Delaware Court of Chancery Finds Suit against Lululemon Chairman and Board Is Precluded by Previous Dismissal of New York Lawsuit
 

On June 15, 2016, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed a derivative action against current and former directors of Lululemon Athletica, Inc., finding that plaintiffs’ claims were precluded by a previous dismissal of similar allegations in a New York based action.  Laborers District Council Constr. Indus. Pension Fund v. Bensoussan et al., C.A. No. 11293-CB (Del. Ch. June 14, 2016).

Plaintiffs alleged that Lululemon’s chairman, Dennis Wilson, violated his fiduciary duties when he sold nearly $80 million in shares shortly after learning of the CEO’s pending resignation. The sale was effectuated shortly before a public announcement of that departure, which resulted in a 17 percent stock drop. The trades in question had been made by an independent broker pursuant to the terms of a “10b5-1 trading plan” designed to permit sales of securities by insiders such as Mr. Wilson. Plaintiffs nonetheless claimed that the timing and circumstances of the trade were suspicious and that the other board members had also violated their fiduciary duties by failing to investigate the trades.

A similar action had previously been litigated in the Southern District of New York and had been dismissed for failure to show that a demand on the board was excused. Among other things, the New York court found that the New York plaintiffs had failed to allege that the board was aware of any inconsistencies between Wilson’s trades and his 10b5-1 trading plan. In the absence of such allegations, the New York court was unwilling to conclude that the mere failure to investigate the trades demonstrated a lack of board independence sufficient to establish demand futility. Chancellor Bouchard determined that this prior ruling precluded the action brought before him in Delaware, holding that the same arguments for demand futility that were rejected in New York were being recycled and also now formed the basis of the substantive allegations against the board in the Delaware action.

The Delaware plaintiffs had sought to avoid preclusion by arguing that the litigation strategy of the New York plaintiffs was so flawed that those plaintiffs were “inadequate representatives.” Among other things, the Delaware plaintiffs were critical of the New York plaintiffs’ decision to commence suit before completing books-and-records requests and of their opposition to a prior effort by the Delaware plaintiffs to intervene in the New York action for precisely this reason. But Chancellor Bouchard found that while the Delaware plaintiffs had perhaps conducted a more thorough investigation, including through their attempted use of books-and-records requests, the New York plaintiffs’ various failings amounted only to an “imperfect legal strategy” rather than the “grossly deficient” litigation management required to render them inadequate representatives and defeat preclusion. Chancellor Bouchard’s recent decision in In re Wal-Mart Stores, Inc. Del. Deriv. Litig., C.A. No. 7455-CB (Del. Ch. May 13, 2016) similarly declined to hold that plaintiffs who had failed to make a Section 220 demand were “grossly deficient.”