Northern District of California Dismisses Shareholder Derivative Suit Concerning Lack of Diversity

On August 30, 2021, in Elliemaria Toronto ESA v. NortonLifeLock Incorporated, Judge Richard Seeborg of the U.S. District Court of the Northern District of California dismissed a derivative suit filed by NortonLifeLock, Inc. shareholders asserting that the cybersecurity company and certain of its directors had made materially misleading statements regarding NortonLifeLock’s commitment to diversity in its proxy statements. In dismissing the case, Judge Seeborg concluded that “[w]ithout questioning that there may be systemic under-representation in corporate boardrooms, or plaintiff’s good faith in looking for legal recourse, the flaws in this putative class action complaint require dismissal.”

Plaintiff asserted that “contrary to the statements and implications in the proxies, the [NortonLifeLock board] has never in good faith actively sought minority candidates and, in fact, impeded nomination of qualified Black directors through its maintenance of ‘proxy access’ provisions and refusal to adopt term limits for directors” and that the proxies “failed to disclose that none of NortonLifeLock’s executive compensation decisions actually take into consideration whether the executives have been successful in achieving the company’s stated diversity and inclusion goals.”

The court concluded that plaintiff had failed to sufficiently allege that a demand that the NortonLifeLock board pursue plaintiff’s claims would have been futile. Under Delaware law, pleading demand futility in this case requires alleging particularized facts creating a reasonable doubt that a majority of the board would be disinterested with respect to the underlying claims or independent of any interested director. The court rejected plaintiff’s efforts to show that NortonLifeLock directors faced a substantial likelihood of personal liability, which, in light of the exculpation provision in NortonLifeLock’s bylaws, requires alleging particularized facts showing a breach of the duty of loyalty. The court found that “plaintiff’s attempt to tar the entire [board] as disqualified rests on unduly conclusory assertions that, as [b]oard members, they all necessarily had knowledge of, and are responsible for, the discrepancies between the assertions in the proxies and the alleged true state of affairs.”

The court also concluded that “[t]he complaint here simply does not plausibly plead an actionable false statement” because statements such as “the composition of the Board should reflect the benefits of diversity as to gender, race, and ethnic background” and “diversity is one of the numerous criteria the Nominating and Governance Committee reviews before recommending a candidate” were “non-actionable puffery or aspirational (and hence immaterial.” Finally, based on the forum selection clause in NortonLifeLock’s bylaws, the court dismissed plaintiff’s state law claims without prejudice to their being refiled in the Delaware Court of Chancery.

Delaware Court of Chancery Dismisses Stockholder Suit Against Medical Device Company for Failure to Plead Demand Futility

On August 25, 2021, in In re Zimmer Biomet Holdings, Inc. Derivative Litigation, Vice Chancellor Lori W. Will of the Delaware Court of Chancery dismissed a derivative suit by Zimmer Biomet Holdings, Inc. shareholders asserting breach of fiduciary duty and other claims against current and former Zimmer officers and directors and private equity funds that sold Zimmer stock in 2016 registered offerings. The court held that the shareholders failed to sufficiently allege demand futility.

The case stems from a 2016 U.S. Food and Drug Administration inspection of a Zimmer medical device manufacturing facility that identified compliance issues and resulted in Zimmer issuing a shipment hold on products from the facility. Zimmer thereafter reported disappointing financial results and saw its share price fall about 14%.

Zimmer shareholders subsequently filed derivative suits, claiming that Zimmer’s officers and directors concealed Zimmer’s regulatory compliance challenges while facilitating sales of Zimmer stock by private equity funds that were aware of those challenges. Defendants moved to dismiss, arguing that plaintiffs failed to sufficiently allege that a demand that the Zimmer board pursue plaintiffs’ claims would have been futile. Under Delaware law, pleading demand futility in this case requires alleging particularized facts creating a reasonable doubt that a majority of the board would be disinterested with respect to the underlying claims or independent of any interested director.

Agreeing with defendants, the court dismissed the case in its entirety, concluding that a majority of the board could have impartially considered a demand to pursue plaintiffs’ claims on Zimmer’s behalf. The court rejected plaintiffs’ efforts to show that Zimmer directors faced a substantial likelihood of personal liability, which, in light of the exculpation provision in Zimmer’s certificate of incorporation, requires alleging particularized facts showing a breach of the duty of loyalty. The court concluded that while plaintiffs “assert that [certain directors] face a substantial likelihood of liability for approving false and misleading disclosures,” “the plaintiffs cannot link what the directors learned about continuing FDA compliance challenges with any materially misleading statements they were responsible for making.” The court also concluded that while plaintiffs contended that certain Zimmer directors “face liability because they knowingly facilitated” insider trading by the private equity funds by approving Zimmer’s 2016 offerings, plaintiffs failed to allege “particularized facts supporting an inference that the directors knew that the [private equity funds] received non-public information and that their sales were based on that information.” Finally, the court concluded that plaintiffs failed to show that Zimmer directors faced liability based on failing to ensure Zimmer’s compliance (a so-called Caremark claim) because plaintiffs had not alleged particularized facts showing that the directors failed to implement any reporting or information system or controls or failed to monitor any such system.

