Securities Law Alert
Year in Review:• Supreme Court Decisions• Circuit Court Decisions Addressing Section 10(b) Claims• Circuit Court Decisions Addressing Section 11 Claims• Circuit Court Decisions Addressing SLUSA• Other Significant Circuit Court Decisions• Significant Delaware Supreme Court Decisions

2019

Supreme Court Decisions
Defendants Can Face Primary
Liability Under Rules 10b-5(a)and (c) for Disseminating False or
Misleading Information With Intent
to Defraud
Simpson Thacher’s“[s]ophisticated group of
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On March 27, 2019, the Supreme Court heldthat “dissemination of false or misleadingstatements with intent to defraud can fallwithin the scope of subsections (a) and(c) of Rule 10b-5, . . . even if the disseminator
did not ‘make’ the statements” within themeaning of the Supreme Court’s decisionin Janus Capital Group v. First Derivative
Traders, 564 U.S. 135 (2011), “andconsequently falls outside subsection (b) of”
Rule 10b-5. Lorenzo v. SEC, 139 S. Ct. 1094
(2019) (Breyer, J.).1

1. The Janus Court held that for purposes of Rule 10b-5, “themaker of a statement is the person or entity with ultimate
authority over the statement, including its content andwhether and how to communicate it.” Please click here to readour discussion of the Supreme Court’s decision in Janus.
Simpson Thacher & Bartlett LLP

SEC Rule 10b-5 proscribes three types of
securities fraud: subsection (a) makes it
unlawful “[t]o employ any device, scheme or
artifice to defraud”; subsection (b) prohibits“mak[ing] any untrue statement of a materialfact”; and subsection (c) prohibits “engag[ing]in any act, practice, or course of business
which operates or would operate as a fraud or
deceit.” The Court rejected the argument thatthe three subsections of Rule 10b-5 “should
be read as governing different, mutually
exclusive, spheres of conduct.” The Court
explained that both the Supreme Court andthe SEC “have long recognized considerable
overlap among the subsections of the Ruleand related provisions of the securities laws.”
The Court also found meritless the contention
that subsection (b) “exclusively regulates
conduct involving false or misleadingstatements.” The Court reasoned that
adopting this interpretation “would mean
those who disseminate false statements with
the intent to cheat investors might escapeliability under the Rule altogether.” The Court
observed that “using false representations toinduce the purchase of securities would seema paradigmatic example of securities fraud.”
The Court explained that Janus did not
require a different result as it concerned
only subsection (b) of Rule 10b-5, and did
not address Rule 10b-5’s “application to
the dissemination of false or misleading
information.” The Court stated that “Janus
would remain relevant (and preclude liability)
where an individual neither makes nor
disseminates false information—provided, ofcourse, that the individual is not involved insome other form of fraud.”

Circuit Court Decisions
Addressing Section 10(b)ClaimsSecond Circuit: Plaintiffs Cannot
Assert a Securities Fraud Claim
Based on “Tentative and Generic”
Compliance-Related Statements
On March 5, 2019, the Second Circuit
affirmed the dismissal of a securities fraud
action alleging that a health services company
made misstatements concerning its regulatorycompliance. Singh v. Cigna Corp., 918 F.3d
57 (2d Cir. 2019) (Cabranes, C. J.). The court
cautioned that plaintiffs cannot assert “aprima facie case of securities fraud” merely
by “point[ing] to banal and vague corporate
statements affirming the importance ofregulatory compliance” coupled with“significant regulatory violations.” The courtemphasized that “such generic statements do
not invite reasonable reliance.”
The Second Circuit found that compliancerelated statements in the company’s Codeof Ethics were “textbook example[s] of
puffery” because they were simply “generaldeclarations about the importance of acting
lawfully and with integrity.” The court further
held that a reasonable investor would not rely
upon the “tentative and generic” compliancerelated statements in the company’s SEC
filings, particularly because those statements
were “framed by acknowledgements of thecomplexity and numerosity of applicableregulations.” The court observed that “[s]uch
framing suggests caution (rather thanconfidence) regarding the extent of [thecompany’s] compliance.”

