which is a proper purpose.”

The court concluded that the scope of the inspection should include “Formal Board Materials.” The court explained that, “in this case, AmerisourceBergen prevented the plaintiffs from obtaining any information about what types of books and records exist and who has them. . . . After AmerisourceBergen produces Formal Board Materials, the plaintiffs may conduct a Rule 30(b)(6) deposition to determine what other types of books and records exist and who has them.” The court ruled that, if the parties cannot agree on the final scope of the inspection, plaintiffs may make an application for “Informal Board Materials” (i.e., “informal materials that evidence the directors’ deliberations, the information that they received, and the decisions they reached”) or “Officer-Level Documents” (i.e., “communications and materials that were only shared among or reviewed by officers and employees”) that plaintiffs can show are necessary for the inspection.

Delaware Supreme Court Affirms Dismissal of Derivative Lawsuit Concerning Uber's Acquisition of Ottomotto

On January 13, 2020, the Delaware Supreme Court in McElrath v. Kalanick et al. affirmed the Court of Chancery’s dismissal, with prejudice, of a derivative suit brought against the board of Uber Technologies, Inc. over its 2016 acquisition of Ottomotto LLC. After the transaction closed, Uber settled misappropriation claims brought by Google based on alleged misuse of proprietary information by former Google employees at Ottomotto and in conjunction with that settlement issued additional Uber stock to Google valued at $245 million. The Court of Chancery dismissed the lawsuit for failure to make a demand, finding that a majority of the board could have fairly considered plaintiff’s demand. Plaintiff appealed, arguing that the directors were interested or were not independent of those who were interested.

The Delaware Supreme Court affirmed the Court of Chancery’s decision. The court held that only one of Uber’s directors was interested; the other directors were not interested because plaintiff had not sufficiently pleaded that those directors had acted in bad faith (and, therefore, there was no “substantial likelihood” of personal liability). The court also held that a majority of the board was independent of the interested director. As a result, plaintiff had failed to plead demand futility and his lawsuit was properly dismissed by the Court of Chancery.

Eastern District of new York Dismisses Securities Class Action complaint Against Tax Preparation Company

On January 17, 2020, in In Re Liberty Tax, Inc. Securities Litigation, the Eastern District of New York dismissed a securities class action complaint against Liberty Tax, Inc., which offers tax preparation services in the United States and Canada primarily through franchise locations, as well as its former CEO John Hewitt and former CFO Kathleen Donovan. The complaint alleged (among other things) that defendants “fraudulently covered up Hewitt’s wide-ranging misconduct as CEO and that this misconduct eventually caused Liberty’s stock price to plummet.” Hewitt allegedly “used his position as CEO and controlling shareholder of Liberty to inappropriately advance his romantic and personal interests” at the same time that “Liberty released multiple SEC filings and public statements touting its compliance efforts, disclosure procedures, and internal controls over financial reporting.” Hewitt’s alleged misconduct was reported to Liberty’s ethics hotline in 2017 and ultimately led to his termination.

The district court held that defendants’ statements regarding Liberty’s internal controls were “puffery” because “[i]t is well-established that general statements about reputation, integrity, and compliance with ethical norms are inactionable puffery.” In addition, the district court held that Liberty’s failure to disclose Hewitt’s alleged perquisites was not actionable. Although most concerned expenses that “may be questionable business decisions, they are not compensation that was awarded to, earned by, or paid to” Hewitt. The remainder concerned Hewitt’s “higher incremental travel expenses,” but plaintiffs did not “allege sufficient detail about Hewitt’s many trips to support an inference that the business meetings he conducted on those trips were not integrally and directly related to Hewitt’s performance of his duties as CEO” and, therefore, imposed a duty on Liberty to disclose them.

The district court also held that plaintiffs failed to plead loss causation. Plaintiffs attempted “to establish loss causation by relying on diminished productivity and increased losses and debt reported on Form 8-K filings” but, “while plaintiffs allege a causal connection between Hewitt’s misconduct and the diminished productivity and increased losses and debt reported on the Form 8-K filings, they do not allege that Liberty misstated or omitted anything about the company’s performance in the past.” Further, the district court concluded that “plaintiffs cannot rely on allegations that Hewitt set a damaging tone at the top to explain with particularity how the concealment of Hewitt’s ethical lapses in Virginia caused independently run franchises across North America to process fewer tax returns.”