Although Plausible, Securities Fraud Claims Fail

On June 5th, the First Circuit affirmed the dismissal of plaintiffs’ securities fraud lawsuit. The appellate court found that Genzyme had no duty to disclose a FDA post-facility inspection letter at the time it was received and that plaintiffs failed to adequately allege scienter. At the time the letter was sent, it appeared that FDA approval would be received as scheduled. Similarly, defendants had no duty to disclose production failures at its plants. The cause of the failures was unknown and the failures did not seem related to the requested FDA approval. Moreover, defendants disclosed the FDA letter and the production failures once the significance of the events became clear. The appellate court, however, did express concern over the district court’s decision to dismiss the complaint with prejudice. The First Circuit noted that nothing in the Private Securities Litigation Reform Act requires the dismissal of a complaint with prejudice. In Re Genzyme Corp. Securities Litigation.

Federal Tax Law Doesn’t Preempt Delaware Shareholder Voting Rights Law

On May 30th, the Third Circuit affirmed the dismissal of a lawsuit challenging Viacom’s shareholder vote which rendered excess executive compensation tax deductible. Plaintiff, a Viacom shareholder, brought direct and derivative claims alleging that, as a condition for allowing certain executive compensation in excess of $1 million to be tax deductible, federal tax law requires that the compensation be awarded pursuant to a plan approved in a vote of all the shareholders, even those without voting rights, thus preempting Delaware law authorizing corporations to issue non-voting shares as Viacom has done. The Third Circuit held that federal tax law does not confer voting rights on shareholders not otherwise authorized to vote or affect Delaware law which permits corporations to issue shares without voting rights. It further holds that the derivative claim failed to allege demand futility. Freedman v. Redstone.