Securities Law Alert
In This Issue:• Supreme Court to Address the Personal Benefit Requirement Established in Dirks v. SEC for Insider
Trading Liability Based on Tipping Material Inside Information to a Third Party• Fifth Circuit: (1) Disclosure of an Accurate “Bottom Line” Impact of a Company Problem Is Generally
Sufficient, and (2) Courts Cannot Infer Scienter Based on an Executive’s Position in the Company Absent“Special Circumstances”• Southern District of New York: (1) Purchases Made on Over-the-Counter Bond Markets Do Not Satisfy
Morrison’s First Prong, and (2) Settling a Transaction Through the DTC System Is Not Enough to Satisfy
Morrison’s Second Prong• Southern District of New York: (1) General Corporate Compliance Statements Are Not Actionable, and(2) Accurate Statements of Past Earnings Are Not Misleading Even If the Earnings Were Boosted by anAlleged Fraudulent Scheme• Southern District of New York: Fiscal Strategy-Related Statements Are Not Misleading If the Company
Was Considering a Different Strategy at the Time, Provided the Company Did Not Emphasize One Strategy
and Imply That It Had Ruled Out Other Strategies• Northern District of California: Corporate Executives May Be Liable for Blog Posts on the Company’s
Website If the Executives Allegedly Had “Ultimate Authority” Over the Posts Within the Meaning of theSupreme Court’s Decision in Janus• Delaware Chancery Court: Disclosure-Only Settlements Must Be Carefully Scrutinized to Ensure
Supplemental Disclosures Are Sufficiently Material to Warrant a Broad Release of Claims• Oregon Supreme Court: Delaware Forum Selection Bylaw Is Enforceable Even When Adopted on the Eve ofa Merger Announcement and Shareholders Had No Opportunity to Repeal or Amend the Bylaw

January 2016
Simpson Thacher & Bartlett LLP

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Supreme Court to Address the
Personal Benefit Requirement
Established in Dirks v. SEC
for Insider Trading Liability
Based on Tipping Material
Inside Information to a
Third Party

Simpson Thacher is
a “standout choice forfinancial institutions,with a well-establishedreputation for its handlingof high-value litigation.”– Chambers USA
2015

In Dirks v. S.E.C., 463 U.S. 646 (1983), theSupreme Court determined that an insider
can only be held liable under Section 10(b)and Rule 10b-5 for disclosing material inside
information to a third party, or tipping, if
the insider “receive[d] a direct or indirect
personal benefit from the disclosure, such asa pecuniary gain or a reputational benefit thatwill translate into future earnings.” Notably,
the Dirks Court stated that “[t]he elements offiduciary duty and exploitation of nonpublic
information also exist when an insider makes
a gift of confidential information to a trading
relative or friend.” The Dirks Court foundthat if a tipper receives no personal benefit
for disclosing the information to a third party(the tippee), then the tippee has no duty to
abstain from trading on that information.
On January 19, 2016, the Supreme Court
granted certiorari to address a circuit split on
the scope of the personal benefit requirement.
Salman v. U.S. (No. 15-628). The Court willconsider whether the Government must prove“an exchange that is objective, consequential,
and represents at least a potential gain
[to the tipper] of a pecuniary or similarly
valuable nature,” as the Second Circuit heldin United States v. Newman, 773 F.3d 438(2d Cir. 2014) (Parker, J.); or whether theGovernment may establish the existence of apersonal benefit by presenting “evidence ofa friendship or familial relationship between
tipper and tippee,” as the Ninth Circuit foundsufficient in United States v. Salman, 792
F.3d 1087 (9th Cir. 2015) (Rakoff, J.).

Second Circuit Holds That a
Personal Relationship Between the
Tipper and Tippee Is Not Enough,Standing Alone, to Satisfy the
Personal Benefit Requirement
In Newman, 773 F.3d 438, the Second Circuit
held that the Government cannot “prove
the receipt of a personal benefit by the merefact of a friendship, particularly of a casualor social nature.” The Second Circuit foundthat “[t]o the extent Dirks suggests that apersonal benefit may be inferred from apersonal relationship between the tipper andtippee,” “such an inference is impermissible
in the absence of proof of a meaningfully
close personal relationship that generates
an exchange that is objective, consequential,
and represents at least a potential gain [to thetipper] of a pecuniary or similarly valuable
nature.”The Second Circuit further stated that while“the tipper’s gain need not be immediately
pecuniary, . . . the personal benefit received in
exchange for confidential information must
be of some consequence.” The court indicatedthat the personal benefit requirement may besatisfied if there is “evidence of ‘a relationshipbetween the insider and the recipient thatsuggests a quid pro quo from the latter, or an
intention to benefit the [latter]’” (quoting U.S.
v. Jiau, 734 F.3d 147 (2d Cir. 2013)).

Ninth Circuit Holds That the
Personal Benefit Requirement Is
Met Where an Insider Discloses
Confidential Information toa Trading Relative or Friend,
Even If the Insider Did Not
Receive an Actual or Potential
Financial Benefit
In Salman, 792 F.3d 1087, the Ninth Circuit
held that the personal benefit requirement
is satisfied where an insider discloses
confidential information to a trading relativeor friend, even if the insider did not receive
a potential or actual financial benefit for that
disclosure.
The Ninth Circuit expressly declined to follow
the Second Circuit’s decision in Newman“[t]o the extent Newman can be read to go sofar” as “to hold that evidence of a friendshipor familial relationship between tipper
and tippee, standing alone, is insufficient
to demonstrate that the tipper received abenefit.” The Ninth Circuit reasoned that if
it were to hold otherwise, “then a corporate
insider or other person in possession ofconfidential and proprietary information
would be free to disclose that information to
her relatives, and they would be free to tradeon it, provided only that she asked for no
tangible compensation in return.”

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The court concluded that “[p]roof thatthe insider disclosed material nonpublic
information with the intent to benefit a
trading relative or friend is sufficient toestablish the breach of fiduciary duty elementof insider trading.”1***
The Court will decide Salman this term; adate for oral argument has not yet been set.

