The Delaware Court of Chancery recently held that claims for breach of the fiduciary duty of oversight are not easier to plead against corporate officers than against corporate directors. The decision in Segway Inc. v. Cai emphasizes the high burden for pleading oversight claims against officers as well as directors, and it repeats the admonition that the oversight doctrine “is not a tool to hold fiduciaries liable for everyday business problems.”
In 2020, SolarWinds Corp., a company that provided information technology software to private and government entities, was the victim of a cybersecurity breach. Russian hackers are believed to have slipped malicious code into a SolarWinds software product called Orion, which was then used to infect, and in certain cases, compromise…
While we are growing accustomed to pandemic-based shareholder actions relating to improper health and safety disclosures or misrepresentations relating to COVID-19 treatments and tests, this month brings a novel variant of the COVID-19 lawsuit. A Universal Health Services Inc. investor has filed a derivative suit against company officers and directors, claiming they took advantage of a pandemic-related drop in the company’s stock price to grant and receive certain stock options that were unfair to the company and its stockholders. The plaintiff investor claims that “company insiders took advantage of the temporary drop in the company’s stock price to grant and receive options to buy the company’s stock at rock bottom prices, thereby showering themselves in excessive compensation.” The complaint alleges that the drop in stock price was “not caused by any changes in the company’s fundamentals or business prospects,” but instead was entirely attributable to the effect of the pandemic on the markets writ large.
The spate of shareholder actions against biotech companies relating to COVID-19 treatments shows no signs of stopping, and now, derivative lawsuits are following the initial wave of securities class actions. For example, late last week, a shareholder of CytoDyn, Inc., brought a derivative action against certain officers and directors of the company. CytoDyn is a biotechnology company that has focused on the development and commercialization for a drug called “Leronlimab,” what was promoted as a potential therapy for HIV. According to the complaint, in 2020, CytoDyn began promoting Leronlimab as a treatment for COVID-19, causing its stock price to rise. But when it came out that marketing Leronlimab as a COVID-19 treatment was not a commercially viable development for the company, the complaint alleges CytoDyn’s shares dropped significantly.
An interesting shareholder derivative suit was filed on November 30, 2020 in the Northern District of California against Pinterest, Inc. Pinterest, a visual discovery engine popular for collecting ideas for weddings and aggregating recipes, went public in April 2019. The complaint alleges that Pinterest executives “breached their fiduciary duties to the [c]ompany by perpetrating or knowingly ignoring the long-standing and systemic culture of discrimination and retaliation at Pinterest.” Pinterest allegedly payed unequal salaries to women and racial minorities while denying multiple women opportunities commensurate with their job titles and level of experience.
The Delaware Supreme Court will address the standard for pleading that an independent director has breached fiduciary duties in connection with a controlling shareholder buyout. The issue was certified for interlocutory appeal in a pair of recent Delaware Chancery Court cases. In re Cornerstone Therapeutics Stockholder Litigation, No. CIV.A. 8922-VCG (Del. Ch. Sept. 10, 2014) (Glasscock, V.C.); In re Zhongpin Stockholders Litigation, No. CV 7393-VCN (Del. Ch. Nov. 26, 2014) (Noble, V.C.).
In Cornerstone and Zhongpin, minority shareholders sued after the controlling shareholder of a publicly-traded company attempted a going-private transaction. In both cases, the board of directors formed a special committee of independent directors to negotiate with the controller; however, neither deal was conditioned, at the outset, on approval of a majority of the minority shareholders. In both cases, the corporate charter contained a provision enacted pursuant to Delaware General Corporation Law 102(b)(7), which exculpated directors from liability for breach of the duty of care.