Welcome to Shearman & Sterling LLP’s Need-To-Know Litigation Weekly, which analyzes notable U.S. decisions, orders and developments each week in areas of Securities Litigation, M&A Litigation, Government/Regulatory Enforcement, Antitrust Litigation and IP Litigation. This weekly newsletter is intended to supplement our various publications and thought leadership concerning these important substantive areas.
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Southern District Of New York Dismisses In Part Securities Fraud Claims Against Major Industrial Conglomerate, Allowing Claims Based Upon Factoring In Financial Filings To Proceed
On August 29, 2019, Judge Jesse M. Furman of the U.S. District Court for the Southern District of New York dismissed most of the securities fraud claims in a putative class action against a major industrial conglomerate (the “Company”), and certain of its current and former executives, brought under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. AP-Fonden v. Gen. Elec. Co., 2019 BL 325702 (S.D.N.Y. Aug. 29, 2019). Plaintiffs alleged defendants concealed performance problems in the Company’s insurance and power divisions. The Court found, among other things, that plaintiffs did not adequately plead claims based upon allegedly misrepresented liabilities in the Company’s long-term care (“LTC”) insurance portfolio. The Court did not, however, dismiss plaintiffs’ claim that the Company failed to disclose that it used “factoring” arrangements to generate current revenue by selling future revenues to third parties.
Second Circuit Limits The Application Of McDonnell v. United States And Declines To Extend The Potential Scope Of Liability In FCPA Cases
On August 9, 2019, the United States Court of Appeals for the Second Circuit denied the appeal by a Chinese real estate developer of his 2017 conviction arising from the alleged bribery of United Nations (“UN”) officials. U.S. v. Ng Lap Seng, No. 18-1725 (2d Cir. 2019). In affirming the conviction, the Second Circuit ruled that the holding in McDonnell v. United States—in which the Supreme Court held that prosecutors must prove that a bribe is paid in exchange for an “official act” in cases involving the federal anti-bribery statute (18 U.S.C. § 201)—does not apply to prosecutions under the Foreign Corrupt Practices Act (“FCPA”). The Second Circuit clarified in its ruling that the FCPA and the anti-corruption law aimed at protecting federal funding, known as Section 666, are written differently and target a broader set of bribery goals than the federal anti-bribery statute that was at issue in McDonnell.
Delaware Court Of Chancery Grants Shareholder’s Post-Merger Books And Records Demand, Finding “Credible Basis” To Investigate Merger Process
On August 28, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery granted a shareholder’s demand under 8 Del. C. § 220 to inspect the books and records of defendant GGP Inc. for the purpose of investigating potential mismanagement. Kosinski v. GGP Inc., C.A. No. 2018-0540 (Del. Ch. Aug. 28, 2019). Plaintiff’s demand stemmed from a merger in which defendant, a real estate company, was acquired by Brookfield Property Partners L.P., another real estate company that owned approximately one third of defendant’s common stock at the time. Plaintiff contended that the buyer had been defendant’s de facto controlling shareholder and the procedural protections necessary for deferential review of a merger process involving a controller—under Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”)—had not been implemented. Following trial, the Court granted plaintiff’s Section 220 demand, holding that where procedural protections are absent, “it is possible that the transaction was not at arm’s length,” and finding that plaintiff had demonstrated facts that established a “credible basis” to investigate potential breaches of fiduciary duty. But the Court noted that it was making an “exceptionally modest point” and not announcing a rule that noncompliance with MFW procedural protections “automatically supplies a credible basis.”
Delaware Court Of Chancery Denies Stay Sought By Special Litigation Committee Appointed By Conflicted General Partner
On August 28, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to stay filed by the special litigation committee formed by defendant Blue Bell Creameries, Inc. (“BBGP”) in connection with a derivative action by limited partners of Blue Bell Creameries, LLP (“Blue Bell” or the “Partnership”) against BBGP, which is the sole general partner of Blue Bell, and others. Wenske v. Blue Bell Creameries, Inc., C.A. No. 2017-0699 (Del. Ch. Aug. 28, 2019). The Court previously denied a motion to dismiss the derivative action because it determined that BBGP had “a disabling interest for pre-suit demand purposes.” BBGP then appointed two new directors to its board, who established a special litigation committee consisting of three non-director members empowered to determine the interests of the Partnership in the derivative litigation. The special litigation committee promptly moved to stay the derivative action to permit its investigation and make a determination. But the Court denied the motion. It explained that “[a]ny conflict that disables the principal disables the agent” and “[b]ecause BBGP, as principal, is not fit to decide how to manage the Partnership’s claims against the Defendants (including the claims against BBGP itself), its purported special litigation committee, as agent, is likewise disabled.”
Second Circuit Affirms Dismissal Of Price Fixing Claims Against Oil Companies
On August 29, 2019, the United States Court of Appeals for the Second Circuit issued an Opinion and Summary Order affirming the dismissal of plaintiffs-appellant derivatives traders’ Sherman Act and Commodities Exchange Act claims against defendant-appellees oil companies. Prime International Trading, Ltd., et al. v. BP PLC, et al., No. 1:17-cv-2233 (2d Cir. 2019).
PTAB Designates As Precedential Decision Barring IPR Filed More Than One Year After Patent Challenger Filed District Court Action That Was Dismissed Without Prejudice
On August 29, 2019, the U.S. Patent and Trademark Office’s Patent Trial and Appeal Board (“PTAB”) designated as precedential a January 31, 2019 decision in Cisco Systems, Inc. v. Chrimar Systems, Inc., Case IPR2018-01511 (PTAB Jan. 31, 2019) (Paper 11). The PTAB found that 35 U.S.C. § 315(a) bars a patent challenger from challenging a patent at the PTAB more than one year after filing a declaratory judgement (“DJ”) action in district court challenging the same patent, even if the patent challenger voluntarily withdrew the DJ action without prejudice.