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, Government/Regulatory Enforcement, M&A And Corporate Governance, 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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Ninth Circuit Affirms In Part And Reverses In Part Decision Dismissing Section 16(b) Complaint
On November 16, 2023, the United States Court of Appeals for the Ninth Circuit affirmed in part and reversed in part a motion to dismiss a derivative action brought by a shareholder of a publicly traded biotechnology company under Section 16(b) of the Securities Exchange Act of 1934 against the Company, its beneficial owner, one of the Company’s directors and his wife, and their trust. Andrew E. Roth v. Foris Ventures LLC, et al., 22-16632 (9th Cir. Nov. 13, 2023). The Court held that the district court erred by imposing a purpose-specific approval requirement regarding an exemption for Section 16(b) liability pursuant to Rule 16b-3, but did not err in finding that the Company’s board was aware that the Director Defendant had an indirect pecuniary interest in the challenged transactions when the board approved those transactions. The Court remanded to the district court to determine whether the Beneficial Owner was a director by deputization and thus eligible for the exemption.
SEC Announces $25 Million Enforcement Action Over Company’s Use Of Stock Buyback Plans That SEC Alleged Failed To Comply With Rule 10b5-1
On November 14, 2023, the Securities and Exchange Commission announced a settled enforcement action against Charter Communications, Inc. imposing a $25 million civil penalty over allegations that the Company had used stock buyback plans that did not comport with Rule 10b5-1 of the Securities Exchange Act of 1934. The SEC claimed that the Company’s stock buyback plans did not comport with Rule 10b5-1 because the plans contained provisions that allowed the Company to change the total dollar amounts available to buy back stock and the timing of buybacks after the plans took effect; and while Rule 10b5-1 is a safe harbor rather than a standard that must be met, the SEC alleged that the use of buyback plans that did not meet the Rule 10b5-1 standard evidenced insufficient accounting controls in violation of Section 13(b)(2)(B) of the Exchange Act. While the SEC has been focused on Rule 10b5-1 for a number of years, bringing such an enforcement action over non-conforming 10b5-1 plans—particularly where the reason for non-conformance is nuanced—is an aggressive new approach that should cause companies to consider double-checking their own 10b5-1 plans against the current Rule.
M&A AND CORPORATE GOVERNANCE
Addressing The Enforceability Of Con Ed Provisions In Merger Agreements, Delaware Court Of Chancery Rejects Petition For Post-Closing Mootness Fee, Finding Stockholders Lacked Third-Party Beneficiary Standing To Seek Lost-Premium Damages
On October 31, 2023, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery issued final judgment denying a petition for a mootness fee award to a stockholder—who had previously asserted claims for breach of a merger agreement—after the merger closed. Crispo v. Musk, No. 2022-0666-KSJM (Del. Ch. Oct. 31, 2023). The Court explained that, to obtain a mootness fee, a “plaintiff-stockholder must demonstrate that his mooted claim was meritorious when filed.” The claim at issue was for breach of a so-called “Con Ed provision” in the merger agreement purporting to provide for lost-premium damages. The Court found that plaintiff did not have third-party beneficiary status, at least at the time he filed suit, and therefore his claim was not meritorious.
Eleventh Circuit Holds That Evidence Requiring The Court To Make Inferences Cannot Be “Direct” Evidence Of An Antitrust Conspiracy
On October 30, 2023, the United States Court of Appeals for the Eleventh Circuit affirmed the district court’s summary judgment in favor of defendants Ring Power Corporation, Ziegler, Inc., and Thompson Tractor Company, Inc., because plaintiff International Construction Products, LLC failed to present sufficient evidence—direct or circumstantial—to establish a conspiracy to boycott under Section 1 of the Sherman Act. International Construction Products, LLC v. Ring Power Corporation, No. 22-10231, 2023 WL 7127515 (11th Cir. Oct. 30, 2023).
INTELLECTUAL PROPERTY LITIGATION
Federal Circuit Affirms PTAB’s Decision Finding Semiconductor Patent Unpatentable After Addressing Threshold Question Relating To Original Assignee’s Interest In Patent
On November 17, 2023, the U.S. Court of Appeals for the Federal Circuit issued an opinion affirming the decision of the Patent Trial and Appeal Board finding unpatentable the challenged claims of a patent directed to methods for making semiconductor devices. Bell Semiconductor LLC v. Advanced Semiconductor Eng’g, Inc., __ F.4th __ (Fed. Cir. Nov. 17, 2023).).