On February 28, 2013, the Court of Chancery, through its opinion of In re Diamond Foods, Inc. Derivative Litigation, C.A. No. 7657-CS (Del. Ch. Feb. 28, 2013), entered an order dismissing the derivative complaint before it. In this case, two derivative plaintiffs, an individual and a pension fund, filed a derivative suit against the directors and officers of Diamond Foods, Inc. (“Diamond”), a snack food manufacturer that is incorporated in Delaware and headquartered in California. The plaintiffs allege that, in a period between October 2010 and June 2012, two defendants, Diamond’s former CEO and former CFO, breached their fiduciary duties by engaging in a manipulation of the company’s financial statements. Moreover, the plaintiffs asserted actions against the additional defendants, former directors of the company, for failing to try in good faith to ensure that the company operated in compliance with the law.
The first group of derivative suits was filed in California state courts, alleging claims of the same nature. These three suits were consolidated, and the “California State Action” is ongoing, with both proceedings before the court and a settlement process before a mediator. The derivative plaintiffs in this case brought the second set of suits in the U.S. District Court for the Northern District of California, alleging state law claims of the kind outlined above and claims under § 14(a) of the Securities Exchange Act of 1934, on the grounds that Diamond’s proxy statements in 2010 and 2011 were materially misleading. The
Defendants brought a motion to dismiss or stay the case under the McWane doctrine. First, the California Federal Action filed by the Dual Forum Plaintiffs was dismissed by the Northern District of California for lack of subject matter jurisdiction. The court found that the federal claim asserted therein failed as a matter of law. With the federal claims dismissed, the court found that it had no jurisdiction over the suit and did not consider any of the state law claims.
One of those plaintiffs has appealed that decision, but just weeks after noticing the appeal, the plaintiffs filed a nearly identical complaint with the Delaware Court of Chancery, without the federal law claims. Thus, the plaintiffs seek to have the dismissal of the California Federal Action overturned and to proceed in the U.S. District Court for the Northern District of California not only with their federal claims but with the same claims as those asserted in this action.
The Court granted defendants motion to dismiss pursuant to the McWane doctrine. Of significance, the Court found that (i) this action was brought well after these claims were already being litigated in California state court; (ii) plaintiffs brought this action after bringing these same claims in a federal court in California and thus after conceding that a non-Delaware court could competently adjudicate the claim; (iii) plaintiffs continue to press an appeal that, if successful, will enable them to litigate their claims in federal district court; and (iv) plaintiffs have not demonstrated that they are better positioned to represent Diamond than the plaintiffs in the California State Action.