Securities Law Alert
Year in Review:• Omnicare: Supreme Court Clarifies Pleading Requirements for Claims Premised on Statements ofOpinion Under Section 11 of the Securities Act of 1933
• Circuit Court Decisions Addressing the Supreme Court’s Decision in Janus Capital Group v. First
Derivative Traders• Circuit Court Decisions Addressing Liability for Omissions Under Section 10(b)• Circuit Court Decisions Addressing Section 10(b)’s Scienter Requirement• Circuit Court Decisions Addressing the PSLRA’s Safe Harbor for Forward-Looking Statements• Circuit Court Decisions Addressing Inactionable Puffery Under Section 10(b)• Circuit Court Decisions Addressing Loss Causation and Damages in the Context of Section 10(b) Claims• Other Noteworthy Circuit Court Decisions• Significant Delaware Supreme Court Decisions
December 2015

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2015

Omnicare: Supreme
Court Clarifies Pleading
Requirements for Claims
Premised on Statements ofOpinion Under Section 11 of
the Securities Act of 1933
Section 11 of the Securities Act of 1933
provides a private right of action for any
investor who purchases a security pursuant toa registration statement which “contained an
untrue statement of a material fact or omitted
to state a material fact … necessary to makethe statements therein not misleading.”
On March 24, 2015, in an opinion written by
Justice Kagan, the Supreme Court clarified
the pleading requirements for Section 11
claims based on statements of opinion.
Omnicare, Inc. v. Laborers District Council

Simpson Thacher & Bartlett LLP

Construction Industry Pension Fund, 135 S.
Ct. 1318 (2015) (Kagan, J.). The Court heldthat an opinion can be “an untrue statementof a material fact” under the first clause of
Section 11 only if the speaker subjectively
disbelieved the opinion at the time thestatement was made. The Court made it
clear that a defendant cannot be liable
under Section 11 merely because his or her
opinion ultimately proved to be wrong. The
Court explained that “a sincere statement ofpure opinion is not an ‘untrue statement ofmaterial fact’ regardless whether an investor
can ultimately prove the belief wrong.”
However, the Omnicare Court also held thatan opinion can form the basis for omissions
liability under the second clause of Section
11 if a plaintiff can plead particular material
facts underlying the opinion, the omissionof which made the opinion misleading “toa reasonable person reading the statement1fairly and in context.” The Court stated thata reasonable investor could understand astatement of opinion to convey “facts about
how the speaker has formed the opinion” or“about the speaker’s basis for holding thatview.” The Court went on to explain that “ifa registration statement omits material facts
about the issuer’s inquiry into or knowledge
concerning a statement of opinion, and if
those facts conflict with what a reasonable
investor would take from the statement itself,then § 11’s omissions clause creates liability.”
The Court cautioned that the facts which canbe inferred are inherently contextual, andthe reasonable inferences that can be madeare dependent on the type of opinion being
given, the specificity of the statement, andthe context of the opinion in the registration
statement as a whole.

Circuit Court Decisions
Addressing the Supreme
Court’s Decision in Janus
Capital Group v. First
Derivative Traders
In Janus Capital Group, Inc. v. First
Derivative Traders, 131 S. Ct. 2296 (2011),
the Supreme Court defined what it means
to “make” a statement for purposes of Rule10b-5. The Janus Court held that “themaker of a statement is the person or entitywith ultimate authority over the statement,
including its content and whether and how tocommunicate it.”Second Circuit: Janus’s Definitionof What It Means to “Make” aMisstatement Under Rule 10b-5
Does Not Apply to Section 17(a)(2)On April 9, 2015, the Second Circuit foundthat the Janus “Court’s definition of‘to make’ in Rule 10b-5 does not apply to§ 17(a)(2)” of the Securities Act of 1933.
SEC v. Big Apple Consulting USA, 783 F.3d
786 (2d Cir. 2015) (Siler, Jr., J.). Section
17(a)(2) renders it unlawful “for any person in
the offer or sale of any securities … to obtainmoney or property by means of any untrue
statement of a material fact or any omission
to state a material fact necessary in order tomake the statements made, in light of thecircumstances under which they were made,not misleading.” The Second Circuit foundthat the phrase “by means of any untrue
statement” in Section 17(a)(2) “encompasses a
broader range of conduct than ‘mak[ing]’ sucha statement as defined in SEC Rule 10b-5(b)”(emphasis added by the court).
The Second Circuit found that the Janus
Court’s “narrow holding” does not apply“to the entirety” of Section 17(a) because
subsections (1) and (3) of Section 17(a)—like
subsections (a) and (c) of Rule 10b-5—“donot use the word ‘make’ or even address
misstatements.” The Second Circuit
determined that the Janus Court “did notalter the potential for liability under Rule10b-5(a) and (c).” Even after Janus, adefendant “who is not the ‘maker’ of an
untrue statement of material fact” could“nonetheless … be liable as a primary violatorof Rule 10b-5(a) and (c).” The Second Circuit
explained that it would be “incongruous”
to apply Janus “to remove the potential for
liability under” Sections 17(a)(1) and (3) giventhat “Rule 10b-5(a) and (c) [were] modeled”
after those provisions.
The Second Circuit further found that the textof Rule 10b-5(b) differs from “the expansive
language of [S]ection 17(a)(2).” Under Rule10b-5(b), a defendant may not “make any
untrue statement of a material fact or [ ] omit
to state a material fact” in connection withthe purchase or sale of securities. Section
17(a)(2), however, prohibits defendants
from “obtain[ing] money or property” inconnection with “the offer or sale of any
securities” “by means of any untrue statementof a material fact or any omission to statea material fact” (emphasis added by the
court). While a defendant can only be held
liable under Rule 10b-5(b) for “mak[ing]” amaterial misstatement, the Second Circuit
found that the statutory text suggested thata defendant may be liable under Section
17(a)(2) regardless of whether the defendant“‘use[d] his own false statement or one madeby another individual’” (quoting SEC v.
Tambone, 550 F.3d 106 (1st Cir. 2008)).
Finally, the Second Circuit found Janus
inapplicable to Section 17(a)(2) for the
additional reason that the Janus Court
addressed the implied private right of action
under Rule 10b-5. The Janus Court statedthat it was “mindful” of the need to “givenarrow dimensions … to a right of action
Congress did not authorize when it first2

enacted the statute and did not expand when
it revisited the law.” The Second Circuit
explained that “the same concern regarding
the expansion of a judicially-created privatecause of action” does not apply with respect toclaims under Section 17(a)(2) because “there
is no private right of action under § 17(a).”Seventh Circuit: Janus Applies
to Corporate Insiders as Well as
Legally Independent Third Parties
On May 21, 2015, in connection with asecurities fraud action against Household
International, Inc. (now known as HSBC
Finance Corp.), the Seventh Circuit held thatthe district court had erred in concludingthat the Supreme Court’s decision in Janus“applie[s] only to legally independent third
parties (like the investment adviser in Janus
itself), not corporate insiders.” Glickenhaus& Co. v. Household Int’l, Inc., 787 F.3d 408(7th Cir. 2015) (Sykes, J.). The Seventh
Circuit found that “[n]othing in Janus
limits its holding to legally independent
third parties.” Rather, the court determinedthat the Supreme Court’s interpretation ofRule 10b-5 “applies generally, not just to
corporate outsiders.”
The Seventh Circuit found that the district
court’s jury instruction on what it means to“make” a statement for Rule 10b-5 purposes“directly contradict[ed] Janus.” The court
had “instructed the jury that the plaintiffs
could prevail on their Rule 10b-5 claim if
they proved that the defendant [had] ‘made,approved, or furnished information to be
included in a false statement’” (emphasis
added by the Seventh Circuit). The Seventh
Circuit found that this went “well beyond thenarrow interpretation [of Rule 10b-5] adopted
in Janus” and “plainly misstated the law.”
The Seventh Circuit found that the error
prejudiced the individual defendants,
including HSBC’s CEO. For example,
the Seventh Circuit found no basis forplaintiffs’ claim that the CEO had “‘made’ thestatements in the [company’s] press releases.”
The court recognized that the CEO “hadauthority over the press releases in the sensethat he could have exercised control overtheir content.” However, the Seventh Circuit
explained that “if that were enough to satisfy
Janus, then CEOs would be liable for any
statements made by their employees acting
within the scope of their employment.” Thecourt found that such an approach “wouldn’t
square with the Court’s reminder about ‘thenarrow scope that we must give the implied
private right of action’ under Rule 10b-5.”
To satisfy Janus’s requirements, the Seventh
Circuit explained that HSBC’s CEO “musthave actually exercised control over thecontent of the press releases and whether andhow they were communicated.”

