Securities Law Alert
In This Edition:• Second Circuit: Creates a Circuit Split by Holding That Section 47(b) of the Investment Company Act
Provides a Private Right of Action• Third Circuit: SLUSA Does Not Preclude Opt-Out Actions That Were Never Actually Combined With a“Covered Class Action”• Fifth Circuit: Defendants’ Alleged Awareness of Excess Inventory Levels Was Insufficient to Raise a Strong
Inference of Scienter Concerning a Significant Markdown Risk
• 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 “Implicitly Communicate
Information About the Present”• Delaware Chancery Court: The Entire Fairness Standard of Review Applies to Compensation Awards toControlling Stockholders That Were Not Conditioned on MFW’s Procedural Protections• Delaware Chancery Court: (1) There Is No Violation of Caremark’s First Prong If a Board-Level Reporting
System Exists, and (2) A Class Action Settlement Does Not, Standing Alone, Constitute a Red Flag Under
Caremark’s Second Prong• Delaware Chancery Court: In Appraisal Actions, the Acquirer Must Prove That a Deduction From the Deal
Price for Merger-Related Synergies Is Warranted• New York Supreme Court: Courts Are Split on Whether the PSLRA’s Discovery Stay During the Pendency
of a Motion to Dismiss Applies to State Court Actions
August/September 2019

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Second Circuit: Creates a
Circuit Split by Holding
That Section 47(b) of theInvestment Company Act
Provides a Private Right of
Actionviolative 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.

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

Background
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 byeither party . . .
(2) To the extent that a contract describedin paragraph (1) has been performed,
a court may not deny rescission at the
instance of any party unless the court
finds that under the circumstances thedenial of rescission would produce amore equitable result than its grant
and would not be inconsistent with the
purposes of this subchapter.
15 U.S.C. § 80a-46(b).
In Bellikoff v. Eaton Vance Corp., 481 F.3d
110 (2d Cir. 2007), the Second Circuit heldthat certain other provisions of the ICA do notcreate a private right of action. The district
court in Lansuppe Feeder v. Wells Fargo
Bank, 2016 WL 5477741 (S.D.N.Y. 2016),
relied on the three “Bellikoff factors” to findthat there is also no private right of action
under Section 47(b). First, the court found“the ICA explicitly provides for enforcementof all ICA provisions by the SEC.” Second, thecourt noted that “[t]he explicit creation of a
private right of action in Section 35(b) of the
ICA . . . suggests that Congress’s omission ofan explicit right of action from Section 47(b)was intentional.” Third, the court found that“there is no implication [in Section 47(b)] of
an intent to confer rights on . . . a protectedparticular class of persons.”

Second Circuit Finds Section
47(b)(2) Reflects a Clear
Congressional Intent to Provide a
Private Right of Rescission
The Second Circuit determined that the
district court “erred in its application of
the third Bellikoff factor, and in so doing,
overlooked clear evidence of Congressional
intent to provide a right of action: the text of§ 47(b) itself.” Oxford University Bank, 933
F.3d 99. The Second Circuit explained that“[a]lthough Congress did not expressly state[in Section 47(b)(2)] that a party to an illegal
contract may sue to rescind it, the clausethat begins ‘a court may not deny rescission
at the instance of either party’ necessarily
presupposes that a party may seek rescissionin court by filing suit.” The court concluded
that “[t]he language Congress used is thus

effectively equivalent to providing an express
cause of action.”
The Second Circuit found that “§ 47(b)(2)also identifies a ‘class of persons’ who benefit
from the availability of the right of action.”
The court reasoned that “[t]he most natural
reading of the clause providing for rescission,
which appears in a section entitled ‘Validityof Contracts’ and provides a remedy that
benefits a party to an illegal contract, is that‘any party’ refers to parties to a contract
whose provisions violate the ICA.” The court
deemed “unpersuasive” the argument thatthe term “any party” refers to a governmental
actor, such as the SEC. The court reasoned,
inter alia, that “Section 47(b)(2) cannot
be read in isolation from § 47(b)(1), which
provides that contracts that violate the ICA
are unenforceable by parties to the contract.”
The court explained that Section 47(b)(2)“provides the parallel remedy—rescission
rather than non-enforcement—for violative
contracts that have already been performed.”