Third Circuit: Company’sComprehensive Disclosures
Defeated an Inference of Scienter
On June 20, 2019, the Third Circuit affirmed
the dismissal of a securities fraud action
alleging that a company “fraudulently lauded
its financial health and misrepresented
that its distributions were funded fromthe performance of the business.” Fan v.
StoneMor Partners, 927 F.3d 710 (3d Cir.
2019) (Restrepo, C. J.). The Third Circuit
found that “for each category of alleged
misstatements, [the company] disclosed
sufficient information to render them
immaterial.” The court determined that these
disclosures “alert[ed] reasonable investors” tothe company’s downside potential.
The Third Circuit further held that thecompany’s comprehensive disclosures belied
any inference of scienter. The court notedthat the company’s disclosures “accurately
show how [the company] leveraged its assets
in order to maximize its distributions despite
the state trust requirements” that limited its
ability to recognize proceeds as revenue under
GAAP. The court explained that although thecompany “may have been caught by the risk
inherent in its business strategy, . . . thoserisks were disclosed” to investors and thus2

“the pleadings do not demonstrate scienter as
the [Private Securities Litigation Reform Act(“PSLRA”)] requires.”

Fifth Circuit: Plaintiffs Can Relyon Post-Statement Events to
Demonstrate That a Statement Was
False When MadeOn May 15, 2019, the Fifth Circuit foundplaintiffs adequately pled that a company
made misrepresentations concerning its
algorithm for predicting and collecting
insurance reimbursements, by alleging thatthe company “was ultimately unable to collecton the overwhelming majority of claims itbilled.” Masel v. Villareal, 924 F.3d 734 (5thCir. 2019) (King, C. J.).The court determinedthat “evidence of later events can provide
useful circumstantial evidence that a given
representation was false when made.”
The Fifth Circuit rejected defendants’contention that plaintiffs were “attempting
to prove fraud by hindsight by pointing tolater events in order to shed light on thetruth or falsehood of earlier statements.”
The court noted that “fraud–by–hindsightissues arise in the context of the scienterfactor, not the misrepresentation factor.” Thecourt explained that “[w]here, as here, therepresentation in question concerned an asset
or skill possessed by the defendant (here, analgorithm), the defendant’s failure to perform
as promised casts doubt on whether hepossessed that skill in the first place.”

Fifth Circuit: Plaintiffs Cannot
Impute One Corporation’s
Knowledge to Another ThroughUnsubstantiated Allegations of a
Joint Venture
On May 24, 2019, the Fifth Circuit
affirmed the dismissal of an Enron-related
securities fraud action brought against theindependently–incorporated retail brokerageand investment banking arms of a majorbank. Lampkin v. UBS Fin. Servs., 925 F.3d
727 (5th Cir. 2019) (Higginbotham, C. J.). The
Fifth Circuit rejected plaintiffs’ contention
that “any material, nonpublic information
known to [the investment bank] had to bedisclosed by [the brokerage]” because thebank “operated as a single, fully integrated
entity.” The court found that “‘vague
corporate platitudes about integration as afirm’ are insufficient to support a finding of
joint venture liability” (quoting Giancarlo v.
UBS Financial Services, 725 F. App’x. 278(5th Cir. 2018)). The court emphasized thatplaintiffs did not allege “that defendants
shared profits or losses” or “that defendants
had joint control or right of control over thejoint venture,” as required to establish theexistence of a joint venture under governing
Delaware law.

Fifth Circuit: Defendants’ Alleged
Awareness of Excess Inventory
Levels Was Insufficient to Raisea Strong Inference of Scienter
Concerning a Significant Markdown
Risk
On August 19, 2019, the Fifth Circuit affirmed
the dismissal of a securities fraud action
alleging that a home furnishings company
and its executives failed to disclose “the riskthat [the company] had so much inventory
that it could get rid of it only by lowering
prices dramatically.” Municipal Emps. Ret.
Sys. of Mich. v. Pier 1 Imports, 935 F.3d 424(5th Cir. 2019) (Elrod, C.J.). Plaintiffs did not
claim that defendants “misrepresented [thecompany’s] inventory” but instead asserted
that defendants “misled the public about [thecompany’s] ability to offload that excessive
inventory without significant markdown
risk.” The court held plaintiffs failed toallege scienter because “[k]nowledge of highinventory does not necessarily equate toknowledge of significant markdown risk.”
The court rejected plaintiffs’ contention thatthe company’s “products are particularly
subject to markdown risk” because thecompany “is a trend-based [home] fashion
retailer that is subject to the whims of
consumer trends.” The court found thecompany “operates largely in the sturdierbusiness of style” rather than the everchanging business of fashion. The court also
noted that plaintiffs offered no explanation
for why defendants “kept ordering moreinventory when they supposedly knew deep
down that they would not be able to sell it.”Rather than raising a strong inference of
scienter as to a significant markdown risk,
the court found it “equally plausible . . . that
[defendants] reasonably believed they could
fix the excessive inventory problem without
resorting to markdowns.”

