Securities Law Alert
Year in Review:• Supreme Court Decisions and Developments• Significant Circuit Court Decisions• Significant Delaware Decisions

2023

Supreme Court Decisions
and Developments
Supreme Court: Constitutional
Challenges to Agency Proceedings
Can Be Brought Directly in Federal
District Court

Simpson Thacher’s“deep bench of trial andappellate lawyers” is “regularly
retained to act on multibilliondollar securities class actions andderivative suits.”– Chambers USA

Simpson Thacher & Bartlett LLPOn April 14, 2023, the Supreme Court issued
a unanimous opinion settling a circuit
split concerning whether a party to an
administrative enforcement action can sue
directly in federal district court to challenge
the agency’s constitutional authority toproceed, or whether the party must firstcomplete the administrative process before
seeking review in a federal court of appeals.
Axon Enter. v. FTC, 598 U.S. 175 (2023)(Kagan, J.). Affirming Cochran v. SEC, 20
F.4th 194 (5th Cir. 2021) and reversing
Axon Enterprise v. FTC, 986 F.3d 1173
(9th Cir. 2021), the Court held that federal
district courts have jurisdiction to hearlawsuits challenging the constitutionalityof agency proceedings and to resolve such
constitutional challenges. In both cases, theparties challenged the agency’s administrative
enforcement action on the theory that theadministrative law judges’ dual-layer tenure
protection unconstitutionally insulates themfrom presidential removal.

Justice Kagan, writing for the Court,
concluded that “each of the three Thunder
Basin factors signals that a district court has
jurisdiction to adjudicate [these] sweeping
constitutional claims.” In Thunder Basin
Coal v. Reich, 510 U.S. 200 (1994), theCourt set forth three factors designed todetermine whether a claim was “of the type”
that Congress intended to be reviewed withina statutory review scheme. A court should
consider whether: (i) precluding district court
jurisdiction “could foreclose all meaningful
judicial review” of the claim; (ii) the claim
is “wholly collateral to the statute’s review
provisions”; and (iii) the claim is “outside theagency’s expertise.” If the answer to all threequestions is yes, it is presumed that Congress
did not intend to limit jurisdiction.
Analyzing the first factor, Justice Kagan
contrasted situations where an appellate
court could undo an agency action (such as
by revoking a fine) with situations wherea party faces allegedly unconstitutional
agency authority that “is impossible toremedy once the proceeding is over, which iswhen appellate review kicks in.” The Court
concluded that “[j]udicial review of [these]
structural constitutional claims would
come too late to be meaningful.” As to thesecond factor, the Court concluded that theconstitutional claims were “collateral” to any

orders or rules from which review might besought because the constitutional claims havenothing to do with either the enforcementrelated matters the Commissions regularly
adjudicate or those they would adjudicate
in assessing the charges against the parties.
Regarding the third factor, the Court
determined that the parties’ claims wereoutside the agencies’ expertise noting thatthese tenure protection claims “raise standard
questions of administrative and constitutionallaw, detached from considerations of agency
policy.” Thus, the claims were not “of thetype” that the statutory review schemes reachand a district court could review them.

Supreme Court: Section 11 Requires
Purchasers of Shares in a Direct
Listing to Plead and Prove That
They Purchased Traceable Shares
On June 1, 2023, the Supreme Court issued
a unanimous opinion settling a circuit
split concerning whether Section 11 of
the Securities Act requires a plaintiff whopurchased shares through a direct listing
to trace his shares to a false or misleading
registration statement. Slack Techs. v. Pirani,
598 U.S. 759 (2023) (Gorsuch, J.). The Court
held that to state a claim under Section 11“requires a plaintiff to plead and prove that
he purchased shares traceable to the allegedly
defective registration statement[.]” The Court
remanded the case to the Ninth Circuit toconsider whether plaintiff’s pleadings could
satisfy Section 11 in light of its decision.1
Plaintiff purchased shares on the day thecompany went public through a direct listing,by filing a registration statement relating toa certain number, but not all, of the shares
sold into the market on that date. Following a
stock price drop, plaintiff filed a putative classaction alleging that the company had violated
Sections 11 and 12 of the Securities Act byfiling a materially misleading registration
statement. The company moved to dismiss
arguing that Sections 11 and 12 authorized
suit only for those who held shares issued
pursuant to a false or misleading registration
1. The Court also vacated the Ninth Circuit’s judgment
determining that plaintiff had standing under Section 12(on the ground that Section 12 paralleled Section 11) forreconsideration in light of the Court’s interpretation of Section
11. The Court declined to express a view as to the properinterpretation of Section 12 or its application to the case, but
cautioned “that the two provisions contain distinct languagethat warrants careful consideration.”statement and plaintiff did not allege that hepurchased shares traceable to the allegedly
misleading registration statement. The
district court denied the motion to dismissbut certified its ruling for interlocutory appeal
and a divided panel of the Ninth Circuit
affirmed. The Supreme Court subsequently
granted certiorari.
Writing for the Court, Justice Gorsuch
explained that Section 11 authorizes anindividual to sue for a material misstatement
or omission in a registration statement when
he has acquired “such security.” Viewing thisas a matter of statutory interpretation, theCourt focused its analysis on the meaning of
the term “such security” in Section 11. Notingthat there is no clear referent in Section 11
to indicate what “such” means in the phrase“such security” the Court looked to othersections of the Securities Act for context.
In particular, the Court observed that “thestatute repeatedly uses the word ‘such’ tonarrow the law’s focus.” The Court reasoned
that as to “‘such security,’ the statute islimited to a security registered under theparticular registration statement alleged tocontain a falsehood or misleading omission.”
The Court also noted that Section 11(e) caps
damages against an underwriter at the total
price at which the securities were offeredto the public, thereby tying the maximum
available recovery to the value of theregistered shares alone. The Court observedthat this provision would make “little sense”
under plaintiff’s interpretation because
if Section 11 liability “extended beyond
registered shares then presumably available
damages would too.” The Court concluded
that “[c]ollectively, these contextual clues
persuade us that [the company’s] reading of
the law is the better one.”