The Second Circuit found it significant
that the Supreme Court reached thesame conclusion with respect to a similar
provision in the Investment Advisors Act(“IAA”), companion legislation to the ICA. In
Transamerica Mortgage Advisors v. Lewis,
444 U.S. 11 (1979), the Court held that “inproviding that contracts violating the IAA
were void, Congress intended to include
a right to seek rescission as well.” Oxford
University Bank, 933 F.3d 99 (discussing
Transamerica Mortgage Advisors, 444
U.S. 11).
The Second Circuit recognized that “theThird Circuit and several lower courts havereached the opposite result” with respect tothe availability of a private right of action
under Section 47(b). The court explainedthat it “respectfully disagree[d]” with theThird Circuit’s decision in Santomenno, 677
2

F.3d 178, because the Third Circuit “relied
on interpretive canons that are intended
to help resolve ambiguity” rather than
“focusing on the text of the statute.” The
Second Circuit noted that “the Third Circuit
failed to mention the strongest textualindication of Congressional intent to provide
a private right of action: the clear languageof § 47(b)(2) that ‘a court may not deny
rescission at the instance of any party.’”
The Second Circuit similarly disagreed with
district court decisions holding that Section
47(b)’s “‘language is not sufficient to findan implied private right of action’ because‘it contains a remedy but not a substantive
right.’” Id. (quoting Smith v. Oppenheimer
Funds Distrib., 824 F. Supp. 2d 511 (S.D.N.Y.
2011)).1 The court found “[t]hese district court
decisions effectively read § 47(b)(2) out of
the ICA.”

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 the Securities Litigation Uniform
Standards Act (“SLUSA”) does not preclude
plaintiffs from bringing individual suits understate law after opting out from a securitiesrelated class action unless the opt-out suit andthe class action were “somehow combined,
in whole or in part, for case management
or for resolution of at least one common
issue.” North Sound Capital v. Merck & Co.,2019 WL 4309663 (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.”

Background
SLUSA precludes a “covered class action”
alleging state law-based securities claims.
15 U.S.C. § 78bb(f)(1). SLUSA’s “mass1. See also Smith v. Franklin/Templeton Distribs., 2010 WL
2348644 (N.D. Cal. 2010) (“By its terms, § 47(b) provides a
remedy . . . rather than a distinct cause of action or basis forliability.”); Stegall v. Ladner, 394 F. Supp. 2d 358 (D. Mass.
2005) (“ICA § 47(b) provides a remedy rather than a distinct
cause of action or basis of liability”).

action provision” defines a “covered classaction” to include “any group of lawsuits
filed in or pending in the same court andinvolving common questions of law or fact, inwhich . . . (I) damages are sought on behalf ofmore 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 district court held that SLUSA precluded
opt-out suits that were filed after thedismissal of the relevant class actions, eventhough the cases were at no point combined
and were never pending at the same time.
North Sound Capital LLC v. Merck & Co.,
314 F. Supp. 3d 589 (D.N.J. 2018). The court
reasoned that the absence of “a carve-out
for opt-out actions” in SLUSA “indicatesthat Congress envisioned the aggregation of
opt-out suits with related class actions under
SLUSA’s grouping provision.” The court notedthat SLUSA’s mass action provision refers tosuits that “proceed as a single action for any
purpose,” and determined that “the phrase‘for any purpose’ should be given an expansive
construction . . . consistent with [SLUSA’s]
legislative history.” The court concluded thatthe opt-out suits had “proceeded as a single
action” with the class actions because of “theprocedural history of, and degree of informal
coordination between” the opt-out suits andthe class actions. Plaintiffs appealed.

SLUSA Preclusion Does Not
Generally Apply to Opt-Out Suits
That Did Not “Coincide for Some
Period” With a Covered Class Action
The Third Circuit “consider[ed] what
Congress meant by the broader phrase‘otherwise proceed as a single action
for any purpose.’” The court found that“[b]y qualifying ‘single action’ with the
prepositional phrase ‘for any purpose,’
Congress clarified that the lawsuits need
not proceed together for all—or even most—
purposes; a group of lawsuits may satisfy
the statutory requirement even if a court
contemplates separate trials, judgments, or
hearings.” However, the court determinedthat “at a minimum, suits do not ‘proceed
as a single action’ unless they are somehow
combined for the joint management of acommon stage of the proceedings (such as
discovery) or the resolution of a common
question of law or fact.”3

The court found that “as a general matter,cases cannot ‘proceed as a single action’unless they coincide for some period.” Thecourt explained that it was “hard-pressed
to imagine any scenario in which two casesthat never overlap could function as a single
lawsuit on any dimension, as the massaction provision requires.” The court madeit clear that it did “not read the single action
requirement to mean that cases must be
coextensive with one another but rather thatthey be at least partially coordinated, which
would seem invariably to require that they
coincide for some period.”

