Edwards v. McDermott International, Inc.

UNITED STATES DISTRICT COURT September 11, 2023

SOUTHERN DISTRICT OF TEXAS Nathan Ochsner, Clerk

HOUSTON DIVISION

MIRIAM EDWARDS, §

§

Plaintiff. §

§

V. § CIVIL ACTION NO. 4:18-cv-04330

§

MCDERMOTT INTERNATIONAL, §

INC., et al., §

§

Defendants. §

MEMORANDUM AND RECOMMENDATION

Pending before me in this putative securities class action is the Section 14(a)

Lead Plaintiff’s Amended Motion for Class Certification, Appointment of Class

Representatives, and Appointment of Class Counsel (“Motion for Class

Certification”). Dkt. 303. On May 24, 2023, I held a hearing on the Motion for Class

Certification during which both sides presented expert testimony and voluminous

exhibits. At the hearing, I requested supplemental briefing, which the parties

provided via letters to the Court. See Dkts. 369–70. Having considered the parties’

briefing, oral arguments, the record, and the applicable law, I recommend that the

Motion for Class Certification be DENIED.

BACKGROUND

The Court has already summarized the “pertinent factual allegations” in this

litigation. See Edwards v. McDermott Int’l, Inc., No. 4:18-cv-4330, 2021 WL

1421603, at *1–5 (S.D. Tex. Apr. 13, 2021). So, for efficiency’s sake, I will be brief.

This litigation concerns the 2018 merger of McDermott International, Inc.

(“McDermott”) with Chicago Bridge & Iron Company, N.V. (“CB&I”). Lead Plaintiff

Public Employees’ Retirement System of Mississippi (“Plaintiff”) alleges that

Defendants1 made material misrepresentations and omissions in the Proxy and

1 The Defendants are McDermott, David Dickson (McDermott’s former President and

Chief Executive Officer), Stuart Spence (McDermott’s former Executive Vice President

Proxy Solicitations that were provided to McDermott’s shareholders, which

“misled McDermott’s shareholders and deprived them of an informed vote.” Dkt.

303 at 7–8. These misrepresentations and omissions concern four of CB&I’s

construction projects known at the “Focus Projects.” Specifically, Plaintiff alleges

that “the Focus Projects were expected to incur substantially higher costs than

publicly represented”; that “CB&I overstated the fair value of these projects, and

McDermott improperly assumed that the fair value of the Focus Projects as of the

Merger Date was equal to their respective carrying values”; and that “McDermott’s

representations that they had conducted substantial due diligence on CB&I prior

to the date of the Proxy Statement were false or misleading because even minimal

due diligence did, or should have, revealed the true risks posed by the Focus

Projects.” Dkt. 98 at 11 (internal quotation marks omitted).

Judge George C. Hanks, Jr. denied Defendants’ motion to dismiss back in

April 2021. See Dkts. 162, 167. Discovery is ongoing, having been underway for the

past two years. Plaintiff timely filed its Motion for Class Certification, seeking

certification of the following class pursuant to Federal Rule of Civil Procedure

23(b)(3):

All persons and entities that were McDermott shareholders (including

beneficial owners) as of April 4, 2018, the record date for McDermott

shareholders to be eligible to vote on the Merger of McDermott and

CB&I, and who were damaged thereby (the “Class”). Excluded from

the Class are Defendants herein, the officers and directors of

McDermott and CB&I at relevant times, members of their immediate

families and their legal representatives, heirs, successors, or assigns,

and any entity in which Defendants have or had a controlling interest.

Dkt. 303 at 8. Plaintiff seeks the appointment of itself and Teamsters Local 813

Insurance Trust Fund, Local 813 Pension Trust Fund, and Local 1034 Pension

Trust Fund (the “Funds”) as Class Representatives; and the appointment of Wolf

Popper LLP and Bernstein Litowitz Berger & Grossmann LLP as Class Counsel. See

and Chief Financial Officer), CB&I, and Patrick Mullen (CB&I’s former President and

Chief Executive Officer).

id. at 7. Defendants oppose class certification, though several issues—numerosity,

commonality, typicality, the adequacy of Local 813 as Class Representative,

superiority, and the adequacy of co-class counsel—are uncontested by the parties.

LEGAL STANDARD

Rule 23 governs the inquiry of whether a proposed class should be certified.

“[T]he Rule 23 class-action device was designed to allow an exception to the usual

rule that litigation is conducted by and on behalf of the individual named parties

only.” Califano v. Yamasaki, 442 U.S. 682, 700–01 (1979). “To come within the

exception, a party seeking to maintain a class action must affirmatively

demonstrate [its] compliance with Rule 23.” Comcast Corp. v. Behrend, 569 U.S.

