Corporate Law News

Fitbit Can’t Run From Case on ‘Paranoia'-Induced Inside Trades

Dec. 14, 2018, 10:15 PM

Fitbit Inc. is stuck in court after a Delaware judge Dec. 14 refused to dismiss a shareholder derivative suit alleging the company’s board engaged in insider trading.

Publicly lauded but privately lackluster technology “caused ‘paranoia’ among Fitbit management,” leading them to structure the company’s 2015 IPO and secondary offering to allow them to sell additional stock at higher prices, according to a Delaware Court of Chancery opinion keeping the case in court.

The Fitbit board urged the court to throw out the case because the investors didn’t make a pre-suit demand on the board. But the investors “have pled particularized facts” suggesting that they wouldn’t have gotten impartial consideration from the majority of the board, according to the opinion.

When the investors first filed, Fitbit’s board had seven members, five of whom were named defendants. The company argued that the court should consider the board as it existed when the investors filed their second amended complaint—nine members, but still only five named defendants—in determining if a demand would have been futile. But shareholders don’t have to make a new demand each time they amend their complaint, so the judge sided with the investors.

Because of “the serious nature of these claims,” the judge emphasized in a footnote that the plaintiffs had merely alleged sufficient facts. “Whether they can prove these facts very much remains to be seen,” the judge said.

Young Conaway Stargatt & Taylor LLP and Morrison & Foerster LLP represented Fitbit. Andrews & Springer LLC; Rosenthal, Monhait & Goddess P.A.; Kahn Swick & Foti LLC; Schubert Jonckheer & Kolbe LLP; and Shapiro Haber & Urmy LLP represented the investors.

The case is In re Fitbit Inc. Stockholder Derivative Litig., 2018 BL 463862, Del. Ch., No. 2017-0402, 12/14/18.

To contact the reporter on this story: Jennifer Bennett in Washington at jbennett@bloomberglaw.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bloomberglaw.com

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