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Eleventh Circuit: (1) The
Puffery Defense Applies in the
Securities Fraud Context, and(2) Statements Conveying Future
Plans Are Entitled to Safe Harbor
Protection Even If They “ImplicitlyCommunicate Information Aboutthe Present”
On August 15, 2019, the Eleventh Circuit
issued its first published decision applying thepuffery defense in the securities fraud context.
Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307
(11th Cir. 2019) (Newsom, C.J.). The court
found that “the defense seems a particularly
good fit in the securities context” because
Rule 10b-5 prohibits only “untrue statementsof a material fact, with ‘material’ defined tomean something that a reasonable investor
would view as having significantly altered
the total mix of information made available.”
The court explained that “[e]xcessively vague,
generalized, and optimistic comments—thesorts of statements that constitute puffery—aren’t those that a ‘reasonable investor,’
exercising due care, would view as moving theinvestment decision needle—that is, they’re
not material.”
The Eleventh Circuit cautioned that“[a] conclusion that a statement constitutes
puffery doesn’t absolve the reviewing courtof the duty to consider the possibility—
however remote—that in context and in lightof the ‘total mix’ of available information, areasonable investor might nonetheless attach
importance to the statement.” The court
found that many of the compliance-related
statements at issue in the case before it—suchas assertions that the company “was taking a‘leading role’ and making ‘progress’ toward
compliance”—were “quintessential puffery”
and “immaterial as a matter of law.” Thecourt rejected plaintiffs’ contention that thestatements “can’t be nonactionable puffery
because [the company] did not genuinely or
reasonably believe them.” The court explainedthat “[w]hether a statement was made in
bad faith or without a reasonable basis isirrelevant to the question [of] whether thestatement is nonetheless so airy as to be
insignificant.”
The Eleventh Circuit also held that thecompany’s forward-looking statements
were entitled to safe harbor protection eventhough they included “statements about
the [c]ompany’s present condition andintentions.” The court held that “when aforward-looking statement is of the sort that,by its nature, rolls in present circumstances—that is, when a statement forecasts in atentative way a future state of affairs in whicha present commitment unfolds into action—
the statement isn’t barred from safe harbor
protection solely on that ground.”Circuit Court Decisions
Addressing Section 11 Claims
Second Circuit: Duty to Disclose
Under Item 303 of Regulation S-K
Is Limited to Known Trends orUncertainties That Have Had, or
Are Reasonably Expected to Have,a Material Impact on a Company’s
Overall Revenue
On December 16, 2019, the Second Circuit
affirmed the dismissal of a securities fraud
action against an online hotel search platform
operator and the underwriters of its IPO.
Shetty v. Trivago, 2019 WL 6834250 (2dCir. 2019) (per curiam).2 The Second Circuit
found that defendants had no obligation
under Section 11 of the Securities Act of1933 (the “Securities Act”) to disclose(i) violations of the company’s landing page
standards by the company’s largest advertiser,or (ii) a modification to the company’smarket algorithm known as the “relevanceassessment” that imposed financial penalties
on advertisers that failed to adhere to thecompany’s landing page standards.
The Second Circuit rejected plaintiffs’
contention that defendants had a duty todisclose pursuant to Item 303 of Regulation
S-K, which requires the disclosure of “anyknown trends or uncertainties that have hador that the registrant reasonably expects will
have a material favorable or unfavorable
impact on net sales or revenues.” 17 C.F.R.
§ 229.303(a)(3)(ii). With respect to thelanding page violations by the company’s
largest advertiser, the Second Circuit notedthat the complaint was “silent as to the extent
of the financial impact” of these violations.
The Second Circuit determined that a court
could not “plausibly and reasonably infer”
that these violations “had any negative

2. Simpson Thacher represents the underwriters of Trivago’s
initial public offering in this matter.
4

financial impact at all, let alone a material
impact on [the company’s] overall revenue
such that Item 303 would require disclosure.”
The Second Circuit further found that thecomplaint did not “permit the inference”
that “it was reasonably foreseeable . . . that
implementing the [r]elevance [a]ssessment
would have a material impact [on thecompany’s] revenue.” The court foundthe allegations “suggest that [d]efendants
expected advertisers to conform their landing
pages to the stated standards to avoid
paying the penalty” and thus anticipatedthat the “impact on revenue, if any, would
be minimal.” Although several advertisers
ultimately “ended up paying significant
penalty fees for several months,” the Second
Circuit found that this “merely highlights thebenefits of hindsight.” The court explainedthat this “does not mean that outcome wasreasonably foreseeable when the [r]elevance[a]ssessment was implemented.”

