Like the year before, 2018 was marked by a continued increase in the number of derivative suits filed by shareholders, as compared to previous years. Additionally, this field was marked by a plethora of issues including failure to maintain opioid-related safeguards, the protective power of forum selection clauses and a growing number of cases filed in the wake of the #MeToo movement.
- Filing and Settlements1: In the first three quarters of 2018, 312 federal securities class actions were filed. This trend is likely reflective of the second year of more than 400 filings, substantially outpacing the average number of cases filed between 2012 and 2016. More than doubling each year from 2015 to 2017, “merger objection” cases remain a driving force in cases, but appear to be slowing down. Like 2017, standard filings against firms in the health care sector dominated filings. The 2017 trend of fewer settlements as compared to dismissed cases is also likely to continue. Excluding a $3 billion settlement of the Brazilian owned energy company, Petroleo Brasileiro S.A., the average settlement increased to $26 million, but remained near record lows; however, the median case settled for $13 million, the highest rate in at least a decade.
- Opioid-Related Derivative Suits: A decision in the Northern District of California will make directors of a healthcare company face an investor lawsuit accusing them of failing to honor promises to ensure internal systems for spotting suspicious opioid shipments functioned properly.2 The court denied a defendant company’s motion to dismiss based on the plaintiffs not first presenting a pre-suit demand to the board of directors, holding that the plaintiffs had sufficiently alleged a substantial likelihood that director oversight liability based on conscious failure to oversee the alleged promises.
- Forum Selection Clauses: More frequently, corporations are including provisions in governing documents dictating where breach of fiduciary duty and/or derivative claims must be brought. In October, a Delaware Court of Chancery, in dismissing the plaintiff’s claim, wrote, ”[i]gnoring a Delaware forum selection clause in the bylaws of the Delaware company whose interest he purports to represent, the plaintiff in this stockholder derivative action has adopted an ill-fated ‘anywhere but Delaware’ litigation strategy.”3 The plaintiff had previously filed complaints in both Washington and California. Both states dismissed the action with prejudice.
- Derivative suits and the #MeToo Movement: The past year has been characterized by a growing number of shareholder derivative suits filed in response to a board’s handling of sexual harassment allegations by claiming that directors or other executives breach their fiduciary duties (duties of care/loyalty/good faith). Companies currently facing derivative suits include Weinstein Co., CBS, Nike, Twenty-First Century Fox, Wynn Resorts and, most recently, Alphabet Inc., parent company of Google.4 In response, many companies are revisiting how they address and investigate allegations of sexual misconduct, how to respond when news of potential misconduct becomes public and preparing for the reactions of shareholders.
Beyond this short summary of highlights, shareholder derivative suits continue to present ongoing issues for corporations and require evaluation of existing response protocols to ensure both successful prevention and effective reaction. For more information regarding your corporation’s current policies or to discuss a pending action, please contact Peter French or Tristan Fretwell.
2Available here; see also In re McKesson Corp. Derivative Litig., No. 17-CV-01850-CW, 2018 WL 2197548, at *1 (N.D. Cal. May 14, 2018).
3Tilden v. Cunningham, No. C.A. 2017-0837-JRS, 2018 WL 5307706, at *1 (Del Ch. Oct. 26, 2018).