The court found that its “common-senseinterpretation” of the phrase at issue “draws
further support from the time-honored canon
ejusdem generis, which teaches that wheregeneral words follow an enumeration of
two or more things, those successive words
refer only to persons or things of the samegeneral kind or class specifically mentioned.”
The court noted that “[t]he preceding
verbs ‘joined’ and ‘consolidated’ are nearlysynonymous when used to refer to the unionof lawsuits,” and “illustrate[ ] what Congressmeant by the phrase ‘otherwise proceed as asingle action.’”The court held that the mass action
provision’s “single-action requirement
cannot be contorted enough to cover‘functional coordination,’ as opposed toactual coordination.” The court reasoned
that requiring only “functional coordination”
would mean that “the mere existence ofa class action would preclude individual
plaintiffs from bringing state-law claims,
even if individual plaintiffs do not participate
at all in the class proceedings and, whenpresented with the opportunity, opt out of
the class action.” Such an interpretation
would “foster the complete preemption ofstate-law securities claims—precisely what
Congress chose not to do in adopting SLUSA.”

Moreover, the court observed that “it would
raise serious due process concerns if Congressconditioned the extinguishment of opt-out
investors’ state-law claims on whether anunaffiliated party had elected to bring aputative class action.” The court found “themass action provision evinces no intent topress these constitutional boundaries.”

Fifth Circuit: Defendants’Alleged Awareness of
Excess Inventory Levels
Was Insufficient to Raise aStrong 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 andits executives failed to disclose “the risk that[the company] had so much inventory thatit could get rid of it only by lowering prices
dramatically.” Municipal Emps. Ret. Sys. ofMich. v. Pier 1 Imports, 2019 WL 3886843(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.”
In Novak v. Kasaks, 216 F.3d 300 (2d Cir.
2000), the Second Circuit found plaintiffs
adequately pled scienter by alleging that a
women’s apparel retailer failed to mark down
the inventory value of out-of-style clothing.
Plaintiffs relied on Novak to argue that thecompany’s “products are particularly subject
to markdown risk” because the company “isa trend-based [home] fashion retailer that is
subject to the whims of consumer trends.” But
the Fifth Circuit found the company “operates
largely in the sturdier business of style” rather
than the ever-changing business of fashion.
The court pointed out that the company
does not characterize itself as a “trend-based[home] fashion retailer,” and a substantial
percentage of its inventory consists of “rebuy”
goods. The court determined that plaintiffs’
4allegations therefore did “not create a strong
inference that all (or even most) of [thecompany’s] inventory is so trend driventhat it could not be sold without significant
markdowns.”
The Fifth Circuit also noted that plaintiffs
offered no explanation for why defendants“kept ordering more inventory when they
supposedly knew deep down that theywould not be able to sell it.” The court founddefendants’ “conduct belied any attempt toconceal the impact of that problem: were
[defendants] attempting to conceal significant
markdown risk, continuing to order inventory
would be counterproductive.” Rather thanraising a strong inference of scienter [as to asignificant markdown risk], the court foundit “equally plausible . . . that [defendants]
reasonably believed they could fix theexcessive inventory problem without resortingto markdowns.”

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 “Implicitly Communicate
Information About the
Present”
On August 15, 2019, the Eleventh Circuit
affirmed the dismissal of a securities fraud
action alleging that a financial services
company made material misstatements
concerning its prospects for achieving
regulatory compliance. Carvelli v. Ocwen
Fin. Corp., 2019 WL 3819305 (11th Cir. 2019)(Newsom, C.J.). The court found that someof the alleged misstatements “are immaterial
puffery, some are mere statements of opinion,some fall within the [Private Securities
Litigation Reform Act’s (“PSLRA”)] safe
harbor for forward-looking statements, andstill others are simply not alleged to be false.”
The court’s ruling marks the first published
Eleventh Circuit decision applying the puffery
defense in the securities fraud context.

