Delaware Court of Chancellery Dismisses Shareholders’ Derivative Lawsuit for Failure to Alle the Futility of the Claim | Goodwin

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IN THIS PROBLEM

Delaware Court of Chancellery Dismisses Shareholders’ Derivative Lawsuit for Failure to Alle the Frivolity of the Claim; Connecticut jury finds defendant in cryptocurrency fraud case; Northern District of Illinois Allows Prosecution of Claims Regarding Walgreens’ Public Statements of Adjusted Future Profits Following Summary Judgment Motions; Delaware Chancellery Court awards plaintiff $ 9.35 million in attorney fees for a Section 203 claim.

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DELAWARE COURT OF CHANCERY REJECTS SHAREHOLDER ACTION FOR NON-ALLEGATION OF FUTILITY OF CLAIM

On November 1, 2021, Vice Chancellor Glasscock of the Delaware Court of Chancellery dismissed a derivative shareholder lawsuit on behalf of the Chemours company, alleging that, among other things, the company’s board of directors had violated the Delaware General Companies Act when it approved the shares of the company. buyout plans in 2017 and 2018 and issued cash dividends between 2015 and 2020. The court ruled that the lawsuit could not survive because the plaintiffs had not demanded that the board of directors of the company investigate the their claims, and failed to sufficiently argue that such a claim would have been futile, as they had failed to accurately allege that the directors of the company faced a substantial likelihood of liability on the claimants’ claims.

In this case, In re the Chemours Company Derivative Litigation, the plaintiffs mainly alleged that the company’s share repurchase plans and cash dividend payments violated Articles 160, 170 and 173 of the DGCL because the company “Had no” surplus “to issue dividends or buy back shares”, and that the directors of the company were liable under article 174 of the DGCL for their negligence “by relying on reservations GAAP-based accountants ”to calculate the company’s surplus. The defendants requested dismissal for failure to plead the futility of the claim, and the plaintiffs opposed on the sole ground that the claim would have been frivolous as seven of the nine directors faced a substantial likelihood of liability on the plaintiffs’ claims.

The tribunal rejected the complainants’ arguments and concluded that the complaint did not allege “any particular fact that compromises the Board’s confidence in GAAP-based accounting reserves in its determinations that share repurchases and payments are made. of dividends complied ”with Delaware law. The court further ruled that the defendants were “fully protected” from any liability by article 172 of the DGCL because they relied “in good faith on the files of the [Company] and on »the company’s officers and financial advisers.

The Chancellery’s rejection asserts that directors do not face a substantial likelihood of liability for authorizing share buyback plans and cash dividend payments, as long as they have relied in good faith on reliable accounting practices for making such authorizations.

CONNECTICUT JURY FINDS 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 he was selling constituted “investment contracts” which would have subject him to such laws.

According to the complaint, Fraser had a stake in GAW Miners and ZenMiner, two companies that offered a variety of cryptocurrency-related products. The plaintiffs, clients of the miners GAW and ZenMiner who brought the lawsuit on their own behalf and that of all others in a similar situation, alleged that Fraser and the companies engaged in fraudulent behavior by distorting the nature of the investments they made. ‘they were selling.

Siding with the defendant, the jury rejected a key premise of the plaintiffs’ argument and concluded that the cryptocurrency-related products at issue were not investment contracts and, therefore, Fraser did not violate federal and state securities laws. It was the first time that a jury questioned whether cryptocurrency products were investment contracts that would subject them to certain federal and state securities laws.

NORTHERN ILLINOIS DISTRICT ALLOWS CLAIMS CONCERNING WALGREENS PUBLIC STATEMENTS ON FUTURE ADJUSTED PROFITS TO BE PROCEEDED FOLLOWING SUMMARY JUDGMENT REQUESTS

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

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

The court first considered two statements made by the company in 2014 regarding the likelihood of Walgreens meeting its profit targets. The court found that the first statement – indicating that Walgreens was tracking below its revenue targets but “remained[ed] focused on delivery [them]- was a forward-looking statement accompanied by a disclaimer that it was not subject to prosecution under the safe harbor provision of the Private Securities Litigation Reform Act. However, the court dismissed Walgreens ‘motion for the second statement, in which the company’s chief financial officer said Walgreens’ financial goals “remain.[ed] achievable ”, finding that there were genuine differences over material facts, including whether and when Walgreens knew it would not be able to meet its financial goals for 2016.

The court then dismissed the defendants ‘motion for summary judgment regarding some of the defendants’ statements about generic price inflation, finding that there were genuine questions of material fact better suited to a resolution at trial as to whether who made these statements, if they were false and if they were made with scienter. For these same reasons, the court also dismissed the plaintiffs’ motion for partial summary judgment in its entirety with respect to these public statements.

The court ruling shows that while the safe harbor provision of the PSSRA can be a powerful tool in eliminating claims, a trial may still be deemed necessary to resolve the controversial issues of falsity and science.

DELAWARE COURT OF CHANCERY RECEIVES APPLICANT $ 9.35 MILLION IN LAWYERS ‘FEES FOR SECTION 203 CLAIM

On November 8, 2021, in Hollywood Firefighters Pension Fund v. Malone, Vice-Chancellor Glasscock of the Delaware Court of Chancery awarded the plaintiffs $ 9.35 million in legal fees on a Section 203 claim after ruling that the claim provided substantial benefits to the plaintiffs. shareholders, and thus, resulted in an award of additional attorneys’ fees under the Delaware employee benefits doctrine.

The group’s claimants are shareholders of GCI Liberty, Inc., which has announced a merger agreement with Liberty Broadband Corp. in August 2020. The plaintiffs claimed that the merger would violate Section 203 of the Delaware General Corporations Act, which prohibits any owner of 15% or more of the company’s voting shares from participating business combinations with the company for three years, including consolidating the voting rights of the chairman of its board of directors and its CEO of GCI Liberty. The plaintiffs also alleged that GCI Liberty’s definitive merger proxy was misleading and did not provide sufficient information to shareholders who would vote on the merger in light of the alleged defect in Section 203.

On November 21, 2020, about a month after the plaintiffs filed their class action lawsuit, the parties filed a preliminary injunction stipulation, in which the merger was amended so as not to consolidate voting power or profit disproportionately to individual defendants. Accordingly, the claimants agreed to dismiss the section 203 claims as they were moot. The parties subsequently settled the remaining claims, resulting in $ 22 million in legal fees awarded to the plaintiffs in the settlement claims alone.

Subsequently, the plaintiffs requested attorney fees for their section 203 claims. The court awarded $ 9.35 million in additional attorney fees after finding that such compensation was appropriate under the benefits doctrine, which provides that a plaintiff can recover attorney’s fees if it can prove that “(1) the lawsuit was meritorious when it was filed; (2) the action for the benefit of the company was brought by the defendants before a judicial resolution was reached; and (3) the resulting business benefit was causally related to the lawsuit. “

In awarding the fees, the court found that the plaintiffs not only brought the merger into compliance with Section 203, but also caused GCI Liberty to make additional public disclosures regarding the people in conflict and reduce the control of votes for individual defendants. Applying Sugarland’s factors, the court assessed each part of the shareholder benefit separately, valuing the benefit of the additional public disclosures at $ 800,000, the benefit of invoking the section claims. 203 at $ 3.05 million and the benefit of the change in voting control at $ 5.5 million. .

While the Vice-Chancellor acknowledged that his analysis involved an hourly rate for attorney fees of $ 3,442.06, he found this to be reasonable given the contingent nature of the litigation.

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