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Twitter Derivative Suit in Del. Stayed in Favor of Calif. Securities Action

[caption id="attachment_2788" align="aligncenter" width="620"]

Twitter headquarters.
Twitter headquarters.

Photo: Jason Doiy/ALM
[/caption] A magistrate judge in Delaware on Monday put a derivative suit against Twitter Inc.'s board of directors on pause while the San Francisco-based social media giant defends a similar securities suit in a California federal court. The ruling, from Chief U.S. Magistrate Judge Mary Pat Thynge of the District of Delaware, removes for the time being one legal obstacle for the company and its board, which have now been accused in three separate lawsuits of misleading investors about the growth of its daily user base in the run-up to a 40 percent drop in its stock price in 2015. Twitter's board had argued that a stay in the Delaware federal suit would ease the burden of having to litigate two cases, which would require the company to take conflicting defensive stances, and avoid the risk of decisions in two different forums. In May, the directors' Simpson Thacher & Bartlett attorneys said that, without a stay, the company would be in the "precarious position" of having to accuse its directors of violating federal securities laws in Delaware, while at the same time defending itself against those same allegations in California. Also, they argued, damages in the derivative case would depend on the outcome of the California suit, since the plaintiffs would seek to shift any corporate losses in the securities action to individual directors and officers in Delaware. A group of Twitter investors countered that the derivative suit pressed additional causes of action, and a stay would harm their ability to pursue standalone claims. In an eight-page report, Thynge noted that the securities action, in the U.S. District Court for the Northern District of California, is already headed toward a scheduled trial in January 2020, with discovery set to wrap up in the next five months. A stay pending the resolution of that case would delay the Delaware case, but not cause any undue prejudice to the plaintiffs, she said. "The court finds that staying this action for a limited period will likely simplify the issues in the instant case: specifically, it will relieve the tension on Twitter caused by alleging wrongful conduct in this matter while defending against substantially similar allegations of wrongful conduct in the securities action in the Northern District of California," Thynge wrote. Attorneys for both sides did not return calls Tuesday afternoon seeking comment on Thynge's decision. Twitter shareholders in both cases allege that the company's then-CEO and chief financial officer touted the company’s monthly active user numbers to investors in early 2015, when the company actually put more internal weight on its flagging daily active user base. Without accurate data on daily active users, the plaintiffs argue, investors were left with the impression that the company was on track for continued user-engagement growth, which feeds advertising revenue. Investors sued Twitter in November 2016, saying that the allegedly misleading disclosures had caused a nearly 40 percent drop in Twitter's stock price. A federal judge in California last year denied the company's bid to dismiss the securities case and just last week certified a class of investors who purchased the company's stock between Feb. 6 and July 28, 2015. In Delaware, shareholders filed a string of similar derivative suits, which attempt to hold individual directors and officers liable for allegedly causing harm to a corporation. The federal cases were consolidated and assigned to Thynge to handle up until a potentially case-dispositive motion. Another investor sued Twitter's board in a derivative complaint earlier this month in the Delaware Court of Chancery. The case has been assigned to Vice Chancellor Tamika Montgomery-Reeves, though Twitter has yet to respond to the state court action. Twitter is represented in both the California and Delaware federal cases by a team of attorneys from Simpson Thacher. Richards Layton & Finger in Wilmington is acting as local counsel for the company. The Delaware plaintiffs are represented by Johnson & Weaver in San Diego and Cooch and Taylor in Wilmington. The Delaware case is captioned In re Twitter Shareholder Derivative Litigation.