Circuit Court Decisions
Addressing Liability
for Omissions Under
Section 10(b)Second Circuit: Failure to ComplyWith Item 303 of Regulation S-K
May Only Be Actionable Under
Section 10(b) If the Alleged
Omission Was Material Under
Basic’s Probability/Magnitude Test
Item 303 of Regulation S-K sets forth
the disclosure requirements for theManagement’s Discussion and Analysis(MD&A) section of a public company’s Form
10-Qs and other SEC filings. In relevant part,
Item 303 states that a public company must“[d]escribe any known trends or uncertainties
that have had or that the registrant reasonably
expects will have a material favorable orunfavorable impact on net sales or revenues
or income from continuing operations.”
On January 12, 2015, the Second Circuit
held “as a matter of first impression … that a
failure to make a required Item 303 disclosure… is indeed an omission that can serve as
the basis for a Section 10(b) securities fraudclaim.” Stratte-McClure v. Morgan Stanley,776 F.3d 94 (2d Cir. 2015) (Livingston, J.).
The court explained that “Form 10-Qs aremandatory filings that speak … to the entire
market,” and reasoned that “omitting an item
required to be disclosed on a 10-Q can renderthat financial statement misleading.”
Significantly, the Second Circuit found that“such an omission is actionable only if itsatisfies the materiality requirements outlinedin [Basic Inc. v. Levinson, 485 U.S. 224(1988)], and if all of the other requirements
to sustain an action under Section 10(b) are
fulfilled.” The Second Circuit explained that“[t]he SEC’s test for a duty to report under3

Item 303 … involves a two-part … inquiry”
that is “different” from the test for materiality
under Basic. When determining whether Item
303 mandates disclosure of a “known trend,”“management must make two assessments.”
First, management must consider whether the
known trend is “likely to come to fruition.”
Second, in the event that “management
cannot make that determination, it mustevaluate objectively the consequences of the
known trend … on the assumption that it will
come to fruition.” Item 303 then requires
disclosure of the trend “unless management
determines that a material effect on theregistrant’s financial condition or results ofoperations is not reasonably likely to occur.”
Under the Basic test, on the other hand,“the materiality of an allegedly required
forward-looking disclosure is determined by‘a balancing of both the indicated probability
that the event will occur and the anticipatedmagnitude of the event in light of the totalityof the company activity.’” Stratte-McClure,776 F.3d 94 (quoting Basic, 485 U.S. at 224)
(emphasis added by the Second Circuit).
The Second Circuit held that a plaintiff
alleging “a violation of Item 303’s disclosure
requirements can only sustain a claim under
Section 10(b) and Rule 10b-5 if the allegedly
omitted information … was material under
Basic’s probability/magnitude test” and if allother requirements for a claim under Section
10(b) and Rule 10b-5 are satisfied.

In so holding, the Second Circuit recognizedthat its decision was “at odds” with the Ninth
Circuit’s opinion in In re NVIDIA Corp.
Securities Litigation, 768 F.3d 1046 (9th Cir.
2014). The NVIDIA court held that “Item 303
does not create a duty to disclose for purposesof Section 10(b) and Rule 10b-5.” The Second
Circuit determined that the Ninth Circuit’s

decision was based on an overbroad readingof the Third Circuit’s decision in Oran v.
Stafford, 226 F.3d 275 (3d Cir. 2000). The
Second Circuit found that “Oran actuallysuggested, without deciding, that in certain
instances a violation of Item 303 could giverise to a material [Rule] 10b-5 omission.”

Fourth Circuit: Partial Disclosure
Can Give Rise to a Duty to Disclose
for Section 10(b) Purposes
On March 16, 2015, in a securities fraud
action brought against Chelsea Therapeutics
International and several of its executives,
the Fourth Circuit found “plaintiffs’
allegations … permit[ted] a strong inference
that … defendants [had] either knowingly
or recklessly misled investors by failing todisclose critical information received fromthe FDA during the new drug application
process, while releasing less damaging
information that they knew was incomplete.”Zak v. Chelsea Therapeutics Int’l, 780 F.3d
597 (4th Cir. 2015) (Keenan, J.). The court
concluded that plaintiffs had adequately pledscienter by alleging a “conflict[ ]” between
the “material, non-public information known
to [ ] defendants about the status of” thecompany’s application for FDA approvaland “defendants’ public statements on
those subjects.”
The Fourth Circuit “emphasize[d] that[its] conclusion [did] not stand for the
proposition that a strong inference of scienter
can arise merely based on a defendant’s
failure to disclose information.” The court
recognized that “Chelsea and its corporate
officers may have lacked an independent,
affirmative duty to disclose” adverse
information received from the FDA inconnection with the company’s application
for FDA approval. However, the Fourth
Circuit stated that “defendants’ failure” todisclose “must be viewed under Section
10(b) and Rule 10b-5(b) in the context of thestatements that they affirmatively elected
to make” regarding the likelihood of FDA
approval. The Fourth Circuit noted that under
Matrixx Initiatives, Inc. v. Siracusano, 131 S.
Ct. 1309 (2011), “companies can control what
they have to disclose under [Section 10(b)and Rule 10b-5(b)] by controlling what they
say to the market” (quoting Matrixx, 131 S.
Ct. 1309).

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Circuit Court Decisions
Addressing Section 10(b)’sScienter Requirement
First Circuit: (1) Materiality and
Scienter Analyses Are Linked,
and (2) a Statement’s MarginalMateriality Can Weigh Against a
Finding of Scienter
In a decision dated February 6, 2015, theFirst Circuit stated that “the materiality andscienter inquiries are linked.” Fire & Police
Pension Ass’n of Colorado v. Abiomed, Inc.,
778 F.3d 228 (1st Cir. 2015) (Lynch, C.J.).
The court reaffirmed that “‘[t]he question ofwhether a plaintiff has pled facts supportinga strong inference of scienter has an obvious
connection to the question of the extent towhich the omitted information is material’”(quoting City of Dearborn Heights Act 345
Police & Fire Ret. Sys. v. Waters Corp., 632
F.3d 751 (1st Cir. 2011)). The First Circuit
reasoned that “‘[i]f it is questionable whethera fact is material or its materiality is marginal,that tends to undercut the argument that
defendants acted with the requisite intent or
extreme recklessness in not disclosing thefact’” (quoting Waters Corp., 632 F.3d 751).
On December 8, 2015, the First Circuit
applied the same reasoning in holding that a“thin materiality showing” could not “support
a finding of scienter” in an SEC action against
two former employees of State Street Bankand Trust Company. Flannery v. SEC, 2015
WL 8121647 (1st Cir. 2015) (Lynch, J.).

