Influential Court Adopts a Balanced Approach to Reviewing Dismissals of Derivative Suits
In a case brought by a JPMorgan Chase & Co shareholder represented by Robbins Arroyo LLP arising out of the infamous “London Whale” scandal in 2012, the U.S. Court of Appeals for the Second Circuit announced that it will end a decades’ long tradition of a limited and more difficult standard of appellate review for shareholders of district court decisions that dismiss or terminate shareholder derivative actions.
In an order made public on August 12, 2015, after Robbins Arroyo attorneys George Aguilar and Jay Razzouk briefed and argued the issue before a panel of three appellate judges, the Second Circuit ruled that it will now exercise its review of dismissals in shareholder derivative actions “de novo“, or without any deference to the lower courts, discarding the standard to which it had been previously bound. The Second Circuit, generally recognized as one of the most important courts for shareholder litigation in the United States, adopted this new and precedent setting standard after the JPMorgan shareholder specifically asked the Circuit Court to do so in an en banc petition.
Decision Expected to Provide More Clarity for Shareholders and Corporate Boards
A shareholder derivative action is a lawsuit brought by a shareholder on behalf and for the benefit of a corporation, often to remedy breaches of fiduciary duty by officers and directors. Remedies commonly sought include corporate governance reforms designed to prevent future fiduciary misconduct, removal of officers or directors whose misconduct injured the corporation, and monetary payments in the form of damages and disgorgement of ill-gotten gains.
Prior to this decision, shareholders bringing a derivative action faced greater difficulty in convincing the Second Circuit to overturn the dismissal of their case on appeal than if the case was a securities class action or other type of shareholder action. Under the traditional “abuse of discretion” standard of review, the Second Circuit, which covers the states of New York, Connecticut, and Vermont, gave lower courts significant leeway in deciding whether a shareholder could bring a derivative action. These decisions often turn on whether shareholders adequately allege that making a demand on a company’s board of directors would be futile, or that the board wrongfully refused their demand. Following this decision adopting de novo review, the Second Circuit is no longer required to accept district court determinations on such issues as demand futility and wrongful refusal, and will decide for itself those questions. This de novo standard of review is expected to provide a more consistent approach to the review of allegations made by shareholders in derivative actions, which should create more clarity for the benefit of shareholders and corporate boards.
“The Second Circuit’s decision to change the standard of review on appeal recognizes the importance and value of shareholder derivative actions,” said George Aguilar, a partner at Robbins Arroyo. “There is no reason for reviewing dismissals of derivative actions differently than dismissals of virtually all other cases.”
“London Whale” Derivative Suit Will Continue
In the ruling, the Second Circuit also asked the Delaware Supreme Court’s advice regarding whether JPMorgan’s board wrongfully refused the JPMorgan shareholder’s litigation demand concerning the London Whale debacle that has so far resulted in more than $6 billion of losses for JPMorgan. Robbins Arroyo will represent the plaintiff shareholder before the Delaware Supreme Court if the Court decides to accept the Second Circuit’s request to provide advice on the certified question. Espinoza ex rel. JPMorgan Chase & Co. v. Dimon, — F.3d — , No. 14-1754, 2015 WL 4747068 (2d Cir. Aug. 12, 2015).