Justia Civil Procedure Opinion SummariesArticles Posted in Corporate Compliance
NOELLE LEE V. ROBERT FISHER
Plaintiff brought a shareholder derivative action alleging that The Gap, Inc. and its directors (collectively, Gap) failed to create meaningful diversity within company leadership roles, and that Gap made false statements to shareholders in its proxy statements about the level of diversity it had achieved. Gap’s bylaws contain a forum-selection clause that requires “any derivative action or proceeding brought on behalf of the Corporation” to be adjudicated in the Delaware Court of Chancery.Notwithstanding the forum-selection clause, Plaintiff brought her derivative lawsuit in a federal district court in California, alleging a violation of Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. Section 78n(a), along with various state law claims. The district court dismissed Plaintiff’s complaint based on its application of the doctrine of forum non conveniens, holding that she was bound by the forum selection clause.The Ninth Circuit affirmed the district court’s dismissal and held that Plaintiff did not meet her burden to show that enforcing Gap’s forum-selection clause contravenes federal public policy, rejecting as unavailing the evidence Plaintiff identified as supporting her position: the Securities Exchange Act’s anti-waiver provision and exclusive federal jurisdiction provision, Delaware state case law, and a federal court’s obligation to hear cases within its jurisdiction. The court, therefore, concluded that the district court did not abuse its discretion in dismissing the complaint. View "NOELLE LEE V. ROBERT FISHER" on Justia Law
Sirott v. Superior Court of Contra Costa County
EBO filed suit after unsuccessfully seeking to lease a space in a building owned by the Taylor LLC, including derivative claims brought by EBO on behalf of Taylor, alleging that the denial of the lease caused Taylor to suffer economic injury. The defendants argued that EBO lacked standing under Corporations Code section 17709.02 to pursue them because during the litigation it relinquished its interest in and was no longer a member of the Taylor LLC. The court determined that it nonetheless had statutory discretion to allow EBO to maintain the derivative claims.The court of appeal vacated. Section 17709.02 requires a party to maintain continuous membership in a limited liability company to represent it derivatively, just as section 800 requires a party to maintain continuous ownership in a corporation to represent it derivatively. The statutory discretion conferred on trial courts under section 17709.02(a)(1), to permit “[a]ny member [of an LLC] who does not meet these requirements” to maintain a derivative suit does not permit courts to excuse a former member from the continuous membership requirement. While equitable considerations may warrant exceptions to the continuous membership requirement, no such considerations were presented here. View "Sirott v. Superior Court of Contra Costa County" on Justia Law
Grove v. Juul Labs, Inc.
Grove, an employee of Juul, a Delaware corporation that was headquartered in San Francisco, received options to acquire company stock. Grove stopped working for Juul in 2017, then exercised those options. In 2019, Grove sought to inspect the company’s books and records under California Corporations Code section 1601 to determine the value of his stock and to investigate potential breaches of fiduciary duty. Juul sought declaratory and injunctive relief in Delaware. Grove filed a shareholder class action and derivative complaint in California. Juul cited a forum selection clause, requiring that derivative and class claims proceed in Delaware. Grove filed an amended complaint, alleging only violations of section 1601. The California court stayed Grove's action, reasoning that the Agreement Grove signed states that Delaware courts have exclusive jurisdiction to enforce the agreement. The Court of Chancery of Delaware then granted Juul judgment on the pleadings; Grove did not waive inspection rights under California law but “[s]tockholder inspection rights are a core matter of internal corporate affairs,” so Grove’s rights as a stockholder are governed by Delaware law; Grove may litigate his inspection rights only in a Delaware court.The California court of appeal affirmed the stay order. It was reasonable to enforce the forum selection clause as to the class and derivative claims. Grove’s claim to inspect the books and records has already been adjudicated in the Delaware court, whose decision is entitled to full faith and credit. View "Grove v. Juul Labs, Inc." on Justia Law
Nelsen v. Nelsen
