Securities Law Alert
In This Edition:• Supreme Court: Hears Oral Argument on Whether the SEC May Seek and Obtain Disgorgement in
Civil Enforcement Proceedings• Supreme Court: “Actual Knowledge” Requirement for the Three-Year Statute of Limitations for ERISA
Breach of Fiduciary Duty Claims Is Not Satisfied Merely by the Plaintiff’s Receipt of the Relevant
Disclosures• Tenth Circuit: Affirms the Dismissal of a Securities Fraud Action for Failure to Allege That Any
Individual Defendant or the Corporation Itself Acted with Scienter• Southern District of New York: Plaintiffs Cannot Satisfy the PSLRA’s Pleading Requirements With
Uncorroborated Allegations Attributed to Anonymous Sources Referenced in Short-Seller Reports• Southern District of New York: Dismisses Securities Fraud Complaint That Mischaracterized
Defendants’ Opinions and Emphasizes That Companies Have No Duty to Disclose All Facts Cutting
Against Statements of Opinions• Central District of California: Plaintiffs Adequately Alleged That (1) Purchases of Unsponsored ADRs
Constituted “Domestic Transactions,” and (2) the Foreign Issuer’s Alleged Fraud Was “in Connection
With” Those Transactions• Delaware Supreme Court: Federal Forum Selection Provisions for Securities Act Claims Are
Facially Valid• Delaware Chancery Court: MFW’s Procedural Safeguards Were Not Satisfied Where a Majority of theSpecial Committee Members Allegedly Had a Material Self-Interest in the Transaction• Delaware Chancery Court: Involvement of a Special Committee Can Cleanse a Transaction Approvedby a Conflicted Board Only If the Special Committee Is Engaged Before the Commencement of
Substantive Economic Negotiations• Delaware Chancery Court: Allegations That Directors Made Misrepresentations Concerning FDA
Approval Prospects Were Insufficient to Plead Demand Futility Absent Plausible Allegations of
ScienterFebruary/March 2020
Simpson Thacher & Bartlett LLPSupreme Court: Hears Oral
Argument on Whether the
SEC May Seek and Obtain
Disgorgement in Civil
Enforcement Proceedings
On March 3, 2020, the Supreme Court heard
oral arguments in Liu v. SEC, No. 18-1501. At
issue is whether existing legislation authorizes
the SEC to seek disgorgement of profits as“equitable relief” in district court proceedings
to enforce the Securities Act of 1933 and the
Securities Exchange Act of 1934.

Background

Simpson Thacher “hasa very experienced andknowledgeable
team for securities classaction defense.”–The Legal 500

In the case before the Court, defendantspetitioners (“Petitioners”) raised approximately$27 million for a project, but misappropriatedthe bulk of the investment. The district
court imposed penalties of $8 million (theamount of the salaries defendants received)and ordered disgorgement of the remaining$19 million defendants took from investors.
The district court declined to offset thedisgorgement amount by Petitioners’
legitimate business expenses (approximately$4.5 million). The Ninth Circuit affirmed the
district court’s decision.
The SEC often seeks disgorgement incases where it believes defendants havedefrauded or deliberately deceived investors.
In 2019, the SEC obtained $3.2 billion indisgorgement, compared with $1.1 billion
in civil penalties; the SEC returned 37% ofdisgorged profits to harmed investors, withthe remainder of disgorged funds dispensed
to the U.S. Treasury.
Congress has authorized the SEC to seek
disgorgement in its own administrative
proceedings, see 15 U.S.C. § 78u-2(e), but has
not expressly authorized disgorgement when
the SEC seeks such relief in federal court.

Instead, Congress has authorized the SEC
to seek a range of remedies in district court
proceedings, including “any equitable relief
that may be appropriate or necessary for the
benefit of investors.” 15 U.S.C. § 78(u)(d)(5).
The Court recently held in Kokesh v. SEC,
137 S. Ct. 1635 (2017), that disgorgementof profits is a penalty, and not an equitable
remedy, for purposes of the statute oflimitations set forth in 28 U.S.C. § 2462.1
The unanimous Kokesh Court did not reachthe question of whether the SEC can seek
disgorgement in district court proceedings.

Several Justices Express Concern
Regarding the Punitive Nature of
the Disgorgement Sought by the
SEC in the Case Before It
During oral argument, the Justices focusedon the seemingly punitive nature of thedisgorgement the SEC sought in the casebefore it. The Justices asked whether
disgorged funds should be returned toinvestors and appeared concerned that
here, the SEC sought to disgorge all of theinvestments Petitioners raised, not justtheir profits.
Justice Alito asked Petitioners’ counsel if theremedy would be equitable if it were limited
to net profits instead of the entire amount
Petitioners took in from investors. Petitioners’
counsel responded that a similar remedy
in equity would be based on profits, butthat such a remedy would normally only beavailable for breaches of fiduciary duty, which
the SEC did not plead or prove in this case.
When Justice Kavanaugh followed up on therelevance of the disgorgement’s calculation
as revenues or profits, Petitioners’ counsel
noted that there is not even agreement among
the circuit courts as to what disgorgement
is and how it should be calculated andurged that Congress, not the Court, should
be responsible for crafting the scope ofdisgorgement and determining how it should
be calculated.
Justice Kavanaugh asked if the analysis would
be different if disgorged funds were dispersed
to investors (instead of the Treasury).
Petitioners’ counsel acknowledged that thiswould address one of the main inconsistencies
between the disgorgement obtained by the
SEC and traditional equitable remedies.
1. Please click here to read our discussion of the Supreme Court’s
decision in Kokesh.
2Nonetheless, Petitioner’s counsel insisted
that the disgorgement sought by the SEC“was clearly a penalty and clearly inconsistent
with Kokesh.” Justice Ginsburg observed thatthe context of Kokesh, which concerned thestatute of limitations set forth in 28 U.S.C.
§ 2462, was vastly different from the equitable
remedy question at issue in Liu. She noted
the equitable principle that wrongdoers
should not profit from their wrongs. Counsel
for the SEC downplayed the significance ofKokesh and instead pointed the Court toKansas v. Nebraska, 135 S. Ct. 1042 (2015),
a case where disgorgement was ordered as anequitable remedy.

