Obtaining Early Dismissal of Shareholder Derivative Actions

On February 13, U.S. District Judge Robert Sweet of the Southern District of New York issued a potentially groundbreaking opinion dismissing a number of shareholder derivative suits against officers and directors of Facebook Inc. in In re Facebook IPO Securities and Derivative Litigation, MDL No. 12-2389, 2013 U.S. Dist. LEXIS 19631 (S.D.N.Y. Feb. 12, 2013). Not only is the decision a significant victory for the Facebook defendants, but it also lays out a blueprint for defendants in other derivative litigation as to how they might obtain an early dismissal on standing and ripeness grounds. In addition, the case provides helpful guidance for companies wishing to include a binding, exclusive forum selection clause in their articles of incorporation.

Background

The Facebook shareholder derivative litigation stems from alleged problems with the company’s May 18, 2012, initial public offering (IPO), in which Facebook offered 421 million shares of its common stock for $38 per share. According to Sweet’s opinion, Facebook’s registration statement and prospectus, filed with the U.S. Securities and Exchange Commission (SEC) prior to the IPO, cautioned prospective investors that the company might experience slowed revenue growth as Facebook users increasingly access the website through mobile devices rather than personal computers, that the company had only recently begun to advertise on its mobile products, and that it had no proven ability to monetize them. The opinion explains that, on May 19, the day after the IPO, Reuters reported that, during a roadshow the week before the IPO, Facebook "’altered its guidance for research earnings’"; that, on May 22, Reuters revealed that Facebook’s lead IPO underwriters "had cut their earnings forecasts for the company prior to the IPO, but that it was ‘unclear whether Morgan Stanley only told its top clients about the revised view or spread the word more broadly’"; and that Facebook’s stock price closed on May 22 at $31 per share, more than 18 percent below the IPO price. Also on May 22, as the court noted, Facebook amended its certificate of incorporation by, inter alia, adding a "choice of forum" provision specifying that the Delaware Chancery Court shall be the "sole and exclusive" forum for any derivative suits or suits alleging a breach of fiduciary duty.