Supreme Court: The Court Hears
Oral Argument on Whether
the SEC’s In-House Courts Are
Unconstitutional
On November 29, 2023, the Supreme Court
heard oral argument concerning whether
statutory provisions that empower the SEC
to initiate and adjudicate administrative
enforcement proceedings seeking civil
penalties in its own in-house courts violate
the Seventh Amendment right to a jury trial.
SEC v. Jarkesy, No. 22-859. In the case, theSEC brought an administrative proceeding2

against a hedge fund owner and his advisory
firm for allegedly making misrepresentations
to investors. After an SEC administrative
law judge determined that respondents had
violated the Securities Act, Exchange Act,and Advisers Act, a divided panel of the Fifth
Circuit vacated and remanded. In its petition
for a writ of certiorari, the SEC asserted that
the Fifth Circuit’s holdings were “incorrect”
and “highly consequential.”
During oral argument, the attorney appearing
on behalf of the SEC emphasized thatin-house adjudications are a “longstanding
and entrenched practice” and asserted
that the Supreme Court’s decision in Atlas
Roofing v. Occupat’l Safety & Health Rev.
Comm’n, 430 U.S. 442 (1977) considered
many of the same arguments and “reaffirmedthat Congress does not violate the Seventh
Amendment when it authorizes an agency
to impose civil penalties in administrative
proceedings to enforce a federal statute.”
In Atlas Roofing, the Court stated “in cases
in which ‘public rights’ are being litigated- e.g., cases in which the Government sues
in its sovereign capacity to enforce publicrights created by statutes within the power ofCongress to enact - the Seventh Amendment
does not prohibit Congress from assigning thefactfinding function and initial adjudication toan administrative forum with which the jury
would be incompatible.”
Justice Thomas asked if the rights being
litigated were categorized as private rights
rather than public rights if that would
determine whether the case should be
adjudicated before an Article III court. Justice
Sotomayor noted that Justice Thomas’s
writings have broadly defined a private rightas any right that involves property, life, or
liberty. The SEC attorney acknowledged thatthe definition of public rights is contested but
pointed out that when an agency is enforcing
a federal statute in exercise of its sovereign
powers, that it is a matter involving publicrights under Atlas Roofing, even if private
property was involved. The SEC attorneyasserted that this case involves public rights
because the SEC is seeking to vindicate is the
public’s right to fair and honest markets.
Justice Gorsuch commented that the SEC
has changed over the years and statedthat “Congress has a lot more problems
on its plate today than it -- than it did ahundred years ago or even 50 years ago.
But that doesn’t mean that the constraintsof the Constitution somehow evaporate[.]”Similarly, Chief Justice Roberts noted that“the extent of impact of government agencies
on daily life today is enormously moresignificant than it was 50 years ago.” Chief
Justice Roberts further pointed out that whenan administrative agency can decide whether
to proceed against a defendant before its own
in-house court or in federal court, that “itdoes seem to me to be curious that and unlike
most constitutional rights that you have thatright until the government decides that they
don’t want you to have it. That doesn’t seemto me the way the Constitution normallyworks.”
Addressing respondents’ counsel, JusticeKagan pointed out that Atlas Roofing statedthat “the Seventh Amendment is no bar to thecreation of new rights or to their enforcement
outside the regular courts of law.” Comparing
the statutory scheme at issue with the OSH
Act at issue in Atlas Roofing, Justice Kagan3stated that both served a prophylactic purpose
allowing the government to take action before
harm occurs. Respondents’ counsel counteredthat a new statutory public right had notbeen created here because the elements ofa 10b-5 action are “substantially the sameand certainly serve the same essentialfunction as a traditional common law fraudclaim.” Respondents’ counsel continued
that if a common law claim or something“approximating” such a claim is thrown into astatutory scheme that it still requires the rightto trial by jury.
The Court’s decision in this case is highly
anticipated as its outcome may affect how the
SEC litigates certain cases.

