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

Supreme Court Decisions
and Developments
Supreme Court: The Basic
Presumption Can Be Rebuttedby Showing There Was No Price
Impact Even Though That Evidence
Is Also Relevant to Materiality

Simpson Thacher
Names Lynn K. Neuner
Co-Chair of Global
Litigation Department-Click here to learn more

On June 21, 2021, in Goldman Sachs
Group v. Arkansas Teacher Retirement
System, 141 S. Ct. 1951 (2021) (Barrett, J.),
the Supreme Court vacated the Second
Circuit’s class certification affirmance in asecurities fraud class action brought under
Section 10(b).1 The Court unanimously heldthat a court must consider all probative
evidence, including the nature of the alleged
misrepresentations, in assessing price impact
at the class certification stage. An eight-justicemajority of the Court further held that it was
not clear that the Second Circuit properly
considered the generic nature of the alleged
misrepresentations at issue and for thatreason vacated and remanded back to theSecond Circuit. The Court directed the Second
1. Simpson Thacher filed an amici curiae brief on behalf of the
Securities Industry and Financial Markets Association, theU.S. Chamber of Commerce, the Bank Policy Institute, theAmerican Bankers Association, and the American Property
Casualty Insurance Association in support of defendantsappellants.

Simpson Thacher & Bartlett LLP

2021

Circuit on remand to reassess the district
court’s price impact determination, taking
into account “all record evidence relevant
to price impact, regardless [of] whether that
evidence overlaps with materiality or any
other merits issue.” A six-justice majority of
the Court also held that a defendant seeking
to overcome the Basic presumption bears
the burden of persuasion to prove a lack ofprice impact, which must be carried by apreponderance of the evidence.
Plaintiff stockholders relied on a stock priceinflation-maintenance theory asserting thatthe alleged misrepresentations caused thebank’s stock price to remain inflated until thetruth regarding certain conflicts of interest
was revealed and the bank’s stock price fell.
Defendants sought to defeat class certification
by rebutting the presumption of relianceestablished in Basic v. Levinson, 485 U.S.
224 (1988) with evidence that their alleged
misrepresentations had no stock price impact.
The district court determined that defendants
failed to carry their burden of proving a lackof price impact and certified the class, and theSecond Circuit affirmed.
With respect to assessing price impact at
the class certification stage, the Supreme
Court observed that the “generic nature ofa misrepresentation often will be important
evidence of a lack of price impact, particularlyin cases proceeding under the inflationmaintenance theory.” The Court reasoned
that when the alleged misrepresentationis generic and the back-end corrective
disclosure is specific, the argument thatthe back-end price drop equals front-end
inflation starts to “break down” and it is lesslikely that the disclosure corrected the alleged
misrepresentation, meaning that there is lessreason to infer price impact.
Subsequently, the Second Circuit sent thecase back to the district court seeking aruling using “all record evidence relevant
to price impact.” On December 8, 2021, thedistrict court concluded that defendants
failed to rebut the Basic presumption
by a preponderance of the evidence andtherefore granted the motion for classcertification. In re Goldman Sachs Sec.
Litig., 2021 WL 5826285 (S.D.N.Y. 2021)(Crotty, J.). Specifically, the court concluded
that defendants failed to establish a lackof price impact by a preponderance of theevidence. The court determined that thealleged misstatements were not so genericas to diminish their power to maintain preexisting price inflation, and given the strong
evidence of price impact, the court foundthat the statements did in fact maintain priceinflation. As to defendants’ argument thatsuch statements are commonplace the court
questioned why such statements “would haveachieved such ubiquity in the first place were
they incapable of influencing (including by
maintaining) a company’s stock price.”

