Case Name: In Re Yahoo! Inc. Shareholder Litigation (Consolidated Action)
Case No.: 17CV307054 (lead case)

These consolidated shareholder and derivative actions arise from the sale of the operating assets of Yahoo! Inc. (now Altaba Inc.) to Verizon Communications Inc. Before the Court are plaintiffs’ motions (1) to compel further responses to requests for production of documents from all defendants and (2) to compel the deposition of Altaba Inc.’s person most qualified. Both motions are opposed.

I. Analysis

Among other reasons, defendants oppose plaintiffs’ motion on the ground that shareholders are not entitled to discovery in a derivative action prior to establishing their right to sue on behalf of the corporation in whose name the derivative claims are brought. Defendants cite Jones v. Martinez (2014) 230 Cal.App.4th 1248 (“Jones”) as binding precedent on this issue.

Jones, like these actions, involved derivative claims against a Delaware corporation, with the shareholder plaintiff alleging the right to sue on the corporation’s behalf because demand upon its board was futile. As in these actions, the trial court had sustained with leave to amend a demurrer to the operative complaint, holding that it failed to allege particularized facts showing that a prefiling demand on the board for action would have been futile. (Jones, supra, 230 Cal.App.4th at p. 1252.) It subsequently denied the plaintiff’s motion to compel discovery. Affirming the trial court, the appellate court held that the plaintiff’s motion to compel was properly denied, because the plaintiff was “not entitled to discovery to assist his compliance with the particularized pleading requirement of Rule 23.1,” establishing the standard for pleading demand futility under Delaware law. (Id. at p. 1254.) The court held that the plaintiff was limited to other tools, “such as [a corporate books and records] inspection demand or taking the steps necessary to obtain the facts from publically available SEC filings, corporate reports or minutes available to shareholders….” (Id. at p. 1255.)

Jones specifically rejected the arguments raised by plaintiffs here: that discovery is a procedural matter that should be governed by California law even where the defendant is incorporated in Delaware and that California’s policy favoring broad access to discovery should permit plaintiffs to obtain discovery to satisfy the demand futility requirement. (Jones, supra, 230 Cal.App.4th at p. 1253.) The court held that the demand futility requirement “is a substantive matter, not a procedural issue that may vary from jurisdiction to jurisdiction,” citing Kamen v. Kemper Financial Services, Inc. (1991) 500 U.S. 90. (Id. at pp. 1253-1254.) It further noted that California law, like Delaware law, provides that no action may be instituted or maintained by a shareholder unless a plaintiff who does not make a demand upon the board alleges demand futility “with particularity.” (Id. at p. 1254.) While the Court recognizes the great challenges this rule presents for plaintiffs attempting to meet the stringent pleading requirements in a derivative action, and while the rule in this specific context stands in stark contrast to California’s generally permissive policy towards discovery, Jones is binding precedent on this issue and the Court must follow it.

Williams v. Superior Court (Marshalls of CA, LLC) (2017) 3 Cal.5th 531 (“Williams”) is not to the contrary. There, the Supreme Court of California granted review “to consider the scope of discovery available in PAGA actions.” (Id. at p. 538.) In that context, it reaffirmed the broad right to discovery in California and held that “[n]othing in the characteristics of a PAGA suit … affords a basis for restricting discovery more narrowly” in PAGA actions than in other contexts. (Ibid.) Here, however, the Court is presented with a unique body of substantive law holding that a derivative plaintiff must plead demand futility to establish an entitlement to compel any discovery on a corporation’s behalf. Williams certainly supports the proposition that this threshold requirement will not alter the broad scope of discovery available in California once a derivative plaintiff establishes the right to sue in a corporation’s name, but it simply does not speak to the validity of this specific body of substantive law. Jones remains the controlling authority on this point.

A few narrower arguments by plaintiffs remain to be addressed. First, plaintiffs cannot avoid the application of Jones by merely characterizing certain of their claims as direct as opposed to derivative. In its order sustaining Altaba’s demurrer to plaintiffs’ prior complaint, the Court held that the claims styled therein as “direct” were in fact derivative claims, not that plaintiffs had failed to state a cause of action as in Mattco Forge, Inc. v. Arthur Young & Co. (1990) 223 Cal.App.3d 1429. While plaintiffs have now filed an amended complaint that again attempts to assert direct claims, they do not even attempt to explain in their briefing how these claims are different from those previously held to be derivative. The Court will not allow discovery on so-called “direct” claims until it is persuaded that they are, in fact, direct.

Plaintiffs also contend that they should be permitted to obtain discovery from Verizon if not from Altaba. However, the reason that plaintiffs cannot compel discovery from Altaba is that they have not yet established their right to bring any of the claims asserted in these actions on Altaba’s behalf, or directly on their own behalf. The same reasoning holds that plaintiffs cannot compel discovery from Verizon at this juncture. Further, this same reasoning bars plaintiffs from compelling the production in these actions of discovery provided in the consumer litigation proceeding in federal court (although it does not bear on whether plaintiffs may use it in these actions if they obtain it lawfully by other means).

II. Conclusion and Order

For these reasons, plaintiffs’ motions are DENIED.

The Court will prepare the order.