Fifth Circuit: (1) Disclosureof an Accurate “Bottom Line”
Impact of a Company Problem
Is Generally Sufficient,and (2) Courts Cannot
Infer Scienter Based on an
Executive’s Position in the
Company Absent “Special
Circumstances”
On January 13, 2016, the Fifth Circuit
affirmed dismissal of a securities fraud action
against Diodes, a semiconductor company,
and two of its corporate officers for failure
to raise a strong inference of scienter. Local
731 I.B. of T. Excavators and Pavers Pension
Trust Fund v. Diodes, 2016 WL 157822 (5thCir. 2016) (Jones, J.). The court rejected
plaintiffs’ contention that “more disclosure
was required” as to the reasons for a labor
shortage where defendants had accurately
disclosed both the timing and financial impactof that shortage. The court explained that“[m]ost reasonable investors would rather
receive an accurate ‘bottom line’ assessmentof a disclosed company problem than all of its
assumptions and nuances.” The court further
held that it could not infer scienter based on
the officers’ positions at the company absent“special circumstances,” which the court
found were not present.

1. The Seventh Circuit’s decision in SEC v. Maio, 51 F.3d 623 (7thCir. 1995) also arguably conflicts with Newman. There, the court
found that a tipper had violated Section 10(b) when he made “animproper gift of inside information to . . . a trading friend” eventhough the tipper “did not receive any direct or indirect personal[financial] benefit as a result of his tip.”

Court Finds No Basis for Plaintiffs’
Contention That Diodes’s CEO
and CFO Must Have Known That
the Labor Shortage Was Due to
Diodes’s Workplace Policies
In the case before the court, defendants
had “repeatedly warned investors of a labor
shortage that would affect [the company’s]
output in the first two quarters of 2011” andalso “accurately warned [of] the precise
impact this labor shortage would have on[the company’s] financial results.” Plaintiffs
nevertheless claimed that defendants’disclosures were materially misleading
because defendants did not disclose thatthe labor shortage was “due principally to
Diodes’s own harsh labor practices thatalienated workers and caused them to quit.”
Plaintiffs did not allege any “facts indicatingthat [Diodes’s CEO and CFO] knew thatthe labor shortage was principally caused
by Diodes’s workplace practices.” Instead,plaintiffs contended that “a strong inferenceof scienter [could] be drawn simply fromthe magnitude of disruption caused by thecompany’s labor policies, which, from their
top executive positions, [Diodes’s CEO and
CFO] must or should have known about.”
Plaintiffs acknowledged that under Fifth
Circuit case law, “‘an officer’s position witha company does not suffice to create aninference of scienter’” (quoting Nathensonv. Zonagen, 267 F.3d 400 (5th Cir. 2001)).
However, plaintiffs argued that courts in
the Fifth Circuit have held that “special
circumstances, ‘taken together with an
officer’s position, may support a strong
inference of scienter’” (quoting Dorsey
v. Portfolio Equities, 540 F.3d 333 (5thCir. 2008)).
The Fifth Circuit in Diodes explained thatthese “‘special circumstances’ cases exhibit
some combination of four considerations thatmight tip the scales in favor of an inferenceof scienter.” First, the court noted that “thesmaller the company the more likely it isthat corporate executives would be familiar
with the intricacies of day to day operations.”
A second factor is whether the transactionin question was “critical to the company’s
continued vitality.” A third factor is whether“the misrepresented or omitted information
at issue would have been readily apparent
to the speaker.” Finally, a fourth factor is3

whether the “defendant’s statements wereinternally inconsistent with one another.”
The Fifth Circuit determined that “[n]oneof these considerations [was] present here.”
The court pointed out that “Diodes is a large
company with over 4,000 employees at
locations across the world.” The court foundit “not at all clear that Diodes’s top executives
in Dallas would have been aware of labor
policies at the Shanghai facility, much less thechatter on the factory floor and the varying
reasons for employee attrition.” There was noallegation that the labor shortage “jeopardized
the company’s existence.” As to the causes ofthe labor shortage, the court found that the
impact of Diodes’s workplace policies on thelabor force would not necessarily have been“readily apparent” to Diodes’s CEO and CFO
given that there were also other factors atplay (the Chinese New Year and new Chinese
government policies). Finally, the court notedthat “defendants’ statements [on the labor
shortage] were both consistent and accurate.”

Court Finds Stock Sales by Diodes’s
CEO Insufficient to Support a
Finding of Scienter
The Fifth Circuit then turned to plaintiffs’
contention that stock sales by Diodes’s CEO
prior to the company’s disclosure of theimpending labor shortage supported aninference of scienter. The court explainedthat “insider trading, by itself, cannot createa strong inference of scienter, but it may
meaningfully enhance the strength of theinference of scienter.” The court underscoredthat “even unusual sales by one insider do notgive rise to [an inference of] scienter whenother defendants do not sell some or all of
their shares during the [c]lass [p]eriod.”

The court therefore concluded that it
could not infer scienter based solely on theexecutives’ positions at Diodes.

Court Finds Diodes’s Early Product
Shipments Do Not Suggest Scienter
Plaintiffs also contended that “Diodes’s early
shipments of orders without prior customer
authorization” “indicate[d] that Diodes [had]intended to conceal the true impact of thelabor problems from the public and to deceive
investors by artificially pushing forward
its earnings.”
The Fifth Circuit found that this “argument[was] beset with difficulties, not the least ofwhich is that early shipping is a legal practicethat may be supported by any number oflegitimate reasons, and usually does notsupport a strong inference of scienter.” Thecourt also deemed plaintiffs’ theory illogicalbecause “shipping orders early would tend
to enhance the labor shortage problem,
not disguise it.” The court explained that“shipping orders early would deplete theinventory” and “Diodes’s ensuing inability
to keep up with orders would [then] quickly
become apparent, and its revenue and grossprofit margin would decrease.”

The Fifth Circuit agreed that Diodes’s CEO’s
stock sales “might be considered suspicious”
when “[v]iewed in isolation” because they
were “out of line with his prior trades,
which were infrequent and in much smaller
amounts.” However, the court concluded
that the CEO’s stock sales could not support
an inference of scienter because “[t]he sales
represented a small portion of his investmentin the company” and there were no allegationsof other suspicious insider sales during thesame time period.
Based on the “[t]otality of the circumstances,”the Fifth Circuit found that plaintiffs had
failed to allege facts giving rise to “a strong
inference of scienter.”