Significant Circuit Court
Decisions
Second Circuit: Bank’s Failure
to Disclose Money Laundering
Suspicions Not Actionable As There
Was No Obligation to Self-Report
On August 25, 2021, the Second Circuit
affirmed the dismissal of a putative securities
fraud class action alleging that a bank’s
financial statements were misleading under
Section 10(b) of the Exchange Act because
they incorporated revenue from money
laundering but failed to simultaneously
disclose what the bank knew about possible
money laundering at one branch. Plumber& Steamfitters Local 773 Pension Fund v.
Danske Bank, 11 F.4th 90 (2d Cir. 2021)(Jacobs, J.). The court pointed out thatplaintiffs did not allege that the financial
numbers were manipulated in any way, onlythat defendants failed to simultaneously
disclose the anti-money laundering issues.
The court held that “because [the bank]
was under no obligation to self-report its
growing suspicions regarding those issues,
its disclosure of accurate historical data,
standing alone, is not actionable.”
The court stated that “companies do not havea duty to disclose uncharged, unadjudicatedwrongdoing.” The court further explainedthat “[a]s a corollary of that rule, accurately
reported financial statements do not
automatically become misleading by virtueof the company’s nondisclosure of suspected
misconduct that may have contributed to thefinancial results.”
In support of its conclusion that the bank’s
disclosure of accurate historical data was
not actionable because it was under noobligation to self-report, the court reasoned
that otherwise every company whose
quarterly financial reports included revenue
from transactions that violated anti-money
laundering regulations could be sued for
securities fraud. The court thus affirmed
the district court, concluding that plaintiffs’“allegations do not move the claims outside
the realm of corporate mismanagement andinto the realm of securities fraud.”

2

Ninth Circuit: Projected Timelines
Concerning a New Product Are
Forward-Looking Statements

sort of features that are inherent in any
forward-looking statement.”

On January 26, 2021, the Ninth Circuit
affirmed the dismissal with prejudice of aputative securities fraud class action alleging
that a car company and two of its officers
misled investors about the company’s
progress in building production capacity for
its first mass-market electric vehicle. Wochos
v. Tesla, 985 F.3d 1180 (9th Cir. 2021)(Collins, J.). The court held that none of the
15 statements at issue were actionable as they
were protected as forward-looking statements
under the Private Securities Litigation ReformAct (“PSLRA”), or to the limited extent thatthey were not so protected plaintiffs failed toadequately plead falsity.

The court stated that “statements of theassumptions underlying or relating to a
declared objective are also deemed to be
forward-looking statements.” The court
determined that “[t]his reasoning precludes[p]laintiffs’ theory that [the company’s] yearend goal rested on scheduling assumptions
that [the company] knew it was unlikely tomeet.” The court concluded that “[a]ny suchschedule about how future production would
play out on the way toward the announced
goal is simply a set of the assumptions about
future events on which that goal is based.”
The court continued, stating that “[l]ike
the goal itself, such projected timelines areforward-looking statements.”

Plaintiffs alleged that the company announced
production goals for its new vehicle for “theend of 2017 that it knew it would not be able
to achieve, and it repeatedly reaffirmed that
it was on track to reach those targets, evenas the end-of-the-year deadline drew closer
and as delays grew increasingly significant.”
With respect to the PSLRA’s safe harbor for
forward-looking statements, the court foundthat the company’s “goal to produce 5,000
vehicles per week is unquestionably
a forward-looking statement under § 21E,
because it is a plan or objective ofmanagement for future operations, andthis plan or objective relates to the productsof [the company].”

Ninth Circuit: Applies Omnicare
Standard to Pleading Falsity ofOpinion in Section 14(a) Claims

The court further found that “[the company’s]
various statements that it was on track toachieve this goal and that there are no issues
that would prevent [the company] fromachieving the goal are likewise forwardlooking statements.” The court reasoned that“[b]ecause any announced objective for future
operations necessarily reflects an implicit
assertion that the goal is achievable basedon current circumstances, an unadorned
statement that a company is on track toachieve an announced objective, or a simple
statement that a company knows of no issues
that would make a goal impossible to achieve,
are merely alternative ways of declaring or
reaffirming the objective itself.” The court
pointed out that “[t]he statutory safe harbor
would cease to exist if it could be defeatedsimply by showing that a statement has theOn April 20, 2021, the Ninth Circuit affirmed
the dismissal of a putative securities classaction alleging misrepresentations of fact
and omissions in a proxy statement used tosecure shareholder approval for the sale ofthe defendant company in violation of Section
14(a), Section 20(a), and Rule 14a-9. Golub
v. Gigamon, 994 F.3d 1102 (9th Cir. 2021)(Wardlaw, J.). Plaintiff alleged that thesemisrepresentations of fact and omissions
made certain statements of opinion in theproxy statement false or misleading. The
court held that it would apply the standards
for actionability for falsity under Section 11
explained in Omnicare v. Laborers District
Council Construction Industry Pension Fund,
575 U.S. 175 (2015), to falsity of a statement of
opinion under SEC Rule 14a-9 through either
a misrepresentation-of-material-fact theory
or an omission-of-material-fact theory.

