Securities Law Alert
In This Edition:• Supreme Court: Duty to Monitor ERISA Plan Investments and Remove Imprudent Ones Not
Satisfied by Offering Low-Cost Investments as Plan Options• Central District of California: Denies Class Certification Because Unsponsored ADRs Were
Purchased in a Foreign Transaction• Northern District of California: Dismissal Denied as Reasonable Minds Could Differ on Whether“Technical and Narrow” Disclosures Were Sufficient to Reduce the Risk of Misleading Investors• New York Supreme Court: Rejects Proposed $300 Million Settlement in a Derivative Lawsuit on
Fairness Grounds
February 2022

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Simpson Thacher & Bartlett LLPSupreme Court: Duty
to Monitor ERISA Plan
Investments and Remove
Imprudent Ones Not Satisfied
by Offering Low-CostInvestments as Plan Options
On January 24, 2022, the Supreme Court
unanimously vacated the Seventh Circuit’s
judgment that was in favor of defendant
plan fiduciaries in a lawsuit where ERISA
plan participants alleged that defendants
violated their duty of prudence by failingto remove imprudent investments from theplans’ offerings. Hughes v. Northwestern,
142 S.Ct. 737 (2022) (Sotomayor, J.). The
Court disagreed with the Seventh Circuit’s
conclusion that defendants offering plaintiffs’
preferred type of low-cost investments asplan options eliminated any concern that
other plan options were imprudent. The
Court held that “[s]uch a categorical rule

is inconsistent with the context-specificinquiry that ERISA requires and fails totake into account respondents’ duty tomonitor all plan investments and remove
any imprudent ones.”

Background
Petitioners, participants in two employee
retirement plans, commenced this litigation
alleging that respondents, their plan
administrators, violated their fiduciary dutyof prudence under ERISA by: (i) offering
too many investment options, which caused
participant confusion and poor investment
decisions; (ii) offering retail share classesof mutual funds and annuities rather thaninstitutional share classes, which resulted
in higher fees; and (iii) failing to monitor
and control recordkeeping fees. The district
court granted respondents’ motion to dismissand denied leave to amend. The Seventh
Circuit affirmed.

The Court Examines the Dutyof Prudence Under Tibble v.
Edison International
The Court began its analysis by discussing
Tibble v. Edison International, 575 U. S. 523(2015), where the Court interpreted a plan
fiduciary’s duty of prudence under ERISA.
In Tibble, plaintiffs similarly alleged that theplan fiduciaries had offered higher priced
retail-class mutual funds as plan investments
when lower priced institutional-class mutual
funds were available. The Court in Tibble
concluded that plaintiffs had identified apotential violation because “a fiduciary is
required to conduct a regular review of its
investment.” The Court further determinedthat this duty is a “continuing” one andthat “a plaintiff may allege that a fiduciary
breached the duty of prudence by failing toproperly monitor investments and remove
imprudent ones.”

Failing to Remove an Imprudent
Investment From a Plan Within a
Reasonable Time Could Breach the
Duty of Prudence
Applying Tibble’s discussion of the duty
to monitor plan investments, the Court
determined that petitioners’ allegation—that
respondents failed to remove imprudent
investments from the plans’ offerings—“mustbe considered in light of the principles
set forth in Tibble to determine whether
petitioners have stated a plausible claim forrelief.” The Court noted that the Seventh
Circuit did not apply Tibble’s guidance andinstead focused on “a fiduciary’s obligation
to assemble a diverse menu of options.”
The Seventh Circuit determined that thefiduciary’s provision of “an adequate array ofchoices,” including choices that petitioners
wanted, precluded petitioners’ claims.