Significant Circuit Court
DecisionsThird Circuit: A District Court Must
Impose “Some Form” of Rule 11
Sanctions When It Finds Rule 11
Violations in Proceedings Governedby the PSLRAOn April 5, 2023, the Third Circuit resolved
whether a district court erred in failing toaward attorneys’ fees or impose any othersanctions in connection with determiningthat plaintiffs violated Rule 11 in bringing
three federal securities claims following
their purchase of unregistered securities in
a company’s stock offering. Scott v. Vantage
Corp., 64 F.4th 462 (3d Cir. 2023) (Smith, J.).
The Third Circuit affirmed the district court’s
determination that certain of plaintiffs’ claims
violated Rule 11 and that the company’s
founder (the only defendant party to theappeal) was not entitled to attorneys’ fees.
The court held, however, that the PSLRA“mandates the imposition of some form ofsanctions when parties violate Rule 11 inbringing federal securities claims.”
After plaintiffs purchased stock in thecompany’s 2016 stock offering under SEC
Rule 506(b), they brought an unregisteredsecurities claim, a misrepresentation claim,
and a Rule 10b-5 securities fraud claim
against the defendant company, its president,
and the company’s founder. In 2019, thedistrict court granted summary judgment forthe company’s founder and the company’s
president on the three federal securities
law claims. On appeal, the Third Circuit
affirmed the district court’s determinationthat plaintiffs’ unregistered securities claim
and their misrepresentation claim against
the company’s founder violated Rule 11. The
Third Circuit also held that the district court
did not abuse its discretion in determiningthat these claims lacked factual support inviolation of Rule 11(b)(3).
Noting that under Mary Ann Pensiero, Inc.
v. Lingle, 847 F.2d 90 (3d Cir. 1988), courts
should assess Rule 11 compliance by assessinga party’s or attorneys’ conduct based onwhat was reasonable to believe at the time of
the complaint the Third Circuit stated thatplaintiffs made only general unregisteredsecurities allegations in the complaint andfailed to identify any specific individuals as
unaccredited investors. Similarly, as to themisrepresentation claim, the Third Circuit
pointed to the district court’s determinationthat plaintiffs’ pre-filing investigation shouldhave revealed the lack of factual support for
their allegation that the offering was public.
The Third Circuit also affirmed the district
court’s determination that plaintiffs’ 10b-5
securities fraud claim did not violate Rule 11.
The Third Circuit concluded that there wasno abuse of discretion in the district court’s
determination that plaintiffs had a reasonablebasis to allege securities fraud. The Third
Circuit also noted that while the district
court did summarily dismiss the 10b-5 claim,“courts must ensure that Rule 11 ‘not be used
as an automatic penalty against an attorney
or a party advocating the losing side of adispute.’” (quoting Gaiardo v. Ethyl Corp.,
835 F.2d 479 (3d Cir. 1987)).
Ultimately, the Third Circuit concluded thatthe district court did abuse its discretion in
declining to impose any form of sanctions andvacated the portion of the order that declined
to impose sanctions because the text of the
PSLRA makes the imposition of sanctions
mandatory after a court determines that a
party has violated Rule 11. On remand, theThird Circuit instructed the district court
to impose “some form of sanction” against
plaintiffs in accordance with Rule 11, but
took no position on what sanction to impose
acknowledging that the district court was
better situated to make that determination.

4

Fourth Circuit: Proxy Statement
Need Not Have Included Cash-Flow
Projections Given the Array of
Other Metrics
On June 1, 2023, the Fourth Circuit affirmed a
district court’s grant of summary judgment infavor of a defendant bank holding company,
which was alleged to have violated Section
14(a) of the Exchange Act by misleading
shareholders about the true value of theirshares ahead of a stock-for-stock merger.
Karp v. First Conn. Bancorp, 69 F.4th 223(4th Cir. 2023) (Diaz, J.). Affirming the
district court’s ruling, the Fourth Circuit
held that no reasonable jury could findthe omission from the proxy statement ofcertain cash-flow projections prepared by the
defendant’s financial advisor was material.
In 2018, defendant and another bankholding company proposed a merger. After
defendant’s shareholders voted to approvethe merger, plaintiff commenced a putativeclass action alleging that defendant’s proxystatement did not disclose either the specificcash-flow projections used in its financial
advisor’s discounted cash flow analysis or aset of “more optimistic” cash-flow projections
that defendant’s financial advisor prepared inconnection with a previous potential merger.
Plaintiff claimed this led shareholders toundervalue their shares and approve themerger. Both parties moved for summary
judgment, the district court denied plaintiff’s
motion and granted the defendant’s.
On appeal, the Fourth Circuit agreed withthe district court that there was no genuine
dispute of material fact regarding any ofthe elements of plaintiff’s Section 14(a)claim. The court explained that to prevail
under Section 14(a) “plaintiff must showthat (1) the proxy statement contained amaterial misrepresentation or omission(2) that caused the plaintiff injury and that(3) the proxy solicitation was an essential linkin the accomplishment of the transaction.”
Rejecting plaintiff’s argument that areasonable investor would have found theomitted cash flow projections would havebeen material because they would have shownthat the merger consideration was inadequate
and that the financial advisor’s valuation
was skewed, the Fourth Circuit held that noreasonable jury could find the omission of the
cash-flow projections material. The Fourth

Circuit agreed with defendant that it was“not enough to speculate that shareholders
might have found the projections helpful tothe deliberations, so long as the merger proxy‘provided a thorough and accurate summary’of the financial advisor’s work.” The Fourth
Circuit noted that, “as other courts have held,
shareholders aren’t entitled to double-checkevery aspect of the advisor’s math so long as
the proxy statement contains an adequate
and fair statement of their work.” The Fourth
Circuit concluded that based on “the arrayof metrics in the proxy statement,” it was
unlikely that the more optimistic cash-flow
projections “would have significantly altered
the total mix of information.”

Fourth Circuit: Affirms Dismissal
of Securities Fraud Class Action
Alleging Misrepresentations or
Omissions Regarding a Clinical
Trial DrugOn March 2, 2023, the Fourth Circuit
affirmed the dismissal of a putative
securities fraud class action alleging that adrug company, its president/CEO and its
CFO made material misrepresentations oromissions concerning a new drug, in violationof Section 10(b) of the Exchange Act and Rule10b-5. Emps. Ret. Sys. v. MacroGenics, 61
F.4th 369 (4th Cir. 2023) (Gregory, J.). The
court held that plaintiffs failed to sufficiently
allege any actionable misrepresentations
or omissions that would give rise to a duty
to disclose.
In June 2019 the company presented clinical
trial data for its new drug at a scientificconference, including a graph that provided avisual depiction of the interim overall survival
data. An analyst described this data as
5

“underwhelming.” Subsequently, the company
experienced a stock price drop and plaintiffs
sued asserting violations of Section 10(b) andRule 10b-5 and Sections 11 and 12(a)(2) of the
Securities Act. Plaintiffs alleged that the graphdepicting interim overall survival data shouldhave been disclosed earlier and showed thatthe overall survival data was not on track to
generate a statistically significant result when
the data fully matured.

