By Anne Sherry, J.D.
Derivative actions alleging that Facebook directors breached their fiduciary duties in connection with the company’s IPO were properly dismissed for failure to plead contemporaneous share ownership, the Second Circuit held. None of the putative plaintiffs satisfied the Federal Rule of Civil Procedure 23.1 requirement by alleging that they were shareholders at the time of the director defendants’ alleged wrongdoing (In re Facebook, Inc. Initial Public Offering Derivative Litigation, July 24, 2015, Jacobs, D.).
Dismissals. The various lawsuits, which the Judicial Panel on Multidistrict Litigation consolidated in the Southern District of New York, alleged that Facebook’s directors breached their duties to shareholders because the IPO registration statement did not include a sufficient description of the effect of increasing mobile usage on the company’s projected growth. When Facebook moved to dismiss the actions, the district court held that it had discretion to decide threshold grounds for dismissal without first adjudicating whether it had subject matter jurisdiction, a “possible arduous inquiry.” The complaints challenged disclosures made before the IPO, so plaintiffs who acquired Facebook in the IPO could not meet the Rule 23.1 threshold.
Lack of standing. The Second Circuit approved of the decision to decide the threshold questions first. Although the Supreme Court has stated that a court should not assume “hypothetical jurisdiction” to adjudicate the merits of a case, neither must a court make a difficult determination as to subject matter jurisdiction when another clear threshold defect would warrant dismissal. The district court’s dismissal based on a lack of standing to proceed in a derivative capacity—rather than on a deficiency as to the merits of the allegations—did not sidestep the Article III requirements.
Contemporaneous ownership. Furthermore, the district court concluded correctly that none of the plaintiffs satisfied Rule 23.1. Complaints that simply recited the language of the rule by alleging that they continuously held ownership interests in Facebook at the time of the alleged misconduct did not go far enough; the court is not bound to accept conclusory allegations as factual conclusions. Nor did the plaintiffs’ purchase of SharesPost units, which effected an agreement to purchase Facebook stock on the secondary market, make them eligible owners of stock. Finally, one of the plaintiffs unsuccessfully argued that her ownership of Facebook stock from and after the IPO was contemporaneous because the alleged omissions were part of a “continuing wrong.” A derivative plaintiff must have owned stock throughout the course of activities constituting the primary basis of the complaint; here, the challenged disclosures were made prior to the IPO.
The case is No. 14-1445.