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Southern District of New York:(1) Purchases Made on Overthe-Counter Bond Markets
Do Not Satisfy Morrison’sFirst Prong, and (2) Settlinga Transaction Through the
DTC System Is Not Enoughto Satisfy Morrison’s Second
Prong
In Morrison v. National Australia Bank,
561 U.S. 247 (2010), the Supreme Court heldthat Section 10(b) only applies to securities
fraud claims brought “in connection withthe purchase or sale of a security listed
on an American stock exchange, and thepurchase or sale of any other security in the
United States.”
On December 20, 2015, the Southern Districtof New York dismissed on Morrison grounds
securities fraud claims brought by certain
investors who had purchased debt securities(the “Notes”) issued by Petróleo Brasileiro(“Petrobras”), a Brazilian oil company, on
over-the-counter bond markets in New
York. In re: Petrobras Sec. Litig., 2015 WL
9266983 (S.D.N.Y. 2015) (Rakoff, J.). The
court held that an over-the-counter bondmarket does not qualify as an “Americanstock exchange” under the first prong of theMorrison test. The court further ruled thatthe second prong of the Morrison test is notsatisfied whenever a transaction is settled
in the United States through the Depository
Trust Company (“DTC”) system.

Court Finds That an Over-theCounter Bond Market Is Not an
American Stock Exchange for
Purposes of the First Prong of theMorrison Test
Applying the first prong of the Morrison test,
the court found that an over-the-counter bondmarket does not qualify as a national stock
exchange. The court reasoned that “over-thecounter transactions are, by definition, thosethat do not occur on an exchange.”
The court further observed that the Notes“were listed or intended to be listed on the
New York Stock Exchange” but “they did nottrade there.” The court explained that under
Second Circuit precedent, “mere listing,without trading, is insufficient to satisfy
Morrison’s first prong” (citing City of Pontiac
Policemen’s and Firemen’s Ret. Sys. v. UBSAG, 752 F.3d 173 (2d Cir. 2014)).

Applying the Second Circuit’s Test
in Absolute Activist, Court Finds
That Settling a Transaction in the
United States Through the DTC
System Is Not Enough to Satisfy
Morrison’s Second Prong
Turning to the second prong of the Morrison
test, the court noted that “the Second Circuit
has construed the Morrison test narrowly,
in line with its underlying rationale.” Thecourt explained that under the Second
Circuit’s decision in Absolute Activist
Value Master Fund Ltd. v. Ficeto, 677 F.3d
60 (2d Cir. 2012),2 “the second prong of
Morrison is satisfied only ‘when the parties
incur irrevocable liability to carry out thetransaction within the United States or whentitle is passed within the United States’”(quoting Absolute Activist, 677 F.3d 60). To
meet the requirements of Absolute Activist,
plaintiffs must “allege . . . specific facts,‘including but not limited to, facts concerning
the formation of contracts, the placementof purchase orders, the passing of title, orthe exchange of money’” (quoting Absolute
Activist, 677 F.3d 60).
Here, plaintiffs did “not claim that legal title
in the Petrobras Notes was transferred in the
United States.” Plaintiffs instead contended“that beneficial ownership was transferredin the United States because their Notes
purchases settled through the [DTC] in
New York, New York.” Plaintiffs argued that“when [the] DTC adjusts its books to settle an
investor’s trade, it is the functional equivalentof transfer of title.”
The court acknowledged that “global financial
markets could not properly function without
the DTC or similar depository institutions andthat the chain reaction of adjustments to bookentries set off by a securities transaction isnecessary to complete a purchase.” However,the court held that “the operations of the DTC
are insufficient to satisfy Absolute Activist,
even assuming that DTC’s bookkeeping
affects a change in beneficial ownership in
New York.” The court explained that under
Second Circuit precedent, “domestic ‘actions
2. Please click here to read our prior discussion of the Absolute
Activitist decision.
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needed to carry out . . . transactions’ . . . are
insufficient to satisfy Morrison (quoting
Loginovskaya v. Batratchenko, 764 F.3d 266(2d Cir. 2014)). While “[t]he mechanics of
DTC settlement are actions needed to carryout transactions,” the court underscoredthat those mechanics “involve neither
the substantive indicia of a contractual
commitment necessary to satisfy Absolute
Activist’s first prong nor the formal weight ofa transfer of title necessary for its second.”
The court further reasoned that “the entire
thrust of Morrison and its progeny would
be rendered nugatory if all DTC-settled
transactions necessarily fell under the reachof the federal securities laws.” The court
explained that “[t]he laws would reach mosttransactions, not because they occurred on adomestic exchange but because they settled
through the DTC.” The court held that“[t]his result cannot be squared with theplain language and careful reasoning of
Morrison and Absolute Activist.”

Southern District of New
York: (1) General Corporate
Compliance Statements Are
Not Actionable, and(2) Accurate Statementsof Past Earnings Are Not
Misleading Even If theEarnings Were Boosted by anAlleged Fraudulent Scheme
On January 6, 2016, the Southern District of
New York dismissed a securities fraud action
alleging that Sanofi and its former CEO had
made misleading statements in connection
with an alleged scheme to increase salesof Sanofi’s diabetes products. In re Sanofi
Sec. Litig., 2016 WL 93866 (S.D.N.Y. 2016)(Castel, J.). The court held that Sanofi’s
general statements concerning complianceand corporate integrity were inactionablepuffery. The court further ruled that Sanofi’s
failure to disclose the alleged illegal marketing
scheme did not render its sales figures fordiabetes products false or misleading. The
court explained that “the allegation that a
corporation properly reported income thatis alleged to have been, in part, improperly

obtained is insufficient to impose Section
10(b) liability.”

Background
Plaintiffs alleged that Sanofi and its former
CEO, Christopher Viehbacher, had “engaged
in an illegal marketing scheme to artificiallyboost the sales of its diabetes productline and hid those illegal practices frominvestors while touting the product line’s
incredible sales growth and publicizing
Sanofi’s commitment to corporate integrity.”
According to plaintiffs, “the eventual
abandonment of Sanofi’s illegal marketing
scheme caused a slowing of diabetes sales,
which in turn led to a significant decline in
Sanofi’s share price.” Defendants moved todismiss plaintiffs’ claims.