Second Circuit: 10b5-1 Plan Stock
Trades May Support an Inferenceof Scienter If Plan Participation
Commenced After the Alleged
Fraud Began
On July 24, 2015, in a securities fraud action
against Green Mountain Coffee Roasters,
Inc. and certain of its executives, the Second
Circuit rejected defendants’ contention thatthe executives’ stock sales did “not support aninference of scienter because they were madepursuant to … pre-determined 10b5-1 trading
plans.” Emps.’ Ret. Sys. of Gov’t. of V.I. v.
Blanford, 794 F.3d 297 (2d Cir. 2015) (Chin,J.). The court underscored the allegation that
defendants began participating in these plans“long after … Green Mountain’s fraudulent

growth scheme [allegedly] began.” The court
held that “[w]hen executives enter into a
trading plan during the [c]lass [p]eriod andthe [c]omplaint sufficiently alleges that the
purpose of the plan was to take advantage ofan inflated stock price, the plan provides nodefense to scienter allegations.”
In the case before it, the Second Circuit
found that defendants had allegedly “madepositive public statements about Green
Mountain’s growth that drove up its stock
price immediately before” scheduled sales ofstock in their 10b5-1 trading plans. Although
the sales “were made pursuant to their 10b5-1
trading plans,” the court found it significant
that defendants “knew the dates of theirscheduled sales [were] imminent when
they made allegedly misleading statements
to investors.”

Ninth Circuit: Adverse Interest
Exception to Imputing an
Executive’s Scienter to the
Corporation Does Not ApplyIf (1) the Executive Acted with
Apparent Authority; and (2) an
Innocent Third Party Relied on the
Executive’s Misrepresentations
On October 23, 2015, the Ninth Circuit
held that fraudulent misrepresentations
made by Ron Chan, the founder and CEO of
ChinaCast Education Corporation, could be
imputed to ChinaCast even though Chan had
acted adversely to ChinaCast’s interests by“embezzl[ing] millions” from the company.
In re ChinaCast Educ. Corp. Sec. Litig., 2015
WL 6405680 (9th Cir. 2015) (McKeown, J.).
The Ninth Circuit determined that the adverse
interest exception to the general rule imputing
an executive’s scienter to the corporation did
not apply because the complaint alleged that
(1) “Chan [had] acted with apparent authority
on behalf of the corporation” and (2) “thirdparty shareholders [had] understandably
relied on Chan’s representations, which weremade with the imprimatur of the corporationthat selected him to speak on its behalf andsign SEC filings.” The Ninth Circuit foundthat “the adverse interest exception itself has
an exception: the principal is charged witheven the faithless agent’s knowledge when an
innocent third-party relies on representations
made with apparent authority.”5

Tenth Circuit: Failure to Comply
with a Securities Regulation
Disclosure Requirement Is
Insufficient, Standing Alone, toRaise a Strong Inference of Scienter
On August 18, 2015, the Tenth Circuit foundthat “the bare identification of a securities
regulation violation is not enough,” standing
alone, to raise a strong inference of scienter.
In re ZAGG, Inc. Sec. Litig., 797 F.3d 1194
(10th Cir. 2015) (Tymkovich, J.).
The court affirmed dismissal of a securities
fraud action alleging that ZAGG, Inc. had
failed to disclose the number of company
shares pledged as collateral in a marginaccount by Robert Pedersen, the company’s
then-CEO, in violation of Item 403(b) ofRegulation S-K. The Tenth Circuit heldthat the fact of the Item 403(b) disclosure
violation was “insufficient” to raise a strong
inference of Pedersen’s scienter absent “someother facts evidencing [that] Pedersen[had] signed the filings with the knowledge
that they omitted a required disclosure.”
The court also rejected plaintiffs’ contention
that the disclosure violation was “evidenceof conduct that was an extreme departurefrom the standards of ordinary care, or akinto conscious disregard,” particularly giventhat Pedersen had “personally disclosed themargin account after each margin call.”Tenth Circuit: Allegations of
GAAP Violations and Claims That
Defendants “Must Have Known” ofthe Fraud Are Insufficient, Standing
Alone, to Allege Scienter Under
the PSLRA’s Heightened PleadingStandards
On January 16, 2015, the Tenth Circuit
reaffirmed that “‘allegations of GAAP
violations or accounting irregularities,
standing alone, are insufficient to state asecurities fraud claim.’” In re Gold Resource
Corp. Sec. Litig., 776 F.3d 1103 (10thCir. 2015) (Seymour, J.) (quoting City ofPhiladelphia v. Fleming Cos., Inc., 264 F.3d
1245 (10th Cir. 2001)). The court held thatsuch allegations may only “‘be sufficient tostate a claim’” where they are “‘coupled withevidence that the violations or irregularities
were the result of the defendant’s fraudulent
intent to mislead investors’” (quoting
Fleming, 264 F.3d 1245).

The Tenth Circuit further ruled that plaintiffs
in the case before it could not meet thescienter pleading requirements of the Private
Securities Litigation Reform Act (“PSLRA”)
merely by alleging that defendants “musthave known” of the alleged fraud or financial
discrepancy at issue in light of the size ofthe misstatement or the significance of the
product line at issue. The Tenth Circuitemphasized that “plaintiffs’ view of thesituation fail[ed] to take account of otherplausible inferences” as required under theSupreme Court’s decision in Tellabs, Inc.
v. Makor Issues & Rights, Ltd., 551 U.S.
308 (2007). The court noted that one such
“plausible inference” is that a “prudent
executive” might “want to investigate andconfirm [a] claimed discrepancy before
disclosing it publicly.” The Tenth Circuit
explained that “‘[k]nowing enough to launch
an investigation … is a very great distancefrom convincing proof of intent to deceive’”(quoting Higginbotham v. Baxter Int’l, Inc.,
495 F.3d 753 (7th Cir. 2007)).

Eleventh Circuit: Allegations
That a Corporate Executive “MustHave Known” of an Alleged Fraud
Given Her Role at the Company
Are Insufficient to Plead Scienter
Absent Other Particularized
Allegations Supporting the
Executive’s Knowledge
On March 25, 2015, the Eleventh Circuit
affirmed dismissal of a securities fraud
action against Jiango Pharmaceuticals’ CFO
and auditor on scienter grounds. Brophy v.
Jiangbo Pharm., 781 F.3d 1296 (11th Cir.
2015) (Pryor, J.). The court rejected plaintiffs’
attempt to establish scienter on the part ofElsa Sung, Jiangbo’s former CFO, by claimingthat “the disparity between Jiangbo’s actualand reported cash balances” was so large “thatit would have been difficult or impossible for
Ms. Sung not to have known about it in her
capacity as CFO.”
The Eleventh Circuit found that plaintiffs
essentially wanted the court to “rely solely
on Ms. Sung’s position as CFO to overlook[the] omissions and ambiguities in thecomplaint.” In support of this argument,
plaintiffs “cite[d] cases in which courts [have]recognized a strong inference of scienter
based in part on a senior financial executive’s
oversight of the processes that produce a6company’s financial statements.” The court
deemed those cases inapposite because they
all “involve[d] particularized allegations thatthe executives knew or were severely recklessin disregarding how those processes weredistorted by fraud.” Here, however, plaintiffs
had “allege[d] no particularized facts that
directly show[ed] [that] Ms. Sung intended
to deceive shareholders or knew about or was
severely reckless with respect to deficiencies
in reporting.” The court determined that“[t]he seriousness of Jiangbo’s errors and
Ms. Sung’s proximity to those errors at mostimpl[ied] negligence, which is not enough toestablish scienter.”