This appeal stemmed from a family dispute concerning ownership interests in Nelsen Farms, LLC (“LLC”). The LLC, as originally established, included equal ownership for two of the Nelsen’s sons, Jack S. and Jonathan. However, in 2015, Jack H. Nelsen (“Jack H.”) and Joan Nelsen modified their estate plans and decided to pass their interests in the LLC to Jonathan via an inter vivos transfer, rather than through their wills. In August 2017, members of the LLC held a special meeting, during which the transfer of the membership interest to Jonathan was approved. The next month, Jack S., his wife and son, and Jack S.’s sister Janice Lehman, filed a complaint against Jack H., Joan and Jonathan alleging Jack H. and Joan were incompetent and lacked testamentary capacity to modify their 2015 wills and to make the 2017 inter vivos conveyance. Appellants also alleged Jonathan unduly influenced Jack H. and Joan to obtain the estate modification. Appellants amended their complaint in October 2017, adding a claim for dissolution of the LLC. The district court ultimately granted summary judgment to Respondents and dismissed all of Appellants’ claims. After review, the Idaho Supreme Court affirmed the district court in all respects save one: dissolution of the LLC. To this, the Court held that when the district court granted dissolution on summary judgment, Jack S. was ipso facto deprived of his membership interest and relegated to the status of economic interest holder, without the right to petition for dissolution since, under the statute, only members could do so. Jack S. was reinstated as a member of the LLC, and had the right to seek dissolution upon remand. View "Nelsen v. Nelsen" on Justia Law
Borer v. Eyak Corporation
A winning candidate for a seat on the board of directors of an Alaska Native Corporation declined to sign the corporation’s confidentiality agreement and code of conduct. When the corporation denied him a seat on the board, he sought a declaratory judgment that these agreements were unlawful and an injunction that he be seated on the board. He argued that the scope of the confidentiality agreement was so broad, and the code of conduct so apt to be used to suppress dissenting directors, that they were inconsistent with directors’ fiduciary duties to the corporation. The Alaska Supreme Court determined he did not challenge the application of these agreements to any concrete factual situations, therefore, his claims were not ripe for adjudication. The Court therefore affirmed the judgment and the award of attorney’s fees against him. View "Borer v. Eyak Corporation" on Justia Law
Seafarers Pension Plan v. Bradway
In October 2018, a Boeing 737 MAX airliner crashed in the sea near Indonesia, killing everyone on board. In March 2019, a second 737 MAX crashed in Ethiopia, again killing everyone on board. Within days of the second crash, all 737 MAX airliners around the world were grounded. The FAA kept the planes grounded until November 2020, when it was satisfied that serious problems with the planes’ flight control systems had been corrected. The Pension Plan, a shareholder of the Boeing Company, filed a derivative suit on behalf of Boeing under the Securities Exchange Act of 1934, 15 U.S.C. 78n(a)(1), alleging that Boeing officers and board members made materially false and misleading public statements about the development and operation of the 737 MAX in Boeing’s 2017, 2018, and 2019 proxy materials.The district court dismissed the suit without addressing the merits, applying a Boeing bylaw that gives the company the right to insist that any derivative actions be filed in the Delaware Court of Chancery. The Seventh Circuit reversed. Because the federal Exchange Act gives federal courts exclusive jurisdiction over actions under it, applying the bylaw to this case would mean that the derivative action could not be heard in any forum. That result would be contrary to Delaware corporation law, which respects the non-waiver provision in Section 29(a) of the federal Exchange Act, 15 U.S.C. 78cc(a). View "Seafarers Pension Plan v. Bradway" on Justia Law
Ramirez v. Gilead Sciences, Inc.
There were allegations that Gilead intentionally withheld a safer and potentially more effective HIV/AIDS medication in order to extend the sales window for its older, more dangerous treatment. In 2019, Ramirez, a beneficial owner of Gilead shares, demanded that the company permit him to inspect broad categories of documents for the purpose of “obtaining accurate and complete information about his investment in Gilead, and to find out how the mismanagement and breaches of fiduciary duties at Gilead relating to violations of federal and state laws affect that investment..” Gilead rejected the inspection request. Ramirez then filed a petition for writ of mandate, Corporations Code section 1601, in the superior court asserting common law and statutory rights to inspect the documents described in his demand letter.The trial court denied the petition on the ground that Delaware, Gilead’s state of incorporation, was the sole and exclusive forum to litigate Ramirez’s inspection demand. While his appeal was pending, Ramirez litigated his inspection demand to judgment in Delaware. The court of appeal concluded Ramirez lacks standing to pursue his California inspection demand under section 1601 because he is not a holder of record of Gilead stock. View "Ramirez v. Gilead Sciences, Inc." on Justia Law
Coster v. UIP Companies, Inc.