Excessively Vague and Optimistic
Corporate Statements Are Typically
Immaterial as a Matter of Law
The Eleventh Circuit noted that although
it has “accepted the puffery defense in thecommon-law context,” the court had “yet toapply it in a reported securities-fraud case.”
The court found that “the defense seems aparticularly good fit in the securities context”
because Rule 10b-5 prohibits only “untrue
statements of a material fact, with ‘material’
defined to mean something that a reasonable
investor would view as having significantly
altered the total mix of information madeavailable.” The court explained that“[e]xcessively vague, generalized, andoptimistic comments—the sorts of statementsthat constitute puffery—aren’t those that a‘reasonable investor,’ exercising due care,would view as moving the investment decisionneedle—that is, they’re not material.”
The court cautioned that “[a] conclusionthat a statement constitutes puffery doesn’t
absolve the reviewing court of the duty toconsider the possibility—however remote—that in context and in light of the ‘total mix’ ofavailable information, a reasonable investor
might nonetheless attach importance to thestatement.” The court instructed that “whenconsidering a motion to dismiss a securitiesfraud action, a court shouldn’t grant unlessthe alleged misrepresentations—puffery orotherwise—are so obviously unimportant
to a reasonable investor that reasonableminds could not differ on the question of
their importance.”
The court found that many of the compliancerelated statements at issue—such as
assertions that the company “was taking a‘leading role’ and making ‘progress’ toward5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
explained that “[w]hether a statement wasmade in bad faith or without a reasonablebasis is irrelevant to the question [of] whether
the statement is nonetheless so airy as to
be insignificant.”statement is of the sort that, by its nature,rolls in present circumstances—that is,when a statement forecasts in a tentative
way a future state of affairs in which a
present commitment unfolds into action—
the statement isn’t barred from safe harbor
protection solely on that ground.”

A Statement Concerning Future
Plans Is Not Ineligible for Safe
Harbor Protection Merely Because
It Includes Implicit Statements
Concerning Present Facts
The court found the company’s forwardlooking statements were entitled to safe
harbor protection even though they included“statements about the [c]ompany’s present
condition and intentions.” The court
explained that “a present-tense declarationis, in some cases, an inextricable part,rather than an easily severed ancillary, of aforward-looking statement.” For instance,
the statement that the company “would‘continue to provide strong servicing
results’ . . . impl[ies] both that servicing
results are currently strong and that [thecompany] commits to provide strong resultsin the future.” The court found “[t]hese
types of statements, when accompanied bymeaningful cautionary language, are properly
sheltered under the safe-harbor because
they convey management plans for yet-to-be
proven future operations and goals.”
The court reasoned that “[i]t would be
illogical to bar forward-looking statementsfrom protection simply because they
implicitly communicate information about thepresent—indeed, many plans and projections
are conveyed in just this way.” The court
noted, for example, that the statement,“‘I’ll leave my desk in 5 minutes,” includes
an implicit statement that the speakeris “presently at work.” The court foundstatements of this nature “are intended, firstand foremost, to communicate a future plan.”
The court clarified that its decision did
not stand for the proposition “that false
misrepresentations of present fact can be‘smuggled’ in under the cover of forwardlooking statements.” But the court did
specifically hold that “when a forward-looking