The Fourth Circuit noted that while acompany must disclose information when“necessary to make statements made, inlight of the circumstances under which
they were made, not misleading,” under
Matrixx Initiatives v. Siracusano, 563 U.S.
27 (2011), the Fourth Circuit determined that
defendants did not have a duty to disclose
the interim overall survival results because
their written and oral statements prior to a
May 2019 press release—where the company
discussed the overall survival data for the
first time in detail—“did not ‘speak’ about
the [overall survival] data.” Instead, theseprior statements had “primarily focused” onthe clinical trial’s success in reaching its first
endpoint and “[a]ny language concerning the[overall survival] endpoint was preliminary
and focused on the ongoing nature of the[overall survival] data’s accumulation.”

Seventh Circuit: Specifies theCorrect Pleading Standard for a
Breach of the Duty of Prudence
Under ERISA in the Wake of
HughesOn March 23, 2023, on remand from theSupreme Court’s decision last year in Hughes
v. Northwestern, 595 U.S. 170 (2022),
the Seventh Circuit reexamined plaintiffs’
allegations that the defendant plan fiduciary

breached its duty of prudence under ERISA.
Hughes v. Northwestern, 63 F.4th 615 (7thCir. 2023) (Brennan, J.). Under the Supreme
Court’s decision in Hughes, to plead a breachof the duty of prudence under ERISA, aplaintiff must plausibly allege fiduciary
decisions outside a range of reasonableness.
The plan fiduciary argued that plaintiffs
must plead that a prudent alternative action
was “actually available.” Rejecting this, theSeventh Circuit held that “[a]t the pleadings
stage, a plaintiff must provide enoughfacts to show that a prudent alternative
action was plausibly available, rather thanactually available.”
The Seventh Circuit noted that Hughes
directed it “to reevaluate plaintiffs’ allegations
based on the duty of prudence articulated
in Tibble v. Edison International, 575 U.S.
523 (2015), applying the pleading standard
discussed in Ashcroft v. Iqbal, 556 U.S. 662(2009), and Bell Atlantic Corp. v. Twombly,
550 U.S. 544 (2007).” Iqbal and Twombly
establish that an obvious alternative
explanation for a defendant’s conductthat precludes liability can undermine theclaim’s plausibility. The court stated that“[o]nly obvious alternative explanations
must be overcome at the pleadings stage,
and only by a plausible showing that suchalternative explanations may not accountfor the defendant’s conduct.” The court thenconcluded that “whether a claim survives
dismissal necessarily depends on the strengthor obviousness of the alternative explanationthat the defendant provides.”In applying this standard, the Seventh
Circuit concluded that plaintiffs plausibly
alleged that the plan fiduciary violated its
duty of prudence by incurring unreasonable
recordkeeping fees. The court noted thatplaintiffs alleged that recordkeeping services
are fungible, that the market for such services
is highly competitive and that the fees were
excessive relative to the recordkeeping
services rendered. The Seventh Circuit alsodenied dismissal of plaintiffs’ second claimthat the plan fiduciary failed to swap out retailshares for identical, lower-cost institutional
shares of the same funds. The court noted
plaintiffs’ allegations that the plan fiduciary
retained more expensive retail-class sharesof 129 mutual funds, when less expensive but
otherwise identical institutional-class shareswere available.
6Ninth Circuit: Affirms Dismissal of
Derivative Suit Based on a ForumSelection Clause in the DefendantCompany’s Bylaws
On June 1, 2023, a majority of the Ninth
Circuit sitting en banc affirmed the dismissalof a putative derivative action that plaintiff
brought in California district court against
a retail clothing company incorporated in
Delaware in light of a forum-selection clause2
in the company’s bylaws requiring any
derivative action or proceeding to be brought
in Delaware Chancery Court. Lee v. Fisher,
70 F.4th 1129 (9th Cir. 2023) (Ikuta, J.). The
Ninth Circuit held that enforcement of theforum-selection clause did not violate the
Exchange Act’s antiwaiver provision, Section
29(a), and was not contrary to Section 115
of the Delaware General Corporation Law(“DGCL”).
Plaintiff alleged that the company andcertain directors violated Section 14(a)of the Exchange Act by making false or
misleading statements to shareholders about
the company’s commitment to diversity.
After the district court dismissed on forum
non conveniens grounds, a three-judge
panel of the Ninth Circuit affirmed in 2022.
The instant Ninth Circuit opinion follows
its decision to rehear the case en banc to
consider whether a forum-selection clause canrequire that all derivative actions be brought
in a state court in the state of incorporation.
As to the Exchange Act’s antiwaiver provision,
the court began its analysis with the textof Section 29(a), which provides that “anycondition, stipulation, or provision binding
any person to waive compliance with any
provision of this chapter or of any rule orregulation thereunder . . . shall be void.” In
Shearson/Am. Exp. v. McMahon, 482 U.S.
220 (1987), the Supreme Court interpreted
Section 29(a) as prohibiting “only . . . waiverof the substantive obligations imposed by the
Exchange Act.” The Ninth Circuit then framed
the issue as whether the forum-selection
clause authorized the company to waive
compliance with the substantive obligationof Section 14(a) and Rule 14a-9 (i.e., to not
to make a false or misleading statement in aproxy statement). While plaintiff argued thatenforcing the forum-selection clause would
allow the company to waive such complianceby precluding her from bringing a derivative
Section 14(a) action in any forum (because
the Chancery Court would dismiss her action
based on federal courts’ exclusive jurisdictionof Exchange Act violations), the Ninth Circuit
explained that plaintiff could still enforce thecompany’s compliance with the substantive
obligations of Section 14(a) by bringing a
direct action in federal court. The court notedthat the forum-selection clause does not
impose any limitation on direct actions.
The Ninth Circuit also concluded that theforum-selection clause was valid under
Delaware law because in Salzberg v.
Sciabacucchi, 227 A.3d 102 (Del. 2020),
the Delaware Supreme Court indicatedthat federal claims like plaintiff’s derivative
Section 14(a) action are not “internal
corporate claims” as defined in Section
1153 of the DGCL, and because no language
in Section 115, the official synopsis, orBoilermakers Local 154 Retirement Fundv. Chevron Corp., 73 A.3d 934 (Del. Ch.
2013)—which Section 115 was intended to
codify—“operates to limit the scope of what
constitutes a permissible forum-selection
bylaw under Section 109(b)[.]”
3. Section 115 of the DGCL, states that a corporation’s “bylaws
may require, consistent with applicable jurisdictional
requirements, that any or all internal corporate claims shallbe brought solely and exclusively in any or all of the courts inthis State.” Section 115 defines “internal corporate claims” as
those “that are based upon a violation of a duty by a current orformer director or officer or stockholder in such capacity,” andclaims “as to which the DGCL confers jurisdiction.”

