January 21, 2019

Federal Judge Applies California Insider Trading Statute To Delaware Corporation

Attentive readers of this blog should be aware that California included an insider trading statute (Corp. Code § 25402) as part of the Corporate Securities Law of 1968.  More than a dozen years ago, a California Court of Appeal held that the internal affairs doctrine does not supplant this statute. Friese v. Superior Court, 134 Cal.App.4th 693, 36 Cal. Rptr. 3d 558 (2005).  The Court rejected an earlier federal court decision, In re Sagent Technology, Inc. Derivative Litigation, 278 F.Supp.2d 1079 (N.D.Cal.2003), as "not persuasive authority".  Then, last fall, U.S. District Court Judge Jon Tigar ruled:

"While a close issue, the Court concludes that Plaintiffs claims under Section 25402 are barred by the internal affairs doctrine.  California law codifying the internal affairs doctrine is relatively clear that '[t]he directors of a foreign corporation are liable to the corporation . . . according to any applicable laws of the state or place of incorporation,' and not California law."

In re Wells Fargo & Co. Shareholder Derivative Litigation, 282 F. Supp. 3d 1074, 1111-12 (N.D. Cal. 2017).   See Judge Rules Internal Affairs Doctrine Governs California Insider Trading Statute.  

Now, matters are coming full circuit.  Last week, Judge Claudia Wilken elected to follow the California Court of Appeal's holding in Friese and deny the defendants motion to dismiss insider trading claims with respect to a Delaware corporation on the basis of the internal affairs doctrine.   In re McKesson Corp. Derivative Litig., 2018 U.S. Dist. LEXIS 81049.  However, there is more to this story and that is something that I hope to cover in an ensuing post.

For more, but dated, information on Section 25402, see my article, California’s Unique Approach to Insider Trading Regulation, 17 Insights 21 (2003).  

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...