Kevin LaCroix reports:
Regular readers will recall that last year and earlier this year, plaintiffs’ lawyers filed a series of shareholder derivative lawsuits against the directors of several companies alleging that the lack of diversity on the companies’ boards breached the directors’ fiduciary duties. ...
The Oracle complaint asserts that the company’s board is “one of the few remaining publicly-traded companies without a single African American director.” The complaint alleges further that the directors “repeatedly made gross misrepresentations in the Company’s public statements by claiming to have a multitude of policies, internal controls, and processes designed to ensure diversity both at the management level and the Board itself.” ...
The complaint asserts claims for breach of fiduciary duty; aiding and abetting breach of fiduciary duty; abuse of control; unjust enrichment; and violation of Section 14(a) of the Securities Exchange Act of 1934.
The defendants filed a motion to dismiss, contending that the plaintiffs had not sufficiently pleaded demand futility and, in light of the forum selection clause in the company’s by-laws, that the plaintiffs’ state law claims must be asserted in the Delaware Court of Chancery. ...
On May 21, 2021, Northern District of California Magistrate Judge Jacqueline Scott Corley granted the defendants’ motion. A copy of Magistrate Judge Corley’s order can be found here.
The court agreed that the state law claims could only be brought in Delaware Chancery Court, reinforcing the power of forum selection clauses. It severed the federal Securities Exchange Act Section 14(a) claims and held they could be dismissed for failure to plead demand futility.
For discussion of the implications of this dismissal and two earlier dismissals in similar cases, go read the whole thing. As usual, it's a detailed and very cogent analysis.
Here's my question: I don't understand why plaintiff framed his Section 14(a) claims as derivative. Since the Section 14(a) implied private right of action was created by the Supreme Court, the law has been that "a right of action exists [under that statute] as to both derivative and direct causes. J. I. Case Co. v. Borak, 377 U.S. 426, 431 (1964). "It is well settled law that a Section 14(a) claim may be brought directly or derivatively." In re Trump Hotels Shareholder Derivative Litig., 96 CIV. 7820 DAB, 2000 WL 1371317, at *10 n.5 (S.D.N.Y. Sept. 21, 2000).
In the Trump case, the plaintiff's suit was dismissed for failure to make demand solely because the plaintiffs were “[p]roceeding in a purely derivative capacity in the right and for the benefit of the Company." Id. Which is what also happened here.
So why didn't the plaintiff in either case bring a direct cause of action under Section 14(a)?