However, the Court found that “[t]he Seventh
Circuit erred in relying on the participants’ultimate choice over their investments to
excuse allegedly imprudent decisions by
respondents.” The Court observed that theSeventh Circuit’s exclusive focus on investor
choice elided the duty to properly monitor
investments and remove imprudent options.
The Court held that fiduciaries could breach
their duty if they “fail to remove an imprudent
investment from the plan within a reasonable
time[.]” The Court stated that on remand,“the Seventh Circuit should consider whether
petitioners have plausibly alleged a violationof the duty of prudence as articulated
in Tibble[.]”Central District of California:
Denies Class Certification
Because Unsponsored ADRs
Were Purchased in a Foreign
Transaction
On January 25, 2022, the Central Districtof California denied class certification ina putative securities fraud class action
alleging violations of the Exchange Act
against a corporation headquartered inJapan. Stoyas v. Toshiba, 2022 WL 220920(C.D. Cal. 2022) (Pregerson, J.). The court
determined that the plaintiff pension funds
could not establish that the unsponsoredAmerican Depositary Receipts (“ADRs”)1 ofdefendant were purchased in a “domestictransaction” as required under Morrison
v. National Australia Bank, 561 U.S. 247(2010). The court further determined that theinvestment manager of one of the funds (and1. Unsponsored ADRs are implemented by a depositary bankwithout the cooperation of the issuing foreign company.

2

by extension, that fund) incurred irrevocableliability in Japan when the investment
manager’s broker acquired the shares ofdefendant’s common stock on the Tokyo
Stock Exchange.

issue depends on whether a “domestictransaction” occurred. Defendant argued thatthe fund acquired its shares as common stockin Japan, and therefore the relevant purchase
was a foreign transaction.

Background
Plaintiffs alleged that one of the pension
funds purchased shares of unsponsored
ADRs of defendant on the over-the-counter(“OTC”) market2 in the United States. The
fund accessed the OTC market through its
investment manager, which placed a buy
order for the unsponsored ADRs throughits broker. The broker then purchased the
ADRs for the fund on the OTC market.
Notably for the outcome of the case, before
the ADRs were available to purchase on the
OTC market, the broker had to purchase thedefendant’s common stock on the Tokyo
Stock Exchange to be converted into ADRs.
After commencing this litigation, plaintiffs
moved to certify a class of securities
purchasers3 under Federal Rule of Civil
Procedure 23. Defendant argued thatplaintiffs could not satisfy the typicality
requirement under Rule 23(a) with respect
to the Exchange Act claims, because, unlike
the members of the proposed class, the fund
did not acquire defendant’s securities in the
United States.

Class Certification Depends on
Whether a “Domestic Transaction”
Occurred Under the Second Prongof Morrison
Beginning its analysis, the court explainedthat under Morrison, “to state a fraudclaim under the Exchange Act, fraudulent
statements or omissions must be made inconnection with the purchase or sale of(i) a security listed on an American stock
exchange or (ii) the purchase or sale of any
other security in the United States.” Because
unsponsored ADRs only trade on the OTC
market, which is not a domestic stock
exchange, the court stated that the typicality
2. The OTC market is where securities are traded via a brokerdealer network, as opposed to on a centralized exchange.
3. The class of securities purchasers was defined as: “All persons
who purchased securities listed under the [corporation’s]
ticker symbols . . . between May 8, 2012 and November
12, 2015 using the facilities of the OTC Market (‘American
Securities Purchasers’)[.]”

Whether a Domestic Transaction
Occurred Depends on Where
Irrevocable Liability to Take andPay for the ADRs Occurred
The court pointed out that in 2018 theNinth Circuit addressed the domesticity
issue in this case, on appeal from the first
motion to dismiss, by adopting the Second
Circuit’s “irrevocability test” from Absolute
Activist Value Master Fund v. Ficeto. Stoyas
v. Toshiba, 896 F.3d 933 (2d Cir. 2018).
Applying the test, the Ninth Circuit examined
whether plaintiffs alleged sufficient facts to
support an inference that the fund purchased
the unsponsored ADRs in a domestictransaction. Interpreting the Ninth Circuit’s
decision, the court observed that the “testfocuses squarely on ‘where the purchaser
incurred irrevocable liability to take and pay
for the securities[,]” which can “determine thelocus of a securities purchase or sale.”
The court held that the fund incurred
irrevocable liability to take and pay for the
ADRs in Japan, not in the United States. The
court took issue with plaintiffs’ approach,stating that it “ascribes little importance tothe first step in the ADR conversion process:the purchase of [defendant’s] common
stock. Plaintiffs’ argument glosses overthe fact that [the fund’s] ability to acquire
ADRs was contingent upon the purchaseof underlying shares of common stock that
could be converted into ADRs.” The court
found that the evidence indicated that thebroker executed the purchase of defendant’scommon stock for conversion, on behalf of3

the investment manager for the fund. The
court determined that once the broker fully
executed the purchase of the common stockon the Tokyo Stock Exchange, the fund was“logically and legally” bound to take and pay
for the ADRs, once converted. Accordingly,
the transaction was not domestic.