3

The court explained that Rule 14a-9
prohibits any statement which, under thecircumstances, is false or misleading withrespect to any material fact, or which omits
to state any material fact necessary inorder to make the statements not false or
misleading. The court further explained that
despite Rule 14a-9’s use of the word “fact” italso permits “a plaintiff to plead and prove
false the ‘statements of reasons, opinions, or
beliefs’ of a company’s directors[.]” (quoting
Va. Bankshares v. Sandberg, 501 U.S. 1083
(1991)).
The court pointed out that the Ninth Circuit
has not addressed how Omnicare affects
claims alleging falsity of an opinion under
Rule 14a-9. The court explained that in
Omnicare, “the Supreme Court examined thestandards for alleging falsity of an opinion
under [S]ection 11[.]” The Ninth Circuit
then referenced its decision in Wochos v.
Tesla, 985 F.3d 1180 (9th Cir. 2021), which
discussed Omnicare and summarized thethree ways2 that “a statement of opinion
may nonetheless involve a representationof material fact that, if that representation
is false or misleading, could be actionable.”
Citing Wochos, the court explained that“[s]uch a statement could potentially giverise to liability under an omission theory if
the facts conveyed in that fashion are untrue,
as would be apparent based on a more
fulsome disclosure.”
The court held “that Omnicare’s standards
for pleading falsity of opinion—via either amisleading representation or omission—apply
to claims arising under [S]ection 14(a), as
implemented by Rule 14a-9.”
The Ninth Circuit summarily dealt
with plaintiff’s allegations in a separate
unpublished memorandum concluding that,with respect to the alleged misrepresentations
and omissions in connection with statementsof opinion, plaintiff failed to allege falsity or to
overcome the PSLRA’s safe harbor. See Golub
v. Gigamon, No. 19-16975, 847 F. App’x 368(9th Cir. 2021).

2. Specifically: (1) “every statement of opinion explicitly affirms
one fact: that the speaker actually holds the stated belief”;(2) “some sentences that begin with opinion words like ‘Ibelieve’ contain embedded statements of fact”; and (3) “areasonable investor may, depending on the circumstances,
understand an opinion statement to convey facts about how
the speaker has formed the opinion—or, otherwise put, about
the speaker’s basis for holding that view.”

Ninth Circuit: Affirmative
Misrepresentation Allegations“Push” Mixed Securities Fraud
Case Outside of Affiliated Ute’s
Presumption of Reliance
On June 25, 2021, the Ninth Circuit reversed
the denial of summary judgment to a
defendant auto manufacturer in a putative
securities fraud class action alleging that
defendant made omissions and affirmative
misrepresentations in offering memoranda
relating to its secret use of defeat devices in
its vehicles to hide unlawfully high emissions.
In re Volkswagen “Clean Diesel” Mktg.,
Sales Pracs., & Prods. Liab. Litig., 2 F.4th
1199 (9th Cir. 2021) (Smith, J.). The Ninth
Circuit held that the presumption of relianceestablished by Affiliated Ute Citizens of Utah
v. United States, 406 U.S. 128 (1972), did not
apply because plaintiff’s allegations could
not be characterized “primarily” as claims ofomission. The Ninth Circuit remanded thecase to the district court to further consider
whether a triable issue of material fact exists.
In Affiliated Ute, the Supreme Court
established the presumption of reliance ina case where plaintiff stockholders alleged“primarily a failure to disclose.” The Court
reasoned that if the stockholders wererequired to affirmatively prove reliancethey “would have been forced to prove a
speculative negative: that they would haverelied on information about the secondary
market before selling their stock had thebank disclosed it.” Subsequently, in Binder
v. Gillespie, 184 F.3d 1059 (9th Cir. 1999),
the Ninth Circuit held that the “presumption
should not be applied to cases that allege both
misstatements and omissions unless the casecan be characterized as one that primarily
alleges omissions.”
After acknowledging that plaintiff allegedan overarching omission (defendant did notdisclose for years that it was secretly installing
defeat devices), the Ninth Circuit pointed outthat plaintiff also alleged “more than ninepages of affirmative misrepresentations thatwere made by [defendant] and relied uponby Plaintiff and its investment advisor.” Thecourt observed that plaintiff “does not face
the difficult or impossible task of proving
a speculative negative.” The Ninth Circuit
concluded that while this is a mixed case,plaintiff’s “allegations cannot be characterized4