Court Finds Sanofi’s ComplianceRelated Statements Too General to
Be Actionable
The court found that “statements regarding
Sanofi’s legal compliance and corporate
integrity” were “not actionable under the
securities laws” because the statements were
“too general to cause a reasonable investor
to rely on them.” The court determined thatthose statements were nothing more thancorporate puffery.
In so holding, the court relied on the Second
Circuit’s decision in ECA and Local 134
IBEW Joint Pension Trust of Chicago v. JP
Morgan Chase, 553 F.3d 187 (2d Cir. 2009)(ECA). There, the Second Circuit held that
JP Morgan Chase’s “statements about risk
management and corporate integrity . . . could
not be the basis for a securities violation”
Sanofi, 2016 WL 93866 (discussing ECA, 553
F.3d 187). The Southern District of New York
found that “[d]efendants’ statements about
Sanofi’s compliance program and corporate
integrity [were] analogous to the statements
held not to be actionable in ECA.”

Court Holds That Sanofi’s Sales
Figures for Its Diabetes Products
Were Not Misleading Even Though
Sanofi Did Not Disclose the Alleged
Illegal Marketing Scheme
Plaintiffs alleged that Sanofi’s “SEC filings,
press releases and conference calls reporting
the growth in diabetes product sales . . . weremisleading because they omitted material6information” regarding the company’s alleged
illegal marketing scheme for those products.
According to plaintiffs, “Sanofi’s reported
diabetes sales were inflated as a result of thealleged scheme.”
The court explained that “the securities laws
do not impose a general duty to disclose
corporate mismanagement or uncharged
criminal conduct.” However, the court
acknowledged that “a duty to disclose
uncharged criminal conduct does arise if it
is necessary to ensure that a corporation’s
statements are not misleading.” The court
found that the “critical consideration” is“whether the alleged omissions . . . are
sufficiently connected to defendants’ existing
disclosures to make those public statements
misleading.”
Applying this standard to Sanofi’s statements,
the court determined that defendants did
not “plausibly attribute the growing sales ofdiabetes products to pharmacies implicatedin the alleged illegal kickback scheme.” Thecourt noted that “[n]one of the statements. . . offered any explanation as to why the
products were selling more.” The court
concluded that “the omission of the alleged
illegal marketing [scheme was] not sufficiently
connected to defendants’ existing disclosures
to make those public statements misleading.”
The court also found that the statements
at issue were “not actionable as a matterof law because they [were] simply accurate
statements of past earnings and growth.”
The court explained that “a violation offederal securities laws cannot be premised
upon a company’s disclosure of accurate
historical data.” The court underscored that“the allegation that a corporation properly
reported income that is alleged to have been,in part, improperly obtained is insufficient toimpose Section 10(b) liability.”
Here, “Sanofi’s [SEC] filings merely reported
the financial health of the company andthe percentage growth in diabetes productsales.” The court found these statements
inactionable because there was no “allegationthat Sanofi [had] reported income that it
did not actually receive or sales growth that
did not actually occur.” The court also foundinactionable statements in “defendants’
20-Fs, press releases, and conference calls”
because “those statements were nothing morethan accurate descriptions of the growth ofdiabetes products sales in a different form.”

The court reasoned that “[i]f accurately
reporting the percentage growth of diabetes
products is itself not actionable under the
securities laws, . . . [then] it cannot be the casethat merely reporting that growth in morecolorful words, without attributing the sales
growth to a particular factor that is implicatedin the alleged fraud, is actionable.”

Court Rejects Plaintiffs’ Contention
That Sanofi’s CEO Must Have
Known of the Alleged Scheme Basedon His Position in the Company
Plaintiffs attempted to allege scienter as toChristopher Viehbacher, Sanofi’s former CEO,based largely on “his position within Sanofi.”
Plaintiffs claimed that “Viehbacher musthave received information detailing [Sanofi’s]
internal investigation [of the alleged illegal
marketing scheme] and its findings becauseof the general operation of . . . corporate
policies at Sanofi.” However, plaintiffs did not“reference any specific report or statement[concerning the alleged scheme] that was
produced as a result of any of those policies.”
The court found plaintiffs’ allegations
insufficient to plead Viehbacher’s scienter.
The court explained that “[s]cienter . . .
cannot be inferred solely from the fact
that, due to the defendants’ . . . executive
managerial position, they had access to thecompany’s internal documentation as well as
any adverse information.”
The court also deemed unpersuasive“plaintiffs’ suggested inference that
Viehbacher and Sanofi knew their statements[concerning diabetes product sales] weremisleading because an internal investigation
was ordered but then never disclosed.” Thecourt found that any “inference of scienter
based on the unreported findings of an
unreported internal investigation [was] notas compelling as an alternative nonfraudulent
inference: defendants did not have knowledge
that their statements about Sanofi’s diabetes
sales were misleading because whateverinternal investigation took place—if any—
did not uncover any unlawful activity of amaterial proportion.” The court reasoned
that “[i]f Sanofi’s [b]oard committed theresources necessary to undertake an internal
investigation and that internal investigation
uncovered unlawful behavior, why would
the [b]oard of a publicly-traded company
not disclose that information?” The court
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stated that “[t]o assume that Sanofi’s[b]oard was silently clutching the results ofan investigation . . . directly contradict[ed]the rationale behind engaging in an internal
investigation in the first place: the desire
to uncover any improper conduct by
Sanofi’s employees.”Southern District of New
York: Fiscal StrategyRelated Statements Are Not
Misleading If the Company
Was Considering a Different
Strategy at the Time, Provided
the Company Did Not
Emphasize One Strategy and
Imply That It Had Ruled Out
Other Strategies
On December 23, 2015, the Southern
District of New York dismissed a securities
fraud action alleging that China Gerui
Advanced Materials Group (“China Gerui”)
had made misrepresentations regarding
its fiscal strategy. Pehlivanian v. China
Gerui Advanced Materials Group, 2015 WL
9462115 (S.D.N.Y. 2015) (Ramos, J.). The
court held that a company’s fiscal strategyrelated statements are not misleading even if
the company was considering a different fiscal
strategy at the time, provided the company
did not “hype” a specific fiscal strategy
and imply that it had ruled out other fiscal
strategies.