The two equal stockholders of UIP Companies, Inc. were deadlocked and could not elect new directors. One of the stockholders, Marion Coster, filed suit in the Court of Chancery and requested appointment of a custodian for UIP. In response, the three-person UIP board of directors — composed of the other equal stockholder and board chairman, Steven Schwat, and the two other directors aligned with him— voted to issue a one-third interest in UIP stock to their fellow director, Peter Bonnell, who was also a friend of Schwat and long-time UIP employee (the “Stock Sale”). Coster filed a second action in the Court of Chancery, claiming that the board breached its fiduciary duties by approving the Stock Sale. She asked the court to cancel the Stock Sale. After consolidating the two actions, the Court of Chancery found what was apparent given the timing of the Stock Sale: the conflicted UIP board issued stock to Bonnell to dilute Coster’s UIP interest below 50%, break the stockholder deadlock for electing directors, and end the Custodian Action. Ultimately, however, the court decided not to cancel the Stock Sale. The Delaware Supreme Court reversed the Court of Chancery on the conclusive effect of its entire fairness review and remanded for the court to consider the board’s motivations and purpose for the Stock Sale. "If the board approved the Stock Sale for inequitable reasons, the Court of Chancery should have cancelled the Stock Sale. And if the board, acting in good faith, approved the Stock Sale for the 'primary purpose of thwarting' Coster’s vote to elect directors or reduce her leverage as an equal stockholder, it must 'demonstrat[e] a compelling justification for such action' to withstand judicial scrutiny." View "Coster v. UIP Companies, Inc." on Justia Law
Meland v. Weber
California Senate Bill 826 requires all corporations headquartered in California to have a minimum number of females on their boards of directors. Corporations that do not comply with SB 826 may be subject to monetary penalties. The shareholders of OSI, a corporation covered by SB 826, elect members of the board of directors. One shareholder of OSI challenged the constitutionality of SB 826 on the ground that it requires shareholders to discriminate on the basis of sex when exercising their voting rights, in violation of the Fourteenth Amendment.The Ninth Circuit reversed the dismissal of the suit for lack of standing. The plaintiff plausibly alleged that SB 826 requires or encourages him to discriminate based on sex and, therefore, adequately alleged an injury-in-fact, the only Article III standing element at issue. Plaintiff’s alleged injury was also distinct from any injury to the corporation, so he could bring his own Fourteenth Amendment challenge and had prudential standing to challenge SB 826. The injury was ongoing and neither speculative nor hypothetical, and the district court could grant meaningful relief. The case was therefore ripe and not moot. View "Meland v. Weber" on Justia Law
Deibel v. Hoeg
In 1986 Deibel, Hoeg, and Steffen founded Hy-Pro Corporation. Deibel, its president, received 2,500 shares, representing 12.5% of the authorized stock. Deibel guaranteed Hy-Pro’s payment of a $100,000 debt to a bank. Within a year Deibel demanded that Hoeg leave. When Hoeg refused, Deibel quit but held onto his stock even. A state court suit settled, but the settlement was not reduced to writing. Deibel insists that under the settlement Hy-Pro would pay $15,000 and arrange with the bank to release his guarantee. Hoeg and Steffen assert that Deibel was also to surrender his shares.Almost 30 years later, Deibel filed a federal suit. HyPro was sold in 2017 for about $20 million; a 12.5% share would exceed $2.5 million. Indiana has a two-year period of limitations for such claims. The Seventh Circuit affirmed the dismissal of the suit as untimely, rejecting Deibel’s claims that he was still an investor when the firm was sold, and, if not, that a firm’s refusal to recognize him as an investor was a “continuing wrong.” When Deibel did not return his shares, Hy-Pro canceled Deibel’s stock. Deibel has not been on the company’s books as a shareholder since 1992. Deibel received multiple letters from various parties, including the IRS, notifying him of that fact; his claim accrued no later than 1998. View "Deibel v. Hoeg" on Justia Law