primarily as claims of omission, so the
Affiliated Ute presumption of reliance does
not apply.” The court determined that “[t]hese
affirmative misrepresentations . . . push
this case outside Affiliated Ute’s narrow
presumption.” The Ninth Circuit explainedthat to hold otherwise would make thepresumption available for all securities fraudclaims “because all misrepresentations can becast as omissions, at least to the extent they
fail to disclose which facts are not true.”

Ninth Circuit: Plaintiff Who
Purchased Shares in a Direct
Listing Has Standing Under Section
11 and Section 12(a)(2) Regardlessof Whether Shares Were Registeredor Unregistered
On September 20, 2021, the Ninth Circuit
affirmed a ruling that a stockholder whopurchased shares of a company that went
public through a direct listing had standing
under Section 11 and Section 12(a)(2) of
the Securities Act even though he could not
determine if he had purchased registeredor unregistered shares in the direct listing.
Pirani v. Slack Techs., 13 F.4th 940 (9thCir. 2021) (Restani, J.). The court heldthat plaintiff had standing because hisshares “could not be purchased without theissuance of [the company’s] registration
statement, thus demarking these shares,
whether registered or unregistered, as ‘such
security’ under Sections 11 and 12 of the
Securities Act.”
Noting that this was a case of first impression,
the court framed the issue as “what does‘such security’ mean under Section 11 in thecontext of a direct listing, where only one
registration statement exists, and whereregistered and unregistered securities areoffered to the public at the same time, basedon the existence of that one registration
statement[.]” Section 11 of the Securities Act
states, “In case any part of the registration
statement, when such part became effective,
contained an untrue statement of a material
fact or omitted to state a material fact
required to be stated therein or necessary to
make the statements therein not mis-leading,any person acquiring such security . . . may,either at law or in equity, in any court ofcompetent jurisdiction, sue—(1) every person
who signed the registration statement . . . .”15 U.S.C. § 77k(a). The court explainedthat under the NYSE’s direct listing rule3 acompany must file a registration statement
in order to engage in a direct listing. The
court continued that the SEC “interprets thisreference to a registration statement in therule as an effective registration statement filed
pursuant to the Securities Act of 1933.” Thecourt then noted that with a direct listing—as opposed to an IPO—both registered andunregistered shares are immediately soldto the public at the time of the effectivenessof the registration statement, and the sameregistration statement makes it possible tosell both types of shares.
The court determined that the company’s“unregistered shares sold in a direct listingare ‘such securities’ within the meaning ofSection 11 because their public sale cannot
occur without the only operative registrationin existence.” As there was only one
registration statement here, the court statedthat all of the stock sold in this direct listing,whether labeled as registered or unregistered,
was traceable to that one registration. The
court determined that plaintiff pled facts
sufficient to establish standing under Section
11 and affirmed the denial of dismissal.
Separately, the court stated that “Section 12
liability (resulting from a false prospectus) is
consistent with Section 11 liability (resulting
from a false registration statement).”
Accordingly, the court found that plaintiff also
had statutory standing under Section 12(a)(2).

