VeriSign Shareholder Derivative Action Dismissed

VeriSign is a leading provider of Internet security and control services, facilitating on-line communications and commercial transactions. Following the period of alleged misconduct (January 2001 to January 2002), VeriSign stock fell from $29.03 to $9.89 per share, VeriSign came under FTC investigations, and it was the target of securities fraud suits filed in California.The shareholder derivative action alleged that the defendant directors and managers of VeriSign breached their fiduciary duties of care by (a) announcing material misleading information and then engaging in insider trading, and (b) failing to maintain adequate accounting controls and failing to follow accepted accounting practices. Under Court of Chancery Rule 23.1, the Delaware Chancery Court dismissed the action, finding that the Plaintiff failed to plead the complaint with particularity the reasons for demand excusal.

The requirement of demand is that the Plaintiff must go to the Board before going to court. Court of Chancery Rule 23.1 requires that “[t]he complaint shall ... allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff's failure to obtain the action or for not making the effort.” The court must determine, therefore, “whether Rattner [the Plaintiff] has pleaded with particularity that demand upon the Board would be futile and, thus, is excused” [emphasis added].

Since there has been no decision or action by the board, the court used the test from Rales instead of Aronson. Under Rales, “demand is excuse if the particularized facts of the . . . Complaint create a reasonable doubt that . . . a majority of the Board could have exercised disinterested and independent business judgment in responding to Rattner’s demand.” Since the Plaintiff did not question the Board’s independence, the issue was whether there is reason to doubt the disinterestedness of a majority of the Board.

The court found that the complaint failed to raise reasonable doubt that the directors are interested with respect to the insider trading allegations. The complaint does not allege with particularity how a majority of the directors obtained insider information and that the timing of the trades indicates insider trading. “[I]t must be shown that each sale by each individual defendant was entered into and completed on the basis of, and because of, adverse material non-public information” (citations and quotations omitted).

The complaint also failed to raise reasonable doubt that the directors are interested with respect to the failure to exercise oversight of improper accounting practices. The complaint does not contain particularized facts about the relevant accounting controls at the time or the Board’s involvement in the preparation of and release of financial information. Furthermore, a plaintiff can only prevail on a claim for failure to exercise oversight if he can show gross negligence—the complaint does not plead with “particularity sufficient to sustain an inference that the Defendant Directors were guilty of gross negligence.”

Rattner v. Bidzos, No. Civ.A. 19700, 2003 WL 22284323, (Del. Ch. Sept. 30, 2003).

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