Justices Sotomayor and Gorsuch asked how
the SEC decides whether to return money
to investors or distribute it to the Treasury.
Counsel for the SEC explained that while the
SEC attempts to return disgorged funds toinvestors, there are some cases, such as thosearising under the Foreign Corrupt Practices
Act, in which there may not be an individual
victim who should receive the disgorgement
proceeds. Justice Kavanaugh questioned
whether the Supreme Court should announce
a rule on how disgorgement is calculated orleave it to district courts to decide.
Justice Ginsburg probed the SEC’s position
that administrative proceedings (in which
the SEC is statutorily authorized to seek
disgorgement) are an inadequate substitutefor district court proceedings. She notedthat the SEC could take an administrative
order to a district court for enforcement
if needed. Counsel for the SEC responded
that the SEC often proceeds in district court
when it has doubts about a defendant’s
compliance, allowing for a more streamlined
enforcement action.
The Supreme Court will rule on Liu v. SEC
later this Term.

Supreme Court: “Actual
Knowledge” Requirement
for the Three-Year Statute ofLimitations for ERISA Breachof Fiduciary Duty Claims
Is Not Satisfied Merely by
the Plaintiff’s Receipt of theRelevant Disclosures
ERISA breach of fiduciary duty claims are
subject to a six-year statute of limitations
unless the plaintiff “had actual knowledgeof the breach or violation,” in which case athree-year statute of limitations applies. 29
U.S.C. § 1113(2). On February 26, 2020, theSupreme Court held that an ERISA plaintiff
does not necessarily have “actual knowledge”
of information contained in disclosures that
he received but did not read or recall reading.
Intel Corp. Inv. Policy Comm. v. Sulyma,
2020 WL 908881 (2020) (Alito, J.). The
Court found that in order to satisfy Section
1113(2)’s “actual knowledge” requirement,“the plaintiff must in fact have become awareof that information.”

BackgroundIn the case before the Court, plaintiff
alleged that an investment plan committee
and other plan administrators “breachedtheir fiduciary duties by overinvesting inalternative assets.” Plaintiff brought suit“within six years of the alleged breaches,” but“more than three years after [defendants] haddisclosed their investment decisions to him.”
Plaintiff “testified in his deposition that hedid not ‘remember reviewing’” the relevant
disclosures.
The district court granted summary judgment
to defendants because plaintiff failed to bringsuit within three years of the receipt of thedisclosures. The district court reasoned that“[i]t would be improper to allow [plaintiff’s]
claims to survive merely because he did
not look further into the disclosures madeto him.” 2017 WL 1217185 (N.D. Cal. Mar.
31, 2017). The Ninth Circuit reversed the
district court’s decision. 909 F.3d 1069
(9th Cir. 2018). The court held that Section
1113(2)’s “actual knowledge” requirement
demands “knowledge that is actual, notmerely a possible inference from ambiguous
circumstances.” The Ninth Circuit’s
3interpretation was in accord with prior rulings
from the Second, Third, Fifth, Seventh andEleventh Circuits. Only the Sixth Circuit has
held that “[a]ctual knowledge does not require
proof that the individual [p]laintiffs actually
saw or read the documents that disclosed
the allegedly harmful investments.” Brown
v. Owens Corning Inv. Review Comm., 622
F.3d 564 (6th Cir. 2010).
Defendants petitioned the Court for certiorari
to consider whether Section 1113(2) “barssuit where all of the relevant information wasdisclosed to the plaintiff by the defendants
more than three years before the plaintiff
filed the complaint, but the plaintiff chose notto read or could not recall having read theinformation.” The Court granted the petition
on June 10, 2019.

Court Interprets the Phrase “Actual
Knowledge” to Require Awarenessof the Relevant Information
In a unanimous decision authored by JusticeAlito, the Court held that Section 1113(2)’s“actual knowledge” requirement demands“more than evidence of disclosure alone.”
The Court determined that “§ 1113(2) begins
only when a plaintiff actually is aware of therelevant facts, not when he should be” basedon the receipt of the relevant disclosures. The
Court explained that “a given plaintiff will
not necessarily be aware of all facts disclosed
to him; even a reasonably diligent plaintiff
would not know those facts immediately uponreceiving the disclosure.”

provision limiting ERISA actions, it hasdone so explicitly.” The Court explainedthat it could not “assume that [Congress]
meant to do so by implication in § 1113(2),”particularly since the 1987 Congress repealed
the constructive knowledge clause includedin the original version of Section 1113(2).
The Court determined that “Section 1113(2)’shistory thus more readily suggests thatthe current version does in fact require
actual knowledge.”

Court Leaves Open the Possibility
That Defendants Can Show
“Actual Knowledge” ThroughWillful Blindness
The Court clarified that “[n]othing in[its] opinion forecloses any of the usual
ways to prove actual knowledge at any stage
in the litigation.” The Court explained thatin addition to relying on direct evidence,
defendants may prove “actual knowledge”“through inference from circumstantial
evidence.” The Court noted that “[e]videnceof disclosure would no doubt be relevant,as would electronic records showing thata plaintiff viewed the relevant disclosuresand evidence suggesting that the plaintiff
took action in response to the information
contained in them.” Significantly, the Court
stated that its “opinion also does not preclude
defendants from contending that evidence of‘willful blindness’ supports a finding of ‘actual
knowledge.’”