Delaware Supreme Court
Decisions
Delaware Supreme Court: Plaintiff
Need Not Explain Strategy in
Section 220 Document Demand
On December 10, 2020, the Delaware
Supreme Court held that when a Section
220 books and records inspection demandstates a proper investigatory purpose it need
not identify the particular course of action
the stockholder will take if the books andrecords confirm the stockholder’s suspicionof wrongdoing. AmerisourceBergen v. Leb.
Cnty. Emps.’ Ret. Fund, 243 A.3d 417 (Del.
2020) (Traynor, J.). The court further held
3. NYSE Listed Company Manual, Section 102.01B, Footnote E.
5that, although the actionability of wrongdoing
can be a relevant factor to consider whenassessing the legitimacy of a stockholder’sstated purpose, an investigating stockholder
is not required in all cases to establish that thewrongdoing under investigation is actionable.
Reaffirming the credible basis test as thestandard for investigative inspections under
Section 220, the court held that “[t]o obtainbooks and records, a stockholder must show,
by a preponderance of the evidence, a credible
basis from which the Court of Chancery caninfer there is possible mismanagement or
wrongdoing warranting further investigation.”
The court determined that when a stockholder
can present a credible basis from whicha court can infer possible wrongdoing or
mismanagement, a stockholder’s purpose
will be deemed proper under Delaware
law. However, the court cautioned that “acorporation may challenge the bona fides ofa stockholder’s stated purpose and present
evidence from which the court can infer thatthe stockholder’s stated purpose is not its
actual purpose.” Further, the court explainedthat “when assessing the propriety of astockholder’s purpose,” the court can imply“what the stockholders’ intended use of thebooks and records will be.”Delaware Supreme Court: PostMerger Standing Exists if Merger
Fairness Is Challenged Due toFailure to Secure a Pending
Derivative Claim’s ValueOn January 22, 2021, the Delaware Supreme
Court reversed the Court of Chancery’s
dismissal, due to lack of standing, of postmerger claims challenging a merger’s fairness
for the controller’s failure to recoup thevalue of derivative claims. Morris v. Spectra
Energy, 246 A.3d 121 (Del. 2021) (Seitz, C.J.).
The court explained that “[w]ith limited
exceptions, a merger extinguishes an equity
owner’s standing to pursue a derivative
claim against the target entity’s directors orcontroller.” However, the court held that “thesame plaintiff has standing to pursue a postclosing suit if they challenge the validity of themerger itself as unfair because the controller
failed to secure the value of a material asset—
like derivative claims that pass to the acquirer
in the merger.”

Referring to the three-part test4 to evaluate
standing on a motion to dismiss in In re
Primedia, Inc. Shareholders Litigation, 67
A.3d 455 (Del. Ch. 2013), the court statedthat there were “two errors in the [lower]
court’s materiality analysis at the motion todismiss stage of the proceedings.” The court
stated that it was reasonably conceivable boththat the general partner acted in subjective
bad faith and that had plaintiff succeededin the derivative suit challenging thereverse drop down transaction, the recovery
could have been at least $660 million. The
court concluded that “[a]pplying a further
litigation risk discount at the pleading stage
was inconsistent with the court’s standardof review on a motion to dismiss for lackof standing.”

The second materiality analysis error wasthat “even if it was proper to discount the$660 million in damages alleged in thecomplaint to reflect the public unitholders’interest in the derivative recovery, tomaintain equivalence, the court should havecompared the $112 million pro rata interestin the derivative claim recovery to the public
unitholders’ proportional interest in themerger consideration.” The court explainedthat the merger consideration was $3.3
billion, the public unitholders had a 17%
beneficial interest in the merger considerationand that an “apples-to-apples comparison
would have compared $112 million to$561 million[ ]” (i.e., 17% of $3.3 billion).
The court determined that “[u]nder thiscalculation, the derivative claim was material
at the motion to dismiss stage.”
4. First, “the court must decide whether the underlying
derivative claims were viable, meaning they would survive
a motion to dismiss.” Second, “the derivative claim
recovery as pled must be material in relation to the merger
consideration.” Third, “the court should also assess whether
the complaint alleges that the acquirer would not assert theunderlying derivative claim and did not provide value for it.”(emphasis added).
6Delaware Supreme Court: In
Overruling Gentile v. Rossette the
Court Throws Out the Exception
to Tooley’s “Simple” Test to
Distinguish Between Direct and
Derivative Claims

increase in the percentage of the outstanding
shares owned by the controlling shareholder,
and a corresponding decrease in the sharepercentage owned by the public (minority)
shareholders.” A “dual-natured claim” is one
that is both derivative and direct in character.