Background
China Gerui is a China-based steel processing
company. Plaintiffs alleged that China
Gerui and certain of its current and former
directors and officers had “made material
misstatements and/or omissions relating to
China Gerui’s expenditure of approximately$234 million to purchase antique Chinese
porcelain.” According to plaintiffs, thepurchase was “shocking” because up
until the company’s September 4, 2014
purchase announcement, China Gerui had“consistently and unambiguously stated thatits growth strategy consisted of expanding
and diversifying its product line, identifying
overseas markets, and undertaking strategic
mergers and/or acquisitions.”

Defendants moved to dismiss plaintiffs’
claims on the grounds that stockholder
disagreements with a company’s investment
decisions are “beyond the purview of thefederal securities laws.”

Court Holds That China Gerui’s
Fiscal Strategy-Related Statements
Were Not Necessarily False
or Misleading Even Though
the Company May Have Been
Considering a Different Strategy at
the Time
Plaintiffs contended that China Gerui musthave been in the process of purchasing the
Chinese porcelain on or before May 20,
2014, “and thus, statements made afterthat date regarding [China Gerui’s] growthand fiscal strategies were false or materiallymisleading.” The court found that even if
China Gerui had decided to purchase theChinese porcelain collection by May 20,
2014, strategy-related “statements madeafter that date [were] not inherently false
or misleading.”
The court explained that in San Leandro
Emergency Medical Group Profit Sharing
Plan v. Phillip Morris Companies, 75 F.3d
801 (2d Cir. 1996) (Phillip Morris), theSecond Circuit “rejected the argument that acompany’s statement discussing one strategy
was ‘false because the company had alreadymade the decision, or was actively considering
adopting a plan’ to implement a different
strategy” (quoting Phillip Morris, 75 F.3d
801). The Second Circuit acknowledgedthat “‘it may be reasonable to infer that [thecompany] began to consider changing its
marketing strategy at least a couple of weeks
before the plan was presented.’” However, theSecond Circuit found that plaintiffs had “‘notalleged circumstances indicating how suchconsideration would have rendered any of thecompany’s prior statements false’” given thatthe company had not made “‘any statements
or predictions foreclosing the possibility of
adopting alternative’ strategies.”
Relying on Philip Morris, the Southern
District of New York found that China Gerui’s
decision “to pursue another strategy” (thepurchase of Chinese porcelain) did not render“its earlier statements false.”8

Court Finds China Gerui Had No
Duty to Update Its Fiscal Strategy
Statements Because It Did Not“Hype” Any Particular Strategy to
the Exclusion of Others
The court rejected plaintiffs’ contention that
China Gerui “had a duty to update” its fiscal
strategy-related statements “once the[c]ompany seriously considered purchasing
the [Chinese porcelain] [c]ollection and after
the [p]urchase allegedly occurred.”
The court recognized that “‘[a] duty to update
may exist when a statement, reasonable at thetime it is made, becomes misleading becauseof a subsequent event’” (quoting In re Intl.
Bus. Machines Corporate Sec. Litig., 163 F.3d
102 (2d Cir. 1998) (IBM)). However, the court
explained that “[t]here is no duty to update‘vague statements of optimism or expressionsof opinion’ that ‘lack the sort of definite
positive projections that might require later
correction’” (quoting IBM, 163 F.3d 102).
The court further noted that “there is no duty
to update non-forward-looking statements
unless the statements ‘contain somefactual representation that remains ‘alive’in the minds of investors as a continuing
representation’” (quoting IBM, 163 F.3d 102).
In considering the scope of China Gerui’s
duty to update, the court found instructive
the Second Circuit’s decision in In re Time
Warner Securities Litigation, 9 F.3d 259 (2dCir. 1993). Plaintiffs in the Time Warner case“claimed that the company’s ‘highly publicized
campaign to find international ‘strategic
partners’ who would infuse billions of dollars
of capital into the company’ . . . [was] false
and misleading because the company failed
to disclose its consideration of an alternative
method of raising capital” (quoting Time
Warner, 9 F.3d 259). The Second Circuit
stated that “‘when a corporation is pursuinga specific business goal and announces thatgoal as well as an intended approach forreaching it, it may come under an obligation
to disclose other approaches to reaching
the goal when those approaches are underactive and serious consideration.’” Given thatthe company had “‘publicly hyped strategic
alliances,’” the Second Circuit concluded thatthe company “‘may have come under a duty
to disclose’” its consideration of alternate
strategies “‘that would place the statements
concerning strategic alliances in a materiallydifferent light.’”

The China Gerui court noted that in Philip
Morris, the Second Circuit found that Time
Warner “‘went nearly to the outer limit of
the line that separates disclosable plans fromplans that need not be disclosed’” (quoting
Philip Morris, 75 F.3d 801). The Philip
Morris court deemed it significant that Time
Warner had “‘hyped a specific plan, thereby
inducing investors to believe that alternatives
were excluded.’”The Southern District of New York foundthat China Gerui had not “‘hype[d]’ aspecific plan for addressing the declining
economy.” Because China Gerui had instead“identified many potential strategies,” thecourt found it “unlikely that its statements
created the impression that other potential
strategies were excluded.” The court therefore
concluded that China Gerui had no duty to
update its fiscal strategy-related statements.
The court further found that statements
addressing China Gerui’s fiscal discipline
and its careful management of cash reserves
were “general pronouncements” that did “notrequire updating.”

Northern District ofCalifornia: Corporate
Executives May Be Liable for
Blog Posts on the Company’s
Website If the Executives
Allegedly Had “Ultimate
Authority” Over the Posts
Within the Meaning of theSupreme Court’s Decisionin Janus
On December 23, 2015, the Northern Districtof California declined to dismiss securities
fraud claims brought against Rocket Fuel,an advertising solutions company, and threeof its senior executives in connection withan allegedly misleading blog post on thecompany’s website. In re Rocket Fuel Sec.
Litig., 2015 WL 9311921 (N.D. Cal. 2015)(Hamilton, J.). Plaintiffs did not claim that
Rocket Fuel’s executives had authored orreviewed the blog post. Nevertheless, thecourt found that the executives could be
deemed the “makers” of the blog post within
the meaning of the Supreme Court’s decision9

in Janus Capital Group v. First Derivative
Traders, 131 S. Ct. 2296 (2011)3 because
plaintiffs alleged that the executives had“ultimate authority” over that post.