Third Circuit: Nonvoting Board
Observers Affiliated With an
Issuer’s Placement Agent Are Not
Subject to Liability Under Section 11
On July 23, 2019, the Third Circuit heldthat “a nonvoting board observer affiliatedwith an issuer’s placement agent” is not
subject to liability under Section 11 of the
Securities Act as a person who “‘perform[s]similar functions’” to a “‘director.’” Obasi Inv.
Ltd. v. Tibet Pharm., 931 F.3d 179 (3d Cir.
2019) (Hardiman, C. J.) (quoting 15 U.S.C.
§ 77k(a)(3)).

directors” based on the description of theirroles in the registration statement. First,
the nonvoting board members “cannot votefor board action” and thus have no “ability
to manage the company’s affairs,” which is
the “directors’ most basic power.” Second,
the nonvoting board members are “alignedwith the placement agent” rather than thecompany. The court explained that the
nonvoting board members’ “loyalties aren’t
with [the company’s] shareholders—andloyalty to the shareholders is as vital todirectorship as the power to manage.” Finally,
the nonvoting board members’ “tenures are
set to end automatically, with no opportunity[for shareholders] to vote them out.” The
Third Circuit therefore concluded that the
nonvoting board members could not face
Section 11 liability pursuant to § 77k(a)(3).

Fifth Circuit: Grant of Stock
Options Pursuant to an Employee
Stock Option Plan Is Not a “Sale”
of Securities
On May 24, 2019, the Fifth Circuit heldthat a grant of stock options pursuant to an
employee stock option plan was not a “sale”
of securities, as required to state a claim
under Sections 11 and 12 of the Securities
Act. Lampkin v. UBS Fin. Servs., 925 F.3d
727 (5th Cir. 2019) (Higginbotham, C. J.).
The court reasoned that “participation in
the [plan] was compulsory and employees
furnished no value, or tangible anddefinable consideration in exchange for the
option grants.”

15 U.S.C. § 77k(a)(3) provides that Section
11 claims may be brought against “every
person who, with his consent, is named in theregistration statement as being or about tobecome a director, person performing similarfunctions, or partner.” The Third Circuit heldthat “deciding whether a person is a proper§ 77k(a)(3) defendant . . . is a question of law
for the court, not a question of fact for thejury.” The court further held that the inquiry
is limited to a review of “the description
provided” in the registration statement of theperson’s role, and does not extend to extrinsic
evidence concerning the person’s actual
functions.

The Fifth Circuit noted that in International
Brotherhood of Teamsters v. Daniel, 439
U.S. 551 (1979), the Supreme Court heldthat “‘participation in a noncontributory,
compulsory pension plan’ is not theequivalent of purchasing a security” because“the ‘purported investment is a relatively
insignificant part’ of the employee’s totalcompensation, and the decision to accept
and retain employment likely had only anattenuated relationship to the investment.”
Lampkin, 925 F.3d 727 (quoting Daniel, 439
U.S. 551). The Fifth Circuit found that the key
inquiry under Daniel is “whether employees
made an investment decision that could be
influenced by fraud or manipulation.”In the case before it, the Third Circuit
determined that “[t]hree features differentiate[the nonvoting board members] from

Applying Daniel, the Fifth Circuit held thatplaintiffs “failed to demonstrate that the grantof” the options at issue “amounted to the sale5

of a security.” The court found that it was“of no consequence” that plaintiffs “would
eventually make an affirmative investment
decision—whether to exercise the option or let
it expire,” since plaintiffs’ claims were “based
explicitly on the grant of the option, not theexercise of that option.”action for any purpose.’” The court explainedthat it was “hard-pressed to imagine any
scenario in which two cases that never overlap[in time] could function as a single lawsuit on
any dimension, as the mass action provision
requires.”