Northern District ofCalifornia: Dismissal Denied
as Reasonable Minds Could
Differ on Whether “Technicaland Narrow” Disclosures Were
Sufficient to Reduce the Riskof Misleading Investors
On January 14, 2022, the Northern Districtof California largely denied the dismissal of aputative securities class action alleging that asolid-state battery manufacturer and certainof its executives misrepresented that thetesting conditions of the company’s batteries
were not compromised and that the testing
condition disclosures were insufficient to
reduce the risk of misleading investors to“nil.” In re Quantumscape Sec. Class Action
Litig., 2022 WL 137729 (N.D. Cal. 2022)(Orrick, J.). The court found that the testingdata disclosures “were certainly extensive andmay well weaken or even defeat the plaintiffs’
case at a later stage when a factfinder canweigh them contextually.” However, at the
motion to dismiss stage, the court held thatit “cannot conclude that the adequacy of thedisclosure is so obvious that reasonable minds
could not differ about whether the statements
were misleading.”

Background
Plaintiffs alleged that defendants repeatedly
falsely represented that their solid-statebatteries had overcome certain well-known
technical challenges, which prevented theirsuccessful commercialization, and thatthey were comparable to or outperformed
conventional batteries. Plaintiffs also allegedthat defendants’ tests were “compromised”
to make their batteries’ performance look
more promising than it was, and that theirbatteries performed meaningfully worse
than conventional batteries. After plaintiffs’
lawsuits were consolidated, defendants
moved to dismiss.

“Technical and Narrow”
Disclosures May Not Render“Categorical” Statements
Non-Misleading
Defendants claimed that their statements4
were not actionable because the testing
methodologies and conditions were
accurately disclosed. Defendants further
argued that the testing statements amounted
to interpretations of the data. Citing thestandard used by the Supreme Court in
Virginia Bankshares v. Sandberg, 501 U.S.
1083 (1991), plaintiffs argued that because
defendants affirmatively represented that theconditions were not compromised when theconditions were in fact compromised, “thedisclosure of test conditions were insufficient
to reduce the risk of misleading investors
to ‘nil’ especially where it would take anexpert to know that the test conditions werecompromised.”
The court stated that it could not conclude
that the adequacy of the disclosures was so
obvious that reasonable minds could not
differ about whether the overall statements
were misleading. The court noted that thedisclosures revealed particular information(such as discrete testing conditions), but theallegedly misleading statements also included“broader, more categorical statements.” Thecourt stated that it could not “definitively saythat these more categorical statements would
be rendered entirely non-misleading by thefar more technical and narrow disclosures
4. Specifically, that the solid-state batteries were tested with
uncompromised conditions/in real-world conditions; that,based on those test results, the technical challenges had beensolved; and that, consequently, the batteries were ready forbroader commercialization if production could be ramped up
and the batteries could be layered.
4that [defendants] rel[y] on.” The court statedthat it was reasonable to think that investors
were entitled to rely on the unequivocal
representation that the testing results
were not compromised. Citing Virginia
Bankshares, the court determined that, given
the overall “mixture” of information, it could
not say that defendants’ disclosure of hypertechnical testing details would “discredit”
the allegedly misleading statement (thatothers used compromised conditions but
defendants did not) “so obviously that therisk of real deception drops to nil.” The court
similarly determined that the overall mix of
information concerning the representationthat the technical challenges had been solved
did not lead it to conclude that the risk ofdeception was “nil.”