The Court rested its decision on the plain
meaning of the phrase “actual knowledge.”
The Court found that the phrase “actual
knowledge” refers to “[r]eal knowledge as
distinguished from presumed knowledge
or knowledge imputed to one.” The Court
explained that in order “to have ‘actual
knowledge’ of a piece of information, onemust in fact be aware of it.” The Court foundthat “if a plaintiff is not aware of a fact, hedoes not have ‘actual knowledge’ of that fact
however close at hand the fact might be.”In interpreting Section 1113(2), the Court
found it significant that “Congress hasrepeatedly drawn a linguistic distinction
between what an ERISA plaintiff actuallyknows and what he should actually know.”
The Court noted that “when Congress has
included both forms of knowledge in a4

Tenth Circuit: Affirms theDismissal of a Securities
Fraud Action for Failure toAllege That Any Individual
Defendant or the Corporation
Itself Acted with Scienter
On February 25, 2020, the Tenth Circuit
affirmed the dismissal of a securities fraud
action alleging misstatements concerninga money transfer company’s anti-money
laundering (“AML”) and anti-fraud
compliance systems. Smallen v. The Western
Union Co., 2020 WL 893826 (10th Cir. 2020)(Baldock, C.J.). The Tenth Circuit recognizedthat “the complaint may give rise to someplausible inference of culpability on the partof [d]efendants,” but determined that plaintiff
did not plead particularized facts raising astrong inference of scienter as to any of theindividual defendants. The court further
found that that plaintiff did not plead thatthe corporation itself acted with scienter.
Addressing a question of first impression,
the court held that for purposes of pleading a
corporation’s scienter with respect to alleged
misstatements, the knowledge of nondefendant corporate agents who played norole in those statements cannot be imputed tothe corporation.

Plaintiffs Failed to Plead Scienter as
to Any of the Individual Defendants
The Tenth Circuit rejected plaintiff’s
contention that the individual defendants“must have known the company’s complianceprograms were ineffective” because thecompany received complaints regarding
hundreds of millions of dollars in fraudulent
transactions. The court explained that thetransactions at issue represented less than
1% of the total dollars transferred by thecompany and therefore did not impact “anoverwhelming percentage of the company’sbusiness.”
The Tenth Circuit also declined to infer
the individual defendants’ scienter basedon “materials from [the company’s] board
and committee meetings, which theindividual defendants allegedly attended.”
The court explained that “mere attendanceat meetings does not contribute to an
inference of scienter.” The Tenth Circuit
further determined that it could not infer

the individual defendants’ scienter based onreports and records concerning complianceissues that were produced to government
investigators. The court explained that there
were no “particularized allegations showing
the [i]ndividual [d]efendants themselves dealt
with the government regulators, reviewed
the underlying documents submitted aspart of the investigations, or were otherwise
informed legal noncompliance existed within
the company during the [c]lass [p]eriod.”
While the court found plaintiffs’ theory ofscienter “strongest against” the company’sCEO, who was allegedly “regularly briefed”
on compliance issues, the court concluded
that it could not “infer scienter based only
a defendant’s position in a company or
involvement with a particular project.”
The Tenth Circuit also held that findings ina joint settlement agreement with federal
regulators and admissions in a deferred
prosecution agreement did not demonstratethat the individual defendants knew ofcompliance violations. The court foundplaintiff’s reliance on these documents
was “simply another variation of fraud
by hindsight” because “neither document
provide[d] particularized facts tying the[i]ndividual [d]efendants to these violations
or otherwise showing they were aware ofongoing illegality and widespread disciplinary
failures during the [c]lass [p]eriod.” The
Tenth Circuit also found that plaintiffs could
not demonstrate a motive to defraud based on
the individual defendants’ stock sales, as twoof the defendants “increased their aggregate
holdings” while one of the defendants sold nocompany stock during the class period.

The Scienter of Non-Defendant
Corporate Agents Who Played No
Role in the Alleged Misstatements
Cannot Be Attributed to
the Corporation
The Tenth Circuit acknowledged that“[a]lthough [p]laintiff fail[ed] to adequately
plead scienter for any of the [i]ndividual[d]efendants, the complaint could, intheory, still give rise to a strong inference[that the company] acted with the requisitestate of mind.” The court explained that“[c]orporations, of course, do not have thetheir own state of mind. Rather, the scienterof a corporation’s agents must be imputed
to it.”

5

The court noted that “[t]he appropriate
standard for evaluating whether a nondefendant corporate agent’s state of mind canbe imputed to a corporate defendant underthe [Private Securities Litigation Reform Act(“PSLRA”)] appears to be an open question”
in the Tenth Circuit. The court held that“[b]ecause the allegations here concern
allegedly fraudulent public statements,”
it would “look to the state of mind of theindividual corporate official or officials whomake or issue the statement (or order orapprove it or its making or issuance, or who
furnish information or language for inclusion
therein, or the like).”

The court expressly rejected plaintiffs’
argument that “the scienter of any [company]
agent, including lower-level corporate officers
who played no role in the misstatement, canbe imputed to the company for purposesof liability under the PSLRA.” The court
explained that “[i]f the scienter of any agent is
imputable to a corporation, ‘then it is possiblethat a company could be liable for a statement
made [] so long as a low-level employee,
perhaps in another country, knew something
to the contrary.’” The court found that “[s]ucha result runs afoul of the PSLRA’s heightened
standard for pleading scienter.”
The court determined that plaintiff’s
allegations did not “give rise to a strong
inference of scienter as to any identifiable[corporate] officer,” and further held that thecompany was not “subject to § 10(b) liability
under the doctrine of ‘corporate scienter,’”which “allows a plaintiff to plead scienter
against a corporate defendant without doing
so for a particular individual.” The court
noted that the Tenth Circuit has “neither
accepted nor rejected this theory of corporate
scienter,” but found that it need not resolve
the question as “the facts pleaded are a farcry” from the frequently-cited hypotheticalsituation “as to when the doctrine would
apply”: the example of a car company thatclaimed to have sold millions of vehicles but
in fact sold none.