2. The forum-selection clause states that “Unless the Corporationconsents in writing to the selection of an alternative forum,
the Court of Chancery of the State of Delaware shall be thesole and exclusive forum for . . . any derivative action orproceeding brought on behalf of the Corporation . . . .”7

Ninth Circuit: Complaint Timely
Where Plaintiff Could Not Have
Discovered Necessary Facts
Until an SEC Order Revealed
That a Company’s Statements
Were Misleading
On April 11, 2023, the Ninth Circuit reversed
and remanded a district court’s dismissal ofa securities fraud class action on the groundthat it was untimely. York Cnty. v. HP, Inc.,
65 F.4th 459 (9th Cir. 2023) (Bybee, J.). The
Ninth Circuit determined that the defendantprinting supply company’s “allegedly
fraudulent statements, on their own, wereinsufficient to start the clock on the statuteof limitations.” The Ninth Circuit held thatthe complaint was timely, concluding thatplaintiff could not have discovered the facts
necessary to plead an adequate complaint
until after the issuance of an SEC orderthat revealed the misleading nature ofdefendants’ statements.

During 2015 and 2016 investor calls thedefendant company made statements about
whether it was meeting its inventory target
ranges. Subsequently, an SEC investigation
uncovered that the company had allegedly
engaged in sales practices that led to shortterm gains but harmed overall profits. The
SEC issued an order in 2020 (“SEC Order”)
instituting cease-and-desist proceedings.
The company agreed to pay a fine without
admitting or denying the allegations
contained in the SEC Order. Within weeks of
the SEC Order, plaintiff sued alleging that thecompany violated Section 10(b) and Rule 10b5. The company moved to dismiss assertingthat plaintiff’s claims were time-barred by thestatute of limitations in 28 U.S.C. § 1658(b)(1), which provides “that private actions
alleging securities fraud must be brought nomore than ‘2 years after the discovery of thefacts constituting the violation’ of securities
laws.” The district court dismissed thecomplaint as time-barred.
Relying on Merck & Co. v. Reynolds, 559
U.S. 633 (2010), the Ninth Circuit held that“a defendant establishes that a complaint
is time-barred under § 1658(b)(1) if itconclusively shows that either (1) the plaintiff
could have pleaded an adequate complaint
based on facts discovered prior to the critical
date and failed to do so, or (2) the complaint
does not include any facts necessary to plead
an adequate complaint that were discovered
following the critical date.” Under Merck, “thecritical date” is defined as the date “two years
before the complaint was filed.” Adopting
the reasoning of City of Pontiac General
Employees’ Retirement System v. MBIA,
Inc., 637 F.3d 169 (2d Cir. 2011), the Ninth
Circuit further held that a “reasonably diligent
plaintiff has not ‘discovered’ one of the facts
constituting a securities fraud violation until
he can plead that fact with sufficient detailand particularity to survive a 12(b)(6) motion
to dismiss.”
In this case, the critical date was April 21,
2019, based on the fact that the complaint
was filed on April 21, 2021. The Ninth Circuit
noted the allegation that the false statements
and misrepresentations were madeapproximately three years before the criticaldate. The court then noted plaintiff’s assertion
that it did not “discover the facts constituting
the violation” until after the critical datebecause “the SEC Order put [the company’s]
prior statements in a new context, revealingthat ostensibly innocuous statements wereactually intentional misrepresentations.”
Because plaintiff pleaded facts that post-dated
the critical date, the court explained that thecompany could still show the claim was timebarred by either showing that: (i) plaintiff“could have pleaded its claim based solely
on things that it knew or should have known
prior to the critical date”; or (ii) “the SEC
Order provided no information necessary”
to plaintiff’s claim. The court stated that thecompany failed to make this showing.