New York Supreme Court:
Rejects Proposed $300
Million Settlement inDerivative Lawsuit on
Fairness Grounds
On December 10, 2021, the New YorkSupreme Court denied a proposed $300
million settlement in a closely watchedshareholder derivative lawsuit alleging thatthe controlling shareholder defendants5
defrauded the minority shareholders of a
NYSE-listed Chinese company incorporated
in the Cayman Islands. In re Renren
Derivative Litig., 2021 WL 5873150 (N.Y.
Sup. Ct. 2021) (Borrok, J.). Citing fairness
concerns, the court held that the proposed
settlement “cannot be approved as asettlement to a derivative action structured
with direct payments to certain minority
shareholders but excluding relevant injured
minority shareholders.” Specifically, the court
took issue with plaintiffs’ counsel’s argumentthat only his clients should be paid and not
all of the minority shareholders who were
harmed, pointing out that plaintiffs werecertain of the minority shareholders that areentitled to payment.
The parties entered into the stipulation of
settlement in October 2021. It was notable
5. The company’s CEO/board Chair, certain directors,
controlling shareholders and the financial advisor for a special
committee of the board. The complaint alleged that together
defendants controlled a majority of the company’s stock.

due to both its record-breaking size andfor creating a rare direct cash payment to
the minority shareholders totaling at least$300 million. The proposed settlement was
subject to a “true up” process that could haveincreased the ultimate payment amount
depending on the final determination of thenumber of shares and American Depositary
Shares held by non-defendants.
In rejecting the proposed settlement, thecourt explained that having undertaken
to make a claim on behalf of all minority
shareholders, plaintiffs may not limit the
rewards reaped by this action to themselves.
The court observed that this would be“antithetical” to the concept of the derivative
action. Citing Benedict v. Whitman Breed
Abbott & Morgan, 910 N.Y.S.2d 474 (N.Y.
App. Div. 2010), the court concluded that“the settlement as structured is not fair andreasonable to the effected shareholders andwhen taken as a whole is ‘so unfair on its face
to preclude judicial approval[.]’”

By way of background, the defendantcompany became a major social media
company in China after a prominent U.S.
social media company was banned there.
This development led to interest from
Western investors and the company’s U.S.
IPO, which raised over $777 million. The
lawsuit arose when plaintiffs claimed that
defendants misrepresented, in soliciting its
IPO, how the company planned to use the IPO
proceeds and by seeking personal financial
benefits. Plaintiffs alleged that the company
had invested its 2011 NYSE IPO proceeds
towards a number of ventures and becamea de facto venture capital fund. Plaintiffs
further alleged that defendants defrauded thecompany and its minority shareholders outof over $500 million in company investment
5assets by spinning off the company’s assets
into a private company in exchange for anundervalued cash dividend. Plaintiffs asserted
derivative claims under Cayman law and New
York law in connection with the spin-off.
In May 2020, the New York Supreme Court
denied defendants’ motions to dismiss andheld that plaintiffs had standing to bringderivative claims under Cayman law underthe “fraud on the minority” exception
established in the seminal English case,
Foss v. Harbottle (2 Hare 461 [1843]).6 In
re Renren Derivative Litig., 127 N.Y.S.3d
702 (N.Y. Sup. Ct. 2020). The court also
held that it had personal jurisdiction overdefendants based on their significant New
York activities. In March 2021, the Appellate
Division unanimously affirmed that there wasproper personal jurisdiction and standing topursue Cayman law derivative claims in New
York against the company and its directors.
In re Renren, 140 N.Y.S.3d 701 (N.Y. App.
Div. 1st Dept. 2021). The parties reached the
proposed settlement, now rejected, following
the Appellate Division’s decision.

6. Shareholders do not have standing to pursue derivative
litigation under Cayman law unless they can meet one of
the four exceptions first articulated in Foss. To proceed, ashareholder must show that the conduct: (1) infringed on
the shareholder’s personal rights; (2) would require a special
majority to ratify; (3) qualifies as a fraud on the minority; or(4) consists of an ultra vires act.

This edition of the
Securities Law Alert was edited by
Meaghan A. Kelly / +1-202-636-5542
mkelly@stblaw.com
George S. Wang / +1-212-455-2228
gwang@stblaw.com andDavid Elbaum / +1-212-455-2861
david.elbaum@stblaw.com

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