Southern District of New
York: Plaintiffs Cannot
Satisfy the PSLRA’s Pleading
Requirements With
Uncorroborated Allegations
Attributed to Anonymous
Sources Referenced in ShortSeller Reports
On March 2, 2020, the Southern Districtof New York dismissed a securities fraud
action that relied on allegations attributed
to anonymous sources referenced in a shortseller report. Miao v. Fanhua, 2020 WL
996602 (S.D.N.Y. 2020) (Engelmayer, J.).
The court explained that “[w]hen properly
utilized and suitably corroborated or
particularized, factual representations
by [confidential witnesses] and in shortseller reports may enable a securities fraud
complaint to clear the bar set by the PSLRA.”
The court found the complaint did not meetthis standard, as it “relie[d] exclusively on
general statements” that were “credited toanonymous interviewees in a secondhand
short-seller report” and were “uncorroborated
by an independent investigation by counsel.”
The court recognized that “[s]hort sellers
operate by speculating that the price of asecurity will decrease” and thus “have an
obvious motive to exaggerate the infirmitiesof the securities in which they speculate.” Id.
Notwithstanding this potential bias, the court
held that a complaint’s reliance on a shortseller report does not necessarily requiredismissal. The court found “[t]he developing
body of case law involving factual attributions
to short-seller reports to satisfy pleading
requirements in a securities fraud complaint
instead reflects the need for similar caution
and care as with respect to attributions to[confidential witnesses].”
The court observed that the case law indicates“a particular need for close scrutiny where ashort-seller report relied upon by a securities
plaintiff itself relies on ‘confidential’ oranonymous sources, without corroboration.”
6

The court explained that in such cases,“the risk of motivated reporting by theauthor of the short-seller report is twinned
with the reliability concerns presented byanonymous sourcing.” Conversely, “where
courts have found that well-pled independentand particularized facts corroborate
those attributed to anonymous sources inshort-seller reports, courts have sustainedsuch complaints.”
In the case before it, the court found thecomplaint did “no more than recapitulate
the [short-seller report’s] characterizationof purported interviews with anonymous
sources” and did “not allege any independent
corroborative facts, any independent
investigation by counsel, or any contact byplaintiff’s counsel with the interviewees.” Thecourt found it “concerning” that the complaint
reproduced “significant factual errors”
contained in the short-seller report that “[a]nalert reader of [the company’s SEC filings]
would have caught.” The court found thesefactual errors “raise[d] doubt as to whether
the other factual representations in the same
short-seller’s report . . . can be credited
as a reliable basis to establish the factual
falsity of [the company’s] representations to
the market.”
The court held the complaint failed tostate a claim with respect to the alleged
misstatements for which the anonymous
sources referenced in the short-seller reportwere cited. The court gave plaintiff theopportunity to replead these allegations,reasoning that “an independent investigation
could [potentially] substantiate [plaintiff’s]
theory that . . . an actionable fraud occurred.”Southern District of New
York: Dismisses Securities
Fraud Complaint That
Mischaracterized Defendants’Opinions and Emphasizes
That Companies Have No
Duty to Disclose All Facts
Cutting Against Statements ofOpinionOn February 27, 2020, the Southern Districtof New York dismissed a securities fraud
action alleging that a mining company
misleadingly expressed continued confidence
in its plan for developing and operatinga mine (the “mine plan”), while failing todisclose that the quantity of unusable “waste
rock” excavated at the mine was higher than
expected. In re Pretium Resources Sec.
Litig., 2020 WL 953609 (S.D.N.Y. 2020)(Preska, J.). The court found that contrary
to “[p]laintiffs’ mischaracterizations, [thecompany’s] statements were not affirmationsof categorical confidence in all aspects of themine plan or of specific confidence in theplan’s waste rock projections.”
The court held that the statements at issue
were opinions. The court explained that inorder to allege that a statement of opinion
was misleading by omission under the test
set forth in Omnicare v. Laborers District
Council Construction Industry Pension
Fund, 575 U.S. 175 (2015), “the plaintiff must
identify particular (and material) facts goingto the basis for the speaker’s opinion whose
omission makes the opinion statement . . .
misleading to a reasonable person reading thestatement fairly and in context.”2 The court
underscored that “a reasonable investor does
not expect that every fact known to a speakersupports its opinion.” The court noted that“[a]n opinion therefore is not necessarily
misleading when a speaker knows, but fails todisclose, some fact cutting the other way.”
The court determined that “[d]efendants’disclosures about the mine plan could nothave been fairly construed by reasonable
investors as expressing confidence in theplan’s waste rock projections or the plan asa whole.” The court held that “[d]efendants’failure to disclose the waste rock excavation
2. Please click here to read our discussion of the Supreme Court’s
decision in Omnicare.
7numbers therefore did not render thestatements misleading.” The court further
found that even if the company’s “statements
could be interpreted as broad expressionsof confidence in the mine plan’s viability,[d]efendants’ failure to disclose the waste
rock figures would still not be actionable.”
The court explained that “[s]ecurities fraud
plaintiffs must do more than show that the
speaker knew or had access to countervailinginformation; they must show that the
speaker’s opinion did not fairly align withall the information that was then available.”
The court held that plaintiffs did “not satisfy
that standard.” To the extent that “increased
tunneling and waste rock excavation weighedagainst a cheerful view of the mine plan’soverall viability,” the court found plaintiffs
had “not plausibly alleged that [this] pushed
the scale’s needle so far as to render
continued faith in the plan unreasonable.”
The court also found plaintiffs failed to allege
scienter because the waste rock data waspublicly available in the company’s reports to
Canadian regulators. The court held that the
public accessibility of this data “kick[ed] thelegs out from any inference of scienter.”