27, 33 (2013) (quotation omitted).

Rule 23(a) requires that any purported class meet four “prerequisites”:

numerosity, commonality, typicality, and adequacy of representation. See

Madison v. Chalmette Refining L.L.C., 637 F.3d 551, 554 (5th Cir. 2011). These

prerequisites are necessary but not sufficient conditions for class certification. See

id.

Rule 23(b) specifies three class types and sets out requirements—beyond

those articulated in Rule 23(a)—for each. The putative class here seeks certification

under Rule 23(b)(3), which permits class certification where “questions of law or

fact common to class members predominate over any questions affecting only

individual members, and that a class action is superior to other available methods

for fairly and efficiently adjudicating the controversy.” FED. R. CIV. P. 23(b)(3).

In considering a motion for class certification, I must “must rigorously

consider both Rule 23(a)’s prerequisites and the Rule 23(b) class type.” Chavez v.

Plan Benefit Servs. Inc., 957 F.3d 542, 546 (5th Cir. 2020). This rigorous analysis

requires me “to go beyond the pleadings to determine whether the requirements

of Rule 23 have been met: a court must understand the claims, defenses, relevant

facts, and applicable substantive law in order to make a meaningful determination

of the certification issues.” Cole v. Gen. Motors Corp., 484 F.3d 717, 724 (5th Cir.

2007) (quotation omitted). “Merits questions may be considered to the extent—

but only to the extent—that they are relevant to determining whether the Rule 23

prerequisites for class certification are satisfied.” Amgen Inc. v. Conn. Ret. Plans

& Tr. Funds, 568 U.S. 455, 466 (2013).

As part of this “rigorous analysis,” I must ask whether the proposed class’s

damages model “measure[s] only those damages attributable to [its] theory [of

liability].” Comcast, 569 U.S. at 35. “Calculations need not be exact, but at the

class-certification stage (as at trial), any model supporting a plaintiff’s damages

case must be consistent with its liability case, particularly with respect to the

alleged effect of the violation.” Ludlow v. BP, P.L.C., 800 F.3d 674, 683 (5th Cir.

2015) (cleaned up) (applying Comcast’s rationale to a putative securities class

action); see also Slade v. Progressive Sec. Ins. Co., 856 F.3d 408, 410–11 (5th Cir.

2017) (“Comcast held that when plaintiffs argue that damages can be decided on a

class-wide basis, plaintiffs must put forward a damages methodology that maps

onto plaintiffs’ liability theory. Our cases interpreting Comcast confirm that what

Comcast demands is fit between plaintiffs’ class-wide liability theory and plaintiffs’

class-wide damages theory.”). “Such an analysis will frequently entail overlap with

the merits of the plaintiff’s underlying claim. That is so because the class

determination generally involves considerations that are enmeshed in the factual

and legal issues comprising the plaintiff’s cause of action.” Comcast, 569 U.S. at

33–34 (quotations omitted).

With these principles in mind, I turn to Plaintiff’s Motion for Class

Certification.

ANALYSIS

A. WHETHER PLAINTIFF HAS STANDING TO BRING ITS CLAIMS

Before I analyze Rule 23’s requirements, I must confront the antecedent

question of whether Plaintiff is bringing a direct or derivative claim. The nature of

Plaintiff’s claim is relevant because, if Plaintiff’s claim is derivative, Plaintiff must

satisfy certain requirements before it can “step into the corporation’s shoes.” Lewis

v. Knutson, 699 F.2d 230, 238 (5th Cir. 1983) (discussing Rule 23.1’s shareholder

derivative standing requirements as a prudential aspect of standing). Specifically,

Rule 23.1 requires that shareholders to a derivative action “state with particularity:

(A) any effort by the plaintiff to obtain the desired action from the directors or

comparable authority and, if necessary, from the shareholders or members; and

(B) the reasons for not obtaining the action or not making the effort.” FED. R. CIV.

P. 23.1(b)(3). It is undisputed that Plaintiff has not satisfied Rule 23.1’s procedural

hurdles and thus cannot bring a derivative claim. Indeed, Plaintiff has consistently

maintained that it is bringing only a direct claim. See Dkt. 142 at 34

(acknowledging that although “Section 14(a) claims sometimes may be properly

plead[ed] derivatively on behalf of the corporation, here, Plaintiff alleges direct

claims”); Dkt. 329 at 8 (“Plaintiffs Assert a Direct Section 14(a) Claim”).