Background
Rocket Fuel “claim[ed] that its technology[was] better than its competitors’ at detecting‘digital ad fraud’—including the viewing of ads
by computer programs, such as ‘bots,’ rather
than by real people.”
Plaintiffs brought suit alleging that “Rocket
Fuel and its officers [had] made false andmisleading statements (and omissions)regarding the technology’s effectiveness”
and “failed to disclose that bots were actuallycausing some Rocket Fuel customers to stopusing its service.” Among other statements,
plaintiffs cited to a blog post on the company’s
website representing that Rocket Fuel “‘uses
real-time data points to recognize these bad
actors and block them at the source,’ thatit ‘undermines fraudulent practices andmakes sure con artists always leave emptyhanded’ and is ‘able to identify and eliminate
all threats before serving a single ad’”(collectively, the “Blog Post Statements”).
Defendants moved to dismiss plaintiffs’
claims on the grounds that, inter alia, theBlog Post Statements were inactionable“product marketing statements.”

Court Finds the Blog Post
Statements Actionable Because
They Described “a Specific Levelof Effectiveness” for Rocket Fuel’s
Bot-Blocking Technology
The court found the Blog Post Statements
actionable because they “describe[d] aspecific” but allegedly inaccurate “level of
effectiveness” with respect to Rocket Fuel’s
bot-blocking technology. The court explainedthat “[t]he words ‘all’ and ‘always’ serve[d]to distinguish” the Blog Post Statements“from the remainder of the allegedly
false/misleading statements contained in
the complaint.”
The court rejected defendants’ contention thatthe Blog Post Statements were “mere ‘productmarketing statements.’” The court foundthat the statements were “more properly
3. Please click here to read our prior discussion of the Janus
opinion.

characterized as ‘factual statements regarding
Rocket Fuel’s efforts to combat bot fraud.’”
The court also deemed meritless defendants’claim that no “reasonable investor” would
have “relied upon” the Blog Post Statements“as a guarantee that Rocket Fuel’s technology
prevented literally every single instanceof ad fraud in the billions of impressions
Rocket Fuel considered per day.” The court
stated that it “[knew] of no authority for the
proposition that a statement can be so clearly
false that it should not be considered false or
misleading.”

Court Finds Rocket Fuel’s Senior
Executives Could Be Considered
the “Makers” of the Blog Post
Statements Within the Meaning of
the Supreme Court’s Decision in
Janus
In Janus, the Supreme Court defined what itmeans to “make” a statement for purposes ofRule 10b-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.” 564 U.S. 135.
Defendants argued that the Blog Post
Statements could not be attributed to thethree senior executives named as defendants(Rocket Fuel’s CEO, President, and CFO)
because there was no allegation that theexecutives had “authored, reviewed, or
approved any portion” of those statements.
Rocket Fuel, 2015 WL 9311921. However, thecourt found that plaintiffs did “allege thatthe three [executives] ‘possessed the power
and authority to control the contents of the[c]ompany’s press releases [and] investor
and media presentations.’” Based on these
allegations, the court held that plaintiffs had“adequately alleged” that the three executives“had ‘ultimate authority’ over” the Blog Post
Statements within the meaning of Janus.

Court Relies on the “Core
Operations” Theory to Find That
Plaintiffs Had Adequately Alleged
Scienter as to the Company’s
Senior Executives
The court found that plaintiffs had adequately
alleged scienter as to Rocket Fuel’s threesenior executives based on the “coreoperations” theory, which “allows a court to10

infer[ ] that the facts critical to a business’s
core operations or important transactions
are known to a company’s key officers.” Thecourt also determined that defendants’ own
arguments indicated that they knew the Blog
Post Statements were misleading. The court
explained that “[t]o the extent that defendants
impl[ied] that a reasonable investor would
know that” the Blog Post Statements were not“literally true, that implication also supports
a finding that the statements were madewith scienter.”
Because the court found that plaintiffs
had “adequately alleged scienter” as to thethree corporate executives, the court also
held that plaintiffs had “adequately alleged
corporate scienter.”

Court Rejects Plaintiffs’ Contention
That the Blog Post Statements
Should Be Considered Partof Rocket Fuel’s Registration
Materials Under Omnicare
Plaintiffs also asserted Securities Act claims
against Rocket Fuel’s underwriters, andcontended that the Blog Post Statements
should be considered part of the company’s
registration materials for purposes of thoseclaims. Plaintiffs relied on the Supreme
Court’s recent decision in Omnicare v.
Laborers District Council Construction
Industry Pension Fund, 135 S. Ct. 1318
(2015)4 to argue that Rocket Fuel’s
registration materials “need to be considered
in a ‘broader frame.’”
The court found that plaintiffs’ argument“stretch[ed] Omnicare too far, in an apparent
attempt to shoehorn their strongest allegation. . . into all asserted claims.” The court
explained that “Omnicare holds only that ‘aninvestor reads each statement within such a
document, whether of fact or opinion, in lightof all its surrounding text, including hedges,
disclaimers, and apparently conflicting
information’” (quoting Omnicare, 135 S. Ct.
1318). The court determined that “[n]othingin Omnicare endorses plaintiffs’ approachof importing statements into registrationmaterials in order to state a Securities
Act claim.”

4. Please click here to read our prior discussion of the Omnicare
decision.

Delaware Chancery Court:
Disclosure-Only Settlements
Must Be Carefully Scrutinized
to Ensure Supplemental
Disclosures Are Sufficiently
Material to Warrant a Broad
Release of Claims
On January 22, 2016, the Delaware Chancery
Court rejected a proposed disclosure-only
settlement of a stockholder class action
challenging the stock-for-stock merger of
two online real estate companies, Zillow andTrulia. In re Trulia S’holder Litig., 2016 WL
270821 (Del. Ch. 2016) (Bouchard, C.). The
court found the supplemental disclosuresneither “material” nor “even helpful toTrulia’s stockholders,” and therefore
concluded that the proposed settlement
did “not afford [Trulia’s stockholders]
any meaningful consideration to warrant
providing a release of claims to thedefendants.”
The court discussed at length the proliferationof disclosure-only settlements in the context
of merger litigation. Finding numerous
inherent problems with such settlements, thecourt cautioned that “disclosure settlements
are likely to be met with continued disfavor
in the future unless the supplemental
disclosures address a plainly material
misrepresentation or omission, and thesubject matter of the proposed release isnarrowly circumscribed to encompass nothing
more than disclosure claims and fiduciary
duty claims concerning the sales process, if
the record shows that such claims have been
investigated sufficiently.”

