Securities & Derivative Litigation: Quarterly Update

In 2021, securities class actions declined compared to the year before, and were significantly less than the number of filings in the previous three years. According to statistics from the Stanford Law School Securities Class Action Clearinghouse, in 2021, there were 210 federal securities class actions filed, which is a 34% drop from the 319 filings in 2020, and a significant drop from the over 400 filings in 2017, 2018, and 2019. The 2021 filings were more in line with previous numbers pre-2017.¹ Despite this slower pace of filing, there were several notable developments in 2021 and the first few weeks of 2022.

In particular, a federal California court allowed a new variation in SEC insider trading enforcement cases to survive a motion to dismiss, the Seventh Circuit rejected the application of a federal forum selection clause in a Section 14(a) claim, and the Delaware Court of Chancery issued its first decision addressing fiduciary duties in a de-SPAC merger.

California Court Denies Motion to Dismiss based on SEC’s Novel Insider Trading Theory

In SEC v. Panuwat, Judge Orrick in the Northern District of California denied a motion to dismiss filed by Defendant Matthew Panuat. In Panuwat, the SEC alleged that Panuwat used confidential information that a company called Medivation was about to be acquired to buy stock options in another a biopharmaceuctical company called Incyte Corp., whose stock might be affected by the Medivation acquisition announcement. Panuwat was a senior director of business development; worked closely with investment bankers; and received confidential information about Medivation, including actual and/or potential acquisitions, through that work. After Medivation’s CEO sent executives at his company, including Panuwat, an email indicating that Pfizer, Inc. had expressed “overwhelming interest” in acquiring Medivation, Panuwat immediately purchased 578 Incite call option contracts. The SEC alleges that the announcement of the acquisition of Medivation not only increased the stock price of Medivation, but also of other companies in the same space such as Incite, and that Panuwat understood this relationship.

In his defense, Panuwat argued that the SEC has not shown that he possessed any confidential information about Incyte at the time he purchased the stock options. Instead, he argued that the SEC made a conclusory argument that because Panuwat had confidential information about Medivation, it was material to “other allegedly similar biopharmaceutical companies,” including Incyte. The Court rejected Panuwat’s argument. The Court held that the SEC had sufficiently pleaded that the information about the Medivation acquisition was nonpublic and material to Incyte, as the acquisition would make Incyte a more valuable acquisition target. The Court also held that the SEC adequately alleged that Panuwat breached his fiduciary duties to Mediviation by using the information to purchase stock in another publicly traded company.

Ultimately, the Court found that Section 10(b) casts a “wide net,” prohibiting insider trading of “any security” using “any manipulative or deceptive device.” Indeed, the Court found that the SEC sufficiently alleged that the information about Medivation’s acquisition was confidential, nonpublic and material to Incyte and that Panuwat breached his duty to Medivation by using the information about the acquisition to buy the Incyte stock options. The case will now proceed to discovery and trial if it is not resolved by the parties.

The Seventh Circuit Rejects Application of a Federal Forum Selection Clause

In Seafarers Pension Plan v. Bradway,² the Seventh Circuit recently refused to enforce a federal forum selection clause to bar a derivative Section 14(a) claim. Specifically, the Court held that “[b]ecause the federal Exchange Act gives federal courts exclusive jurisdiction over actions under it, applying the bylaw to this case would mean that plaintiff’s derivative Section 14(a) action may not be heard in any forum. That result would be contrary to Delaware corporation law, which respects the non-waiver provision in Section 29(a) of the federal Exchange Act.”

In Seafarers, a shareholder of Boeing brought a derivative claim under Section 14(a) of the Exchange Act after two crashes involving Boeing manufactured airliners, alleging that Boeing’s officers and directors made materially false and misleading public statements about the development and operation of the 737 MAX in Boeing’s proxy materials. Boeing moved to dismiss based on the doctrine of forum non conveniens, invoking its forum-selection bylaw that provides in relevant part that the Delaware Court of Chancery would be “the sole and exclusive forum for . . . any derivative action or proceeding brought on behalf of the Corporation. . . . ” The district court upheld the bylaw and dismissed the suit. The Seventh Circuit, however, reversed and remanded noting that the Securities Exchange Act of 1934 gives federal courts exclusive jurisdiction over actions under it. Accordingly, applying the federal forum selection bylaw in this action would mean that the Section 14(a) action could not be heard in any forum. In reaching its decision, the Court noted that the Delaware court in Boilermakers Fund “provided important guidance for this case” because it specifically addressed a similar hypothetical: if a board took the position that a bylaw “waived the stockholder’s rights under the Securities Exchange Act, such a waiver would be inconsistent with the antiwaiver provisions of that Act.” The Seventh Circuit concluded, therefore, that “Delaware law would not look kindly on defendants’ effort to apply the Bowing bylaw here.” Boeing also argued that the bylaw should be upheld under the U.S. Supreme Court case, M/S Breman v. Zapata Off-Shore Co., and the Seventh Circuit case, Bonny v. Society of Lloyd’s, but the Seventh Circuit found those cases distinguishable because Breman involved a private contractual dispute, not a claim arising from a federal statute, and in Bonny, plaintiffs could still pursue a claim under English law. In dissent, Judge Easterbrook challenged the conclusion that enforcing the bylaw would completely eliminate plaintiffs’ claims and noted that there is no statutory right to bring a derivative claim alleging violation of Section 14(a).

Time will tell whether Boeing will seek a rehearing en banc, or a petition for certiorari to the U.S. Supreme Court. For now, future plaintiffs may seek to file Section 14(a) derivative claims within the Seventh Circuit.

Delaware Court of Chancery Issues First Decision Addressing Directors’ Fiduciary Duties in a De-SPAC Merger

As explained in Dechert’s OnPoint earlier this year, the Delaware Court of Chancery also addressed for the first time fundamental precepts of Delaware law in the context of a special purpose acquisition company (“SPAC”) on January 3, 2021. In In re MultiPlan Corp. Stockholders Litigation,⁴ Vice Chancellor Lori Will ruled on the disclosure obligations of the board of directors of a SPAC in connection with the decision of the SPAC’s public stockholders whether to redeem their shares before the closing of a merger between the SPAC and a private company target—i.e., a “de-SPAC merger.” In ruling on these claims, the Vice Chancellor also offered important insights on the potential conflicts between a SPAC’s sponsoring stockholder and management team, on the one hand, and the public stockholders, on the other.

While the MultiPlan decision represents an important foray by the Delaware courts into the distinct issues presented by SPACs, it remains unclear whether the Delaware courts will apply entire fairness review to every de-SPAC merger in which the Sponsor has the benefit of a promote, or if courts will entertain arguments by defendants that entire fairness review is not appropriate in every de-SPAC transaction. Consideration should be given to steps that could be taken to qualify a de-SPAC transaction to be reviewed under the business judgment rule. Open questions left by the decision indicate that Delaware courts will have more to say at a later date. Given that we expect securities and derivative actions arising from de-SPAC transactions to continue to increase in 2022, courts should have plenty of opportunities to address these types of actions.

Footnotes

1. As in years past, targeted companies included life sciences and non-U.S. issuers, which Dechert will publish annual reports this quarter.
2. Seafarers Pension Plan v. Bradway, et al., No. 20-2244, 2022 WL 70841 (7th Cir. Jan. 7, 2022).
3. C.A. No. 2021-0300-LWW, 2022 WL 24060 (Del. Ch. Jan. 3, 2022).