February 13, 2013

Facebook wins dismissal of IPO derivative case in U.S. District Court for Southern District of New York.

On February 13, the United States District Court for the Southern District of New York handed down a decision (In re Facebook, Inc. IPO Sec. & Derivative Litig., No. 12-md-2389 (S.D.N.Y. Feb. 13, 2013)), dismissing the shareholder derivative actions that have been brought against Facebook and its Board of Directors in the aftermath of the Company’s May 18 initial public offering. Willkie is serving as co-counsel with Kirkland & Ellis LLP for the Facebook defendants in the Facebook IPO-related litigation.

The court based its dismissal on several grounds. First, the court concluded that the plaintiffs, who did not make a demand to the Board, failed to rebut the presumption that the majority of Facebook’s Board of Directors was disinterested and did not plead sufficient facts to demonstrate the Board’s conscious inaction. Significantly, the court found that plaintiffs’ breach of fiduciary duty claims premised on the nondisclosure of internal projections prior to the IPO were without support. The court stated that the company "repeatedly made express and extensive warnings in the Company’s Registration Statement, drafts of the Registration Statement and in its final Offering Documents about the trend of increased use of mobile applications." Thus, "[e]ven if internal projections could be considered material to the IPO, Plaintiffs have not demonstrated that the Facebook projections would have ‘significantly altered the total mix information in the marketplace’ considering that these disclosures [regarding increased mobile use] were publicly disseminated." The court went further commenting that rulings "throughout the country have uniformly agreed that ‘internal calculations and projections are not material facts that are require[d] to be disclosed’ in a registration statement. . . . These courts have followed the lead of the SEC which has consistently refused to adopt a rule that would ‘require projections or other forward-looking information to be included in [IPO] registration statements.’" The decision also noted that plaintiffs failed to allege any facts with specificity suggesting that defendant Mark Zuckerberg engaged in any wrongdoing.

In addition, the court held that the named plaintiffs did not have standing to pursue their claims. The court accepted defendants’ argument that investors — who admitted that they acquired shares during the Facebook IPO — are not permitted to bring derivative actions based on defendants’ allegedly wrongful conduct that took place prior to the IPO. That is, these investors lack standing to pursue a derivative action given the theory of the complaints. Next, the court concluded that plaintiffs’ claims were not ripe. The court noted that plaintiffs’ claim of damages is contingent on the outcome of the securities class action. As a result, plaintiffs cannot yet demonstrate that the alleged costs incurred by the Company resulted from an actual corporate wrong. The court provided plaintiffs with the customary opportunity to replead their claims within 20 days.

In addition to this latest decision, Willkie and Kirkland previously obtained several critical victories for Facebook and its directors and officers in efforts to streamline the various proceedings. Most notably, on October 4, 2012, Facebook obtained comprehensive MDL treatment for all IPO-related litigation in the Southern District of New York.

The Willkie team is led by partner Richard Bernstein and includes partners Tariq Mundiya, Elizabeth Bower, Todd Cosenza and Sameer Advani.

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