Esa v. NortonLifeLock Incorporated

Background

Elli­emaria Toronto Esa filed a shareholder derivative action, meaning a lawsuit brought in the company’s name to seek relief for alleged harm to the company. She sued NortonLifeLock Incorporated and twelve current or former directors. She did not make a demand on NortonLifeLock’s board before filing, but argued that making such a demand would have been futile.

Esa alleged that proxy statements for the company’s 2018, 2019, and 2020 annual shareholder meetings misleadingly stated that the company considered diversity in selecting directors and that the Board of Directors sought diversity. She also alleged that the proxy statements failed to disclose that executive compensation decisions did not meaningfully account for progress on the company’s diversity and inclusion goals. Her claims included a claim under Section 14(a) of the Securities Exchange Act of 1934 and common-law claims for breach of fiduciary duty, aiding and abetting, abuse of control, and unjust enrichment.

Forum-selection clause

NortonLifeLock’s bylaws contained a forum-selection clause requiring most derivative actions and certain other shareholder actions involving the company’s internal affairs to be brought in Delaware’s Court of Chancery. The parties did not dispute that the clause was generally enforceable for derivative actions against the Board. They disputed whether it could apply alongside Esa’s federal Exchange Act claim, because Delaware’s Court of Chancery could not hear that federal claim.

Following earlier decisions allowing a federal claim to be separated from state claims, the court severed the state-law claims and dismissed them without prejudice to their reassertion in the Delaware Court of Chancery. Because of that ruling, the court did not need to decide defendants’ personal-jurisdiction argument concerning a proxy statement filed after NortonLifeLock’s move to Arizona.

Demand futility

Federal Rule of Civil Procedure 23.1 requires a shareholder bringing a derivative action either to first demand action from the corporation’s directors or to plead particular facts showing why demand would have been futile. Delaware law supplied the standard for deciding whether demand was futile.

The court explained that Esa needed to plead particular facts creating reasonable doubt that at least five of the nine directors on the relevant board could have independently and disinterestedly considered a demand. The court rejected Esa’s attempt to treat the entire board as disqualified based mainly on the directors’ board membership and alleged knowledge of the differences between the proxy statements and the alleged facts. The court also noted that the company’s bylaws protected directors and officers from liability to the fullest extent allowed by Delaware law. Under the applicable standards, the court concluded that Esa had not adequately pleaded demand futility and dismissed the Section 14(a) claim on that basis.

Failure to state a claim

The court also considered defendants’ motion under Rule 12(b)(6), which tests whether a complaint alleges a legally sufficient claim. To state a Section 14(a) claim, Esa had to identify a materially false or misleading statement or a material omission, explain why it was misleading, and allege the required level of culpability and connection to the proposed transaction.

The court concluded that the complaint did not plausibly allege an actionable false statement. It characterized the proxy statements about the company’s commitment to diversity and the Board’s consideration of diversity as aspirational statements or non-actionable “puffery,” rather than statements of objectively verifiable fact. The court therefore identified failure to state a claim as an alternative basis for dismissal.

Disposition

The court’s order granted the motion to dismiss with leave to amend. It dismissed Esa’s Section 14(a) claim for failure to allege demand futility and/or for failure to state a claim. Any amended complaint had to be filed within 30 days of the order. The court severed and dismissed the common-law claims without prejudice to refiling them in Delaware under the forum-selection clause.