In re Nutanix, Inc. Stockholder Derivative Litigation

Background

Aravind Bhonagiri, Ashwin Juneja, and TJ Park filed a stockholder derivative action on behalf of Nutanix, Inc. against Nutanix and individual defendants. The plaintiffs challenged statements made in public filings, press releases, and conference calls concerning lead generation, new-customer growth, sales personnel, sales productivity, and changes in Nutanix’s product offerings. They also challenged statements in a 2018 proxy statement.

Nutanix and the individual defendants separately moved to dismiss the amended complaint under Federal Rules of Civil Procedure 12(b)(6) and 23.1. Rule 12(b)(6) requires dismissal when a complaint does not adequately state a legally actionable claim. Rule 23.1 requires a stockholder bringing a derivative action to first demand that the corporation’s directors pursue the claim, or to plead particularized facts showing that such a demand would have been futile.

Demand futility and standing

The court held that the plaintiffs had not adequately pleaded demand futility. The plaintiffs argued that they did not need to satisfy a new demand-futility requirement because they had voluntarily amended the original complaint. The court concluded that the original complaint was not validly in litigation for purposes of excusing a new demand because the plaintiffs did not meaningfully contest that it could not have survived a motion to dismiss.

The court also held that, even assuming the plaintiffs needed to show reasonable doubt as to only five of the nine board members when the original complaint was filed, they still had not done so. Allegations that certain defendants served on the audit committee, signed Nutanix’s 2018 annual report, were professional board members, held Nutanix stock, or sold stock were insufficient by themselves. The allegations also did not provide particularized facts overcoming the presumption that the directors had fulfilled their fiduciary duties. The plaintiffs therefore failed to comply with Rule 23.1 and lacked standing to bring claims on Nutanix’s behalf.

Alternative analysis of the individual defendants’ motion

Because the plaintiffs lacked standing, the court stated that it did not need to decide the individual defendants’ motion. The court nevertheless concluded that, even if the plaintiffs had standing, the amended complaint would not survive the motion to dismiss.

The court determined that the challenged statements about Nutanix’s sales hiring and new customers generally sounded in fraud and therefore had to be pleaded with particularity. It found that the 2018 proxy statement’s representation that Nutanix was focused on continued investment in acquiring new customers was not shown to be false or misleading. The plaintiffs also did not adequately plead the individual defendants’ involvement in or knowledge of that statement.

Regarding the other challenged statements, the court stated that some statements by Pandey and Williams were misleading and were made with the required state of mind. However, the plaintiffs did not adequately allege that the other individual defendants participated in making those statements or knew they were misleading. The court rejected reliance on general allegations based on audit-committee membership, participation in company meetings, the importance of the subjects to Nutanix, or the idea that officers were automatically responsible for company statements because of their positions.

The court also held that the insider-trading fiduciary-duty claim was not adequately pleaded because the plaintiffs did not sufficiently allege that the insider-selling defendants knew the challenged statements were false or misleading. Without that knowledge, the defendants could not have improperly used the information when trading.

The court further held that the claim under Section 14(a) of the Securities Exchange Act failed. The plaintiffs did not adequately allege that the 2018 proxy statement contained a false or misleading statement, that the individual defendants knew of such a statement, that the alleged misrepresentation was material to a reasonable shareholder’s voting decision, or that the proxy statement caused the claimed harm.

Disposition

Judge William H. Orrick granted Nutanix’s motion to dismiss and the individual defendants’ motion to dismiss, with leave to amend. The plaintiffs were ordered to file an amended complaint by October 26, 2020. The opinion does not state that the action was dismissed with prejudice or without prejudice.