Highlights from the September 2016 Issue of the Bank and Corporate Governance Law Reporter
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The most significant Delaware court decisions this month are the following:
- In Jeter v. Revolutionwear, Inc., C.A. No. 11706-VCG (Del. Ch. July 19, 2016), Vice Chancellor Glasscock of the Delaware Chancery Court said that the “unique marketing strategy” involved in this case provided “a cautionary tale of the mixing of roles in a corporate-governance setting.” Revolutionwear Inc. brought Yankee shortstop Derek Jeter into the company as a 15% owner and director in order to use Jeter’s position in the company as a marketing tool. Jeter made representations in his Director Agreement that he would allow Revolutionwear to promote his role with the company, and that such marketing would not conflict with his pre-existing contract with Nike. The company alleged that Jeter nevertheless refused to allow a pledged promotional press release, and that Jeter’s material representations regarding the Nike contract were false. It also alleged that Jeter tried to use his position as director to promote his own business interests and get control of the company.
- In In re Riverstone National Inc. Shareholder Litigation, Consol. C.A. No. 9796-VCG (Del. Ch. July 28, 2016), the Chancery Court of Delaware allowed ex-shareholder plaintiffs’ suit to go forward against directors who allegedly facilitated a merger that extinguished a derivative shareholder action against them for usurpation of a corporate opportunity. The plaintiffs adequately pleaded that the directors received a material benefit from the merger that was not shared by the common stockholders, and that the entire fairness standard applied to the merger. Defendants’ motion to dismiss was denied.
- In In re Xoom Corp. Shareholder Litigation, Consol. C.A. No. 11263-VCG (Del. Ch. Aug. 4, 2016), the Chancery Court awarded $50,000 in attorneys’ fees to plaintiffs who had requested $275,000 for bringing a stockholder lawsuit that resulted in four supplemental disclosures, mooting those claims. The Court noted that in such mootness cases, where other class members are not precluded from bringing suit, the standard is benefit to the class, not materiality; here, the disclosures produced a “modest benefit” to stockholders. The plaintiffs voluntarily dismissed the action with prejudice as to the plaintiffs only, reserving the right to a mootness fee. Plaintiffs then filed an application requesting $275,000 in fees for 63 attorney hours, or approximately $4100 per hour. The court awarded fees of approximately $800 per hour.
- In Sandquist v. Lebo Automotive, No. S220812 (Cal. July 28, 2016), the plaintiff was a former employee of the Defendant, Lebo Automotive, where he worked as a car salesman. As a condition of employment, he signed a contract in which he agreed to arbitrate disputes arising out of his employment with the company. In 2012, the plaintiff filed suit alleging racial discrimination “on behalf of a class of current and former employees of color.” The parties disputed whether a court or an arbitrator had jurisdiction to decide if class-wide arbitration was permissible in this case where the agreement was ambiguous. Relying on long-standing rules of contract interpretation, the Supreme Court of California held that an arbitrator must decide the question on the availability of class-wide arbitration.
- In SRM Global Master Fund Ltd. P’ship v. Bear Stearns Cos., No. 14-507-cv (2d Cir. 2016) (Lohier, J.), the Second Circuit determined “American Pipe tolling does not apply to” 28 U.S.C. § 1658(b)(2), which establishes a five-year statute of repose for securities fraud claims brought under Section 10(b) and Rule 10b-5. SRM Global Master Fund Ltd. P’ship v. Bear Stearns Cos., 2016 WL 3769735 (2d Cir. 2016) (Lohier, J.).
• In Anderson Spirit Aerosystems Holdings, No. 15-3142 (10th Cir. 2016) (Bacharach, J.), the Tenth Circuit affirmed dismissal of a securities fraud action against Spirit AeroSystems Holdings and several of its executives for allegedly misrepresenting cost overruns and production delays. Anderson Spirit Aerosystems Holdings, 2016 WL 3607032 (10th Cir. 2016) (Bacharach, J.). The Tenth Circuit found plaintiffs’ allegations failed to raise a strong inference of scienter. The court determined it was “more probable that the Spirit executives were overly optimistic and failed to give adequate weight to financial red flags.”
- In In re Leapfrog Enterprise, Inc. Securities Litigation, No. 15-cv-00347-EMC (N.D. Cal. June 29, 2016), U.S. District Judge Edward Chen dismissed a shareholder lawsuit brought against children’s educational toymaker LeapFrog Enterprises, Inc. (“LeapFrog”) for failure to adequately plead statements were false or misleading, or made with requisite intent. Plaintiffs’ suit, which was consolidated in 2015, alleged that LeapFrog and its executives hid demand and inventory problems from investors. The judge disagreed, finding that the investors had been sufficiently warned of problems with LeapFrog’s product lines and that the allegedly misleading statements were forward-looking and cautionary, and therefore fell within the PSLRA’s safe harbor. Defendants’ public statements about many of the allegedly misleading topics helped drive home that Plaintiffs’ theory amounted to classic “fraud by hindsight.”
- In Ford v. Voxx Int’l, No. 14-CV-4183 (JS) (AYS) (E.D.N.Y. 2016) (Seybert, J.), the Eastern District of New York dismissed a securities fraud action against VOXX International in which a “single confidential witness” provided “nearly all of the information [d]efendants allegedly failed to disclose in their public statements.” Ford v. Voxx Int’l, 2016 WL 3982466 (E.D.N.Y. 2016) (Seybert, J.). The court held “the statements and opinions attributed to” the confidential witness were “too vague to form the basis of a fraud claim.”
- In The Williams Cos. v. Energy Transfer Equity, C.A. No. 12168-VCG (Del. Ch. 2016) (Glasscock, V.C.), the Delaware Chancery Court considered the requirement in a merger agreement that the parties use “commercially reasonable” efforts to obtain a tax opinion as a condition precedent to the consummation of the merger. The Williams Cos. v. Energy Transfer Equity, 2016 WL 3576682 (Del. Ch. 2016) (Glasscock, V.C.). In the case before the court, intervening economic circumstances allegedly changed both the buyer’s desire to consummate the merger and the designated law firm’s willingness to issue the favorable tax opinion mandated by the merger agreement. The court found the buyer had not breached the requirement to use “commercial reasonable” efforts to obtain the tax opinion because there was no evidence that the buyer’s “activity or lack thereof caused, or had a material effect upon” the law firm’s “inability” to issue the necessary tax opinion.
- In Aleynikov v. The Goldman Sachs Group, Inc., C.A. No. 10636-VCL (Del. Ch. July 13, 2016), the decision is notable partly because it falls within the minority of advancement cases that deny advancement of fees to a former employee who was given the title of vice president. Its application may be limited due to procedural quirks and its reliance on New Jersey law, the Court of Chancery’s post-trial decision features an unusual result in that a vice president was denied advancement, but the 17-page Order of the court was based primarily on the doctrine of “issue preclusion”, and in particular how that concept was construed under New Jersey case law. Thus, it may not be of widespread usefulness in other Delaware corporate litigation regarding advancement.
- In Smollar v. Potarazu, C.A. No. 10287-VCS (Del. Ch. June 29, 2016), in a pair of related decisions issued on the same day the Court of Chancery in Smollar v. Potarazu made the unusual move of disqualifying a derivative plaintiff and his counsel, and granting a motion to intervene brought by another stockholder who sought to become the representative plaintiff.