Central District of California:
Plaintiffs Adequately
Alleged That (1) Purchasesof Unsponsored ADRs
Constituted “Domestic
Transactions,” and (2) the
Foreign Issuer’s Alleged Fraud
Was “in Connection With”
Those ADR Transactions
On January 28, 2020, the Central Districtof California declined to dismiss a securities
fraud action arising out of purchases of
unsponsored American Depositary Receipts
and Shares (ADRs) on over-the-countermarkets.3 Stoyas v. Toshiba Corp., 2020 WL
466629 (C.D. Cal. 2020) (Pregerson, J.). The
court held plaintiffs adequately alleged thatthe purchases were “domestic transactions”
for purposes of the test set forth in Morrison
3. “An ADR is a receipt that is issued by a depositary bankthat represents a specified amount of a foreign security thathas been deposited with a foreign branch or agent of thedepositary, known as the custodian.” Stoyas v. Toshiba Corp.,
191 F. Supp. 3d 1080 (C.D. Cal. 2016).

v. National Australia Bank, 561 U.S. 247(2010), and that alleged misstatements by
the foreign issuer of the underlying securities
were made “in connection with” those ADR
transactions.4

Background
The Central District of California had
previously held that Section 10(b) does
not reach securities fraud transactions in
unsponsored ADRs. Stoyas v. Toshiba Corp.,
191 F. Supp. 3d 1080 (C.D. Cal. 2016). Basedon this determination, the court granted
defendants’ motion to dismiss and denied
plaintiffs leave to amend.
On July 17, 2018, the Ninth Circuit reversed
the Central District of California’s decision.
Stoyas v. Toshiba Corp., 896 F.3d 933(9th Cir. 2018). The Ninth Circuit held that
Morrison does not preclude Section 10(b)claims in connection with unsponsored ADRs,
provided that the ADRs were purchased orsold in a “domestic transaction.”5 The Ninth
Circuit reasoned that Morrison instructs
courts “to examine the location of thetransaction[;] it does not matter that a foreign
entity was not engaged in the transaction.”
The Ninth Circuit adopted the test set forth
in Absolute Activist Value Master Fundv. Ficeto, 677 F.3d 60 (2d Cir. 2012), fordetermining whether the securities werepurchased or sold in a “domestic transaction.”
To plead a “domestic transaction” under theAbsolute Activist test, “a plaintiff must allege
facts suggesting that irrevocable liability was
incurred or title was transferred within the
United States.” Absolute Activist, 677 F.3d
60.6
The Ninth Circuit agreed with the district
court that plaintiffs failed to allege theexistence of a “domestic transaction.” The
Ninth Circuit further found that plaintiffs
failed to plead that the foreign issuer’s alleged
fraud was “in connection with” a “domestictransaction.” The court explained that inorder “for fraud to be in connection with thepurchase or sale of any security, it must touch
the sale—i.e., it must be done to induce the
4. In Morrison, the Supreme Court held that Section 10(b)applies only to (1) “transactions in securities listed on
domestic exchanges,” and (2) “domestic transactions in othersecurities.” 561 U.S. 247.
5. Please click here to read our discussion of the Ninth Circuit’s
decision in Stoyas.
6. Please click here to read our discussion of the Second Circuit’s
decision in Absolute Activist.
8

purchase at issue.” The court suggested thatplaintiffs may need to allege facts concerning
the foreign issuer’s involvement in the ADRs
to satisfy this requirement.
The Ninth Circuit reversed the district
court’s decision and remanded to permit
the plaintiffs an opportunity to amend theircomplaint. After plaintiffs amended theircomplaint, defendants again moved todismiss.

Central District of California Finds
Plaintiffs Adequately Alleged
a “Domestic Transaction” andSatisfied the “in Connection
with” Requirement
The Central District of California held thatthe amended complaint adequately allegedthat plaintiffs incurred irrevocable liability for
the ADRs in the United States by pleading,inter alia, that the buy order, purchase pricepayment, and transfer of title took placein the United States. The court therefore
determined that plaintiffs adequately alleged
a “domestic transaction” for Morrison
purposes. The court rejected defendants’contention that “[p]laintiffs purchased theunderlying securities in a foreign transaction
before converting the foreign stock into
ADRs” because there were no allegations ofa two-step transaction. Rather, “[p]laintiffs
allege[d] that a single transaction occurred”—
the purchase of ADRs on an over-the-countermarket in the United States.
The court also found that plaintiffs“sufficiently alleged [the foreign issuer’s]plausible participation in the establishmentof the ADR program.” Plaintiffs alleged that
one of the banks that offered the unsponsored
ADRs was among the foreign issuer’s tenlargest shareholders and further alleged that it
was unlikely the bank could have acquired somany shares “without the consent, assistanceor participation of” the foreign issuer. The
court held these allegations satisfied the “inconnection with” requirement.

Delaware Supreme Court:
Federal Forum Selection
Provisions for Securities Act
Claims Are Facially ValidOn March 18, 2020, the Delaware Supreme
Court held that forum selection provisions incertificates of incorporation requiring actions
arising under the Securities Act of 1933 (the“Securities Act”) to be filed in federal court
are facially valid under Section 102(b)(1)of the Delaware General Corporation Law(“DGCL”).7 Salzberg v. Sciabacucchi,
2020 WL 1280785 (Del. 2020) (Valihura,J.). The court recognized that federal
forum provisions (“FFPs”) “can provide
a corporation with certain efficiencies inmanaging the procedural aspects of securities
litigation following the United States Supreme
Court’s decision in Cyan, Inc. v. Beaver
County Employees Retirement Fund,” 138 S.
Ct. 1061 (2018), which held that state courts
have concurrent jurisdiction over actions
asserting Securities Act claims.8

Background
The Delaware Supreme Court reversed a
Chancery Court decision holding that FFPs
are “ineffective and invalid.” Sciabacucchi v.
Salzberg, 2018 WL 6719718 (Del. Ch. Dec. 19,2018).9 The Chancery Court based its decision
on Boilermakers Local 154 Ret. Fund v.
Chevron Corp., 73 A.3d 934 (Del. Ch. 2013),
which held that companies may adopt forum
selection bylaws requiring “internal affairs”
litigation to be brought in Delaware Chancery
Court.10 The Boilermakers court indicatedthat it would have reached a different
conclusion if the forum selection bylaws at
issue “regulat[ed] external matters” by, for
7. Section 102(b)(1) sets forth certain categories of provisions
that may be included in a certificate of incorporation.
8. Please click here to read our discussion of the Supreme Court’s
decision in Cyan.
9. Please click here to read our discussion of the Delaware
Chancery Court’s decision in Sciabacucchi.
10. Please click here to read our discussion of the Delaware
Chancery Court’s decision in Boilermakers.