Circuit Court Decisions
Addressing the PSLRA’s Safe
Harbor for Forward-Looking
Statements
D.C. Circuit: Forward-Looking
Statements Fall Within the
PSLRA’s Safe Harbor Only
If Accompanied by Tailored,
Company-Specific Warnings
On June 23, 2015, in a securities fraud action
against Harman International Industries, theD.C. Circuit found that two forward-looking
statements were not entitled to safe harbor
protection under the PSLRA because thestatements were not (1) “accompanied bywarnings specific to the [c]ompany”;(2) “tailored to the specific forward-looking
statements” made; and (3) “consistent withthe historical facts when the statements were
made.” In re Harman Int’l Indus. Sec. Litig.,
791 F.3d 90 (D.C. Cir. 2015) (Rogers, J.).
The court explained that in order “[t]o comewithin the [PSLRA’s] statutory safe harbor, astatement must not only be forward looking(and identified as such), but [must] also[be] ‘accompanied by meaningful cautionary
statements’” (quoting 15 U.S.C. § 78u-5(c)(1)(A)(i)). The court found that “‘[t]herequirement for ‘meaningful’ caution calls
for substantive company-specific warnings
based on a realistic description of the risks
applicable to the particular circumstances’”(quoting Southland Sec. Corp. v. INSpire
Ins. Solutions, 365 F.3d 353 (5th Cir. 2004)).
The D.C. Circuit emphasized that “cautionary
language cannot be ‘meaningful’ if it is‘misleading in light of historical fact[s]’”(quoting Slayton v. Am. Express Co., 604
F.3d 758 (2d Cir. 2010)). “If a company were
to warn of the potential deterioration of
one line of its business, when in fact it wasestablished that that line of business had
already deteriorated, then … its cautionary
language would be inadequate to meet thesafe harbor standard.” The court explainedthat “there is an important difference between
warning that something ‘might’ occur andthat something ‘actually had’ occurred.”
Notably, the D.C. Circuit recognized that
“Congress did not require the cautionary
statement warn of ‘all’ important factors,
so long as ‘an investor has been warned ofrisks of a significance similar to that actuallyrealized,’ such that the investor ‘is sufficiently
on notice of the danger of the investment
to make an intelligent decision about it
according to her own preferences for risk andreward.’” The court observed that “[p]erfectclairvoyance may be impossible because of
events beyond a company’s control of which it
was unaware.”Eighth Circuit: Key Inquiry
for Determining Whether aStatement Is Forward- Looking
for Purposes of the PSLRA’s SafeHarbor Provision Is Whether theStatement’s Veracity Is Discernible
at the Time the Statement Is MadeOn July 2, 2015, the Eighth Circuit held that“[i]n determining whether a statement is truly
forward-looking” for purpose of the PSLRA’s
safe-harbor provision, “the determinative
factor is not the tense of the statement.”
Julianello v. K-V Pharm. Co., 791 F.3d 915(8th Cir. 2015) (Shepherd, J.). Rather, thecourt found that “the key is whether [thestatement’s] ‘truth or falsity is discernible
only after it is made.’”The Eighth Circuit found that alleged
misstatements concerning the likelihood that
the FDA would enforce a period of exclusive
sales rights once K-V Pharmaceuticals
launched Makena, a prescription drug for theprevention of preterm labor, fell within the
PSLRA’s safe-harbor provision because(1) the statements were “tied to a future event:the launch of Makena,” and (2) the veracityof K-V’s statements could not be determineduntil this future event took place.

7

The Eighth Circuit further found that “theuse of the present tense in the challenged
statements [did] not undermine [its]determination that they were forward
looking.” The court held that “[t]he criticalinquiry in determining whether a statement isforward-looking is whether its veracity can be
determined at the time the statement is made,not the tense of the statement.”

Circuit Court Decisions
Addressing Inactionable
Puffery Under Section 10(b)deem important to a securities investment
decision’” (quoting City of Monroe Emps Ret.
Sys. v. Bridgestone Corp., 399 F.3d 651 (6thCir. 2005)).
Notably, the D.C. Circuit found “[n]othing”
in the Sixth Circuit’s City of Monroe decisionthat “purports to render inactionable any
statement that does not contain its own
metric.” The court explained that thestatements at issue in City of Monroe—suchas claims that “Bridgestone sold ‘the besttires in the world’”—were “more in linewith generalized boasting” and were “more‘squishy’ … than the [c]ompany’s report of‘very strong’ … sales” at issue here (quoting
City of Monroe, 399 F.3d 651).

D.C. Circuit: Descriptions Such as“Very Strong” May Be Actionable
If Tied to a Specific Product andTime Period
On June 23, 2015, in a securities fraud action
against Harman International Industries, theD.C. Circuit found that a statement describing
product sales as “very strong” was “plausibly
understood” as “a specific statement about[the company’s] recent financial performanceand not mere ‘puffery’” because the statement
was “specific about [both] product and time
period.” In re Harman Int’l Indus. Sec. Litig.,
791 F.3d 90 (D.C. Cir. 2015) (Rogers, J.).
The D.C. Circuit explained that “‘conclusory
terms [like ‘high’ value and ‘fair’] in
a commercial context are reasonably
understood to rest on a factual basis thatjustifies them as accurate, the absence of
which renders them misleading’” (quoting
Va. Bankshares, Inc. v. Sandberg, 501 U.S.
1083 (1991)). The court determined that“given the context in which it was made,”“the ‘very strong’ statement … [was] plausibly
understood as a description of historical fact
rather than unbridled corporate optimism,i.e., immaterial puffery.” The court explainedthat the statement referred to productsthat “were part of the [c]ompany’s largest
division and had been the focus of recent
public statements.” Moreover, the court foundthat the statement was not “too vague tobe material” because it contained “specifics
that an investor could use to evaluate thestatement’s veracity.” The court noted that
puffery, on the other hand, encompasses
statements that are “‘too untethered toanything measurable, to communicate
anything that a reasonable person would

Second Circuit: Statements ofGeneral Corporate Optimism Are
Typically Inactionable
On April 15, 2015, the Second Circuit foundthat the Royal Bank of Scotland’s (“RBS”)
positive statements concerning its acquisitionof ABN Amro were “inactionable puffery.”
IBEW Local Union No. 58 Pension TrustFund & Annuity Fund v. Royal Bank of
Scotland Grp., 783 F.3d 383 (2d Cir. 2015)(Chin, J.). The court reaffirmed that“[s]tatements of general corporate optimism… do not give rise to securities violations”
unless “‘they are worded as guarantees or aresupported by specific statements of fact, or if
the speaker does not genuinely or reasonably
believe them’” (quoting In re IBM Sec. Litig.,
163 F.3d 102 (2d Cir. 1998)). In the casebefore it, the Second Circuit determinedthat RBS’s statements were mere puffery
because the statements were “not worded as
guarantees” and “there [were] no allegations
that defendants did not reasonably believe”
the statements at the time they were made.

8

Circuit Court Decisions
Addressing Loss Causation
and Damages in the Context of
Section 10(b) Claims

not have bought BP stock at all were it
not for the alleged misrepresentations—adetermination not derivable as a common
question, but rather one requiring
individualized inquiry” into the specific risk
tolerance of each investor.

Fifth Circuit: Damages Based on a“Materialization of the Risk” Theory
Cannot Be Measured on a Class-WideBasis for Rule 23(b)(3) Purposes,
as Required Under the Supreme
Court’s Decision in Comcast

The Fifth Circuit also rejected plaintiffs’ claimthat under the fraud-on-the-market theory,the court had to “presume[ ]” that plaintiffs
had relied on BP’s misrepresentations
in purchasing the stock and that “‘themisrepresentations were a cause-in-fact of
their losses.’” The court explained that the
fraud-on-the-market theory set forth in Basic
Inc. v. Levinson, 485 U.S. 224 (1988) “doesnot provide any presumptions with regard
to loss causation—whether the misstatement
caused the loss.”