A Statement of Opinion Is Not
Actionable Simply Because the
Speaker “Should Have Known” theOpinion Was Objectively Inaccurate
The court also deemed inactionable a numberof the company’s statements of opinion.
The court found plaintiffs failed to allege
either that the company did not actually
believe these statements of opinion, or thatthe statements “contained embedded false
statements of fact,” as required under theSupreme Court’s decision in Omnicare v.
Laborers District Council Construction
Industry Pension Fund, 135 S. Ct. 1318
(2015).2 The court found the company’s
optimistic statements concerning its
compliance efforts were not “mutually
exclusive of—or even inconsistent with—[the company’s] alleged knowledge thatit had persistent software problems” that
hampered its compliance attempts. The
court reasoned that the company “could
have believed both that [its software] wasa mess—even a ‘train wreck’—and that it
had made progress towards compliance.”
The court found plaintiffs’ allegations might“[a]t best . . . giv[e] rise to an inference that[the company] perhaps could or should have
known that it would have difficulty improving
results.” But the court underscored that this is“not enough” to state a securities fraud claim
based on a statement of opinion.
2. Please click here to read our discussion of the Supreme Court’s
decision in Omnicare.
6Delaware Chancery Court:
The Entire Fairness Standardof Review Applies toCompensation Awards toControlling Stockholders That
Were Not Conditioned on
MFW’s Procedural Protections
On September 20, 2019, the Delaware
Chancery Court held that the businessjudgment standard of review did not apply toa board’s decision to award sizable incentive
compensation to a controlling stockholder,even though a majority of the disinterested
stockholders voted in favor of the award.
Tornetta v. Musk, 2019 WL 4566943 (Del.
Ch. 2019) (Slights, V.C.). The court held that“stockholder ratification, without more, does
not counterpoise the risk of coercion” by thecontrolling stockholder. The court found that
“MFW provides the answer” to protecting
against this risk.3 The court held that if aboard preconditions a compensation award toa controlling stockholder on the satisfactionof MFW’s dual procedural safeguards,“[b]usiness judgment deference at thepleadings stage would then be justified.”
The court recognized that “[a] board of
directors’ decision to fix the compensation of
the company’s executive officers” is generally“entitled to great judicial deference,”
particularly if “the board submits its decision
to grant executive incentive compensation to
stockholders for approval, and secures thatapproval.” However, the court stated that its“earnest deference to board determinations
relating to executive compensation does
not jibe with [its] reflexive suspicion
when a board transacts with a controllingstockholder.” The court observed that“[b]ecause the conflicted controller, as the
800 pound gorilla, is able to exert coercive
influence over the board and unaffiliatedstockholders, [Delaware] law has requiredthat transactions with conflicted controllers
be reviewed for substantive fairness
even if the transaction was negotiated by
3. 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 Special Committee 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
MFW.

independent directors or approved by theminority stockholders.”
The court rejected defendants’ contention
that this “concern is less pressing, and lessworthy of protection, in transactions, likethe [a]ward, that do not alter the corporate
contract.” The court found “[t]he controllingstockholder’s potentially coercive influence
is no less present, and no less consequential,
in instances where the board is negotiating
the controlling stockholder’s compensation
than it is when the board is negotiating withthe controller to effect a ‘transformational’
transaction.” The court held that “[i]n [both]
circumstances, stockholder approval of theconflicted controller transaction, alone, will
not justify business judgment deference.”

The court then considered whether “the[b]oard could have structured the approval
process leading to the [a]ward [at issue]
in a way that provides a feasible way for
defendants to get cases dismissed on thepleadings.” The court acknowledged that“neither the Chancery nor Supreme Court
opinions in MFW can be read to endorse anapplication of MFW beyond the squeezeout merger.” Nevertheless, the court
found this did “not mean that MFW’s dual
protections cannot be potent neutralizers inother applications.” The court determinedthat “[j]ust as in the squeeze-out context,
preconditioning a controller’s compensation
package on both the approval of a fully
functioning, independent committee andan informed, uncoerced vote of the majorityof the minority stockholders will dilutethe looming coercive influence of thecontroller.” The court reasoned that withthese procedural protections in place, “theminority stockholders will have far less reason
to fear that the controller will retaliate if thecommittee or minority stockholder votes do
not go his way.”7

Although the board conditioned thecompensation award on the approval ofa majority of the minority stockholders,the board did not condition the award on
the approval of an independent special
committee. The court therefore reviewed
the allegations under the entire fairness
standard of review. The court found it“reasonably conceivable” that the award was
unfair because plaintiff alleged that “[t]he[a]ward has a potential value that is ordersof magnitude higher than what other highly
paid CEOs earn.” The court therefore denied
defendants’ motion to dismiss the plaintiff’s
breach of fiduciary duty claims.