9example, reaching tort claims or commercial
contract claims. The Sciabacucchi court
held that a forum-selection provision cannot
govern Securities Act claims because suchclaims are “external to the corporation.” 2018
WL 6719718. The court reasoned that such aclaim “does not turn on the rights, powers,
or preferences of the shares, language in thecorporation’s charter or bylaws, a provisionin the DGCL, or the equitable relationshipsthat flow from the internal structure of thecorporation.”

Boilermakers’ ‘internal affairs,’ can be within
the boundaries of . . . Section 102(b)(1).”
The Delaware Supreme Court further heldthat Section 115 of the DGCL, which wasenacted in 2015 to codify the Boilermakers
holding, does not limit the scope of Section
102(b)(1).12 Section 115 governs forum
selection provisions concerning “internal
corporate claims.” The Court found that
“Section 102(b)(1) is unquestionably broader
than, and is not circumscribed by, Section
115’s definition of ‘internal corporate claims.’”

FFPs Fall Within the Broad Scope ofSection 102(b)(1)
Section 102(b)(1) provides that a company’s
certificate of incorporation may include:

Section 102(b)(1) Is Not Limited to“Internal Affairs” Matters
The Delaware Supreme Court found that
“Boilermakers did not establish the outer
limit of what is permissible under . . . Section
102(b)(1).” The Court explained that “[t]hereis a category of matters that is situated ona continuum between the Boilermakers
definition of ‘internal affairs’ and its
description of purely ‘external’ claims,”
and held that this category falls within “theuniverse of matters encompassed by Section
102(b)(1).” The Court found that claims under
Section 11 of the Securities Act “are ‘internal’in the sense that they arise from internal
corporate conduct on the part of the Board
and, therefore, fall within Section 102(b)(1).”The Court found that its earlier decision in
ATP Tour v. Deutscher Tennis Bund, 91 A.3d554 (Del. 2014), supports this conclusion.
The ATP Court held that a litigation
fee-shifting bylaw is facially valid.11 The
Sciabacucchi Court found that “ATP suggeststhat certificate of incorporation provisions
governing certain types of ‘intracorporate’
claims that are not strictly within
11. Please click here to read our discussion of the Delaware
Supreme Court’s decision in ATP.

Any provision for the management of thebusiness and for the conduct of the affairsof the corporation, and any provision
creating, defining, limiting and regulating
the powers of the corporation, thedirectors, and the stockholders . . . if suchprovisions are not contrary to the laws ofthis State.
8 Del. C. § 102(b)(1). The Court found that
an FFP “could easily fall within either ofthese broad categories.” The Court explainedthat “FFPs involve a type of securities claim
related to the management of litigation
arising out of the Board’s disclosures tocurrent and prospective stockholders
in connection with an IPO or secondaryoffering.” The Court further noted that “[t]hedrafting, reviewing, and filing of registration
statements by a corporation and its directors
is an important aspect of a corporation’s
management of its business and affairs andits relationship with its stockholders.” The
Court also found that “FFPs do not violate thepolicies or laws of this State” as “the DGCL
allows immense freedom for businesses toadopt the most appropriate terms for theorganization, finance, and governance of theirenterprise.”

12. Section 115 provides that “[t]he certificate of incorporationor the bylaws may require, consistent with applicablejurisdictional requirements, that any or all internal corporateclaims shall be brought solely and exclusively in any or allof the courts in this State, and no provision of the certificate
of incorporation or the bylaws may prohibit bringing suchclaims in the courts of this State.” 8 Del. C. § 115. Section 115
defines “internal corporate claims” to include “claims . . . thatare based upon a violation of a duty by a current or former
director or officer or stockholder in such capacity.” Id.
10

The Court observed that since the UnitedStates Supreme Court’s decision in Cyan,
there has been a sizable increase in Securities
Act actions brought in state courts. The Court
recognized that defending against parallel
suits in federal and state courts involves“costs and inefficiencies,” as well as “[t]hepossibility of inconsistent judgments andrulings on other matters, such as stays of
discovery.” The Court explained that “[b]ydirecting [Securities Act] claims to federal
courts when coordination and consolidation
are possible, FFPs classically fit the definitionof a provision ‘for the management of thebusiness and for the conduct of the affairs of
the corporation’” under Section 102(b)(1).
The court further determined that “[a]n FFP
would also be a provision ‘defining, limiting
and regulating the powers of the corporation,
the directors and the stockholders’ since
FFPs prescribe where current and former
stockholders can bring Section 11 claims
against the corporation and its directors
and officers.”
The Court concluded that “a bylaw that seeks
to regulate the forum in which such ‘intracorporate’ litigation can occur is . . . faciallyvalid under Section 102(b)(1).”

FFPs Do Not Violate Federal Laws
or Policies
The Delaware Supreme Court determinedthat “FFPs do not violate federal law orpolicy.” The court explained that “nothing in
Cyan prohibits a forum-selection provisionfrom designating federal court as the venue
for litigating Securities Act claims.” The court
found it significant that in Rodriguez deQuijas v. Shearson/American Express, 490
U.S. 477 (1989), the United States Supreme
Court enforced an arbitration provision that
precluded the litigation of Securities Act

claims in state court. The Delaware Supreme
Court also noted that in M/S Bremen v.
Zapata Off-Shore Co., 407 U.S. 1 (1972), theUnited States Supreme Court directed “courts
to give as much effect as possible to forumselection clauses.” Because Cyan did not
address or limit either Bremen or Rodriguez,
the Delaware Supreme Court found thatthose rulings “still govern the enforcement of[forum selection] provisions.”

