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June 14 — Lululemon Athletica Inc. directors won't have to face derivative claims alleging they breached their fiduciary duties by failing to investigate former chairman Dennis Wilson's trading activities, the Delaware Chancery Court ruled June 14 ( Laborers' Dist. Council Constr. Indus. Pension Fund v. Bensoussan, 2016 BL 188507, Del. Ch., No. 11293-CB, 6/14/16 ).
Chancellor Andre G. Bouchard dismissed a lawsuit filed by two pension funds on the grounds that the claims and issues had already been litigated in a New York federal court.
The investors alleged that Wilson suspiciously sold company stock under a trading plan just days before the resignation of then-Chief Executive Officer Christine Day was publicly announced.
The New York lawsuit was dismissed while the Delaware plaintiffs were pursuing a books and records action in the chancery court. The books and records case took approximately two years to be resolved (13 CARE 959, 5/8/15).
This is the second case within the last month in which Delaware plaintiffs were foiled in their derivative action because other plaintiffs proceeded in another jurisdiction while they were embroiled in books and records litigation. While Delaware plaintiffs are not required to file such inspection actions, they are strongly encouraged by the state courts to do so before bringing derivative claims.
Last month, the chancery court dismissed investor derivative claims accusing Wal-Mart Stores Inc. directors of breaching their fiduciary duties because another jurisdiction—an Arkansas federal court—had ruled on the matter, also while the Delaware plaintiffs were inspecting the company's internal records (94 CARE, 5/16/16).
Plaintiffs' attorneys previously told Bloomberg BNA that a major concern about protracted Delaware books and records actions is that plaintiffs in other jurisdictions could litigate their derivative lawsuits ahead of the Delaware plaintiffs (84 CARE, 5/2/16).
In August 2013, the U.S. District Court for the Southern District of New York dismissed a lawsuit filed by Lululemon investors asserting various derivative claims, including that Wilson breached his fiduciary duties by selling shares while in possession of insider information.
Applying Delaware law, the federal court found that the plaintiffs failed to adequately plead that a pre-suit demand on Lululemon's board to take remedial action was excused. The district court's decision was subsequently affirmed by the U.S. Court of Appeals for the Second Circuit in April 2015 (13 CARE 747, 4/10/15).
Under Delaware law, investors that file derivative lawsuits must show that they made a pre-suit demand on the board of the company on whose behalf the case is brought, unless doing so would be futile.
In the Delaware case, Bouchard applied New York law in determining that the demand futility issue couldn't be relitigated. The judge concluded that the New York plaintiffs could adequately represent Lululemon stockholders even though they didn't seek to inspect the company's books and records before filing their claims.
Bouchard—the same judge who ruled against the Delaware plaintiffs in the Wal-Mart case—similarly said in Lululemon that it was a “better practice for stockholder plaintiffs to use ‘the tools at hand'”—books and records inspections—to investigate derivative claims.
However, the judge said the fact the New York plaintiffs hadn't pursued such an action didn't rise to the “level of litigation management that was so grossly deficient as to render them inadequate representatives.”
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The opinion is available at http://www.bloomberglaw.com/public/document/Laborers_Dist_Council_Constr_Indus_Pension_Fund_v_Bensoussan_No_1.
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