Securities Snapshot November 16, 2021

Delaware Court of Chancery Dismisses Stockholder Derivative Suit for Failure to Allege Demand Futility

In This Issue
Delaware Court of Chancery Dismisses Stockholder Derivative Suit for Failure to Allege Demand Futility; Connecticut Jury Finds for Defendant in Crypto Currency Fraud Case; Northern District of Illinois Allows Claims Concerning Walgreens’ Public Statements on Future Adjusted Earnings to Proceed Following Summary Judgment Motions; Delaware Court of Chancery Awards Plaintiff $9.35 Million in Attorneys’ Fees for Mooted Section 203 Claim.
In This Issue
In This Issue
In This Issue

Delaware Court of Chancery Dismisses Stockholder Derivative Suit for Failure to Allege Demand Futility

On November 1, 2021, Vice Chancellor Glasscock of the Delaware Court of Chancery dismissed a stockholder derivative suit on behalf of the Chemours Company alleging that, among other things, the company’s board of directors violated the Delaware General Corporation Law when they approved the company’s stock repurchase plans in 2017 and 2018 and issued cash dividends between 2015 and 2020. The court held that the lawsuit could not survive because plaintiffs did not demand that the company’s board of directors investigate their claims, and did not adequately plead that such a demand would have been futile, as they had not alleged with particularity that the company’s directors faced a substantial likelihood of liability on plaintiffs’ claims. 

In this suit, In re the Chemours Company Derivative Litigation, plaintiffs primarily alleged that the company’s stock repurchase plans and cash dividend payments violated DGCL Sections 160, 170, and 173 because the company “did not have ‘surplus’ from which to issue dividends or repurchase stock,” and that the company’s directors were liable under DGCL Section 174 for their negligence “by relying on GAAP-based accounting reserves” to calculate the company’s surplus. Defendants moved to dismiss for failure to plead demand futility, and Plaintiffs opposed on the sole basis that the demand would have been futile because seven of the nine directors faced a substantial likelihood of liability on plaintiffs’ claims.

The court rejected plaintiffs’ arguments and found that the complaint alleged “no particularized facts undermining the Board’s reliance on GAAP-based accounting reserves in connection with its determinations that the stock repurchases and dividend payments complied with” Delaware law. The court further held that the defendants were “fully protected” from liability by DGCL Section 172 because they relied “in good faith upon the records of the [Company] and upon” the company’s officers and financial advisors. 

The Court of Chancery dismissal affirmes that directors do not face a substantial likelihood of liability for authorizing stock repurchase plans and cash dividend payments, so long as they relied in good faith on reliable accounting practices in making such authorizations.

Connecticut Jury Finds for Defendant in Crypto Currency Fraud Case

On November 1, 2021, in Audet v. Fraser, a federal jury returned a verdict in favor of the defendant, Stuart Fraser, finding that he did not violate federal and state securities laws in his involvement in the sale of various cryptocurrency-related products because none of the products that he was selling constituted “investment contracts” that would have subjected him to such laws.

According to the complaint, Fraser held an ownership interest in GAW Miners and ZenMiner, two companies that offered a variety of cryptocurrency-related products. The plaintiffs, customers of GAW miners and ZenMiner who brought the lawsuit on behalf of themselves and all others similarly situated, alleged that Fraser and the companies engaged in fraudulent conduct when they misrepresented the nature of the investments that they were selling.

Siding with the defendant, the jury rejected a key premise of plaintiffs’ argument and found that the cryptocurrency-related products at issue were not investment contracts, and therefore, Fraser had not violated federal and state securities laws. The case was the first time a jury addressed whether cryptocurrency products are investment contracts that would make them subject to certain federal and state securities laws.

Northern District of Illinois Allows Claims Concerning Walgreens’ Public Statements on Future Adjusted Earnings to Proceed Following Summary Judgment Motions

On November 2, 2021, in Washtenaw County Employees’ Retirement System v. Walgreen, the United States District Court for the Northern District of Illinois granted in part and denied in part defendants’ summary judgment motion, and denied in full plaintiffs’ summary judgment motion, concerning Walgreens’ alleged violations of federal securities law.