When the Court denied Defendants’ motion to dismiss, it held that Plaintiff

“is entitled to bring, and has pled, a direct claim.” Edwards, 2021 WL 1421603, at

*6. Defendants ask me to revisit this standing issue, arguing that “Plaintiff faces a

threshold barrier to class certification because its only theory of class-wide

damages confirms the derivative nature of its claim and its concomitant lack of

standing to recover for such derivative harm.” Dkt. 311 at 11. Plaintiff responds that

(1) the Court already rejected this argument in denying Defendants’ motion to

dismiss; (2) the Court’s motion to dismiss ruling constitutes the law of the case and

cannot be revisited at class certification unless it was clearly erroneous; and (3)

even if the issue is revisited, the Court’s motion to dismiss ruling “was absolutely

correct.” Dkt. 370 at 2.

Thus, I must first determine whether it is procedurally proper to even

consider the nature of Plaintiff’s claim and the issue of standing at this juncture.

1. The Law-of-the-Case Doctrine Does Not Bar My

Consideration of Defendants’ Standing Argument

In its supplemental letter to me on this issue, Plaintiff recites one of my own

memorandums and recommendations in which I stated that the “law-of-the-case

doctrine posits that when a court decides upon a rule of law, that decision should

continue to govern the same issues in subsequent stages in the same case.” Id.

(quoting Guerrero v. Mambo Seafood, No. 4:19-cv-03059, 2021 WL 4483509, at

*2 (S.D. Tex. Sept. 3, 2021)). This is a true statement in the abstract, but Plaintiff

omits the rest of what I said in Guerrero: “‘The law-of-the-case doctrine does

not . . . set a trial court’s prior rulings in stone, especially if revisiting those rulings

will prevent error.’ This is true even where . . . a successor judge replaces another

judge.” Guerrero, 2021 WL 4483509, at *2 (quoting United States v. Palmer, 122

F.3d 215, 220 (5th Cir. 1997)). The same is also true where a district judge refers a

motion to a magistrate judge to handle.2 In fact, in Guerrero I recommended

overruling a prior discovery ruling issued by a different district judge in the context

of a subsequent motion to dismiss and for summary judgment. See id. Notably,

Judge Hanks adopted that recommendation. See id., report and recommendation

adopted, 2021 WL 4481091 (S.D. Tex. Sept. 30, 2021).

Yet, Plaintiff argues that under Fifth Circuit precedent, I may only “consider

upending the law of the case” if “‘(1) the evidence on a subsequent trial was

substantially different, (2) controlling legal authority has since made a contrary

decision of the law applicable to such issues, or (3) the earlier decision was clearly

erroneous and would [cause] manifest injustice.’” Dkt. 370 at 2 (quoting McKay v.

Novartis Pharm. Corp., 751 F.3d 694, 703 (5th Cir. 2014); In re Ford Motor Co.,

591 F.3d 406, 411–12 (5th Cir. 2009)). But the tripartite test that Plaintiff quotes

concerns when a transferor district court may overturn the decisions of a

multidistrict litigation (“MDL”) transferee court on remand—a procedurally

unique situation. See Ford, 591 F.3d at 411 (“The law of the case doctrine requires

2 In a footnote Plaintiff argues that “a magistrate judge has no authority to reverse the

decision of a district court.” Dkt. 370 at 2 n.1 (quoting PCM Leasing, Inc. v. BelGioioso

Cheese, Inc., No. 16-cv-50076, 2019 WL 4567576, at *3 (N.D. Ill. Jul. 11, 2019)). This is a

generally true statement of law, but it has no bearing on whether I can or should make a

recommendation regarding Plaintiff’s standing. The Court “may accept, reject, or modify,

in whole or in part” my memorandum and recommendation. 28 U.S.C. § 636(b)(1)(C).

attention to the special authority granted to the multidistrict transferee judge and

ensures that transferor courts respect the transferee court’s decisions.” (quotation

omitted)). In multidistrict litigation, “widespread overturning of transferee court

decisions would frustrate the principle aims of the MDL process and lessen the

system’s effectiveness.” Id. Such concerns simply are not present here.

Outside of the unique MDL context, the law-of-the-case doctrine is

changeable:

[T]he law-of-the-case doctrine does not operate to prevent a district

court from reconsidering prior rulings. A court has the power to

revisit prior decisions of its own in any circumstance. The doctrine

directs a court’s discretion, it does not limit the tribunal’s power. The

law-of-the-case doctrine is a rule of convenience designed to prevent

unnecessary reconsideration of previously decided issues. It is equally

clear, though, that the rule yields to adequate reason.

