The Delaware Supreme Court held yesterday that a stockholder seeking to inspect corporate books and records may use “reliable” hearsay to establish the propriety of the purpose of the inspection demand. The decision in NVIDIA Corp. v. City of Westland Police and Fire Retirement System (July 19, 2022) does not appear to break new ground on this issue, inasmuch as the Court concluded that it “appeared” to have allowed the use of sufficiently reliable hearsay in a 26-year-old decision, which neither party here asked the Court to revisit or overrule. Continue Reading
Divided Delaware Supreme Court Decision Highlights Issues About Director Independence in Derivative Actions
The Delaware Supreme Court recently affirmed a Court of Chancery ruling granting a Special Litigation Committee’s motion to terminate a shareholder derivative action that had survived a motion to dismiss. The split decision in El Pollo Loco (June 28, 2022) highlights whether a director can be considered independent – especially as a member of a Special Litigation Committee (“SLC”) – if he or she had known about and had approved or not objected to the prior motion to dismiss, which had asserted that the claims at issue in the subsequent SLC investigation lacked merit. Continue Reading
Tractor Supply Gets Lift from Court with Diversity Suit Dismissal
Earlier this spring, yet another lawsuit alleging a company failed to adequately promote diversity was dismissed for a failure to properly allege demand futility.
In City of Pontiac Police & Fire Ret. Sys. v. Jamison, the plaintiff, a shareholder of Tractor Supply Company, had alleged that the company and members of its Board falsely stated in securities filings that they were committed to promoting diversity. The plaintiff alleged that diversity maximizes shareholder wealth and that the lack of racial diversity at Tractor Supply contributed to economic disparities at the company. Because, according to the plaintiff, the defendants had failed to sufficiently promote diversity within the company while, at the same time, made statements in Tractor Supply’s 2020 proxy statement that the Board was “committed to the principles of diversity and inclusion,” they had violated Section 14(a) of the Exchange Act.
No Influence: Court Dismisses Claim Based on CEO’s Raucous Influencer Parties
Earlier last month, Judge Vince Chhabbria of the United States District Court for the Northern District of California dismissed a novel complaint that the court noted stretched the bounds of when directors of a company could reasonably be held accountable for the actions of its executives. Notwithstanding the case’s amusing subject matter, the decision applies typical Delaware standards to dismiss a shareholder derivative complaint formed on the basis of an executive’s out-of-office behavior.
Second Circuit Reverses Dismissal of Securities Claim Alleging Failure to Disclose SEC Investigation
The Court of Appeals for the Second Circuit yesterday reversed the dismissal of a securities class action alleging fraud based on the defendants’ failure to disclose an SEC investigation into the company’s disclosed financial-control weaknesses. The May 24, 2022 ruling in Noto v. 22nd Century Group, Inc. (No. 21-0347) is fact-specific, requiring disclosure of the investigation because the defendants (i) had disclosed the accounting deficiencies that had led to the investigation, (ii) had said they were working on the problem, and (iii) eventually had said they had resolved it, even though the SEC investigation had been pending during that entire period.
The Noto decision could affect disclosure assessments where issuers disclose an underlying accounting problem or other deficiency but are debating whether they must also disclose a pending SEC or other governmental investigation related to that specific problem. Depending on the facts and circumstances of the particular situation, a court might hold that failure to disclose the governmental investigation makes the disclosure of the underlying problem materially misleading because nondisclosure of the investigation could cause reasonable investors to make “an overly optimistic assessment of the risk” posed by the underlying problem.
Fifth Circuit Holds SEC’s In-House Courts and Judges Unconstitutional
In Jarkesy v. Securities and Exchange Commission, the Court of Appeals for the Fifth Circuit issued a remarkable opinion holding numerous aspects of the SEC’s administrative enforcement regime are unconstitutional. The May 18, 2022 ruling stands to eliminate the SEC’s ability to adjudicate enforcement actions seeking penalties using ALJs, rather than bringing suit in federal district court. It also could tee up further argument at the Supreme Court to resolve the scope of the SEC’s – and, perhaps, other administrative bodies’ – adjudicatory powers.
SEC Issues New Guidance Regarding Russia Sanctions and Public Company Disclosures
In response to Russian President Vladimir Putin’s decision to invade Ukraine in February, the U.S. government announced sweeping sanctions against Russia. As the conflict nears the three-month mark, businesses around the world are continuing to address compliance with these sanctions. To that end, the SEC recently issued guidance on how companies affected by the Russian invasion of Ukraine should disclose how the conflict is affecting their operations, including the impact of evolving sanctions.