Seventh Circuit: SLUSA Precludes
State-Law-Based Securities Fraud
Class Actions Even If the Proposed
Class Consists of Fifty or Fewer
Members
On January 24, 2019, the Seventh Circuit
held that the Securities Litigation Uniform
Standards Act (“SLUSA”) precluded a state
law-based securities fraud class action
brought on behalf of a class consisting offewer than fifty proposed members. NielenThomas v. Concorde Inv. Servs., 914 F.3d 524(7th Cir. 2019) (Flaum, C. J.).

Circuit Court Decisions
Addressing SLUSA
Third Circuit: SLUSA Does Not
Preclude Opt-Out Actions That
Were Never Actually Combined
With a “Covered Class Action”
On September 12, 2019, the Third Circuit
held that SLUSA does not preclude plaintiffs
from bringing individual suits under state law
after opting out from a securities-related classaction unless the opt-out suit and the classaction were “somehow combined, in whole orin part, for case management or for resolutionof at least one common issue.” North Sound
Capital v. Merck & Co., 938 F.3d 482 (3d Cir.
2019) (Krause, C. J.). The court found that
SLUSA generally does not preclude opt-out
suits that did not “coincide for some period”
with a class action because “[i]f two cases
never overlap, a court cannot combine them.”
SLUSA’s “mass action provision” defines a“covered class action” to include “any group of
lawsuits filed in or pending in the same court
and involving common questions of law orfact, in which . . . (I) damages are sought onbehalf of more than 50 persons; and (II) the
lawsuits are joined, consolidated, or otherwise
proceed as a single action for any purpose.” 15
U.S.C. § 78bb(f)(5)(B)(ii). The Third Circuit“consider[ed] what Congress meant by thebroader phrase ‘otherwise proceed as a single

The court found that Subparagraph (II) of“SLUSA’s ‘covered class action’ definition
includes any class action brought by a named
plaintiff on a representative basis, regardlessof the proposed class size.”3 The court
stated that an “obvious implication” of its“interpretation is that no putative securities
class actions that are based on state law
and otherwise meet SLUSA’s requirements(they involve a covered security, allege amisrepresentation in connection with that
security, etc.) can proceed in either federal orstate court under SLUSA.”The Seventh Circuit noted that SLUSA wasenacted “to combat a specific problem—
litigants were attempting to circumvent the
PSLRA’s barriers to federal securities classactions by filing their class actions under state
law instead.” The court explained that “[t]his
purpose could be easily frustrated if plaintiffs
bringing a state-law securities class action
could simply allege that they represented aclass of no more than fifty people.” Absent
SLUSA preclusion, “such suits could proceed
through the courts until discovery identified
the entire class of plaintiffs.” If it turned outthat “the actual class could include more thanfifty persons, . . . by that time the abuses that
the PLSRA sought to prevent would havealready taken place.”
3. SLUSA provides that a “single lawsuit” constitutes a“covered class action” if, inter alia, “(I) damages are sought
on behalf of more than 50 persons or prospective classmembers,” or “(II) one or more named parties seek to recoverdamages on a representative basis on behalf of themselves
and other unnamed parties similarly situated.” 15 U.S.C.
§ 78bb(f)(5)(B)(i).
6Other Significant Circuit Court
Decisions
Second Circuit: Creates a Circuit
Split by Holding That Section 47(b)of the Investment Company Act
Provides a Private Right of Action
On August 5, 2019, the Second Circuit heldthat Section 47(b) of the Investment Company
Act (“ICA”) “creates an implied privateright of action for a party to a contract that
violates the ICA to seek rescission of that
violative contract.” Oxford University Bank v.
Lansuppe Feeder, 933 F.3d 99 (2d Cir. 2019)(Leval, C. J.). The Second Circuit expressly
disagreed with the Third Circuit’s decision in
Santomenno ex rel. John Hancock Trust v.
John Hancock Life Ins. Co., 677 F.3d 178 (3dCir. 2012), which held that there is no privateright of action under Section 47(b) of the ICA.
Section 47(b) of the ICA provides in relevant
part as follows:
Validity of Contracts(1) A contract that is made, or whose
performance involves, a violation ofthis subchapter . . . is unenforceable
by either party . . .
(2) To the extent that a contract
described in paragraph (1) has been
performed, a court may not deny
rescission at the instance of any party
unless such court finds that under thecircumstances the denial of rescission
would produce a more equitable
result than its grant and would not be
inconsistent with the purposes of thissubchapter.
15 U.S.C. § 80a-46(b).
The Second Circuit found that “[a]lthoughCongress did not expressly state [in Section
47(b)(2)] that a party to an illegal contract
may sue to rescind it, the clause that begins‘a court may not deny rescission at the
instance of any party’ necessarily presupposesthat a party may seek rescission in court byfiling suit.” The court concluded that “[t]helanguage Congress used is thus effectively
equivalent to providing an express causeof action.” The Second Circuit found that“§ 47(b)(2) also identifies a ‘class of persons’
who benefit from the availability of the rightof action.” The court reasoned that “[t]hemost natural reading of the clause providing
for rescission, which appears in a section
entitled ‘Validity of Contracts’ and provides
a remedy that benefits a party to an illegal
contract, is that ‘any party’ refers to parties toa contract whose provisions violate the ICA.”The Second Circuit stated that it “respectfully
disagree[d]” with the Third Circuit’s decisionin Santomenno, 677 F.3d 178, because theThird Circuit “relied on interpretive canonsthat are intended to help resolve ambiguity”
rather than “focusing on the text of thestatute.” The Second Circuit noted that “theThird Circuit failed to mention the strongest
textual indication of Congressional intent toprovide a private right of action: the clear
language of § 47(b)(2) that ‘a court may notdeny rescission at the instance of any party.’”