. . . An order denying [a motion to dismiss] is interlocutory, and leaves

the trial court free to reconsider and reverse its decision for any

reason it deems sufficient, even in the absence of new evidence or an

intervening change in or clarification of the substantive law.

Zarnow v. City of Wichita Falls, 614 F.3d 161, 171 (5th Cir. 2010) (emphasis added)

(cleaned up). Thus, it is clear that the law-of-the-case doctrine does not bar my

consideration of Defendants’ standing arguments. See Pérez-Ruiz v. Crespo-

Guillén, 25 F.3d 40, 42 (1st Cir. 1994) (“Interlocutory orders, including denials of

motions to dismiss, remain open to trial court reconsideration, and do not

constitute the law of the case.”); FED. R. CIV. P. 60(b)(6) (“[T]he court may relieve

a party or its legal representative from a final judgment, order, or proceeding

for . . . any other reason that justifies relief.”).

Still, there are three additional reasons I am certain it is proper to consider

the nature of Plaintiff’s claim and the issue of standing. First, it is within a federal

court’s “discretion” at all times to “consider whether prudential standing principles

nonetheless counsel against hearing the plaintiff’s claims.” Cibolo Waste, Inc. v.

City of San Antonio, 718 F.3d 469, 474 & n.4 (5th Cir. 2013). Second, Rule 23.1

standing “does not overlap with the merits of the claim.” Lewis, 699 F.2d at 238;

see also In re Facebook, Inc., Initial Pub. Offering Derivative Litig., 797 F.3d 148,

157 (2d Cir. 2015) (“[A] derivative plaintiff who has not satisfied [a Rule 23.1]

requirement is no proper party, whatever the merits of the underlying claims.”).

Third, “[a]s [the Fifth Circuit has] recognized, class certification may be the

backbreaking decision that places ‘insurmountable pressure’ on a defendant to

settle, even where the defendant has a good chance of succeeding on the merits.”

Regents of Univ. of Cal. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372,

379 (5th Cir. 2007) (quoting Castano v. Am. Tobacco, 84 F.3d 734, 746 (5th Cir.

1996)). Accordingly, to certify a class without standing would be a monumental

waste of judicial resources. Thus, it is not only proper but prudent for me to

consider whether Plaintiff’s claim is direct or derivative.

2. The “Direct vs. Derivative” Analysis

a. Delaware Law Determines Whether Plaintiff’s Claim

Is Direct or Derivative

Before I can begin to answer the “direct vs. derivative” question, I must first

decide what body of law supplies the rule of decision. Neither party offered a

rigorous choice-of-law analysis in their motion to dismiss briefing, though

Defendants clearly argued for the application of federal common law. See Dkt. 124

at 32. Plaintiff argued for the application of Delaware law, see Dkt. 142 at 33 n.7,3

and Defendants replied that the outcome would be the same whether the Court

applied Delaware law or federal common law. See Dkt. 149 at 12–13.

“The question whether a particular suit is derivative or direct is not always

capable of easy resolution.” 7C FED. PRAC. & PROC. CIV. § 1821 (3d ed.). “In a

diversity action, the determination will be made under state law; in suits in which

the rights being sued upon stem from federal law, federal law will control the issue

whether the action is derivative.” 7C FED. PRAC. & PROC. CIV. § 1821 (3d ed.).

“Because [§ 14(a)] is a federal statute, any common law rule necessary to effectuate

3 McDermott is incorporated in Panama and the parties agree “that Panamanian

courts . . . look to Delaware law.” Id. (citing Dkt. 124 at 32–33 n.5).

a private cause of action under that statute is necessarily federal in character.”

Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 97 (1991). “It does not follow,

however, that the content of such a rule must be wholly the product of a federal

court’s own devising.” Id. at 98. To the contrary, there is a “presumption” that

“federal courts should incorporate state law as the federal rule of decision, unless

application of the particular state law in question would frustrate specific

objectives of the federal programs.” Id. (cleaned up). With this presumption in

mind, it is clear that I must look to the law of the state of incorporation to

determine whether Plaintiff’s claim is direct or derivative.

Indeed, the Fifth Circuit has held that “[s]tate law determines whether a

shareholder may maintain a nonderivative action.” Crocker v. Fed. Deposit Ins.

