In re: Wells Fargo & Company Stockholder Derivative Litigation

Background

Plaintiffs Timothy Himstreet, the Montini Family Trust, and Clyde V. Cotton alleged that they were Wells Fargo shareholders and brought a derivative action—an action shareholders bring on behalf of a corporation. They alleged that Wells Fargo’s unlawful sales practices led to consumer abuses and that the company entered into consent orders with the Federal Reserve System, the Consumer Financial Protection Bureau, and the Office of the Comptroller of the Currency. The orders allegedly required Wells Fargo to improve its oversight, compliance, and risk-management systems, imposed an asset cap, and imposed $1 billion in fines.

Plaintiffs alleged that the individual defendants publicly represented that Wells Fargo had implemented meaningful reforms and complied with the consent orders, even though its compliance and risk-management programs allegedly remained deficient. The complaint asserted: (1) a claim under Section 14(a) of the Securities Exchange Act based on allegedly misleading proxy statements; (2) breach of fiduciary duty; (3) waste of corporate assets; (4) unjust enrichment; and (5) a contribution claim under Sections 10(b) and 21D of the Exchange Act against Timothy J. Sloan and John R. Shrewsberry.

Rule 23.1 and Demand Futility

Federal Rule of Civil Procedure 23.1 requires a shareholder bringing a derivative action to describe with particularity any effort to obtain action from the corporation’s directors and explain why the effort was not made. Delaware law supplied the substantive standard for deciding whether such a demand should be excused as futile.

Applying the Delaware Supreme Court’s three-part test, the court considered, director by director and claim by claim, whether each director received a material personal benefit, faced a substantial likelihood of liability, or lacked independence from someone who did. Demand is excused only if at least half of the demand board satisfies at least one of those conditions.

Count I: Section 14(a)

Plaintiffs alleged that seven demand-board members and Sloan negligently approved materially false or misleading statements in Wells Fargo’s March 14, 2018 proxy statement. The statements concerned Wells Fargo’s commitment to regulatory compliance, its corporate culture, executive compensation, ethical considerations, and its incentive-compensation risk-management program.

The court first held that Wells Fargo’s charter exculpated directors from liability for negligent conduct. The charter did not eliminate liability for acts or omissions not undertaken in good faith or involving intentional misconduct or a knowing violation of law. Because plaintiffs based their Section 14(a) claim only on negligence, the court concluded that they had not shown that the seven directors faced a substantial likelihood of liability.

The court separately held that plaintiffs had not alleged an actionable false or misleading statement. Statements about being “committed” to compliance, conducting a “thorough review,” paying employees fairly, and listening to employees were aspirational, generalized, or vague and were not capable of objective verification. Statements about the incentive-compensation risk-management program were also too general, and plaintiffs did not allege facts showing that the more specific statements about the program were false.

The court therefore held that demand was not excused as futile and dismissed Count I without leave to amend.

Count V: Contribution

The contribution claim was asserted only against Sloan and Shrewsberry. Plaintiffs alleged that Wells Fargo, Sloan, and Shrewsberry were defendants in securities class actions and that Sloan and Shrewsberry could be responsible for part of any liability Wells Fargo might ultimately incur.

The court held that plaintiffs had not shown demand futility because they did not allege that at least half of the demand board faced a substantial likelihood of liability on this claim. Plaintiffs also did not address demand futility for Count V in either their complaint or opposition. In addition, the court noted that a contribution claim dependent on the outcome of a separate pending lawsuit is generally premature because the right to contribution arises only after a final judgment and the required determination of a securities-law violation.

The court dismissed Count V without leave to amend.

State-Law Claims and Disposition

The breach-of-fiduciary-duty, corporate-waste, and unjust-enrichment claims were based on state law, and the court’s jurisdiction over them was supplemental. After dismissing the claims over which it had original federal jurisdiction, the court declined to exercise supplemental jurisdiction over the state-law claims because the case remained at the pleading stage and no apparent consideration favored retaining them.

The court granted Wells Fargo’s Rule 23.1 motion to dismiss. It dismissed Counts I and V, and dismissed Counts II, III, and IV without prejudice to refiling those claims in state court.