Eighth Circuit: Omitting Projected
Net Income/Loss Information
May Render a Proxy Statement
Materially Misleading in Violationof Section 14(a) and Rule 14a-9
On March 1, 2019, the Eighth Circuit reversed
the dismissal of a securities fraud action
alleging that a company’s proxy statement
in connection with a proposed merger wasmaterially misleading in violation of Section
14(a) of the Securities Exchange Act of1934 (“Exchange Act”) and SEC Rule 14a-9,
where the proxy statement failed to disclose
projected net income/loss information forthe pre-merger target company. Campbell
v. Transgenomic, 916 F.3d 1121 (8th Cir.
2019) (Benton, C. J.). The court reasoned
that “projected net income/loss is nottrivial information” and “may be of moresignificance to investors than revenue.”
The Eighth Circuit stated that, for purposes of
SEC Rule 14a-9, “[a]n omitted fact is material
if there is a substantial likelihood that areasonable shareholder would consider it
important in deciding how to vote.” The court
noted that “[u]nder this test it is not necessary
to prove that disclosure of an omitted fact
would have caused a reasonable investor tochange his decision.” The court underscoredthat “[d]oubts as to the critical nature of
information misstated or omitted” should be“resolved in favor of those [SEC Rule 14a-9] isdesigned to protect.”In the case before it, the Eighth Circuit foundthat the pre-merger company’s net income/7

loss figures were particularly relevant because
the proxy statement included gross profit
projections for the pre-merger company.
The court determined that “[b]y omitting the(allegedly) significantly lower projections
for [the company’s] net income/ loss,
the proxy statement may have presented[the company] in a false light that wasmaterially misleading.”

apply extraterritorially” in SEC enforcement
actions “when the statutory conduct andeffects test is satisfied.” The Tenth Circuit
based this conclusion on “the context andhistorical background surrounding Congress’s
enactment of those amendments,” including
the title of Section 929P(b), Strengthening
Enforcement by the Commission.

Significant Delaware Supreme
Court Decisions
Business Judgment Rule Did Not
Apply to a Controlling Stockholder
Transaction Where the Parties
Allegedly “Set the Field of Play for
the Economic Negotiations” Before
the Transaction Was Conditionedon MFW’s Procedural Protections
Tenth Circuit: Pursuant to Section
929P(b) of the Dodd-Frank Act, theConduct and Effects Tests Govern
the Extraterritorial Reach of SEC
Enforcement Actions
On January 24, 2019, the Tenth Circuit heldthat the conduct and effects tests codified
in Section 929P(b) of the Dodd-Frank Act
govern the extraterritorial reach of SEC
enforcement actions brought under Section
10(b) of the Exchange Act and Section 17(a)of the Securities Act. SEC v. Scoville, 913 F.3d
1204 (10th Cir. 2019) (Ebel, C. J.). Enacted
less than a month after the Supreme Court’s
decision in Morrison v. National Australia
Bank, 561 U.S. 247 (2010), Section 929P(b)amended the securities laws to providethat district courts have jurisdiction overextraterritorial SEC enforcement actions
brought under Section 10(b) of the Exchange
Act or Section 17(a) of the Securities Act if the
conduct and effects tests are met.4
Although Section 929P(b) addressed “thejurisdictional provisions of the securities
acts,” the Tenth Circuit determined that
“Congress undoubtedly intended that thesubstantive antifraud provisions should

4. In Morrison, the Supreme Court found that theextraterritorial reach of Section 10(b) is a merits question
rather than a jurisdictional question. The Court repudiated the
conduct and effects tests, and instead held that Section 10(b)applies only to “transactions in securities listed on domestic
exchanges, and domestic transactions in other securities.” 561
U.S. 247.