Delaware Chancery Court:(1) There Is No Violation of
Caremark’s First Prong If a
Board-Level Reporting System
Exists, and (2) A Class Action
Settlement Does Not, Standing
Alone, Constitute a Red Flag
Under Caremark’s Second
Prong
On July 29, 2019, the Delaware Chancery
Court dismissed with prejudice a derivative
action because the plaintiff failed to allege
that a majority of the directors faced asubstantial likelihood of personal liability inconnection with the claims at issue, which
concerned the company’s price comparison
advertising policy and practices. Rojas
v. Ellison, 2019 WL 3408812 (Del. Ch.
2019) (Bouchard, C.). The court found theplaintiff could not allege a violation under
the first prong of Caremark because theplaintiff conceded the existence of a boardlevel reporting system.4 With respect to theplaintiff’s failure-to-monitor allegations under
the second prong of Caremark, the court
found that a settlement without admission
4. In In re Caremark Int’l Derivative Litigation, 698 A.2d 959(Del. Ch. 1996), the court addressed the scope of directors’
obligations to monitor corporate operations. The court heldthat directors must “attempt in good faith to assure that a
corporate information and reporting system, which the board
concludes is adequate, exists.” The court further held that
directors may be liable for “failing adequately to control” thecompany’s employees if “the directors knew or . . . should have
known that violations of law were occurring” and “took nosteps in a good faith effort to prevent or remedy that situation”
and “such failure proximately resulted in . . . losses” to thecorporation.

of wrongdoing or liability does not, standing
alone, constitute a “red flag.”The court rejected what it found to be a“faint-hearted attempt to argue that themembers of the Demand Board face asubstantial likelihood of personal liability
under the first prong of Caremark for ‘utterly
failing’ to implement any reporting or
information system or controls with respect
to the [c]ompany’s advertising and pricing
policies.” The court noted that the Delaware
Supreme Court in Stone v. Ritter, 911 A.2d362 (Del. 2006), was “quite deliberate in its
use of the adverb ‘utterly’—a ‘linguisticallyextreme formulation’—to set the bar highwhen articulating the first way to holddirectors personally liable for a failure ofoversight under Caremark.” More recently,
in Marchand v. Barnhill, 212 A.3d 805(Del. 2019), the Delaware Supreme Court
held that Caremark imposes “a bottomline requirement” that “the board must
make a good faith effort—i.e., try—to put ina place a reasonable board-level system ofmonitoring and reporting.”5 The Marchandcourt observed that “[i]n decisions dismissing
Caremark claims, the plaintiffs usually lose
because they must concede the existenceof board-level systems of monitoring andoversight such as a relevant committee, aregular protocol reporting board-level reports
about the relevant risks, or the board’s
use of third-party monitors, auditors, or
consultants.” The Rojas court found “[t]hat isthe case here,” as the plaintiff admitted thatthe board did in fact have a reporting system
in place.
The Rojas court found similarly meritlessplaintiff’s allegations that the directors
knew or should have known the company
was violating the law, but failed to monitor
the company’s operations under the second
prong of Caremark. The plaintiff claimed thesettlement of a consumer class action “put thefull [b]oard on notice that the [c]ompany’s
pricing policies violated Consumer
Protection Laws.” But the court found“[a] settlement of litigation or a warningfrom a regulatory authority . . . [does notnecessarily] demonstrate that a corporation’s
directors knew or should have known thatthe corporation was violating the law.” Thecourt explained that the issue of “[w]hen such

5. Please click here to read our discussion of the Delaware
Supreme Court’s decision in Marchand.
8events become a ‘red flag’ depends on thecircumstances.”
Here, the court found the settlement wasmade without any admission of liability. The
court observed that the class action “wasnot brought against the backdrop of a priorsettlement where clear, repeated violations ofa law had been found.” Rather, the suit “was apurely civil matter of the type that commercial
parties routinely settle after motion practice.”
The court rejected the plaintiff’s contention
that “the sheer amount of the settlement
payment . . . and the fact that the [c]ompany
lost multiple motions . . . should satisfy his
pleading burden” to allege demand futility.
The court found the plaintiff’s allegations “farfrom sufficient in the context of the overall
circumstances to support the inference of
scienter necessary to demonstrate that [thecompany’s] directors acted in bad faith.”