8

Tenth Circuit: Rejects Motion
to Compel Arbitration of ESOP
Claims, Holding That the Effective
Vindication Exception Applies
On February 9, 2023, the Tenth Circuit
affirmed a district court’s denial of a motion
to compel arbitration in a lawsuit brought by
an ESOP (Employee Stock Ownership Plan)
participant alleging that the plan fiduciaries
breached their fiduciary duties to the planunder ERISA. Harrison v. Envision Mgmt.
Holding, 59 F.4th 1090 (10th Cir. 2023)(Briscoe, J.). On appeal, the Tenth Circuit
held that enforcing the arbitration provisions
in the plan document would prevent plaintiff
from vindicating the statutory causes of action
listed in his complaint, and concluded “thatthe effective vindication exception applies inthis case.”
The Tenth Circuit stated that under American
Express v. Italian Colors Restaurant, 570
U.S. 228 (2013), the “key question is whether‘the prospective litigant effectively may
vindicate its statutory cause of action in thearbitral forum.’” The court explained that, todetermine whether the effective vindication
exception applies, it “must first identify thestatutory remedies [plaintiff] is seeking”
and “then determine whether the arbitration
provisions contained in the Plan Document
effectively prevent [plaintiff] from obtaining
those statutory remedies in the arbitral
forum.” The court noted that the statutory
remedies plaintiff sought were under
ERISA subsections 502(a)(2) and (a)(3),and included a declaration that defendants
breached their fiduciary duties under ERISA,
among other things.4
As to whether the arbitration provisions
effectively prevented plaintiff fromvindicating the statutory remedies, the court
focused on the language in the plan document
stating that “each arbitration shall be limited
solely to one Claimant’s Covered Claims, andthat Claimant may not seek or receive any
remedy which has the purpose or effect ofproviding additional benefits or monetaryor other relief to any Eligible employee,
Participant or Beneficiary other than the
4. These included an injunction of further fiduciary duty
violations, the appointment of a new fiduciary to manage theESOP, removal of the ESOP trustee, and an order directing
the ESOP trustee to restore all losses to the plan that resulted
from the fiduciary breaches and to disgorge all profits madethrough use of the ESOP’s assets.

Claimant.” (emphasis in original). The court
found that “this sentence would clearly
prevent [plaintiff] from obtaining at least
some of the forms of relief that he seeks in hiscomplaint pursuant to [Section 502(a)(2)],”
including, among other things, a declarationthat all defendants breached their fiduciary
duties under ERISA. The court explainedthat these forms of relief would provide
additional benefits to the plan as a whole or to
all of the plan participants and beneficiaries
and would thus be barred by the arbitration
provisions. The court concluded that “Section
21(b) is not problematic because it requires[plaintiff] to arbitrate his claims, but rather
because it purports to foreclose a number ofremedies that were specifically authorized
by Congress[.]”Significant Delaware
Decisions
Delaware Supreme Court: Refines
the Standards for Reviewing
Board Action That Interferes With
Director Elections or Stockholder
Voting Rights in Control Contests
On June 28, 2023, the Delaware Supreme
Court affirmed a Chancery Court decisionfinding that the board of a real estate services
company had not acted for “inequitablepurposes” and had “compelling justifications”
for a stock sale, which diluted plaintiff’s 50%
ownership interest in the company, brokea director election deadlock, and mooted
plaintiff’s petition to appoint a corporate
custodian. Coster v. UIP Cos., 300 A.3d 656(Del. 2023) (Seitz, C.J.). The Supreme Court
held that the Chancery Court did not err asa legal matter, and its factual findings were
not clearly wrong. As to the proper standardof review for stockholder challenges to board
action that interferes with director elections
or stockholder voting rights in control
contests, the Supreme Court folded thethree standards of review in this area into a
unified standard.
In her suit seeking to cancel the board’s stock
sale, plaintiff alleged that the sale had beeneffectuated to dilute her voting power inviolation of the company co-owner’s fiduciary
duties. In a post-trial opinion, the Chancery
9

Court upheld the stock sale under the entire
fairness standard of review and dismissed
the action. In the first appeal, the Supreme
Court did not disturb the Court of Chancery’s
entire fairness decision but remanded with
instructions to review the stock sale under
Schnell v. Chris Craft Industries, Inc., 285
A.2d 437 (Del. 1971)5 and Blasius Industries,
Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch.
1988)6 because entire fairness “is not a
substitute for further equitable review under
Schnell or Blasius when the board interfereswith director elections.”
On remand, the Chancery Court found thatthe board had not acted for inequitablepurposes under Schnell and had compelling
justifications for the stock sale under Blasius(because the custodian appointment would
harm the company and the stock sale had
5. Schnell stands for the proposition that “inequitable action
does not become permissible simply because it is legallypossible and management cannot inequitably manipulate
corporate machinery to perpetuate itself in office anddisenfranchise the stockholders.” Under Schnell, board
actions are “twice tested.” First for legal authorization, andsecond to determine whether the board action was equitable.
In Schnell, the Delaware Supreme Court determined that aboard’s compliance with legal technicalities was insufficientbecause the board’s actions in response to a proxy fight(moving up the annual meeting’s date and switching it to aremote location) were intended to prevent the dissidents frombeing able to wage an effective campaign and motivated by adesire to entrench themselves.
6. Blasius has applied in cases where directors allegedly took
steps for the primary purpose of interfering with a stockholder
vote and established that “directors who interfere with board
elections, even if in good faith, must have a compelling
justification for their actions.” In Blasius, Chancellor
Allen voided the board’s creation and filling of two newboard positions in response to an unaffiliated majority ofstockholders seeking to expand the board and elect a new
majority, despite finding that the directors had acted on theirview of the corporation’s interest and not selfishly because thedirectors’ action “constituted an unintended violation of the
duty of loyalty that the board owed to the shareholders.”