On April 11, 2019, the Delaware Supreme
Court found that the business judgment
standard of review did not apply whereplaintiffs alleged that the company andits controlling stockholder “substantiallynegotiated the financial state of play” before
the transaction was conditioned on theprocedural protections set forth in Kahn v.
M&F Worldwide Corp., 88 A.3d 635 (Del.
2014) (MFW). Olenik v. Lodzinski, 208
A.D.3d 704 (Del. 2019) (Seitz, J.).
The MFW court held that the businessjudgment standard of review applies to acontrolling stockholder transaction if thetransaction “is conditioned ab initio upon theapproval of both an independent, adequatelyempowered Special Committee that
fulfills its duty of care, and the uncoerced,
informed vote of a majority of the minority
stockholders.”5 In Flood v. Synutra Int’l, 195
A.3d 754 (Del. 2018), the Delaware Supreme
Court held that MFW’s ab initio requirement
is satisfied “so long as the controller
conditions its offer on the key protections”
before the commencement of “substantive
economic negotiations with the controller.”6
The Olenik court held that the ab initio
requirement was not met in the case before
it because “the MFW procedural protections
were [allegedly] not put in place until after
5. Please click here to read our discussion of the Delaware
Supreme Court’s decision in MFW.
6. Please click here to read our discussion of the Delaware
Supreme Court’s decision in Synutra.
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almost eight months of substantive economic
dealings among the parties.” The court
found it significant that the parties allegedly“engaged in a joint exercise to value” thetarget company, which allegedly “fix[ed] therange in which offers and counteroffers might
be made.”Chancery Court Erred in Appraising
Shares Using the Unaffected Market
Price, Rather Than the Merger
Price Less Synergies, in an Arm’s
Length Transaction Following a
Fair Sales Process
On April 16, 2019, the Delaware Supreme
Court held that the Chancery Court erredin appraising a company’s shares using theunaffected market price, rather than themerger price less synergies, in an arm’s lengthtransaction following a fair sales process.
Verition Partners Master Fund v. Aruba
Networks, 210 A.D.3d 128 (Del. 2019) (percuriam). The Chancery Court found the deal
price less synergies valuation unreliablebecause “it needed to make an additional
deduction . . . for unspecified ‘reduced agency
costs.’” But the Delaware Supreme Court
determined that there was no evidence ofany “agency cost reductions that were notalready captured by [the acquirer’s] synergies
estimate.”
The Delaware Supreme Court noted thata stock’s market price “is an important
indicator of its economic value.” However,the court underscored that when a company
is sold in an arm’s length transaction thatis preceded by extensive due diligence, “theprice that results . . . is even more likely
to be indicative of so-called fundamental
value” than the unaffected market price. The
court found that the deal price “could beseen as reflecting a better assessment of [thecompany’s] going-concern value” than theunaffected market price because the acquirer“had more incentive to study [the company]
closely than ordinary traders in small blocksof [the company’s] shares, and also hadmaterial, nonpublic information that, bydefinition, could not have been baked into the
public trading price.”

Caremark Imposes a “BottomLine” Requirement of a Board-Level
Oversight System
On June 19, 2019, the Delaware Supreme
Court reversed the dismissal of a derivative
suit alleging that the directors of an ice
cream manufacturing company “breachedtheir duty of loyalty under Caremark” byfailing to oversee the company’s operations.7
Marchand v. Barnhill, 212 A.3d 805 (Del.
2019) (Strine, C.J.). The court found “thecomplaint supports an inference that nosystem of board-level compliance monitoring
and reporting existed at [the company].”
The Delaware Supreme Court recognized that
“Caremark is a tough standard for plaintiffs
to meet” and imposes an “onerous pleading
burden.” The court noted that “directors
have great discretion to design context- andindustry-specific approaches tailored to theircompanies’ businesses and resources” whenestablishing a board-level oversight system.
The court also observed that Delaware“case law gives deference to boards and has
dismissed Caremark cases even when illegal
or harmful activities escaped detection” by
the board’s oversight system. However, thecourt underscored that Caremark imposesa “bottom-line requirement” that directors
must at least “try . . . to put in place areasonable board-level system of monitoring
and reporting.”