On September 8, 2015, in connection with asecurities fraud action against BP arising outof the Deepwater Horizon oil spill, the Fifth
Circuit held that damages based on plaintiffs’“materialization of the risk” theory could
not be measured on a class-wide basis, as
required under the Supreme Court’s
decision in Comcast Corp. v. Behrend,
133 S. Ct. 1426 (2013), because plaintiffs’
damages model required an “individualized
inquiry” into whether each investor would
have purchased BP stock had that investor
known of the true risk of a major spill.
Ludlow v. BP, P.L.C., 800 F.3d 674 (5th Cir.
2015) (Higginbotham, J.).
Plaintiffs contended that “BP [had] allegedly
misstated the efficacy of its safety procedures,
creating an impression that the risk of acatastrophic failure was lower than it actuallywas.” According to plaintiffs, when the riskmaterialized in the form of the Deepwater
spill, investors who were “defrauded into
taking on that heightened risk” were entitled
to recover their losses as damages.
The Fifth Circuit found that the district
court had properly concluded that plaintiffs’
damages theory “was not capable of classwide determination” under Comcast. In
Comcast, the Supreme Court held that “amodel purporting to serve as evidence ofdamages in [a] class action must measure
only those damages attributable to thattheory” and must “establish that damages
are susceptible of measurement across theentire class for purposes of Rule 23(b)(3).”Rule 23(b)(3) provides, in relevant part,that “questions of law or fact common toclass members [must] predominate over any
questions affecting only individual members.”
The Fifth Circuit reasoned that plaintiffs’“materialization of the risk” “theory hinge[d]on a determination that each plaintiff would

Finally, the Fifth Circuit noted that the fraudon-the-market theory “presume[s] reliancebecause (a) all information in an efficient
market is priced into a security and (b)investors typically make investment decisions
based on price and price alone.” Here,however, “plaintiffs’ own model assert[ed]that they [had] relied on something otherthan price: risk.” The Fifth Circuit determinedthat “plaintiffs’ argument thus undercut[ ] oneof the rationales for the Basic presumptionof reliance.”

Seventh Circuit: Plaintiffs Must
Eliminate Firm-Specific Nonfraud
Factors from the Leakage Modelfor Quantifying Loss Causation in
Securities Fraud Actions
On May 21, 2015, the Seventh Circuit vacateda jury verdict finding HSBC and several of its
executives liable for $2.46 billion in damages
for securities fraud. Glickenhaus & Co. v.
Household Int’l, Inc., 787 F.3d 408 (7th Cir.
2015) (Sykes, J.). Relying on the Supreme
Court’s decision in Dura Pharmaceuticals,Inc. v. Broudo, 544 U.S. 336 (2005), theSeventh Circuit held that defendants wereentitled to a new trial because plaintiffs’
leakage model of loss causation1 “did notadequately account for the possibility thatfirm-specific, nonfraud related information
1. The leakage model assumes that “the information containedin a major disclosure event often leaks out to some market
participants before its release.” The leakage model factors in“every difference, both positive and negative, between the stock’s
predicted returns … and the stock’s actual returns during thedisclosure period.” Relying on the leakage model, plaintiffs’
expert assumed that the effect of defendants’ disclosures wasequal to “[t]he total sum of these residual returns.”
9

may have affected the decline in [HSBC’s]stock price during the relevant time period.”
The Seventh Circuit found that “in order toprove loss causation” under Dura, “plaintiffs
in securities-fraud cases need to isolate theextent to which a decline in stock price isdue to fraud-related corrective disclosuresand not other factors.” The court noted thatin Dura, the Supreme Court recognized thata stock price decline “may reflect, not theearlier misrepresentation, but [also] changed
economic circumstances, changed investor
expectations, new industry-specific or firmspecific facts, conditions, or other events,
which taken separately or together accountfor some or all of that lower price” (quoting
Dura, 544 U.S. 336) (emphasis added by theSeventh Circuit).
The Seventh Circuit held that plaintiffs’“leakage theory … did not adequately accountfor the possibility that firm-specific, nonfraud
related information may have affected thedecline in [HSBC’s] stock price.” The court
found that “[t]he model assume[d] thatany changes in [HSBC’s] stock price—otherthan those that [could] be explained bygeneral market and industry trends—[were]
attributable to the fraud-related disclosures.”In the event that “there was significant
negative information [during the class period]
about [HSBC] unrelated to these corrective
disclosures (and not attributable to market orindustry trends),” then the court determinedthat “the model would [have] overstate[d]the effect of the disclosures and in turn of
the false statements.” Conversely, if “there
was significant positive information about[HSBC]” during the class period, “then themodel would [have] understate[d] the effectof the disclosures” (emphasis in the original).
The Seventh Circuit rejected defendants’contention that “any loss-causation model
must itself account for, and perfectly exclude,
any firm-specific, nonfraud related factorsthat may have contributed to the decline
in a stock price.” The court reasoned that“[i]t may be very difficult, if not impossible,
for any statistical model to do this.” Thecourt found that “[a]ccepting the defendants’position likely would doom the leakage theory
as a method of quantifying loss causation.”
However, the court also recognized that “ifit’s enough for a loss-causation expert to offer
a conclusory opinion that no firm-specific,
nonfraud related information affected thestock price during the relevant time period,
then it may be far too easy for plaintiffs toevade the loss-causation principles explainedin Dura.”Finding neither option perfect, the Seventh
Circuit adopted a “middle ground” position.
The court found that “[i]f the plaintiffs’
expert testifies that no firm-specific, nonfraud
related information contributed to the decline
in stock price during the relevant time period
and explains in nonconclusory terms thebasis for this opinion,” then defendants must
“identify[ ] some significant, firm-specific,
nonfraud related information that could
have affected the stock price.” If defendants
cannot do this, then “the leakage model can
go to the jury.” If defendants can identify any
firm-specific, nonfraud factors that may have
impacted the stock price, however, then theburden “shifts back to the plaintiffs to accountfor that specific information or provide aloss-causation model that doesn’t suffer fromthe same problem, like the specific-disclosure
model.” The court observed that “[o]nepossible way to address the issue is to simply
exclude from the model’s calculation any
days identified by the defendants on whichsignificant, firm-specific, nonfraud related
information was released.”

Other Noteworthy Circuit
Court Decisions
Third Circuit: Irrevocable Liability
Test Establishes the Locationof a Securities Transaction for
Purposes of Determining Whether
a Transaction is “Domestic” forMorrison Purposes
In Morrison v. National Australia Bank
Ltd., 561 U.S. 247 (2010), the Supreme
Court held that “Section 10(b) applies only totransactions in securities listed on domestic
exchanges and domestic transactions in othersecurities.”
On January 20, 2015, the Third Circuit
ruled that “irrevocable liability establishes
the location of a securities transaction”
for purposes of determining whether atransaction is “domestic” within the meaningof the Morrison decision. United States
v. Georgiou, 777 F.3d 125 (3d Cir. 2015)(Greenaway, Jr., J.). Under the “irrevocable10liability” test, “‘a securities transaction isdomestic when the parties incur irrevocableliability to carry out the transaction within
the United States’” (quoting Absolute Activist
Value Master Fund Ltd. v. Ficeto, 677 F.3d 60(2d Cir. 2012)). The Third Circuit noted that“[f]acts that demonstrate ‘irrevocable liability’
include the ‘formation of the contracts, theplacement of purchase orders, the passingof title, or the exchange of money’” (quoting
Absolute Activist, 677 F.3d 60).
At issue in the case before the Third Circuit
was an alleged “stock fraud scheme” involving
stocks traded by foreign entities on two
American over-the-counter stock markets,
the OTC Bulletin Board and the Pink OTC
Markets. The court held that these two overthe-counter stock markets are “not national
securities exchanges within the scope of
Morrison.”
The court then considered whether
the transactions qualified as “domestictransactions” under Morrison’s second
prong. Applying the “irrevocable liability”
test, the Third Circuit held “as a matterof first impression” that over-the-counter“purchases and sales of securities issued by
U.S. companies through U.S. market makers
acting as intermediaries for foreign entities
constitute ‘domestic transactions’ underMorrison.”Ninth Circuit: “Personal Benefit”
Requirement for Tippee Liability
Is Met Where an Insider Discloses
Confidential Information to a
Trading Relative or Friend, Even If
the Insider Received No Potential
or Actual Financial Benefit
On July 6, 2015, the Ninth Circuit heldthat “[p]roof that [an] insider disclosed
material nonpublic information with theintent to benefit a trading relative or friend issufficient to establish the breach of fiduciary
duty element of insider trading” for tippee
liability purposes. United States v. Salman,
792 F.3d 1087 (9th Cir. 2015) (Rakoff, J.).
The Ninth Circuit declined to follow theSecond Circuit’s decision in United States v.
Newman, 773 F.3d 438 (2d Cir. 2014) “[t]othe extent Newman can be read to go so far”
as to require that the insider stood to obtain“‘at least a potential gain of a pecuniary orsimilarly valuable nature’” for disclosing
confidential information to a trading relativeor friend (quoting Newman, 773 F.3d 438).
The Ninth Circuit reasoned that if it were to
take this approach, “then a corporate insider
or other person in possession of confidential
and proprietary information would be free todisclose that information to her relatives, andthey would be free to trade on it, provided
only that [the insider] asked for no tangible
compensation in return.”
The Ninth Circuit also questioned whether
Newman in fact requires evidence of such atangible personal benefit in cases involving
disclosures to family members of friends. The
court noted that “Newman itself recognizedthat the ‘personal benefit is broadly defined
to include not only pecuniary gain, but also,inter alia, … the benefit one would obtainfrom simply making a gift of confidential
information to a trading relative or friend’”(quoting Newman, 773 F.3d 438).