FFPs Do Not Violate Inter-State
PolicyThe Delaware Supreme Court acknowledgedthat potentially “the most difficult aspect” ofthe question before it was “the ‘down the road’question of whether [FFPs] will be respected
and enforced by our sister states.” The Court
recognized that other “states might react
negatively” to its decision. Nevertheless, theCourt concluded that there were “persuasive
arguments” to be made that “a provision
in a Delaware corporation’s certificate ofincorporation requiring Section 11 claims to
be brought in a federal court does not offend
principles of horizontal sovereignty—just as
it does not offend federal policy.” The Court
reasoned that “many Section 11 claims closely
parallel state law breach of fiduciary duty
claims” and thus, “many of the same reasonsrequiring application of the internal affairs
doctrine would support the enforcementof FFPs.” The Court stated that “[t]he needfor uniformity and predictability that FFPs
address suggest that they fall closer to the‘internal affairs’ side of the spectrum, which
would argue in favor of deference being given
to them.” The Court emphasized that “forumselection provisions are process-oriented,”and only “regulate where stockholders
may file suit, not whether the stockholder
may file suit or the kind of remedy that thestockholder may obtain on behalf of herself
or the corporation.” Finally, the Court
explained that other states have respected
the types of “forum provisions sanctioned
by Boilermakers,” which “are arguably more
restrictive than FFPs . . . because they may
require non-resident stockholders to litigate
their internal affairs claims exclusively
in Delaware—potentially far from theirgeographic home-base.” The court noted that
“FFPs [merely] require that non-residents
bring Section 11 claims in federal court (which
could be in their home state).”11

The Delaware Supreme Court emphasizedthat its ruling was limited to the facialchallenge at issue. The Court explainedthat its sister courts could consider theenforcement of a particular FFP in an
as-applied challenge and noted that “[s]uch‘as applied’ challenges are an important safetyvalve in the enforcement context.”

Delaware Chancery Court:
MFW’s Procedural Safeguards
Were Not Satisfied Wherea Majority of the Special
Committee Members Allegedly
Had a Material Self-Interest in
the Transaction
On February 26, 2020, the Delaware
Chancery Court held that the businessjudgment standard of review did not apply
to a controlling stockholder transactionthat was conditioned on MFW’s procedural
safeguards because plaintiffs alleged that“three of the four members of the special
committee had a material self-interest in
the transaction.”13 In re AmTrust Fin. Servs.
Stockholder Litig., 2020 WL 914563 (Del.
Ch. 2020) (Bouchard, C.). The court foundthat MFW’s requirement of special committee
independence “was intended to ensure not
only that members of a special committee
must be independent in the sense of not
being beholden to a controlling stockholder,but also that the committee members musthave no disabling personal interest in thetransaction at issue.”
The court explained that “directors areinterested in a transaction if they expect toderive any personal financial benefit fromthe transaction as opposed to a benefit
which devolves upon the corporation or all
stockholders generally.” Moreover, “[i]n theabsence of self-dealing, for the interest of adirector to be disabling, the benefit must be
alleged to be material to that director.”

13. In Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del.
2014) (MFW), the Delaware Supreme Court held that thebusiness judgment standard of review applies to a controllingstockholder transaction if the transaction “is conditioned abinitio upon the approval of both an independent, adequatelyempowered [s]pecial [c]ommittee that fulfills its duty of care,and the uncoerced, informed vote of a majority of the minority
stockholders.” Please click here to read our discussion of the
MFW decision.

In the case before it, plaintiffs alleged thatthe transaction “was expected to extinguishviable derivative claims exposing [three of thefour members of the special committee] tosignificant personal liability.” Plaintiffs argued
that the court should follow the analysis in
In re Riverstone Shareholder Litig., 2016
WL 4045411 (Del. Ch. July 28, 2016), which
involved a similar situation. The Riverstone
court found that “the [d]irector [d]efendants[allegedly] obtained a special benefit forthemselves” “by orchestrating a merger thatextinguished a possible derivative action.”
The court found it significant plaintiffs had
alleged that (1) the directors were aware of
the derivative claim, (2) the claim was viable,and (3) the potential liability was material toeach of the directors.

The AmTrust court found “Riverstone
sets forth an appropriate framework” forevaluating plaintiffs’ contention that amajority of the special committee members
had a material self-interest in the transaction.
The court noted that defendants did notdispute that (1) these special committee
members were aware of a potential derivative
claim, (2) the claim was viable, and (3) “thepotential liability they faced was material toeach of them personally,” as the estimatednet settlement value was between $15
million and $25 million. Moreover, thecourt found plaintiffs adequately allegedthat the transaction had the practical effectof extinguishing the committee members’
liability. The court therefore “conclude[d]that [p]laintiffs have pled a reasonably
conceivable set of facts showing that eachof the conditions necessary to apply the
MFW framework to subject the [t]ransaction
to business judgment review have notbeen satisfied.”12price collar that set the field of play for the
Delaware Chancery Court:
economic negotiations to come.” The court
Involvement of a Special
held the complaint “raises a pleading-stage
inference that these discussions deprived theCommittee Can Cleanse[special] [c]ommittee of the full negotiatinga Transaction Involving a
power sufficient to invoke the business
Conflicted Board Only If thejudgment rule.”
Special Committee Is Engaged
Before the Commencement
Delaware Chancery Court:of Substantive Economic
Allegations That Directors
Negotiations
Made Misrepresentations
On February 27, 2020, the Delaware
Concerning FDA Approval
Chancery Court held that the entire fairness
Prospects Were Insufficient
standard of review applied to a conflictedboard transaction despite the engagement
to Plead Demand Futilityof a special committee because substantive
Absent Plausible Allegations
economic negotiations took place prior to thespecial committee’s involvement. Salladayof Scienterv. Lev, 2020 WL 954032 (Del. Ch. 2020)(Glasscock, V.C.).