On September 20, 2021, the Delaware
Supreme Court in a unanimous decision
overruled Gentile v. Rossette, 906 A.2d 91(Del. 2006) reversing a Court of Chancery
decision that held that plaintiff stockholders
had direct standing to challenge a green
energy company’s private placement ofcommon stock for allegedly inadequate
consideration. Brookfield Asset Mgmt. v.
Rosson, 261 A.3d 1251 (Del. 2021) (Valihura,J.). Plaintiffs alleged that the private
placement harmed the energy company
because the shares were issued at an unfairly
low price and allegedly diluted plaintiffs’
economic and voting power. The court agreed
with defendants that there was a clear conflict
between Tooley v. Donaldson, Lufkin &Jenrette, Inc., 845 A.2d 1031 (Del. 2004),
which established the test to distinguishdirect claims from derivative claims, andGentile, which served as an exception toTooley. In support of its decision, the court
noted the difficulty that courts have had in
applying Gentile in a logically consistent way.

Agreeing with defendants that Gentile
imposes confusion on Tooley’s
straightforward and easy-to-apply analysis,
the court held that the “claim is derivative
because [plaintiffs] allege an overpayment(or over-issuance) of shares to the controllingstockholder constituting harm to thecorporation for which it has a claim tocompel the restoration of the value of theoverpayment. Clearly, the gravamen of theComplaint is that the Private Placement
was unfair and that [the energy company]
suffered harm.”

Under Tooley, whether a stockholder’sclaim is direct or derivative turns solely
on: “(1) who suffered the alleged harm (thecorporation or the stockholders, individually);and (2) who would receive the benefit of any
recovery or other remedy (the corporationor the stockholders, individually)?” Twoyears later, the Gentile5 court allowed
minority stockholder plaintiffs to proceedwith direct claims and held that “a dualnatured claim arises where: (1) a stockholder
having a majority or effective control causes
the corporation to issue ‘excessive’ sharesof its stock in exchange for assets of thecontrolling stockholder that have a lesser
value; and (2) the exchange causes an
5. In Gentile, minority stockholder plaintiffs claimed that thecorporation overpaid its CEO/controlling stockholder when it
forgave a portion of the company’s debt to him in exchange for
additional equity. The subsequent share issuance increased
the CEO’s equity position from 61.19% to 93.49%, while theminority stockholders suffered a corresponding decrease.
The Gentile court determined that plaintiffs had pled two
independent harms, specifically: “(1) that the corporation wascaused to overpay (in stock) for the debt forgiveness, and (2),the minority stockholders lost a significant portion of the cash
value and voting power of the minority interest.”

The court concluded that “the harm to thestockholders was not independent of the harmto the Company, but rather flowed indirectly
to them in proportion to, and via their sharesin, [the company].” The court stated that thisalleged corporate overpayment falls “neatly”
into Tooley’s derivative category. The court
also observed that it saw “no practical needfor the Gentile carve-out.”

Delaware Supreme Court: Adopts
Three-Part Demand Futility Test;
Agrees That Exculpated Claims Do
Not Excuse Demand as They Do Not
Expose Directors to a Substantial
Likelihood of Liability
On September 23, 2021, the Delaware
Supreme Court affirmed a decision dismissing
a derivative complaint for failing to makea demand on the board of a social media
company under Court of Chancery Rule23.1. UFCW Union & Participating Food
Indus. Emps. Tri-State Pension Fund v.
Zuckerberg, 2021 WL 4344361 (Del. 2021)(Montgomery-Reeves, J.). Notably, the court
adopted the Court of Chancery’s three-part
test for demand futility blending the tests
from Aronson v. Lewis, 473 A.2d 805 (Del.
1984),6 and Rales v. Blasband, 634 A.2d 927

6. “Under Aronson, demand is excused as futile if the complaint
alleges particularized facts that raise a reasonable doubt that(1) the directors are disinterested and independent, or (2) the
challenged transaction was otherwise the product of a valid
business judgment.”
7

