All too often, derivative actions are filed on the heels of securities fraud class actions. These cases, which are purportedly brought on behalf of the company against its directors, pose a particular concern for board members.
Gibson Dunn has decades of experience representing companies and their directors and officers in defending, and taking control of, shareholder derivative actions.
Recent representations include:
- Representing one of the world's leading retailers and its current and former directors and officers in civil litigation filed across the United States by the company's shareholders relating to alleged corruption in Mexico. Shareholder derivative lawsuits were filed in the Delaware Chancery Court and the Western District of Arkansas, two cases were filed in Arkansas state court, and a shareholder securities class action was filed in the Middle District of Tennessee (subsequently transferred to the Western District of Arkansas). Accepting Gibson Dunn's arguments, the Western District of Arkansas stayed the six consolidated actions before it in light of the substantially similar shareholder derivative actions pending in the Delaware Chancery Court. This ruling followed a similar one from an Arkansas state court that granted Gibson Dunn's motion to stay a similar shareholder derivative action in that court. The Western District of Arkansas subsequently adopted Gibson Dunn's arguments in connection with a shareholder derivative action brought in Arkansas state court but removed to federal court, denying plaintiff's remand motion and granting our clients' motion to stay pending the related Delaware litigation. These combined rulings permit our clients to litigate the shareholder derivative claims exclusively in the Delaware courts. Parallel government investigations are being pursued by the SEC and the Department of Justice.
- Secured the voluntary dismissal in the Central District of California of a shareholder derivative suit against Conversant, Inc. (formerly known as ValueClick, Inc.), its directors and officers. The suit was prompted by the company's announcement of a major write-down of a note receivable taken in connection with the sale of its lead generation business unit as well as a significant drop in revenues and income from its media segment business. The complaint largely copied similar allegations in a securities class action filed against the company that also was voluntarily dismissed. Shortly after Gibson Dunn moved to dismiss the derivative action for failure to allege demand futility as required by Delaware law plaintiff's counsel voluntarily dismissed.
- Obtained dismissals in the Southern District of New York of two shareholder derivative actions and an ERISA action on behalf of JPMorgan's independent directors, in connection with the company's $6 billion "London Whale" trading losses. Plaintiffs in the principal derivative action alleged that making a litigation demand on the JP Morgan Board would have been futile; in a "demand made" action, the plaintiff claimed that the JPMorgan Board had wrongly refused to bring an action against those responsible for the company's CIO division losses. The court rejected plaintiffs' arguments, as it did also in the action alleging that the JPMorgan directors breached their fiduciary duties under ERISA by continuing to offer participants in the company's 401(k) plan an opportunity to invest in JPMorgan stock, and by providing them with inaccurate investment information. Gibson Dunn worked closely with counsel for JPMorgan in the defense of these lawsuits.
- Secured an unprecedented arbitration victory for Corvex Management and Related Fund Management arising from their campaign to remove the Board of Trustees of CommonWealth REIT due to the Trustees' gross mismanagement of the company. After a two- week hearing on the merits, a panel of arbitrators sided with Gibson Dunn and invalidated a series of by-laws unilaterally enacted by CommonWealth's Trustees to entrench themselves in office and prevent a shareholder vote on removal. To remedy the Trustees' actions, the arbitration panel adopted a streamlined procedure for CommonWealth shareholders to have a vote on the Trustees' removal. Corvex and Related then secured consents from holders of more than 80% of CommonWealth's shares, forcing the removal of all seven members of CommonWealth's board.
- Won dual victories on behalf of Leidos Holdings, Inc. (formerly SAIC, Inc.), in cases arising from SAIC's $500 million settlement and deferred prosecution agreement with the U.S. Department of Justice related to SAIC's involvement with CityTime, the New York City payroll system. In the wake of that resolution shareholders filed derivative suits and securities class actions in federal and state courts around the United States. We secured dismissal and subsequent Second Circuit affirmance of all derivative claims against the directors. In the Southern District of New York we then obtained dismissal of all remaining claims in the securities class actions, pertaining to allegations that Leidos failed to make proper FAS 5 disclosures. These dual rulings dismissed all remaining shareholder litigation against Leidos, and clarified the standards for pleading director liability under Delaware law, and for FAS 5 liability in 10(b) practice.
