USA – CALIFORNIA Trends and Developments Contributed by: Bahram Seyedin-Noor, Jared Kopel, Joshua Korr and Monica Eno, Alto Litigation
California Securities Litigation in 2024 In many ways, California securities litigation in 2024 was more of the same – albeit with an emphasis on the “more”. Difficult financing markets translated into a number of actions by disgruntled shareholders alleging false or mis- leading statements in connection with securities transactions and/or management breaches of fiduciary duty. At the same time, federal plain- tiffs – increasingly alert to important distinctions between federal and state securities laws – often added state claims to their federal complaints to take advantage of those differences. The US Supreme Court held in MacQuarie, Infra- structure Corp v Moab Partners, Inc, 144 S Ct 885 (2024) that a failure to disclose information required by Item 303 of Regulation S-K does not provide a basis for a claim under Section 10(b) of the Securities Exchange Act and Rule 10b-5(b). It remains to be seen whether that ruling will significantly increase the barrier to shareholder actions in federal court. Meanwhile, California corporations have con- tinued to face a wave of litigation regarding cybersecurity breaches. And California crypto- currency companies continue to find themselves in regulators’ crosshairs, as the courts provide conflicting opinions on whether the sale of digital assets constitutes securities under federal law. Recent changes to California law raise the prospect of even more securities litigation in the future. By way of example, new California ESG disclosure rules – set to take effect in 2026 – have the potential to spawn a new wave of disclosure suits, akin to ones that the federal courts have been dealing with in recent years. Lawsuits were filed challenging California’s recently enacted climate and financial report- ing laws. And the California courts’ adoption of
Delaware’s Caremark doctrine may precipitate new cases asserting director nonfeasance. In short, 2024 has been a busy year for securi- ties litigators. The next few years are expected to be busier still. California courts adopt Delaware’s Caremark standard of liability for directors asleep at the wheel California courts often look to Delaware case law concerning corporate governance – although it sometimes takes a while before they expressly endorse a particular Delaware doctrine. On 2 June 2023, the California Court of Appeal offi- cially recognised Delaware’s Caremark doctrine. Under In re Caremark Int’l Inc, 698 A.2d 959 (Del Ch 1996) (“Caremark”) and its progeny, directors may be found liable for breaches of fiduciary duty (even if they did not affirmatively undertake a deleterious action) where they have failed utterly to implement any reporting or information sys- tem or controls or – having implemented such a system or controls – consciously failed to moni- tor or oversee its operations, thus preventing them from being adequately informed of risks or problems. The Delaware courts have held that plaintiffs bringing a Caremark claim must plead and prove that the directors acted in bad faith, which is typically defined as an intentional der- eliction of duty or conscious wrongdoing. In Kanter v Reed, 92 Cal App 5th 191 (2023) (“Kanter”), the California Court of Appeal adopt- ed the Caremark standard for directors of Cali- fornia corporations. The court held that the defi- nitions of director liability under Section 204 of the California Corporations Code were substan- tively the same as their Delaware law corollaries and therefore applied the Caremark standard. In so doing, it noted that California courts have
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