USA – CALIFORNIA Trends and Developments Contributed by: Bahram Seyedin-Noor, Jared Kopel, Joshua Korr and Monica Eno, Alto Litigation
routinely relied “on corporate law developed in the State of Delaware, given that it is identical to California corporate law for all practical pur- poses”. On the merits, the court held that the share- holder derivative plaintiffs before it had not ade- quately alleged a substantial likelihood of direc- tor liability under Caremark and thus had failed adequately to plead that a litigation demand on the board would have been futile. The Califor- nia Supreme Court denied plaintiffs’ petition for review – meaning that the decision, and Care- mark, are now binding law in the Golden State. Given that many corporations who operate in California are incorporated in Delaware, it is not surprising that – a year after the Kanter decision was issued – it has yet to be applied to a sub- stantive California dispute. Indeed, just one Cali- fornia Court of Appeal decision has addressed Caremark since Kanter, and it did so under Dela- ware law. Continued down rounds precipitate shareholder actions As was the case in 2023, 2024 was a difficult year for technology start-ups in Silicon Valley. In addition to a reduction in overall deal volume year-on-year, 2024 has seen an uptick in “down round” financings – whereby a company raises money at a pre-money valuation that is less than the post-money valuation of its financing – in many technology sectors. By way of example, 33% of all Q1 financings were down rounds (the highest rate in the past five years) and 22% in Q2 were down rounds, which was also quite high compared to pre-2023 metrics. In the authors’ experience, a difficult financ- ing environment is often accompanied by more aggressive actions by investors, who may feel
– rightly or wrongly – that they have not gotten their money’s worth from securities transactions. This can lead to an uptick in claims of securities fraud and corporate mismanagement/malfea- sance alike. Unsurprisingly, new securities class action law- suits increased in the first half of 2024 compared to the second half of 2023 by almost 10%. Local- ly, the California Superior Courts encompassing Silicon Valley (Santa Clara County, San Mateo, and San Francisco County) saw new securities litigation filings against several prominent San Francisco Bay Area companies in 2024, includ- ing three actions brought under the Securities Act of 1933. Given the continuing challenges in the financing market, the pace of securities fil- ings is expected to continue increasing in 2025. Plaintiffs include state securities fraud claims in federal complaints Historically, federal securities lawsuits have pri- marily involved only federal securities claims. However, 2024 saw a pattern of California fed- eral plaintiffs strategically including California state securities claims alongside their federal counterparts. Federal and state securities laws both generally prevent, inter alia, the use of false or misleading statements in connection with the purchase or sale of securities. The statutory schemes are not identical, however. By way of example, unlike under federal Section 10(b) of the Securities Exchange Act and Rule 10b-5, a claim under California Corporations Code Section 25501 does not require proof of reliance or scienter but does retain the common-law requirement of privity between the parties (Cal Amplifier Inc v RLI Ins Co, 94 Cal App 4th 102, 108-09 (2001); Apollo Capital Fund, LLC v Roth Capital Ptrs, LLC, 158 Cal App 4th 226, 253 (2007)). The
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