7. In In re Caremark International Derivative Litigation, 698
A.2d 959 (Del. Ch. 1996), the Delaware Chancery Court statedthat “where a claim of directorial liability for corporate loss ispredicated upon ignorance of liability creating activities within
the corporation . . . only a sustained or systemic failure of theboard to exercise oversight—such as an utter failure to attempt
to assure a reasonable information and reporting system
exists—will establish the lack of good faith that is a necessary
condition to liability.”
9Plaintiffs Failed to Allege That
Venture Capital Investors Who
Collectively Controlled 60% of aCompany’s Shares Constituted a“Control Group”

Generalized Allegations of aController’s Need for Liquidity
Do Not, Standing Alone, Warrant
Application of the Entire Fairness
Standard of Review

On October 4, 2019, the Delaware Supreme
Court affirmed the dismissal of a shareholder
action premised on the legal theory thatseveral venture capital firms constituted
a “control group.” Sheldon v. Pinto Tech
Ventures, 2019 WL 4892348 (Del. 2019)(Valihura, J.). Plaintiffs alleged, inter alia,that the venture capital firms (1) collectively
controlled over 60% of the company’s shares,(2) were parties to a voting agreement thatprovided them with the right to appoint three
directors, who in turn chose two additional
directors; and (3) had a history of investing
together. The court found these allegations
insufficient to demonstrate that the venture
capital firms “were connected in a legallysignificant way, either before or during” thetransactions at issue.

On November 1, 2019, the Delaware Supreme
Court affirmed the dismissal of a shareholder
class action alleging that a company’scontrolling stockholder “orchestrated a saleof the company [to a third party] for lessthan fair value to address a personal needfor liquidity prompted by his retirement as
the company’s CEO.” English v. Narang,
2019 WL 1300855 (Del. Ch. Mar. 20, 2019),
aff’d, 2019 WL 5681416 (Del. Nov. 1, 2019)(Vaughn, Jr., J.). The Chancery Court foundplaintiffs alleged “no concrete facts fromwhich it can reasonably be inferred that [theCEO] had an exigent or immediate need for
liquidity” that created a disabling conflictof interest with respect to the transaction.
The court also deemed it significant thatthe company engaged in a lengthy sales
process that included outreach to “numerous
potential buyers.”
Because the court found the transaction wasapproved by a majority of the company’s
uncoerced and fully-informed stockholders,the Chancery Court dismissed the complaint
based on the application of the businessjudgment rule. The Delaware Supreme Court
affirmed the dismissal “on the basis of and forthe reasons assigned by” the Chancery Court.
English, 2019 WL 5681416.

The Delaware Supreme Court noted thatthe voting agreement “bound all of [thecompany’s stockholders]” and “was unrelated”
to the transactions in question. Moreover, thecourt observed that the agreement “does not
require [the stockholders] to vote together on
any transaction.” The court also pointed outthat plaintiffs did “not identify any instancein which all three [v]enture [c]apital [f]irms
participated in any investment,” or “allege
that they held themselves out as a groupof investors or that they reported as suchto the SEC.” Instead, the court found the“allegations merely indicate that venture
capital firms in the same sector crossed paths
in a few investments” and had a “concurrenceof self-interest.”

This edition of the
Securities Law Alert was edited by
Paul C. Gluckow
pgluckow@stblaw.com / +1-212-455-2653,
Peter E. Kazanoffpkazanoff@stblaw.com / +1-212-455-3525,
and Jonathan K. Youngwood
jyoungwood@stblaw.com / +1-212-455-3539.

10

New York

Los Angeles

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

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

Michael D. Kibler+1-310-407-7515
mkibler@stblaw.com

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

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

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

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

Mark J. Stein+1-212-455-2310
mstein@stblaw.com

Palo Alto

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
Joseph M. McLaughlin+1-212-455-3242
jmclaughlin@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
Peter C. Thomas+1-202-636-5535
pthomas@stblaw.com

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

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attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in connection withthe use of this publication. Please contact your relationship partner if we can be of assistance regardingthese important developments. The names and office locations of all of our partners, as well as ourrecent memoranda, can be obtained from our website, www.simpsonthacher.com.
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