(Del. 1993).7 Agreeing with the lower court,
the court held that exculpated care claims do
not excuse demand under Aronson’s second
prong because they do not expose directors
to a substantial likelihood of liability. The
court also determined that plaintiff did notplead with particularity that a majority of thedemand board lacked independence.
The court pointed out that the company’s
charter contained a Section 102(b)(7)8
clause, therefore, the directors faced norisk of personal liability from plaintiff’s
allegations. Under these circumstances theissue was whether a derivative plaintiff canrely on exculpated care violations to establishthat demand was futile under Aronson’s
second prong. The court affirmed the Courtof Chancery’s holding that exculpated careclaims do not satisfy Aronson’s second prong.
The court explained that when Aronson was
decided rebutting the business judgment
rule through allegations of duty of careviolations exposed directors to a substantial
likelihood of liability and raised doubt as
to whether they could impartially consider
7. “Under Rales, demand is excused as futile if the complaint
alleges particularized facts creating a reasonable doubt that,
as of the time the complaint is filed, a majority of the demandboard could have properly exercised its independent anddisinterested business judgment in responding to a demand.”8. Section 102(b)(7) of the Delaware General Corporation
Law “authorizes corporations to adopt a charter provisioninsulating directors from liability for breaching their duty ofcare.”

demand. However, due to the enactment of
Section 102(b)(7) and other corporate law
developments since Aronson, exculpatedbreach of care claims no longer pose a threatthat neutralizes director discretion.
Going forward, under the refined test, “courts
should ask the following three questions on
a director-by-director basis when evaluating
allegations of demand futility: (i) whether the
director received a material personal benefit
from the alleged misconduct that is the
subject of the litigation demand; (ii) whether
the director faces a substantial likelihoodof liability on any of the claims that would
be the subject of the litigation demand; and(iii) whether the director lacks independence
from someone who received a material
personal benefit from the alleged misconductthat would be the subject of the litigation
demand or who would face a substantial
likelihood of liability on any of the claims thatare the subject of the litigation demand.” “Ifthe answer to any of the questions is ‘yes’ forat least half of the members of the demandboard, then demand is excused as futile.”
As to the impact of the refined test, the court
stated that “because the three-part test is
consistent with and enhances Aronson,
Rales, and their progeny, the Court need
not overrule Aronson to adopt this refinedtest, and cases properly construing Aronson,
Rales, and their progeny remain good law.”

This edition of the
Securities Law Alert was edited byPeter E. Kazanoff / +1-212-455-3525
pkazanoff@stblaw.com andJosh Polster / +1-212-455-2266
joshua.polster@stblaw.com

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Senior Counsel+1-212-455-2815
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Stephen P. Blake+1-650-251-5153
sblake@stblaw.com
James G. Kreissman+1-650-251-5080
jkreissman@stblaw.com
Simona G. Strauss
Senior Counsel+1-650-251-5203
sstrauss@stblaw.com

Washington, D.C.
Meaghan A. Kelly+1-202-636-5542
mkelly@stblaw.com
Jeffrey H. Knox
+1-202-636-5532
jeffrey.knox@stblaw.com
Cheryl J. Scarboro+1-202-636-5529
cscarboro@stblaw.com

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

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lawyers who authored it are rendering legal or other professional advice or opinions on specific facts
or matters, nor does the distribution of this publication to any person constitute the establishment of an
attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in connection withthe use of this publication. Please contact your relationship partner if we can be of assistance regardingthese important developments. The names and office locations of all of our partners, as well as ourrecent memoranda, can be obtained from our website, www.simpsonthacher.com.
9SimpsonThacherWorldwide

UNITED STATESEUROPEASIANew York
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New York, NY 10017+1-212-455-2000

Brussels
Square de Meeus 1, Floor 7
B-1000 Brussels
Belgium+32-472-99-42-26

Beijing
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1 Jian Guo Men Wai Avenue
Beijing 100004
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LondonCityPoint
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London EC2Y 9HUEngland+44-(0)20-7275-6500

Hong Kong
ICBC Tower
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Hong Kong+852-2514-7600
Tokyo
Ark Hills Sengokuyama Mori Tower
9-10, Roppongi 1-Chome
Minato-Ku, Tokyo 106-0032
Japan+81-3-5562-6200

SOUTH AMERICA

São Paulo
Av. Presidente Juscelino
Kubitschek, 1455
São Paulo, SP 04543-011
Brazil+55-11-3546-1000

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