Ninth Circuit: Rule 9(b)’sParticularized Pleading
Requirements Apply to Loss
Causation Allegations
Rule 9(b) requires that a plaintiff “alleging
fraud or mistake … state with particularity thecircumstances constituting fraud or mistake.”
On December 16, 2014, the Ninth Circuit
held that “Rule 9(b) applies to all elementsof a securities fraud action, including losscausation.” Oregon Public Emps.’ Ret. Fundv. Apollo Group Inc., 774 F.3d 598 (9th Cir.
2014) (Smith, Jr., J.).
The Ninth Circuit determined that applying
Rule 9(b) to loss causation allegations “isappropriate for at least three reasons.” First,
the court reasoned that “[s]ince Rule 9(b)applies to all circumstances of common-law
fraud, … and since securities fraud is derived
from common law fraud, it makes sense
to apply the same pleading standard to all
circumstances of securities fraud,” including
loss causation. The court noted that “[t]herequirement of loss causation, in particular,
is founded on the common law of fraud anddeceit.” Second, the Ninth Circuit found that“[l]oss causation is part of the ‘circumstances’
constituting fraud” within the meaning ofRule 9(b) “because, without it, a claim of
securities fraud does not exist.” Third, theNinth Circuit explained that its approach“creates a consistent standard through whichto assess pleadings in [Section] 10(b) actions,11rather than the piecemeal standard adopted
by some courts.”
The Ninth Circuit recognized the existenceof a circuit split on whether Rule 9(b)applies to loss causation allegations. The
court explained that it was “persuadedby the approach adopted in the Fourth
Circuit.” Courts in the Fourth Circuit “review
allegations of loss causation for ‘sufficient
specificity,’ a standard largely consonant with
[Rule] 9(b)’s requirement that averments offraud be pled with particularity.” Katyle v.
Penn. Nat’l Gaming, 637 F.3d 462 (2011).

Significant Delaware Supreme
Court Decisions
Financial Advisor Held Liable forIntentionally Aiding and Abetting
Board’s Breaches of Fiduciary Duty
On November 30, 2015, the Delaware
Supreme Court affirmed post-trial decisions(1) finding financial advisor RBC CapitalMarkets, LLC (“RBC”) liable for aiding andabetting breaches of fiduciary duty by the
Board of Rural/Metro Corporation (“Rural”)
in connection with Rural’s 2011 acquisition by
Warburg Pincus LLC (“Warburg”); and(2) holding RBC responsible for 83% of
the total damages that the class suffered.
RBC Capital Markets, LLC v. Jervis, 2015
WL 7721882 (Del. 2015) (Valihura, J.)(Rural III).2
Background

On June 30, 2011, Warburg acquired
Rural at a price of $17.25 per share (the“Merger”). Rural’s shareholders broughtsuit in connection with the acquisition.
Plaintiffs contended that Rural’s directors,
including the company’s President and CEO(collectively, the “individual defendants”),
had “breached their fiduciary duties in two
ways: first, by making decisions that felloutside the range of reasonableness during
the process leading up to the Merger andwhen approving the Merger … , and second,by failing to disclose material information in
the definitive proxy statement … that [Rural]issued in connection with the Merger.” In re
2. Please note that we discuss the Delaware Supreme Court’s
decision in Rural III at length because we have not previously
covered it.

Rural/Metro Corp. S’holdrs. Litig., 102 A.3d
205 (Del. Ch. 2014) (Laster, V.C.) (Rural II).
Plaintiffs also asserted aiding and abetting
claims against RBC, Rural’s lead financial
advisor, as well as Moelis & Company LLC,
Rural’s secondary financial advisor.
Prior to trial, plaintiffs reached an agreementin principle to settle their claims against theindividual defendants and Moelis. The caseproceeded to trial against RBC only.
On March 7, 2014, the Delaware Chancery
Court issued a post-trial decision holding
RBC liable for aiding and abetting breachesof fiduciary duty by Rural’s directors. In re
Rural Metro Corp., 88 A.3d 54 (Del. Ch.
2014) (Laster, V.C.) (Rural I).
On October 10, 2014, the Chancery Court in
Rural II issued an opinion addressing RBC’sentitlement to a settlement credit under
the Delaware Uniform Contribution Among
Tortfeasors Act (“DUCATA”) and holding
RBC liable for $75.8 million in damages.
RBC appealed both decisions.
Delaware Supreme Court Finds the Chancery
Court Did Not Err in Applying Revlon’s
Enhanced Scrutiny Standard to the Special
Committee’s Actions in December 2010, Prior
to the Rural Board’s Formal Decision to Sell the
Company in March 2011

The parties agreed that the enhanced scrutiny
standard articulated in Revlon, Inc. v.
MacAndrews & Forbes Holdings, Inc., 506
A.2d 173 (Del. 1986) applied to plaintiffs’
breach of the duty of care claims against
Rural’s directors. However, “they differ[ed] as
to when, in the continuum between December
2010 and March 2011, Revlon’s enhanced
scrutiny was triggered.” Rural III, 2015 WL
7721882. RBC contended that “the businessjudgment rule—not Revlon—applie[d] tothe Board’s decision to explore strategic
alternatives in December 2010.” According
to RBC, Revlon did not apply until March
2011, when there were two bids on the tablefor Rural and the Board was “‘in a position of
deciding to sell the [c]ompany—when the saleof the [c]ompany became inevitable.’”On appeal, the Delaware Supreme Court
explained that “enhanced scrutiny under
Revlon is triggered … ‘when a corporation
initiates an active bidding process seeking tosell itself,’” among other scenarios (quoting
12

Revlon, 506 A.2d 173). The court explainedthat “the Court of Chancery, as a factual
matter, found that there was no explorationof strategic alternatives” in December 2010.
The Chancery Court instead “found that theSpecial Committee, acting ‘without Board
authorization,’ ‘hired RBC to sell the[c]ompany’” in December 2010. The Delaware
Supreme Court determined that there was“sufficient evidence in the record to support[the Chancery Court’s] conclusions.”
The Delaware Supreme Court “reject[ed]RBC’s attempt to delay the triggering of
Revlon to late March 2011 for three reasons.”
First, the court explained that in March 2011,
the Rural Board “purportedly ‘restated andratified’ the actions of the Special Committee,
including the initiation of the sale processthat had transpired over the preceding
months.” The court found that “the March
15 ‘restatement and ratification,’ which
deemed the actions of the Special Committee
to be acts of the [c]ompany, undermine[d]RBC’s contention that Revlon should not
apply because action by the full Board
was required.”Second, the court found that its earlier
decision in Lyondell Chemical Co. v. Ryan,
970 A.2d 235 (Del. 2009) was distinguishable
because “that case involved a third party
putting the target company in play.”
Lyondell’s “directors decided that they would
neither put the company up for sale nor
institute defensive measures to fend off a
possible hostile offer,” but instead “decided totake a ‘wait and see’ approach.” The Lyondell
court held that “[t]he time for action under
Revlon did not begin until … the directors
began negotiating the sale of Lyondell.” Here,however, the Delaware Supreme Court foundthat the Special Committee had “initiatedthe sale process in December 2010” and theBoard subsequently ratified those efforts.
Rural III, 2015 WL 7721882. The court heldthat Revlon’s enhanced scrutiny standard
therefore applied in this case beginning in
December 2010. Notably, the court expressly“confine[d] [its] holding to these unusual
facts” and did not consider its decision to be“a departure from” Lyondell.
Third, the Delaware Supreme Court foundthat delaying Revlon scrutiny until March2011 “would allow the Board to benefit froma more deferential standard of review during
the time when, due to its lack of oversight, theSpecial Committee and RBC [had] engaged ina flawed and conflict-ridden sale process.”
Court Finds Rural’s Directors Breached Their
Revlon Duties