Background
Following the announcement of the TruliaZillow merger, Trulia’s stockholders broughtsuit alleging that the company’s directors had“breached their fiduciary duties in approving
the proposed merger at an unfair exchange
ratio.” The parties reached a settlement inprinciple a few months later. Pursuant to theterms of the settlement, defendants agreed
to provide supplemental disclosures to thesection of the Proxy statement summarizing
the analysis of Trulia’s financial advisor.
In exchange, plaintiffs agreed to a broad
release of “‘any claims arising under federal,
11state, statutory, regulatory, common law, orother law or rule’ held by any member of the
proposed class relating in any conceivable
way to the transaction, with the exception of
the carve-out for claims arising under stateand federal antitrust law.” The settlement
provided for “the payment of a fee toplaintiffs’ counsel,” but no financial award forTrulia’s stockholders.

Court Finds Disclosure-OnlySettlements Warrant Careful
Judicial Scrutiny
The Trulia court explained that while“Delaware has long favored the voluntary
settlement of litigation, the fiduciary
character of a class action requires the[c]ourt to independently examine the fairnessof a class action settlement before approving
it.” The court stated that “[a]pproval of aclass action settlement requires more thana cursory scrutiny by the court of the issues
presented.” Rather, “[t]he [c]ourt must
exercise its own judgment to determine
whether the settlement is reasonable andintrinsically fair” in order to protect “the legal
rights of absent class members.”
The court noted that there has been a“proliferation” of disclosure-only settlements
in recent years. The court observed that“the public announcement of virtually everytransaction involving the acquisition of apublic corporation provokes a flurry of classaction lawsuits” that “often . . . serve[ ] nouseful purpose for stockholders.” Plaintiffs
have substantial leverage in these suits
because they can threaten an injunction toprevent the closing of the deal. “Faced withthat threat, defendants are incentivized
to settle quickly in order to mitigate theconsiderable expense of litigation and the
distraction it entails, to achieve closing
certainty, and to obtain broad releases as aform of ‘deal insurance.’”
The court found that “[t]he most common
currency used to procure a settlement is theissuance of supplemental disclosures to thetarget’s stockholders before they are asked
to vote on the proposed transaction.” These
disclosures typically consist of “a laundry
list of minutiae in a financial advisor’s board
presentation that does not appear in thesummary of the advisor’s analysis in theproxy materials.” The court explained that“providing supplemental disclosures is aparticularly easy ‘give’ for defendants to makein exchange for a release.”
Once the parties reach a settlement inprinciple, plaintiffs and defendants thenwork together in a “non-adversarial” way toobtain court approval of the settlement. In theusual case, “little or no motion practice has
occurred and the discovery record is sparse.”
Courts have nevertheless been “willing[ ] . . .
to approve disclosure settlements of marginalvalue and to routinely grant broad releases
to defendants and six-figure fees to plaintiffs’
counsel in the process.”
The Trulia court found that this practicehas “caused deal litigation to explode in the
United States beyond the realm of reason.”
The court noted that “[t]he increased
prevalence of deal litigation and disclosuresettlements has drawn the attention ofacademics, practitioners, and the judiciary.”
Legal scholars have “criticized disclosuresettlements” on the grounds that the “nonmaterial supplemental disclosures provide nobenefit to stockholders . . . while the liability
releases that accompany settlements threaten
the loss of potentially valuable claims.”
The Trulia court found that the “historical[judicial] predisposition toward approving
disclosure settlements needs to bereexamined.” The court cautioned that going
forward, “practitioners should expect that
disclosure settlements are likely to be met
with . . . disfavor . . . unless the supplemental
disclosures address a plainly material
misrepresentation or omission, and thesubject matter of the proposed release isnarrowly circumscribed to encompass nothing
more than disclosure claims and fiduciary
duty claims concerning the sale process, if
the record shows that such claims have been
investigated sufficiently.” In cases “[w]here
the supplemental information is not plainlymaterial, it may be appropriate for the [c]ourt
to appoint an amicus curiae to assist the[c]ourt in its evaluation of the alleged benefitsof the supplemental disclosures.”
As to “concern[s] that enhanced judicial
scrutiny of disclosure settlements could
lead plaintiffs to sue fiduciaries of Delaware
corporations in other jurisdictions,” thecourt expressed its “hope and trust” thatcourts in other states would “reach thesame conclusion.”

12Oregon Supreme Court:
Delaware Forum Selection
Bylaw Is Enforceable Even
When Adopted on the Eveof a Merger Announcement
and Shareholders Had No
Opportunity to Repeal or
Amend the Bylaw
On December 10, 2015, the Oregon Supreme
Court enforced a forum selection bylaw
designating Delaware as the exclusive forum
for derivative suits brought by shareholders
of TriQuint Semiconductor (“TriQuint”) eventhough TriQuint’s directors had adopted
the bylaw just days before the company
announced a merger with RF Micro Devices,and the shareholders had no practical
opportunity to repeal or amend the bylaw.
Roberts v. TriQuint Semiconductor, 2015 WL
8539902 (Or. 2015) (Kistler, J.) (TriQuint).

Background
TriQuint’s certificate of incorporation
empowers its board of directors to “adopt,
amend, or repeal” TriQuint’s bylaws
unilaterally. In late February of 2014,
TriQuint’s directors “amended the company’s
bylaws to designate the Delaware Court ofChancery as the exclusive forum for resolving
internal corporate disputes, including
shareholder derivative suits.” Two days later,
TriQuint announced its plan to merge with RF
Micro Devices.
TriQuint’s shareholders subsequently brought
derivative suits in both Oregon and Delaware;
the Oregon suits were consolidated. TriQuint
and its directors (collectively, “defendants”)
moved to dismiss the Oregon suits based on
the forum selection bylaw.
The Oregon trial court declined to enforce
the forum selection bylaw and denied
defendants’ motion to dismiss. Whilethe court “recognized that Delaware law
authorized TriQuint’s board to unilaterally
adopt a binding forum-selection bylaw,”the court found “that Delaware law also
authorized TriQuint’s shareholders to modify
or repeal the company’s bylaws.” The court“reasoned that adopting the forum-selection
bylaw contemporaneously with the merger
effectively deprived TriQuint’s shareholdersof their statutory right to repeal the forum
selection bylaw.”
Defendants petitioned the Oregon Supreme
Court for an alternative writ of mandamus toaddress the enforceability of TriQuint’s forum
selection bylaw, which the court issued.