- Won dismissal from the Northern District of Texas of a creditor derivative lawsuit seeking over $725 million from Energy Future Competitive Holdings, Inc. (EFCH) and its directors. The decision acknowledged a significant difference between Texas and Delaware law on an issue of recurring importance to corporations and their directors. The plaintiffs were subsidiaries of Aurelius Capital Management, a hedge fund that had purchased bonds backed by an EFCH guarantee. Alleging that EFCH had failed to charge an adequate interest rate on loans to EFCH's parent company, Aurelius filed suit challenging the loans' terms, arguing that its status as an EFCH creditor gave it standing to sue derivatively because EFCH was insolvent at the time suit was filed. The court, dismissing for lack of standing, adopted Gibson Dunn's argument in its entirety: While the Texas Trust Fund Doctrine allows creditors to sue corporations and their directors for breach of fiduciary duty if the corporation both is insolvent and has ceased doing business, it was undisputed that EFCH had not ceased doing business. Acknowledging that Delaware follows a different rule and allows creditors to bring derivative suits whenever a corporation is insolvent, even if still operational, the court concluded that the Delaware rule was inconsistent with the pronouncements of Texas intermediate appellate courts on the issue.
- Secured dismissal with prejudice of all claims against the directors of Hewlett-Packard in a shareholder derivative suit arising out of the termination of former CEO Mark Hurd, and related claims of breach of fiduciary duty lodged against HP's board of directors. Plaintiff made demand on HP to bring claims against the directors for, among other things, violating their duty of oversight, making false statements in HP's annual proxy statements, and approving an improper severance deal for Mr. Hurd when he was forced to step down as CEO following a personal scandal. In response, HP conducted an internal investigation and concluded that the directors had not engaged in any wrongful conduct. Plaintiff sued, claiming that his demand was wrongfully refused, and that HP's independent committee, in-house and outside counsel had engaged in a "whitewash" investigation designed to exonerate the board and management. The court dismissed the plaintiff's original as well as amended complaints and denied further leave to amend.
- Successfully defended the independent directors of Diamond Foods in shareholder derivative litigation in the state and federal courts in California and Delaware. The cases arose out of Diamond's announcement of a major accounting restatement in 2012, and the commencement of an SEC investigation into the restatement issues. Gibson Dunn represented the audit committee in the company's internal investigation leading to the announcement of the restatement. Defendants successfully moved to dismiss both the federal and state court derivative actions, after which the derivative cases settled with no payment from our clients.
- Obtained a victory on behalf of the directors of Allergan, Inc. in the Supreme Court of Delaware in a derivative lawsuit brought by shareholders who had filed substantively identical actions against the directors in both California and Delaware. The Delaware court ultimately agreed with Gibson Dunn that the previous dismissal of the federal California action precluded further proceedings in Delaware, holding that under constitutional principles of full faith and credit, the preclusion law of California, not of Delaware, must be applied; and that under established California preclusion law, the dismissal of one shareholder derivative complaint precludes complaints by other shareholders on the same allegations and theories.
- Successfully settled a shareholder derivative action brought against Gibson Dunn clients, the former independent directors of Wachovia Corp, alleging inter alia that Wachovia issued billions of dollars of "toxic" mortgage loans during the housing bubble and that the board of directors breached its fiduciary duties and failed in its oversight obligations. Because Wachovia was acquired by Wells Fargo in 2009, plaintiffs asserted "double derivative" claims and alleged that Wells Fargo's board also breached its fiduciary duties. The settlement, which followed Gibson Dunn's motion to dismiss and has been approved by the court, includes certain corporate governance reforms to be adopted by Wells Fargo, but no monetary payment from our clients. The Northern District of California action is the last of several shareholder lawsuits in which Gibson Dunn acted as national monitoring counsel for the former directors of Wachovia, including class and derivative actions in New York, North Carolina, and Alabama, and a parallel SEC investigation. The SEC action concluded with no action taken against any of our clients.