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Shareholder Derivative Litigation Round-Up

May 30, 2017

Shareholder derivative actions are lawsuits that are brought by a shareholder of a public company on behalf of the company against its directors and/or officers. These types of lawsuits differ from class actions brought on behalf of investors with regards to procedural requirements, as well as the underlying objectives of the action.

For instance, in addition to recovery of monetary damages for wrongdoing, shareholder derivative lawsuits can also require the company to adopt improvements in its corporate governance policies in order to protect against similar harms in the future. 

Shareholder derivative litigation can be a powerful tool, as it allows shareholders to bring litigation that a board might be unwilling to pursue. The following are some current shareholder derivative litigation developments:  

Home Depot Settlement Provides Corporate Governance Framework for Data Security

Home Depot Inc. recently settled both a class action filed by financial institutions and a shareholder derivative action. The recent settlement in the shareholder derivative provided various corporate governance provisions focusing on reforming the company’s cybersecurity and its ability to prevent and respond to future cyberattacks. In the governance provisions, Home Depot and its board of directors agreed to: 

  • Document the duties of the newly hired Chief Information Security Officer
  • Conduct periodic tabletop cyber exercises to test the readiness of Home Depot’s response capabilities in the event of a breach or attack
  • Monitor and assess key compromise indicators in computer networks
  • Work with a “dark web mining service” to search for confidential Home Depot information
  • Maintain an executive level committee that will focus on data security for the company
  • Conduct periodic reporting regarding IT budget for cybersecurity measures
  • Maintain an incident response team and plan
  • Maintain membership in at least one information sharing program
  • Retain internal IT, data, and cybersecurity experts and consultants

The Home Depot shareholder derivative settlement agreement may offer a valuable framework for various companies with regards to data breach prevention and reporting. 

New Pennsylvania Law Addresses Shareholder Derivative Requirements

Pennsylvania’s Act 170 was signed into law in November 2016, and became effective for all Pennsylvania corporations at the beginning of April 2017. The Act contains various changes and clarifications for corporations. In particular, the Act addresses important points on initiating and conducting shareholder derivative lawsuits in the state. 

The new law: 

  • Requires shareholders to make a pre-suit demand on the corporation’s board of directors prior to filing a derivative action
  • Provides directions and guidelines for selection and composition of Special Litigation Committees (SLCs)
  • Imposes a security requirement on certain shareholder-plaintiffs
  • Codifies the standard of review that courts must apply in shareholder derivative lawsuits where an SLC is appointed and made a determination

In particular, the standard for judicial review under Act 170 is significantly different from the standard under Delaware corporate law. Delaware law requires a court to apply its own business judgement when evaluating a corporation’s decision to terminate shareholder derivative litigation. Under Pennsylvania law, the court must enforce the SLC’s determination regarding the shareholder demand if it finds that the statutory standards for SLC investigations are satisfied. 

The Act also sets forth specifics for LLCs on formation, governance, duties of members and managers, dissolution, and other issues.

Shareholder Derivative Suits Filed Against Wells Fargo & Co. 

A federal judge recently allowed a shareholder derivative suit to move forward against Wells Fargo & Co. and current and former members of its board of directors. U.S. District Judge Jon S. Tigar stated that the shareholder plaintiffs had provided sufficient evidence that Wells Fargo’s board was either negligent in not being aware of reports regarding the generation of thousands of fake Wells Fargo accounts, or ignored those reports. 

In related Wells Fargo news, a California state judge tentatively granted a demurrer in a different shareholder derivative suit against Wells Fargo. California Superior Court Judge Curtis Karnow said that the claims regarding breach of fiduciary duty, unjust enrichment, corporate waste, and other matters were not adequately pled in the complaint. The plaintiffs have been granted leave to amend their complaint in order to bolster the allegations against Wells Fargo’s board of directors.

In other news, two shareholders have filed a derivative suit against Elon Musk and other Tesla officials. They claim that the directors issued false and misleading financial statements that caused Tesla to overpay in their acquisition of SolarCity, which was described as having a “bleak future.” 

Shareholder derivative lawsuits can often be complex and nuanced. When reviewing a derivative claim, courts will often consider factors such as the size of a shareholder’s holdings and their level of sophistication, as well as the quality of the plaintiff’s pleading and the experience of their legal counsel. If you have any additional questions or inquiries regarding shareholder derivative actions, contact us today at Kessler Topaz or read more information in our Primer on Shareholder Litigation.