been previously planned). Notably, theChancery Court’s compelling justification
analysis largely borrowed from thereasonableness and proportionality test in
Unocal Corp. v. Mesa Petroleum Co., 493
A.2d 946 (Del. 1985), for defensive measures
adopted by a board in response to a takeover
threat. In Unocal, “the Supreme Court usedan enhanced standard of review to decide
whether the directors had reasonable grounds
for believing that a danger to corporate policy
and effectiveness existed and that the board’s
response was reasonable in relation to thethreat posed.”
On appeal from the remand decision, theSupreme Court sought to reconcile Schnell,
Blasius and Unocal. The Court explainedthat “[w]hen a stockholder challenges board
action that interferes with the election of
directors or a stockholder vote in a contest forcorporate control, the board bears the burdenof proof.” The Court stated that a court should
review whether: (1) “the board faced a threat
to an important corporate interest or to theachievement of a significant corporate benefit.
The threat must be real and not pretextual,and the board’s motivations must be properand not selfish or disloyal”; and (2) “theboard’s response to the threat was reasonable
in relation to the threat posed and was notpreclusive or coercive to the stockholder
franchise. To guard against unwarranted
interference with corporate elections or
stockholder votes in contests for corporate
control, a board that is properly motivatedand has identified a legitimate threat must
tailor its response to only what is necessary tocounter the threat.”10Delaware Court of Chancery:
Denying Dismissal, Court Could
Not Conclude That De-SPAC Merger
Was the Product of Fair Dealing
On January 4, 2023, the Court of Chanceryof Delaware denied dismissal of a putativeclass action alleging breach of fiduciary duty
claims against the sponsor and directorsof a SPAC who allegedly undertook a value
destructive merger and impaired the publicstockholders’ ability to decide whether toredeem or to invest in the post-merger
company. Delman v. GigAcquisitions3, 288
A.3d 692 (Del. Ch. 2023) (Will, V.C.). The
court determined that it could not conclude
that the de-SPAC merger was the productof fair dealing because plaintiff sufficiently
pleaded that the proxy contained material
misstatements and omitted material,
reasonably available information.
Citing In re MultiPlan Shareholders
Litigation, 268 A.3d 784 (Del. Ch. 2022)7 thecourt determined that entire fairness applied
here “due to inherent conflicts between the
SPAC’s fiduciaries and public stockholders in
the context of a value-decreasing transaction.”
In essence, plaintiff alleged that defendants
undertook the transaction to obtain “colossal”
returns on the sponsor’s investment but thatthe public stockholders would have been
better served by liquidation. Defendants also
allegedly provided inadequate disclosures todiscourage redemptions and ensure greater
deal certainty.
The court rejected defendants’ contention thatthe proxy contained all material information,
explaining that compliance with the duty of
disclosure is included within the fair dealing
facet of the fairness test under Weinberger
v. UOP, 457 A.2d 701 (Del. 1983). The
court stated that the public stockholders’redemption decisions were compromised
because defendants failed to disclose the
cash per share that the SPAC would invest
in the combined company, and made an
incomplete disclosure of the value that the
SPAC and its non-redeeming stockholders
could expect to receive in exchange. The
court noted that “[b]oth pieces of information
would be essential to a stockholder deciding
whether it was preferable to redeem her
funds from the trust or to invest them in [the7. In MultiPlan, Vice Chancellor Will applied the entire fairness
standard in the SPAC context for the first time.

combined company].” The court concluded
that “[b]ecause the Proxy allegedly misstatedand obfuscated the net cash—and thus thevalue—underlying [the SPAC’s] shares, publicstockholders could not make an informed
choice about whether to redeem or invest.”
Plaintiff also alleged that defendants
overstated the target’s value. The court
noted that the target’s value would behighly relevant to the public stockholders’investment decisions and concluded that the“lofty projections were not counterbalanced
by impartial information.” The court“inferred that the defendants knew (andshould have disclosed) or should have known(but failed to investigate)” that the target’s
production would be difficult to scale aspredicted. Therefore, the court concluded
that it was reasonably conceivable that theboard deprived the public stockholdersof an accurate portrayal of the target’s
financial health, and consequently the publicstockholders could not fairly decide whether it
was preferable to redeem or invest.

Delaware Court of Chancery:
Clarifies for the First Time That
Corporate Officers, Not Just
Directors, Have a Duty of Oversight
On January 26, 2023, the Court of Chanceryof Delaware denied dismissal of a derivative
action alleging that the defendant former
head of human resources for a global
fast food company breached his fiduciary
duties by: (i) consciously ignoring red
flags regarding sexual harassment andmisconduct at the company (duty ofoversight); and (ii) personally engaging
in sexual harassment (duty of loyalty). In
re McDonald’s S’holder Derivative Litig.,
289 A.3d 343 (Del. Ch. 2023) (Laster,V.C.). Rejecting defendant’s argument that11

Delaware law does not impose any obligation
on officers that are comparable to the dutyof oversight for directors established by
In re Caremark International Derivative
Litigation, 698 A.2d 959 (Del. Ch. 1996), thecourt announced for the first time that “[t]his
decision clarifies that corporate officers owe a
duty of oversight.”

