On September 29, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery granted in part and denied in part a motion to dismiss derivative claims for breach of fiduciary duty against the board of foreign exchange broker FXCM Inc. (“FXCM”), sustaining two grounds for breach after finding that demand would have been futile. Kandell v. Dror Niv et al., C.A. No. 11812 (Del. Ch. September 29, 2017). Specifically, the Court held that demand was excused with respect to (i) the board’s approval of a hastily procured loan in the wake of the “flash crash” generated by the 2015 decoupling of the Swiss franc from the euro, and (ii) FXCM’s alleged violations regulations prohibiting foreign exchange (or FX) brokers from limiting losses on behalf of customers (a feature of FXCM’s business). The Court dismissed plaintiff’s other claims, including as to a stockholder rights plan and an employee bonus plan, finding that the complaint lacked particularized facts necessary to excuse demand.

FXCM was an FX broker that largely focused on retail trades on behalf of customers and allegedly pursued clients by representing that it would hold customers harmless for loss beyond investment. FXCM’s competitors made no such guarantees, and under Dodd-Frank, the CFTC prohibits FX traders from representing that they will limit clients’ losses. 17 C.F.R. § 5.16 (“Regulation 5.16”). The 2015 “flash crash” left FXCM with exposure to its customers of more than $225 million under its loss-limit guarantee. Unable to meet its obligations with existing cash reserves, FXCM rapidly secured a $300 million loan, which called for an interest rate of 10% per annum that would increase by 1.5% each quarter the loan remained outstanding until the interest rate cap of 20.5% was reached.

Plaintiff asserted breach of duty claims as to both the loss-limit guarantee (for which FXCM was subsequently fined by the CFTC) and the loan, as well as with respect to a stockholder rights plan and an employee bonus plan, which plaintiff claimed the board approved to entrench themselves and to enrich the employee-directors, respectively. Plaintiff claimed demand futility as to all of the alleged breaches. The Court agreed regarding the Regulation 5.16 violations, finding that the directors faced a substantial risk of liability if (as plaintiff alleged) they willfully permitted FXCM to violate the law, since Delaware law provides that corporations may only pursue lawful business by lawful acts. Vice Chancellor Glasscock also found demand futility regarding the loan because the loan was not approved by a majority of disinterested directors and the transaction was subject to an entire fairness review. The Court dismissed the remaining claims, finding plaintiffs’ allegations were too conclusory to plead either entrenchment (as to the stockholder rights plan) or a lack of independence (as to the employee bonus plan).

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