Tuesday, February 07, 2017

Lululemon board successfully defends appeal over founder’s trading

By Anne Sherry, J.D.

The Delaware Supreme Court affirmed the chancery court’s dismissal of a derivative action surrounding Lululemon’s founder’s alleged insider trades. The Southern District of New York had rejected a demand futility argument given the lack of allegations of the board’s knowledge and the fact that the trades were governed by a Rule 10b5-1 plan. This decision precluded the suit in Delaware state court (Laborers’ District Council Construction Industry Pension Fund v. Bensoussan, February 3, 2017, Vaughn, J.).

After oral argument and on the parties’ briefs, the high court affirmed the chancery court for the reasons assigned in its opinion. That decision found that issue preclusion applied because the district court necessarily decided the same demand futility issue that the Delaware court was asked to consider. The Delaware plaintiffs also failed to meet their burden of proving that they were not afforded an opportunity to litigate in the New York action. Claim preclusion also barred the suit because the New York action involved an adjudication on the merits, the Delaware plaintiffs stood in privity with the New York plaintiffs, and the claims were or could have been raised in the prior action.

In their briefs on appeal, the plaintiffs took issue with this ruling. The New York court dismissed the claims without prejudice, they argued, so there was no final adjudication on the merits. Although the Delaware plaintiffs moved to intervene in New York, the district judge denied intervention. Furthermore, collateral estoppel did not apply because the demand futility issues in the two suits were not identical: The New York plaintiffs alleged that the board members were under the founder’s control and so facilitated his trades, while the Delaware plaintiffs argued that the board failed to investigate the trades. The defendants countered that the New York action was an adjudication on the merits and that the plaintiffs’ claims were or could have been raised in that action.

Much of the oral argument focused on whether the district court decision was without prejudice to litigate demand futility or whether, as the chancery court had construed it, it was without prejudice to the plaintiffs’ right to make demand. Chief Justice Strine asked plaintiffs’ counsel whether anyone thought to ask the district judge whether she had intended her order to foreclose relitigation. A party can ask, he observed, and the judge can give a yay or nay. Counsel conceded that no one had sought that clarification.

The case is No. 358, 2016.