Delaware Court of Chancery

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On July 30, 2021, L Brands, the parent company behind Victoria’s Secret and Bath & Body Works, settled a rash of derivatives actions which had alleged “toxic” workplace conditions and “a culture of misogyny” at the company.  We previously detailed the allegations in this space as part of our ongoing review of shareholder attempts to hold companies liable for perceived diversity failures and workplace discrimination.  As we noted, a New York Times report detailing specific allegations of a former Chief Marketing Officer led to the filing of shareholder actions across the country, including in Ohio, Oregon, and Delaware.

The rash of shareholder derivative actions alleging violations of fiduciary duties tied to companies’ diversity measures are continuing to take a beating in the Northern District of California.  We previously posted about the dismissal on forum selection clause grounds of a derivative action brought in that court by a shareholder of The Gap, Inc. alleging the company’s directors and officers failed to instill meaningful diversity within its leadership.  We also reported on a similar suit brought against Facebook, which was dismissed because, among other reasons, the forum selection clause in Facebook’s certificate of incorporation provided that the exclusive forum for derivative actions was the Delaware Court of Chancery.

A shareholder derivative action which had alleged that Facebook’s lack of diversity caused a negative effect on its stock price was rejected by a California federal magistrate judge last week.

The court held that the shareholder plaintiff had not pled demand futility with particularity, as required by Fed. R. Civ. P. 23.1, because she had not “plausibly alleged any facts about the directors’ actual or constructive knowledge . . . their failure to act, or their lack of independence.” Labeling the plaintiff’s allegations as “conclusory,” the court held that the complaint contained inaccurate factual allegations and that the plaintiff “did not plead plausible facts about discriminatory practices,” of the Company. Because the allegations that Facebook’s directors ignored red flags were “contradicted by the record,” and the alleged events occurred before four of the directors joined Facebook’s board, the court held the complaint was unsustainable.

The Delaware Supreme Court ruled today that Delaware corporations can adopt charter provisions requiring that actions under the federal Securities Act of 1933 be filed in a federal court. The decision in Salzberg v. Sciabacucchi gives Delaware corporations a way to avoid state-court or multi-forum litigation of Securities Act claims by channeling all such cases into the federal system, where they can be managed more effectively – and where they are subject to the more structured and stringent procedural standards mandated by federal law.

Delaware corporations might want to consider adopting federal-forum charter provisions to address the treatment of potential Securities Act claims.

The Delaware Supreme Court held yesterday that a corporation can be required to produce emails and other electronic documents where necessary to satisfy a shareholder’s legitimate request to inspect corporate books and records under § 220 of the Delaware General Corporation Law.  The Supreme Court also held that, under the circumstances of the case, a court could not impose jurisdictional limitations on the shareholder’s use of documents obtained through the § 220 inspection process.

On January 25, 2018, the Delaware Supreme Court held that the dismissal of a shareholder derivative action for lack of demand futility can preclude other derivative actions as long as the plaintiff in the dismissed case adequately represented the corporation’s interests. The Court’s decision in California State Teachers’ Retirement System …

The Chancellor of Delaware’s Court of Chancery yesterday urged the Delaware Supreme Court to revise Delaware law on preclusion in shareholder derivative actions.  The court’s July 25, 2017 decision in In re Wal-Mart Stores, Inc. Delaware Derivative Litigation recommended that the Supreme Court adopt a rule that a judgment in one derivative action cannot bind the corporation or its stockholders in another derivative action unless either (i) the first action has survived a motion to dismiss because a pre-suit demand on the corporation’s board of directors would have been futile or (ii) the board has given the plaintiff authority to proceed on the corporation’s behalf by declining to oppose the derivative suit.  In other words, preclusion would not apply unless the stockholder in the first case had been empowered by either a court or the board to assert the corporation’s claims.