In my round-up of top D&O stories from 2021, I cited the recent rise of U.S. derivative lawsuit filings against the boards of non-U.S. companies as one of the year’s most important D&O liability and insurance stories. I was not alone in identifying this trend as a key development. Allianz identified the threat of these kinds of U.S. derivative suits against non-U.S. companies’ boards as one of the “five D&O mega trends companies should watch for and guard against in 2022.” However, recent developments could be interpreted to suggest that the threat from these kinds of lawsuits may turn out to be something less than feared.
As Alison Frankel noted in a January 4, 2022 post on her On the Case blog (here), “last week, two Manhattan state-court judges called off the revolution.” In the final week of 2021, two New York state judges granted motions to dismiss in separate derivative lawsuits filed in N.Y. courts against the boards of two non-U.S. companies. As discussed below, these two rulings potentially could spell the end for these kinds of lawsuits; at a minimum, it could mean that the threat may turn out to be significantly less than was feared – although as also noted below, there could yet be more of this story to be told.
As detailed in a September 2021 paper published by AIG in conjunction with the Clyde & Co law firm, plaintiffs’ lawyers have recently filed at least ten derivative actions in New York State courts on behalf of non-U.S. companies, alleging violations of the companies’ home country laws.
Frankel’s blog post to which I linked above highlights what made these cases so “revolutionary”; that is, plaintiffs, whose ability to file U.S. securities class action lawsuits against non-U.S. companies was blocked by the U.S. Supreme Court’s Morrison v National Australia Bank decision, nevertheless were seeking to avail themselves of a U.S. court by “framing their accusations as derivative breach-of-duty claims against corporate directors.” If the plaintiffs’ theory were to be sustained, Frankel said, “New York courts would become a hub of fiduciary litigation against international corporations.” Needless to say, were this type of litigation to survive, it would represent a significant new type of U.S. litigation exposure for non-U.S. companies.
One of the companies involved in these lawsuits is the German pharmaceutical firm Bayer AG, certain of whose directors and officers were, as I detailed in a post at the time, sued in March 2020 in a New York state court derivative action alleging violations of substantive German law. The Bayer lawsuit alleges wrongdoing by the company’s management board in connection with the company’s ill-fated merger with Monsanto. As discussed in my post about this lawsuit, the complaint raises the question of whether shareholders of a company organized under the laws of and based in Germany can pursue German law claims in New York courts using New York court procedures.
The answer to this question, at least with respect to the Bayer lawsuit, is “No.” In a December 27, 2021 opinion (here), New York (New York County) Supreme Court Judge Andrew Borrock granted the defendants’ motion to dismiss the plaintiffs’ complaint, ruling that the case “must be dismissed because this court lacks jurisdiction … because this case has only tenuous connection to New York and has a much greater connection to Germany where this case should have been brought.”
In granting the motion, Judge Borrock not only cited the absence of substantial connections between the forum, the defendant directors, and the dispute, but he also cited the adequacy of the alternative German forum. Judge Borrock also cited the “internal affairs” doctrine, noting that Germany has a significant interest in regulating a major German corporation governed by German law.
As if that were not enough, on December 30, 2021, New York (New York County) Supreme Court Judge Jennifer Schecter granted the motion to dismiss in the derivative action filed in the New York court against the board of UBS AG Group, a Swiss corporation. In granting the motion, Judge Schecter cited and relied on a provision in UBS’s articles of incorporation specifying jurisdiction for disputes arising out of a “corporate relationship” to be “solely at the registered office” – i.e., Switzerland. Judge Schecter noted that it is “logical” for a Swiss company, “like many Delaware companies,” to mandate that its internal affairs would be “adjudicated by a court with expertise in its corporate law.” It would also make little sense, given this provision, to “allow for litigation of massive derivative suits across the globe.” A copy of Judge Schecter’s order can be found here.
As Frankel noted in her blog post about the dismissal rulings, the plaintiffs in these cases can of course appeal these rulings. The same set of plaintiffs’ lawyers that filed these suits are also litigating a handful of other similar derivative suits filed against boards of other non-U.S. companies; it remains to be seen how those other cases, and any appeals, will fare.
However, according to a January 3, 2022 client alert about the Bayer decision from the Wachtell Lipton law firm (here), “while the Bayer decision remains subject to appeal, it may sound the death knell for the plaintiffs’ bar’s campaign to transform New York into the forum of choice for international derivative claims.”
The Wachtell client memo adds the observation that the Bayer ruling “struck an important blow for judicial efficiency and international comity – and, if followed as it should be, the decision will safeguard the authority of foreign jurisdictions to regulate litigation involving their domestic corporations.”
Discussion
It is more than a little bit awkward for me that a few days before I declared the rise of U.S. derivative litigation against non-U.S. companies’ boards to be one of the top D&O stories of 2021 that dismissal motions had been granted in two of the cases I citing. Chalk up this oversight on my part to the lull in news flow over the year-end holidays. But while the dismissal motions were granted in these cases, that does not necessarily mean the end of the threat from these lawsuits. As noted above, the plaintiffs in these cases still have the right to appeal. And there are still similar derivative cases pending against the boards of, among others, Deutsche Bank, Volkswagen, Barclays, and Novartis.
Nevertheless, the dismissal motion grants in these cases is clearly a positive development for anyone concerned about the potential exposure of non-U.S. companies to U.S. litigation. Were these cases to have been sustained, it would not only have had important implications for the liability and litigation exposures of boards of non-U.S. companies, it would have had important D&O insurance implications. In that regard, it can only be hoped, as the Wachtell client memo put it, that the dismissal motion grants in these cases represent the “death knell” for these kinds of cases.
However, before anyone declares final victory in these kinds of cases, there is one important cautionary note that needs to be considered. That is that Judge Borrock, the judge that granted the dismissal motion in the Bayer case, was also the judge in the Renren derivative litigation, in which he denied the dismissal motion in a derivative suit brought in New York court against Renren, a Cayman Islands company based in China, as discussed here. Indeed, a subsequent intermediate appellate court affirmed Judge Borrock’s dismissal motion denial. Just to add a element of terror to the mix, the Renren case later settled for the defendants’ agreement to pay a minimum of $300 million dollars. To be sure, Judge Borrock recently rejected the proposed settlement. The rejection of the settlement does not take away from the fact that in at least one U.S. suit against the board of non-U.S. company, Judge Borrock himself denied the dismissal motion, and the case in fact went on to settle for an eye-watteringly large amount of money (even if the settlement later was rejected).
The facts and circumstances relating to the Renren case suggest that it is far too early to conclude that the threat of U.S. derivative litigation against the boards of non-U.S. companies can be disregarded. For better or worse, there could be more of this story to be told.