Second Circuit Affirms Dismissal of Securities Fraud Class Action Over $230 Billion Money-Laundering Scandal

On August 25, 2021, in Plumbers & Steamfitters Local v. Danske Bank A/S, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of a putative securities fraud class action brought against Danske Bank and several of its officers. The Second Circuit held that plaintiffs failed to allege any actionable misstatement or omission.

The case arises from approximately $230 billion in suspicious transactions that flowed through Danske’s Estonian branch because the branch failed to follow certain anti-money laundering protocols. Plaintiffs allege that Danske failed to supervise the Estonian branch, reacted slowly once made aware of the anti-money laundering issues, and made a series of misstatements and omissions regarding the anti-money laundering issues. Plaintiffs brought claims under Sections 10 and 20(a) of the Securities Exchange Act of 1934 and regulations promulgated thereunder. The district court dismissed the case, concluding that plaintiffs failed to sufficiently allege a materially misleading statement or omission, fraud with particularity, or scienter. On appeal, the Second Circuit affirmed, concluding that plaintiffs failed to sufficiently allege a materially misleading statement or omission.

First, the Second Circuit found that while plaintiffs argued “that it was misleading for Dankse to release [financial results] without simultaneously disclosing what it knew about possible money laundering,” “accurately reported financial statements do not automatically become misleading by virtue of the company’s nondisclosure of suspected misconduct that may have contributed to the financial results” and plaintiffs “do not allege that the financial numbers Danske disclosed were manipulated in any way — just that they failed to simultaneously disclose the [anti-money laundering] issues.” Second, the Second Circuit found that certain challenged statements, including statements related to Danske’s 2014 goodwill impairment, failed to state a claim because “the challenged statements were stale and immaterial to a reasonable investor ... by the time [plaintiffs] invested in ... 2018” in light of intervening events. Third, the Second Circuit found that other challenged statements failed to state a claim because they were made after plaintiffs invested or were mere puffery.

The Second Circuit concluded that “[a]ll told, the allegations do not move the claims outside the realm of corporate mismanagement and into the realm of securities fraud.”

Derivative Lawsuits Targeting SPACs Filed

In mid-August 2021, a single plaintiff filed derivative lawsuits in New York federal court against directors and sponsors of three separate special purpose acquisition companies (SPACs) — Pershing Square Tontine Holdings, Ltd., GO Acquisition Corp., and E.Merge Technology Acquisition Corp.

The lawsuits allege that the SPACs are investment companies pursuant to Section 3(a)(1)(A) of the Investment Company Act of 1940 because, since their IPOs, “investing in securities is basically the only thing” that the SPACs have “ever done” with their assets. The suits against two of the SPACs further allege that their sponsors acted as unregistered investment advisers under the Investment Advisors Act of 1940 by advising on potential business combinations. Additionally, plaintiff also alleges that rather than following the structures set forth in the ICA and IAA, the SPACs paid their alleged investment advisors with SPAC securities that were “worth an extraordinary and excessive amount of money.” The complaints seeks declaratory judgments that the SPACs are investment companies under the ICA and (in two of the lawsuits) that the sponsor personnel are investment advisors, as well as an order rescinding certain elements of defendants’ equity in the SPACs and a disgorgement order.

This litigation has potential wide-ranging implications for SPACs and their directors and advisors. On August 30, 2021, a number of law firms (including Goodwin) issued a joint statement indicating that the participating law firms “view the assertion that SPACs are investment companies as without factual or legal basis and believe that a SPAC is not an investment company under the 1940 Act if it (i) follows its stated business plan of seeking to identify and engage in a business combination with one or more operating companies within a specified period of time and (ii) holds short-term treasuries and qualifying money market funds in its trust account pending completion of its initial business combination.” Further details on the cases and their potential impact can be found in Goodwin’s September 1, 2021 Client Alert.

EDITORIAL BOARD
Kate E. MacLeman

CONTRIBUTORS
Dylan Schweers