Delaware Chancery Court:
In Appraisal Actions, theAcquirer Must Prove Thata Deduction From the Deal
Price for Merger-Related
Synergies Is Warranted
In two recent decisions, the Delaware
Chancery Court held that the fair value ina statutory appraisal proceeding brought
pursuant to Section 262 of the Delaware
General Corporation Law was the deal
price, without any deduction for mergerrelated synergies. See In re Appraisal of
Stillwater Mining Co., 2019 WL 3943851(Del. Ch. Aug. 21, 2019) (Laster, V.C.); In re
Appraisal of Columbia Pipeline Grp., 2019
WL 3778370 (Del. Ch. Aug. 12, 2019) (Laster,V.C.). In both cases, the court found that theacquirer failed to meet its burden of provingthat a downward adjustment for synergies
was warranted.
In Columbia Pipeline, the court recognizedthat “‘[i]t is widely assumed that the saleprice in many M&A deals includes a portionof the buyer’s expected synergy gains, whichis part of the premium the winning buyer
must pay to prevail and obtain control.’” 2019
WL 3778370 (quoting DFC Glob. Corp. v.
Muirfield Value Partners, 172 A.3d 347 (Del.
2017)). The court noted that “Section 262(h)requires that the Court of Chancery discern

the going concern value of the company
irrespective of the synergies involved in amerger.” The court explained that in order“[t]o derive an estimate of fair value, the court
must exclude any synergies or other value
expected from the merger giving rise to theappraisal proceeding itself.”
The court found that it was “not able tocredit [the acquirer’s] position that [thetarget] received 100% of synergies worth$4.64 per share” out of a total deal price of$25.50 per share. The court found that theacquirer “likely could have justified a smaller
synergy deduction, but it claimed a larger
and unpersuasive one” for which it “did notmeet its burden of proof.” The Stillwater
Mining court similarly found that theacquirer “failed to meet its burden of proof toestablish a quantifiable amount that the court
should deduct from the deal price.” 2019 WL
3943851. In both cases, the court declined
to make a downward adjustment to the deal
price to account for merger-related synergies.

New York Supreme Court:
Courts Are Split on Whether
the PSLRA’s Discovery Stay
During the Pendency of a
Motion to Dismiss Applies toState Court Actions
In Cyan v. Beaver Cty. Emps. Ret. Fund,
138 S. Ct. 1061 (2018), the Supreme Court
held that SLUSA did not “strip state courtsof jurisdiction over class actions alleging
violations of only the Securities Act of 1933”(the “1933 Act” or “’33 Act”).6 However, the
6. Please click here to read our discussion of the Supreme Court’s
decision in Cyan.

9

Court did not address whether all of theprocedural rules governing 1933 Act claims
brought in federal court also apply whenplaintiffs bring such claims in state court.
New York state courts have since reacheddiffering conclusions on whether the PSLRA’s
stay of discovery during a pending motion
to dismiss applies in state court actions
asserting 1933 Act claims.7 Compare Matterof PPDAI Grp. Sec. Litig., 2019 WL 2751278(N.Y. Sup. Ct. July 1, 2019) (Scarpulla, J.)(PSLRA’s discovery stay inapplicable in state
court actions), and In re Dentsply Sirona,Inc. S’holders Litig., 2019 WL 3526142 (N.Y.
Sup. Ct. Aug. 2, 2019) (Scarpulla, J.) (same),with In re Everquote, Inc. Sec. Litig., 2019
WL 3686065 (N.Y. Sup. Ct. Aug. 7, 2019)(Borrok, J.) (PSLRA’s discovery stay applies
in state court actions). These rulings havefurthered a growing division of authority on
this question.8

automatic discovery stay is not applicable toan action brought in New York State court.”
In reaching this conclusion, the court notedthat “in the Commercial Division discovery
generally continues during motion practice.”
In In re Denstply Sirona, 2019 WL 3526142,
a decision issued by the same judge, the court
reached the same conclusion.

In Matter of PPDAI, 2019 WL 2751278,
the court found that “[a]pplication of thefederal PSLRA automatic discovery staywould undermine Cyan’s holding that ’33
Act cases may be heard in state courts.” Thecourt therefore concluded that “the PSLRA’s

The Everquote court rejected plaintiffs’
contention that “state court practices andprocedures would be constrained” if the
PSLRA’s discovery stay were to apply in state
court actions. The court explained that “[t]his
is not an issue of federal common law being
applied to supply a rule of decision.” Rather,“[i]t was Congress that created the specificrights covered by the 1933 Act including
affording concurrent jurisdiction to state
courts to adjudicate claims brought under the1933 Act.” The court found that “the criticalissue is not how a stay of discovery squares in
the abstract with either Commercial Division
Rule 11 or CPLR 3214 or case assignment.”
Instead, “the controlling issue is how thiscourt implements the congressional mandate
regarding how it is to manage 1933 Act
claims that find their way into state courts.”
The court held that this “mandate requiresa stay” during a pending motion to dismiss