Concluding “that oversight liability for
officers requires a showing of bad faith[,]”the court explained that “[t]he officer must
consciously fail to make a good faith effort
to establish information systems, or theofficer must consciously ignore red flags.”
The court stated that the duty of oversight iscontext-driven and its application will differ
depending on the officer’s role. However,“a particularly egregious red flag might
require an officer to say something even if itfell outside the officer’s domain.” The court
stated that: “To plead a Red-Flags Claimthat will survive a Rule 12(b)(6) motion,a plaintiff must plead facts supporting an
inference that the fiduciary knew of evidenceof corporate misconduct. The plaintiff also
must plead facts supporting an inference thatthe fiduciary consciously failed to take action
in response. The pled facts must support aninference that the failure to take action was
sufficiently sustained, systematic, or striking
to constitute action in bad faith. A claim thata fiduciary had notice of serious misconduct
and simply brushed it off or otherwise failed
to investigate states a claim for breachof duty.”
The court found that plaintiffs asserted
a red-flags claim because they describedthat defendant: (i) knew about evidence ofsexual misconduct; and (ii) acted in bad
faith by consciously disregarding his duty
to address the misconduct. The court foundthat plaintiffs alleged a number of red flags,
including coordinated EEOC complaints,

employee strikes and Congressional inquiries,
indicating for pleading purposes that sexual
harassment occurred at the company andsupporting a reasonable inference that
defendant knew about the red flags. The court
observed that defendant was the executive
officer with day-to-day responsibility foroverseeing the human resources function andpromoting a safe and respectful environment,
and was thus “supposed to have his ear to
the ground and be knowledgeable about
the Company’s employees.” As to bad faith,
the court explained that Delaware law
presumes that directors and officers act ingood faith, and a complaint must plead facts
sufficient to support an inference of bad faithintent. The court stated that several factors
support an inference of scienter, including
plaintiffs’ allegations that defendant engaged
in multiple acts of sexual harassment andconcluded that “[w]hen a corporate officer
himself engages in acts of sexual harassment,
it is reasonable to infer that the officer
consciously ignored red flags about similar
behavior by others.”
The court also denied dismissal of plaintiffs’
claim that defendant’s own acts of sexual
harassment constituted a breach of the dutyof loyalty. The court explained that an allegedharasser acts in bad faith and breaches theduty of loyalty because a harasser engages
in sexual harassment for selfish reasons.
The court concluded by noting: “Sexual
harassment is bad faith conduct. Bad faithconduct is disloyal conduct. Disloyal conduct
is actionable.”
Notably, on March 1, 2023, the court issued
a Rule 23.1 order dismissing the breachof fiduciary duty claims against defendantbecause plaintiffs had not made a demandon the company’s board before commencing
their lawsuit. The court explained thatplaintiffs’ claims against defendant were
subject to dismissal unless they could plead
demand futility under the three-part test
in UFCW Union & Participating Food
Industry Employers Tri-State Pension
Fund v. Zuckerberg, 262 A.3d 1034 (Del.
2021). Plaintiffs asserted that demand on theboard was futile because the board faced a“substantial risk of liability” from plaintiffs’
claims. However—as discussed below—thecourt dismissed plaintiffs’ claims against theboard on March 1, therefore demand on theboard was not excused.
12

Delaware Court of Chancery:
Allegations on Board’s Response to
Red Flags Fell Short Where Board
Took Responsive Action
On March 1, 2023, in the same litigation
discussed immediately above, the Delaware
Court of Chancery dismissed two breach offiduciary duty claims against the board of a
global fast food company: (i) for failing totake action to address red flags indicatingthat sexual harassment and misconduct
were occurring at the company; and (ii)in connection with various executive
employment decisions. In re McDonald’s
S’holder Derivative Litig., 291 A.3d 652(Del. Ch. Mar. 1, 2023) (Laster, V.C.). The
court held that plaintiffs failed to state aclaim against the board for breach of the
duty of oversight under In re Caremark
International Inc. Derivative Litigation,
698 A.2d 959 (Del. Ch. 1996), for failing totake action to address red flags indicatingthat sexual harassment and misconduct
were occurring at the company. The court
also held that plaintiffs failed to state a claim
against the board for breach of fiduciary
duty in connection with three executive
employment decisions.
The court explained that “[a]lthough they
have pled facts supporting an inference
that red flags came to the attention of the
Director Defendants, they have not alleged
facts supporting a reasonable inference thatthe Director Defendants acted in bad faith

in response to those red flags.” The court
determined that plaintiffs’ allegations fell
short regarding the board’s response to thered flags, noting that at the end of 2018
the board began taking various responsive
steps that included, among other things,
hiring outside consultants, revising thecompany’s policies, implementing new
training programs, providing new levels of
support to franchisees, and setting up an
employee hotline.
The court also held that plaintiffs failed tostate a claim against the board for breachof fiduciary duty in connection with three
executive employment decisions because
the business judgment rule protected thesedecisions to: (i) hire the CEO based on his
assurance that a consultant with whom he wasin an intimate relationship would be removed
from the company’s account, (ii) discipline
rather than terminate the head of humanresources following a sexual harassment
incident, and (iii) terminate the CEO withoutcause rather than with cause after learningthat he had engaged in an inappropriate
relationship with an employee. The court
determined that plaintiffs failed to plead
facts sufficient to rebut any of the businessjudgment rule’s presumptions, which are that“in making a business decision the directorsof a corporation acted on an informed basis,in good faith and in the honest belief that theaction taken was in the best interests of thecompany.” Aronson v. Lewis, 473 A.2d 805(Del. 1984).

This edition of the
Securities Law Alert was edited by
Stephen P. Blake / +1-650-251-5153
sblake@stblaw.com
Craig S. Waldman / +1-212-455-2881
cwaldman@stblaw.com andJonathan K. Youngwood / +1-212-455-3539
jyoungwood@stblaw.com

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Martin S. Bell
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