Oregon Supreme Court Finds
TriQuint’s Forum Selection
Bylaw Valid as Applied Based on
the Delaware Chancery Court’s
Decisions in Chevron and First
Citizens
On appeal, plaintiffs conceded that TriQuint’s
forum selection bylaw was facially valid under
Boilermakers Local 154 Retirement Fund v.
Chevron Corp., 73 A.3d 934 (Del. Ch. 2013).
Plaintiffs claimed, however, that “the bylaw[was] invalid as applied in this case because
it ‘[was] being used for improper purposes
inconsistent with the directors’ fiduciary
duties’” (quoting Chevron, 73 A.3d 934).
In considering plaintiffs’ claims, the Oregon
Supreme Court found instructive theDelaware Chancery Court’s decision in Cityof Providence v. First Citizens BancShares,
99 A.3d 229 (Del. Ch. 2014) (First Citizens),5
which was decided after the trial court issued
its opinion in this case. In First Citizens,the directors of a North Carolina bankincorporated in Delaware adopted a forum
selection bylaw designating North Carolina
as the exclusive forum for shareholder
derivative suits. On the same day that thebank’s directors adopted the bylaw, the bankannounced its plan to merge with a bankholding company. A shareholder subsequently
brought a derivative action in Delaware“challenging both the forum-selection
bylaw and the merger.” TriQuint, 2015 WL
8539902 (discussing First Citizens, 99 A.3d229). Plaintiff contended that “the [bank’s]
board had breached its fiduciary duty to theshareholders in adopting the forum-selection
bylaw” because the bylaw was designed to“‘insulate [the bank’s directors] from thejurisdiction of Delaware courts’” (quotingFirst Citizens, 99 A.3d 229).
The Delaware Chancery Court in First
Citizens “rejected the plaintiff’s breach offiduciary duty claim.” TriQuint, 2015 WL
8539902. The court noted “the absence of
5. Please click here to read our prior discussion of the First
Citizens decision.
13

any ‘well-pled facts to call into question the
integrity of the . . . courts of North Carolina’”(quoting First Citizens, 99 A.3d 229). The
court further found that “the plaintiff had
failed to rebut the board’s exercise of its
business judgment in adopting the forumselection bylaw or to show that the board’s‘selection of North Carolina as the exclusive
forum was irrational’” (quoting First Citizens,99 A.3d 229).
The Oregon Supreme Court determinedthat First Citizens was the most “applicableprecedent” to the facts at hand. As was thecase in First Citizens, “the TriQuint board[had] adopted the forum-selection bylaw
making Delaware the exclusive forum forresolving disputes contemporaneously with
its approval of the merger” with RF Micro
Devices. Following the Chancery Court’s“reasoning in First Citizens,” the Oregon
Supreme Court found that TriQuint’s“forum-selection bylaw [did] not prevent its
shareholders from challenging the merger”
but “only provide[d] where they may do so.”
The court noted that the forum-selection
bylaw kept “TriQuint’s assets from being
diluted by a multiplicity of suits in various
states.” Moreover, the court underscoredthat “Delaware, the state in which TriQuint
is incorporated, is the ‘most obviously
reasonable forum [for internal affairs cases
because those cases] . . . will be decided
in the courts whose Supreme Court has
the authoritative final say as to what the
governing law means’” (quoting Chevron, 73
A.3d 934).
The Oregon Supreme Court therefore
concluded that TriQuint’s forumselection bylaw was neither “invalid[n]or unenforceable under Delaware law
as a breach of the board’s fiduciary duty.”

Oregon Supreme Court Finds
TriQuint’s Forum Selection
Bylaw Enforceable Even Though
TriQuint’s Shareholders Could Not
Realistically Modify or Repeal the
Bylaw
Plaintiffs alternatively contended that
TriQuint’s forum selection bylaw was“unenforceable or unfair” under the Supreme
Court’s test in The Bremen v. Zapata OffShore Co., 407 U.S. 1 (1972) “because giving
effect to the bylaw would deprive TriQuint’s
shareholders of their statutory right to amend
the bylaws.”

The Oregon Supreme Court found that“[t]he Delaware Chancery Court [had]addressed a similar issue in First Citizens.”
The First Citizens court stated that it did“‘not interpret either the [Delaware General
Corporate Law] or Chevron to mandate thata board-adopted forum selection bylaw canbe applied only if it is realistically possiblethat stockholders may repeal it’” (quotingFirst Citizens, 99 A.3d 229). Rather, the First
Citizens court found that “a shareholder’s
remedy against enforcing a board-adopted
forum-selection bylaw lies primarily inarguing” that it would be inequitable toapply the bylaw under Schnell v. Chris-Craft
Industries, 285 A.2d 437 (Del. Ch. 1971).6
The Oregon Supreme Court determinedthat “as a matter of Delaware law, a boardadopted bylaw will be given effect until theshareholders modify or repeal it, unless theboard lacked authority to adopt it or theboard breached its fiduciary duty in adoptingit.” The court reasoned that holding otherwise“would effectively read out of Delaware law a
corporate board’s authority to adopt bylaws
unilaterally because there will always be a
gap between the time that a board adopts abylaw and the time that shareholders have an
opportunity to modify or repeal it.”
The Oregon Supreme Court held that
TriQuint’s forum selection bylaw was notunenforceable as applied, and directed the trial
court to grant defendants’ motion to dismiss
the Oregon shareholder derivative suits.
6. The TriQuint court noted that in Schnell, the Delaware
Supreme Court had found a bylaw amendment unenforceable
where “the board improperly had used the ‘corporate machineryand the Delaware Law for the purpose of perpetuating itself
in office’” (quoting Schnell, 285 A.2d 437). The TriQuint court
observed that in Schnell, the board’s “inequitable conduct
rendered what otherwise would have been a valid bylaw
inequitable and unenforceable.”

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).

14

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Mark G. Cunha+1-212-455-3475
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