Yesterday, the California Court of Appeal affirmed California Superior Court Judge James P. Kleinberg’s judgment sustaining a demurrer in a shareholder derivative action against the officers and directors of Yahoo! Inc. Leyte-Vidal v. Semel, 2013 Cal. App. LEXIS 849 (Cal. Ct. App. 2013). The Court of Appeal’s opinion contains a clear and cogent explanation of demand futility under Aronson v. Lewis, 473 A.2d 805 (Del. 1984) and Rales v. Blasband, 634 A.2d 927 (Del. 1993). In fact, the opinion is larded with citations to numerous well-known Delaware cases.
Given that facts that Yahoo! is a Delaware corporation and the parties’ agreement that Delaware law governs, this shouldn’t be too much of a surprise. Perhaps it should be. California Corporations Code Section 800 expressly applies to foreign corporations. One would think that alone would at least merit some mention by the Court.
A more interesting issue is raised by the plaintiff’s allegations which include alleged insider trading in violation of Section 25402 of the California Corporations Code. Standing to address violations of Section 25402 are set forth in Section 25502.5. That statute provides that when a shareholder alleges a violation, the board “shall be required to consider the allegation in good faith, and if the allegation involves misconduct by any director, that director shall not be entitled to vote on any matter involving the allegation [but may be counted towards a quorum]“. Since California created the cause of action (Section 25402) and provided the remedy and procedure for handling alleged violations (Section 25502.5), one might have expected to see California law applied.
For more on California’s unique insider trading statute, see my article: California’s Unique Approach to Insider Trading Regulation, 17 Insights 21 (2003) and Not Just Anyone Can Violate California’s Insider Trading Ban and Insider Trading California Style.