The court stated that “a fully-empowered,independent special committee canpotentially cleanse [a] transaction” involving
a conflicted board. However, the court foundthat the cleansing effect applies only if thespecial committee is “sufficiently constituted
and authorized ab initio.” The court held that
“this requires the committee’s empowerment
prior to substantive economic negotiations,which include valuation and price discussions
if such discussions set the field of play forthe economic negotiations to come.” Thecourt reasoned that “[i]nsiders in particular,
standing on both sides of the transaction,
may [otherwise] be tempted to exercise theopportunity and influence their positions
afford them to move the transaction favorably
toward their own interests” prior to thespecial committee’s involvement.
Here, plaintiffs alleged that by the time
the special committee became involved,
the parties had already established “aOn February 13, 2020, the Delaware Chancery
Court dismissed a derivative action alleging
that a pre-suit demand on the board of abiopharmaceutical company would have been
futile because the directors faced a substantial
likelihood of liability for either authorizing
or failing to prevent alleged misstatements
in a press release concerning FDA approvalprospects for one of the company’s products.
Owens v. Mayleben, 2020 WL 748023(Del. Ch. 2020) (Slights, V.C.). The court
found plaintiff failed to meet his “burden to
plead particularized facts that those board
members knew the statements were false, but
directed that they be disclosed to the market
nevertheless.”
The press release at issue reported that the
FDA had informed the company during a
recent meeting that it would permit a “fasttracked” regulatory approval process for thecompany’s cholesterol drug. Several weeks
after the issuance of that press release,
the FDA released a summary of the same
meeting. The FDA’s summary “expressed
doubt that [the company’s cholesterol drug]
had a ‘clear regulatory path forward.’”Plaintiff alleged that the press release wasmaterially misleading, and further allegedthat the company’s directors “contributed
to and approved the allegedly misleadingstatements [in the press release] knowing
they were false.”
The court stated that “[w]henever directors
communicate publicly or directly withshareholders about a corporation’s affairs,
13with or without a request for shareholder
action, directors have a fiduciary duty toshareholders to exercise due care, good faithand loyalty.” The court explained that “[i]fthe board of directors intentionally misleads
stockholders about the business of thecorporation it serves, then its members will beheld liable for breach of fiduciary duty.” Thecourt specifically recognized that “directors
who knowingly make materially misleadingstatements to stockholders may be considered
to be interested for the purposes of demand.”The court found “the [c]omplaint pleads nofacts that would allow a reasonable inference
the [o]utside [d]irectors, individually orcollectively, knew that anything included in
the press release was false.” The court notedthat plaintiff did “not allege the [o]utside[d]irectors attended the FDA meeting or thatany one of them knew what occurred at thatmeeting.”
The court observed that it was “not surprising[p]laintiff has not pled particularized facts to
support an inference of bad faith” given that
there was no “conceivable explanation of why
any of the [d]efendants, let alone the [o]utside[d]irectors, would intentionally lie to themarket knowing full well the official FDA
minutes would contradict their statements
in a matter of weeks.” The court pointed outthat there were “no allegations that any of the[d]efendants engaged in insider trading orotherwise derived some benefit from having
misled the market.” The court determinedthat it was therefore “not reasonable to infer
bad faith” absent some rational “explanation
for why [d]efendants would lie so openly,
especially when they were virtually certain to
be caught in the lie.”This edition of the
Securities Law Alert was edited by
Lynn K. Neuner
lneuner@stblaw.com / +1-212-455-2696,
Cheryl J. Scarboro
cscarboro@stblaw.com / +1-202-636-5529,
and George S. Wang
gwang@stblaw.com / +1-212-455-2228.

14

New York

Los Angeles

Brooke E. Cucinella+1-212-455-3070
brooke.cucinella@stblaw.com

Joseph M. McLaughlin+1-212-455-3242
jmclaughlin@stblaw.com

Chet A. Kronenberg+1-310-407-7557
ckronenberg@stblaw.com

Paul C. Curnin+1-212-455-2519
pcurnin@stblaw.com

Lynn K. Neuner+1-212-455-2696
lneuner@stblaw.com

Palo Alto

Stephen M. Cutler+1-212-455-2773
stephen.cutler@stblaw.com

Michael J. Osnato, Jr.
+1-212-455-3252
michael.osnato@stblaw.com

Michael J. Garvey+1-212-455-7358
mgarvey@stblaw.com

Alan C. Turner+1-212-455-2472
aturner@stblaw.com

Susannah S. Geltman+1-212-455-2762
sgeltman@stblaw.com

Craig S. Waldman+1-212-455-2881
cwaldman@stblaw.com

Paul C. Gluckow+1-212-455-2653
pgluckow@stblaw.com

George S. Wang
+1-212-455-2228
gwang@stblaw.com

Nicholas S. Goldin+1-212-455-3685
ngoldin@stblaw.com

Jonathan K. Youngwood+1-212-455-3539
jyoungwood@stblaw.com

Peter E. Kazanoff+1-212-455-3525
pkazanoff@stblaw.com

David Elbaum
Senior Counsel+1-212-455-2861
david.elbaum@stblaw.com

Joshua A. Levine+1-212-455-7694
jlevine@stblaw.com
Linton Mann III+1-212-455-2654
lmann@stblaw.com

Janet A. Gochman
Senior Counsel+1-212-455-2815
jgochman@stblaw.com

Stephen P. Blake+1-650-251-5153
sblake@stblaw.com
James G. Kreissman+1-650-251-5080
jkreissman@stblaw.com
Simona G. Strauss
Senior Counsel+1-650-251-5203
sstrauss@stblaw.com

Washington, D.C.
Jeffrey H. Knox
+1-202-636-5532
jeffrey.knox@stblaw.com
Cheryl J. Scarboro+1-202-636-5529
cscarboro@stblaw.com

Hong Kong
Adam Goldberg+852-2514-7552
adam.goldberg@stblaw.com

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