The decision stems from Walgreens’ shareholders’ claims against Walgreens, its former CEO, and its former CFO for alleged violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934. Specifically, plaintiffs alleged that the company’s executives made false and misleading statements in 2014 about 1) the possibility of achieving its adjusted earnings target, and 2) the risks associated with generic drug price inflation.

The court first addressed a pair of statements the company made in 2014 concerning the likelihood of Walgreens achieving its earnings goals. The court found that the first statement — indicating that Walgreens was tracking below its revenue goals but “remain[ed] focused on delivering [them]” — was a forward-looking statement accompanied by cautionary language such that it was not actionable under the Private Securities Litigation Reform Act’s safe harbor provision. However, the court denied Walgreens’ motion as to the second statement, in which the company’s CFO said that Walgreens’ financial targets “remain[ed] achievable,” finding that there were genuine disputes of material fact, including whether and when Walgreens knew it would be unable to achieve its 2016 financial goals. 

The court next denied defendants’ motion for summary judgment concerning certain of defendants’ statements about generic price inflation, finding there were genuine issues of material fact better suited for resolution at trial as to who made those statements, whether they were false, and whether they were made with scienter. For these same reasons, the court also denied in full plaintiffs’ motion for partial summary judgment as to these public statements. 

The court’s decision shows that, while the PSLRA’s safe harbor provision can be a powerful tool to weed out claims, trial may still be deemed necessary to resolve disputed issues of falsity and scienter.

Delaware Court of Chancery Awards Plaintiff $9.35 Million in Attorneys’ Fees for Mooted Section 203 Claim

On November 8, 2021, in Hollywood Firefighters Pension Fund v. Malone, Vice Chancellor Glasscock of the Delaware Court of Chancery awarded plaintiffs $9.35 million in attorneys’ fees on a mooted Section 203 claim after ruling that the claim provided substantial benefits to stockholders, and thus, gave rise to an award for additional attorneys’ fees under Delaware’s corporate benefit doctrine.

Class plaintiffs are stockholders in GCI Liberty, Inc., which announced a merger agreement with Liberty Broadband Corp. in August 2020. Plaintiffs claimed that the merger would violate Delaware General Corporation Law Section 203, which prohibits any owner of 15% or more of a corporation’s voting stock from participating in business combinations with the corporation for three years, including by consolidating the voting power of GCI Liberty’s chairman of its board of directors and its CEO. Plaintiffs also alleged that GCI Liberty’s definitive merger proxy was materially misleading and did not provide sufficient information to stockholders who would vote on the merger in light of the alleged Section 203 defect.

On November 21, 2020, approximately one month after plaintiffs filed their class complaint, the parties filed a preliminary injunction stipulation, in which the merger was altered so as not to consolidate voting power or benefit the individual defendants disproportionately. As a result, the plaintiffs agreed to dismiss the Section 203 claims as they were moot. The parties later settled the remaining claims, resulting in $22 million in attorneys’ fees awarded to plaintiffs in connection with the settlement claims only.

Thereafter, plaintiffs moved for attorneys’ fees on their mooted Section 203 claims. The court awarded $9.35 million in additional attorneys’ fees after finding that such an award was proper under the corporate benefit doctrine, which provides that a plaintiff can recover attorneys’ fees if she can show that “(1) the suit was meritorious when filed; (2) the action producing benefit to the corporation was taken by the defendants before a judicial resolution was achieved; and (3) the resulting corporate benefit was causally related to the lawsuit.”

In awarding fees, the court found that plaintiffs not only brought the merger into compliance with Section 203, but also caused GCI Liberty to make additional public disclosures regarding conflicted individuals and a reduction in voting control for the individual defendants. Applying the Sugarland factors, the court valued each portion of the benefit for stockholders separately, valuing the benefit of additional public disclosures at $800,000, the benefit of mooting the Section 203 claims at $3.05 million, and the benefit of change in voting control at $5.5 million.

While the Vice Chancellor acknowledged that his analysis implied an hourly rate for attorneys’ fees of $3,442.06, he ruled that this was reasonable in light of the contingent nature of the litigation. 

EDITORIAL BOARD
Ezekiel L. Hill
Kate E. MacLeman

CONTRIBUTORS
Michael Vaglica
Ilana Saltz
Christopher J.C. Herbert
Cassandra T. Desjourdy