The Delaware Supreme Court “agree[d] with
the Court of Chancery’s principal conclusionthat the Board’s overall course of conduct
fail[ed] Revlon scrutiny.” Under Revlon,
a board may “pursue the transaction it
reasonably views as most valuable to thestockholders, provided ‘the transaction is
subject to an effective market check undercircumstances in which any bidder interested
in paying more has a reasonable opportunity
to do so.’” The court noted that under its
recent decision in C & J Energy Services,
Inc. v. City of Miami General Employees’& Sanitation Employees’ Retirement Trust,
107 A.3d 1049 (Del. 2014), “‘[s]uch a market
check does not have to involve an active
solicitation, so long as interested bidders havea fair opportunity to present a higher-value
alternative, and the board has the flexibility
to eschew the original transaction and accept
the higher-value deal.’” Here, the Delaware
Supreme Court found that “the evidence fully
support[ed] the trial court’s findings thatthe solicitation process was structured andtimed in a manner that impeded interested
bidders from presenting potentially higher
value alternatives.”
Rural’s Directors Did Not Fulfill Their
Obligation to Uncover and Address RBC’s
Conflicts of Interest
Based on the record, the Delaware Supreme
Court found that RBC had designed the saleprocess for Rural to run in parallel withthe sale process for Rural’s competitor,
Emergency Medical Services Corporation,
but did not disclose that RBC stood to benefit
financially from this parallel sales structure.
The court recognized that a parallel sales
structure might arguably “fall within therange of reasonableness,” but explainedthat “such decisions must be viewed more
skeptically” where, as here, “undisclosed
conflicts of interests exist.” The court foundthat “Rural’s Board was unaware of theimplications of the dual-track structure of thebidding process,” and consequently “took nosteps to address or mitigate RBC’s conflicts.”
The Delaware Supreme Court underscoredthat “directors need to be active andreasonably informed when overseeing the sale13

process, including identifying and responding
to actual or potential conflicts of interest.”
The court clarified that “a board is not
required to perform searching and ongoing
due diligence on its retained advisors in orderto ensure that the advisors are not acting incontravention of the company’s interests,
thereby undermining the very process forwhich they have been retained.” However,the court explained that “the board should
require disclosure of, on an ongoing basis,material information that might impact theboard’s process.” The court acknowledgedthat “a board may be free to consent to certain
conflicts,” but cautioned that “[a] board’s
consent to a conflict does not give the advisora ‘free pass’ to act in its own self-interest andto the detriment of its client.”
Rural’s Directors and Stockholders Were Not
Adequately Informed of Rural’s Value
The Delaware Supreme Court further foundthat “Rural’s directors were not adequately
informed as to Rural’s value.” Specifically,
the court noted that the Board was “unawareof RBC’s conflicts and how they potentially
impacted the Warburg offer.” The court
explained that “‘[w]hen a board exercises its
judgment in good faith, tests the transaction
through a viable passive market check,and gives its stockholders a fully informed,
uncoerced opportunity to vote to accept thedeal,’ a court will have difficulty determiningthat such board violated its Revlon duties”(quoting C & J Energy, 107 A.3d 1049). Here,however, the court found that “both the Boardand the stockholders were operating on thebasis of an informational vacuum createdby RBC.” The company’s “stockholders were
[therefore] not fully informed when they
voted to accept the deal.”
Plaintiffs Were Not Required to Plead Gross
Negligence to Establish a Breach of the
Directors’ Revlon Duties
The Delaware Supreme Court explained that“[w]hen disinterested directors themselves
face liability,” plaintiffs must establish thatthe directors “acted with gross negligence inorder to sustain a monetary judgment against
them.” However, the court stated that thisprerequisite for monetary damages “doesnot mean … that if [directors] were subject
to Revlon duties, and their conduct was
unreasonable, that there was not a breachof fiduciary duty.” The court agreed with the
Chancery Court’s determination that thedirectors had “breached their fiduciary duties
by engaging in conduct that fell outside therange of reasonableness, and that this was asufficient predicate for its finding of aiding
and abetting liability against RBC.”
Court Finds Rural’s Directors Breached Their
Disclosure Obligations

The Delaware Supreme Court affirmed theChancery Court’s finding that “the Proxy
Statement incorporated a false valuation
analysis” that “did not accurately represent
RBC’s analysis.” The court also agreed with
the Chancery Court’s determination that“[t]he Proxy Statement’s discussion of RBC’s
right to offer staple financing was a partial
disclosure.” The court explained that “[w]henviewed in conjunction with the potential fees
RBC was to receive for its financing services,
the investment bank’s pursuit of Warburg’s
financing business was demonstrative of aconflict that was unquestionably material, andnecessitated full and fair disclosure for the
benefit of the stockholders.”
Court Holds RBC Knowingly Aided and Abetted
the Board’s Breaches

The Delaware Supreme Court explained that“‘[a] third party may be liable for aiding andabetting a breach of a corporate fiduciary’s
duty to the stockholders if the third party‘knowingly participates’ in the breach’”(quoting Malpiede v. Townson, 780 A.2d1075 (Del. 2001)). The court emphasizedthat “the aider and abettor … must act
with scienter.”Here, the court found that RBC had“knowingly induced” the Rural directors’
duty of care breaches “by exploiting its own
conflicted interests to the detriment of Ruraland by creating an informational vacuum.”
The court further concluded that “RBC’s
failure to fully disclose its conflicts andulterior motives to the Board, in turn, led toa lack of disclosure in the Proxy Statement.”
The court determined that “[t]he record
evidence amply support[ed] the trial court’s
conclusion that RBC [had] purposely misled
the Board so as to proximately cause theBoard to breach its duty of care.”Significantly, the Delaware Supreme Court
underscored that its “holding is a narrow
one that should not be read expansively
to suggest that any failure on the part of afinancial advisor to prevent directors from14

breaching their duty of care gives rise to aclaim for aiding and abetting a breach of the
duty of care.” The court explained that “therequirement that the aider and abettor act
with scienter makes an aiding and abetting
claim among the most difficult to prove.”
In a footnote, the Delaware Supreme Court
rejected the Rural I court’s description offinancial advisors as “‘gatekeepers’” fordirectors (quoting Rural I, 88 A.3d 54).
The Delaware Supreme Court explainedthat “[a]dhering to the [Chancery Court’s]
amorphous ‘gatekeeper’ language would
inappropriately expand [its] narrowholding here.”
Court Finds Rural’s Section 102(b)(7)Exculpatory Provision Does Not Shield RBC
From Aiding and Abetting Liability

The Delaware Supreme Court explained that“while Section 102(b)(7) insulates directors
from monetary damages stemming from a
breach of the duty of care, its protection does
not apply to third parties such as RBC.” Thecourt reasoned that the Delaware legislature“did not intend for Section 102(b)(7) tosafeguard third parties and thereby create aperverse incentive system wherein trusted
advisors to directors could, for their own
selfish motives, intentionally mislead a board
only to hide behind their victim’s liability
shield when stockholders or the corporation
seeks retribution for the wrongdoing.” Here,the court found that RBC could not “commit
a fraud upon the very directors who hired
and relied upon it, and subsequently seek toexploit the Board’s exculpatory provision.”
The Delaware Supreme Court rejected thecontention that it was inequitable to holdRBC “liable for damages for aiding andabetting the directors’ breach of due care
where the directors themselves would nothave been liable for damages.” The court
found that the Chancery Court had “properly
determined that RBC’s conduct accounted
for a disproportionate amount of the fault.”
Moreover, the Delaware Supreme Court
emphasized that third-party advisors can only
be held liable for aiding and abetting if they
acted with scienter. The court explained that“[i]f an advisor knowingly induces directors
to breach their duty to act reasonably under
Revlon, the advisor is liable but only under amore stringent standard for imposing liability
than a director faces when the director is notprotected by a Section 102(b)(7) provision.”