7. 15 U.S.C. § 77z-1(b)(1) provides that “[i]n any private action
arising under this subchapter, all discovery and otherproceedings shall be stayed during the pendency of any
motion to dismiss, unless the court finds, upon the motionof any party, that particularized discovery is necessary topreserve evidence or to prevent undue prejudice to that party.”
8. In City of Livonia Retiree Health and Disability Benefits
Plan v. Pitney Bowes, 2019 WL 2293924 (Conn. Super. Ct.
May 15, 2019), a Connecticut state court found that the “plain
meaning” of 15 U.S.C. § 77z-1(b)(1) “compels the conclusionthat [it] . . . applies to actions commenced in state court
under the [1933] Act, as well as such actions commenced infederal court.” (Please click here to read our discussion of theConnecticut Superior Court’s decision in City of Livonia.) But
in Switzer v. Hambrecht & Co., 2018 WL 4704776 (Cal. Super.
Ct. Sept. 19, 2018), a California state court determined that“the PSLRA’s provision for a discovery stay [during a pending
motion to dismiss] is of a procedural nature, and therefore
only applies to actions filed in federal court, not state court.”

But in In re Everquote, 2019 WL 3686065,
a different New York state court judge
applied the PSLRA’s discovery stay during apending motion to dismiss an action alleging
1933 Act claims. The court found that Cyan
“does not control the outcome of” whether
PSLRA’s discovery stay applies in state court
actions. But the court found Cyan “helpful”
insofar as it “underscores the most basic andfundamental rule in statutory interpretation—
the court must start with the express languageof the statute and presume that it means
what it says.” The Everquote court explainedthat “[t]he simple, plain and unambiguous
language [of the PSLRA] expressly provides
that discovery is stayed during a pending
motion to dismiss ‘in any private action
arising under this subchapter.’” Id. (quoting
15 U.S.C. § 77z-1(b)(1)). The court observedthat “[t]he statute simply does not say that the
automatic stay is limited to claims brought
pursuant to the 1933 Act in federal court.”
Quoting Cyan, the court found that Section
77z-1(b)(1) “says what it says—or perhaps
better put here, does not say what it does
not say.”

10

when plaintiffs bring 1933 Act claims instate courts.
The Everquote court reasoned thatholding otherwise would “run afoul of thewell-recognized purpose of [the PSLRA]
and SLUSA.” The court explained that the“specific abuses that Congress decided tocurtail in enacting the [PSLRA] . . . includ[ed]the filing of lawsuits and making significant
discovery requests in otherwise meritlesslawsuits (i.e., lawsuits that will not survive a
motion to dismiss) in the hope of encouraging
early settlement.” The court found that
“Congress enacted the automatic stay of
discovery during a pending motion todismiss to address this concern.” The court
determined that there “simply is no basis tofind that Congress intended for this provision
to only apply to actions brought in federal
court.” The court observed that “a divergencein the application of the [PSLRA] discovery
stay in state and federal court would create
the undesirable . . . and absurd incentive forlawsuits brought under the 1933 Act to bebrought in state court as opposed to federal
court to avoid the very protection supporting
the enactment of the [PSLRA].” The court
found that this would “confound[] Congress’
acknowledged intention that the lion’s shareof securities litigation would occur in thefederal courts.”

This edition of the
Securities Law Alert was edited byAlexis S. Coll-Veryacoll-very@stblaw.com / +1-650-251-5201,
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.

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

Mark J. Stein+1-212-455-2310
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Palo Alto

Michael J. Garvey+1-212-455-7358
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Alan C. Turner+1-212-455-2472
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Craig S. Waldman+1-212-455-2881
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Paul C. Gluckow+1-212-455-2653
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George S. Wang
+1-212-455-2228
gwang@stblaw.com

Nicholas S. Goldin+1-212-455-3685
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Jonathan K. Youngwood+1-212-455-3539
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Peter E. Kazanoff+1-212-455-3525
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David Elbaum
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david.elbaum@stblaw.com

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

Stephen P. Blake+1-650-251-5153
sblake@stblaw.com
Alexis S. Coll-Very+1-650-251-5201
acoll-very@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

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