Shareholder Derivative Action Example

Related to the Opioid Epidemic

Case: In re McKesson Corporation Derivative Litigation, 4:17-cv01850 (N.D. Cal. 2017)

Date: May 14, 2018

The shareholder derivative action accused current and former McKesson directors of breaching their fiduciary duties to the company by allowing it to violate the Controlled Substances Act even after paying a $13.25 million penalty in 2008 related to similar violations in which the DOJ alleged that the distributor had failed to design or implement an effective system to find and catch suspicious orders for controlled substances from its independent and small-chain pharmacy customers. McKesson assured the DEA that it would enforce a compliance program to catch suspicious orders, but the DOJ later discovered that McKesson never implemented the compliance program it had designed after the 2008 settlement.

Shareholders filed a shareholder derivative suit against the retired McKesson CEO and board Chairman along with several other current and former directors who served on the board around the time of either the 2008 agreement, the 2017 fine, or both.

What were the results of this Shareholder Derivative Litigation?

McKesson Corp. directors agreed to pay $175 million to resolve a shareholder derivative action accusing the pharmaceutical distributor’s board of failing to enforce a compliance program to catch suspicious orders of opioids, leading to a $150 million fine from the U.S. Department of Justice.

“McKesson’s board and senior executives knew that continued illegal and improper conduct could subject the company and its stockholders to grave consequences, including large fines and penalties and suspension of sales in lucrative markets,” the complaint stated. “Despite these risks and red flags, the board and senior management threw the dice to see if the rewards from the improper conduct outweighed the negative consequences of being caught ignoring the mandate of the [controlled substance monitoring program] and the CSA.”

In addition to the $175 million cash payment, the settlement included governance reforms that required a separation of the CEO and chairman roles, which were previously held jointly by the same person, term limits for directors, the addition of two new independent directors and an overhaul of McKesson’s compliance committee.

What is a Securities Fraud Class Action?

A securities class action is a case brought pursuant to Federal Rule of Civil Procedure 23 on behalf of a group of persons and entities who purchased the securities of a particular company during a specified period of wrongdoing (the class period). The complaint generally contains allegations that the company and/or certain of its officers and directors violated one or more federal or state securities laws.

What is a Shareholder Derivative Action? Corporate Governance Goals

A shareholder derivative action is a lawsuit brought by a shareholder of a publicly traded company on behalf of and for the benefit of the company itself against the directors and/or officers of that company. In a derivative action, shareholders “step into the shoes” of the directors and officers of a company and bring litigation that the corporate board would be unwilling to pursue on its own. Such unwillingness typically relates to the fact that the board members themselves are alleged to have participated in the misconduct and thus would be unlikely to “sue themselves.”

Shareholder derivative litigation can recover money damages back to the company for financial or reputational harm caused by the conduct of its insiders, and also can be used to improve the governance of public companies in order to guard against such harms in the future.

Any shareholder of a company can be a nominal plaintiff in a shareholder derivative action provided that the shareholder has held stock in the company continuously from at least the period in which the alleged wrongful conduct began through the present.

Joshua H. Grabar

Mr. Grabar specializes in Class Action, Price Fixing, Antitrust, Consumer Protection, Securities Litigation, Compliance. He has been honored as a Super Lawyer from 2017-20 and an AV Preminent attorney. Mr. Grabar is a member of the International Municipal Lawyers Association (IMLA) and Engaging Local Government Leaders (ELGL).