The Delaware Supreme Court stated that“[i]n essence, the aider and abettor standard
affords the advisor a form of protection
by insulating it from liability unless it actswith scienter.”
Delaware Supreme Court Affirms the Chancery
Court’s Damages Ruling

Finally, the Delaware Supreme Court heldthat “the record reflects that the Courtof Chancery properly exercised its broad
discretionary powers in fashioning a remedy
and making its award of damages.”
The applicable settlement agreement
provided that the damages recoverable
against RBC would be reduced to the extent
of the pro rata share of the settlingdefendants’ liability, in accordance with 10
Del. C. § 6304(b) of DUCATA. RBC contended
that “of the eight total defendants, eachshould have been allocated an equal 12.5%
share” and thus “RBC claim[ed] it should havereceived a settlement credit … equal to 87.5%of the damages.” On appeal, the Delaware
Supreme Court found that the Chancery
Court had “properly determined” that theterm “pro rata” means “proportionate” rather
than “equal.” The Chancery Court “assigned
83% of the responsibility for the damages to
the Class to RBC.” The Delaware Supreme
Court “agree[d] with the trial court’s pro rata
allocation of fault.”
The court also concurred with the trial court’s
determination that “RBC [had] forfeited its
right” to seek contribution from the settlingdefendants “by committing fraud against thevery directors from whom RBC would seek
contribution.” The court explained that “if
RBC were permitted to seek contribution forthese claims from the directors, then RBC
would be taking advantage of the targets of its
own misconduct.”15

Business Judgment Rule
Standard of Review Applies to
Non-Controlling Stockholder
Transactions Approved by a
Majority of Fully Informed,
Disinterested Stockholders
On October 2, 2015, the Delaware Supreme
Court affirmed dismissal of an action broughtby stockholders of KKR Financial Holdings
LLC (“Financial Holdings”) who sought
post-closing damages in connection withFinancial Holdings’ acquisition by KKR &Co. L.P. (“KKR”). Corwin v. KKR Financial
Holdings LLC, 2015 WL 5772262 (Del. 2015)(Strine, C.J.) (KKR II). The Court held that“when a transaction not subject to the entire
fairness standard is approved by a fully
informed, uncoerced vote of the disinterested
stockholders, the business judgment
rule applies.”
The Delaware Supreme Court reasoned
that “Delaware corporate law has long beenreluctant to second-guess the judgment of
a disinterested stockholder majority that
determines that a transaction with a party
other than a controlling stockholder is in [its]best interests.”

Allegations of Both a Close
Friendship and a Business
Relationship with an Interested
Party May Be Sufficient to Plead
That a Director Could Not Act
Independently of the Interested
Party for Demand Purposes
On October 2, 2015, the Delaware Supreme
Court reversed dismissal of a shareholder
derivative action brought against the directorsof the Sanchez Energy Corporation alleging
a “gross overpayment” in connection witha transaction involving Sanchez Resources,
LLC. Del. Cnty. Emps. Ret. Fund v. Sanchez,2015 WL 5766264 (Del. 2015) (Strine, C.J.).
The Delaware Supreme Court found that“plaintiffs had pled particularized facts
raising a pleading-stage doubt about theindependence of” Alan Jackson, one of theother Sanchez Energy directors, by alleging
that (1) Jackson “had a close friendship ofover half a century with” the chairman ofSanchez Energy; and (2) Jackson’s “primary
employment (and that of his brother) was
as an executive of a company over which
the [chairman of Sanchez Energy] had
substantial influence.”

In the case before it, the Delaware Supreme
Court found that plaintiffs had not pled“the kind of thin social-circle friendship …
which was at issue in” Beam v. Stewart,
845 A.2d 1040 (Del. 2004). The court foundthat “[w]hen, as here, a plaintiff has pledthat a director has been close friends withan interested party for a half century, theplaintiff has pled facts quite different fromthose at issue in Beam.”
The court also found that the Chancery
Court had erred in separately considering
allegations concerning Jackson’s personal
relationship with Sanchez and allegationsof Jackson’s economic ties to Sanchez. The
Delaware Supreme Court underscored thatthe “law requires that all the pled facts
regarding a director’s relationship to theinterested party be considered in full context
in making the, admittedly imprecise, pleading
stage determination of independence.”

Plaintiffs Must Plead a NonExculpated Claim Against
Disinterested, Independent
Directors to Survive a Motion toDismiss Even If the Transaction at
Issue Is Subject to Entire Fairness
Review
On May 14, 2015, the Delaware Supreme
Court addressed the following question: “inan action for damages against corporate
fiduciaries, where the plaintiff challenges aninterested transaction that is presumptively
subject to entire fairness review, must theplaintiff plead a non-exculpated claim against
the disinterested, independent directors
to survive a motion to dismiss by those
directors?” In re Cornerstone Therapeutics
Inc., S’holder Litig., 115 A.3d 1173 (Del. 2015)(Strine, C.J.). The court “answer[ed] thatquestion in the affirmative,” and held that“[a] plaintiff seeking only monetary damages
must plead non-exculpated claims against a
director who is protected by an exculpatory
charter provision to survive a motion todismiss, regardless of the underlying standardof review for the board’s conduct.”
The Delaware Supreme Court determined that“the mere fact that a plaintiff is able to plead
facts supporting the application of the entire
fairness standard to the transaction, andcan thus state a duty of loyalty claim against
the interested fiduciaries, does not relieve
the plaintiff of the responsibility to plead a16

non-exculpated claim against each director
who moves for dismissal.” In so holding, theDelaware Supreme Court relied on its earlier
decision in Malpiede v. Townson, 780 A.2d1075 (Del. 2001). There, the court “analyzed
the effect of a Section 102(b)(7) provision ona due care claim against directors who [had]approved a transaction which the plaintiffs
argued should be subject to review under
the Revlon standard.” The court found that“[b]ecause a director will only be liable formonetary damages if she has breached anon-exculpated duty, a plaintiff who pleads
only a due care claim against that director has
not set forth any grounds for relief” since theSection 102(b)(7) exculpatory provision bars
such a claim as a matter of law.
The Delaware Supreme Court found thatplaintiffs are not “entitled to an automatic
inference that a director facilitating aninterested transaction is disloyal because thepossibility of conflicted loyalties is heightenedin controller transactions.” First, the court
explained that “‘independent directors arepresumed to be motivated to do their dutywith fidelity.’” Second, the court found thatsuch an inference “would likely create more
harm than benefit” because “the negotiating
efforts of independent directors can help
to secure transactions with controllingstockholders that are favorable to theminority.” The court “decline[d] to adopt
an approach that would create incentives
for independent directors to avoid serving
as special committee members, or to rejecttransactions solely because their role innegotiating on behalf of the stockholders
would cause them to remain as defendants
until the end of any litigation challenging thetransaction.” The court observed that “thefear that directors who faced personal liability
for potentially value-maximizing businessdecisions might be dissuaded from making
such decisions is why Section 102(b)(7) was
adopted in the first place.”

The Securities Law Alertis edited by Paul C. Gluckow
pgluckow@stblaw.com /+1-212-455-2653, Peter E. Kazanoffpkazanoff@stblaw.com /+1-212-4553525 and Jonathan K. Youngwood
jyoungwood@stblaw.com /+1-212-455-3539).

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