Corp., 826 F.2d 347, 349 (5th Cir. 1987) (looking to Mississippi state law to

determine whether a class of minority shareholders could maintain a direct RICO

action against a bank’s controlling shareholders). Although the Crocker panel was

not dealing with a securities class action, later decisions from other federal circuits

have reached the same conclusion regarding § 14(a) claims specifically. See

Freedman v. magicJack Vocaltec Ltd., 963 F.3d 1125, 1134 (11th Cir. 2020)

(collecting cases and holding, in the context of a § 14(a) claim, “that federal courts

should look to state law to decide the issue of whether a claim brought under a

federal statute is direct or derivative”); N.Y.C. Emps.’ Ret. Sys. v. Jobs, 593 F.3d

1018, 1022 (9th Cir. 2010) (“The characterization of a claim as direct or derivative

is governed by the law of the state of incorporation.”).

Defendants cite a trial court opinion from this district for the proposition

“that federal common law governs the analysis of whether a shareholder is

asserting a direct or derivative claim under Section 14(a).” Rudolph v. Cummins,

No. H-06-02671, 2007 WL 1189632, at *2 n.4 (S.D. Tex. Apr. 19, 2007) (Harmon,

J.). But Rudolph is at odds with the presumption articulated in Kamen, the Fifth

Circuit’s holding in Crocker, and the persuasive authority from other federal

circuits issued after Rudolph was decided. Rudolph is also at odds with another

opinion issued by the same district court one month prior, in which the court held

that “[w]hether a claim is derivative or direct is a matter of state law.” In re Enron

Corp. Sec., Derivative & “ERISA” Litig., No. G-02-0299, 2007 WL 789141, at *2

(S.D. Tex. Mar. 12, 2007) (Harmon, J.) (citing Crocker, 826 F.2d at 349).4

I am persuaded by the Eleventh Circuit’s reasoning in Freedman, which

makes clear that the law of the state of incorporation should apply either way:

It follows, therefore, that the rule directing a court to look to the

law of the state or place of incorporation to answer the “direct vs.

derivative” question is a logical one. After all, the law of the state or

place where a company is incorporated establishes the requirements

that a shareholder must meet before bringing either a direct or

derivative claim against a corporation. For instance, if a shareholder

wishes to bring a derivative claim, he must first make a demand on

the corporation. . . . This is a prime example of why a court should

look to the state or place of incorporation to fill in the gaps of federal

law in assessing the parties’ rights in corporate litigation.

Freedman, 963 F.3d at 1133. Thus, I will look to Delaware law to determine

whether Plaintiff’s claim is direct or derivative.5

b. Plaintiff’s Liability Theory Is Direct, but Its Claimed

Damages Are Not

When looking to Delaware law to determine whether Plaintiff’s claim is

direct or derivative, I must begin with the Delaware Supreme Court’s opinion in

Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004).

In Tooley, the Delaware Supreme Court . . . articulated the following

test for determining whether a claim is derivative or direct: “The

analysis must be based solely on the following questions: Who

suffered the alleged harm—the corporation or the suing stockholder

individually—and who would receive the benefit of the recovery or

other remedy?” Tooley, 845 A.2d at 1035. According to the Delaware

4 The difference is perhaps explained by the fact that Enron dealt with purely state law

claims whereas Rudolph’s holding was addressed to a federal claim under § 14(a).

5 To the extent Panamanian law might differ from Delaware law in the “direct vs.

derivative” analysis, the parties have waived any such argument by arguing for the

application only of Delaware law, should state law be applied. See Fruge v. Amerisure

Mut. Ins. Co., 663 F.3d 743, 747 (5th Cir. 2011) (“Failure to raise an argument before the

district court waives that argument, including an argument for choice-of-law analysis.”).

Supreme Court, this approach is “to be applied henceforth in

determining whether a stockholder’s claim is derivative or direct.” Id.

at 1033. The court then clarified this test, stating:

The proper analysis has been and should remain

that . . . a court should look to the nature of the wrong

and to whom the relief should go. The stockholder’s

claimed direct injury must be independent of any alleged

injury to the corporation. The stockholder must

demonstrate that the duty breached was owed to the

stockholder and that he or she can prevail without

showing an injury to the corporation.

Id. at 1039 (emphasis added).

Smith v. Waste Mgmt., Inc., 407 F.3d 381, 384 (5th Cir. 2005) (citing Tooley).

With the Fifth Circuit’s explanation of Tooley in mind, I turn to the analysis of

whether Plaintiff’s claim is direct or derivative.

Plaintiff alleges that it “and other members of the proposed Class were

denied the opportunity to make an informed decision when voting on the Merger.”

Dkt. 98 at 99. “Th[e Delaware Supreme] Court has recognized, as did the Court of

Chancery, that where it is claimed that a duty of disclosure violation impaired the

stockholders’ right to cast an informed vote, that claim is direct.” In re J.P.

Morgan Chase & Co. S’holder Litig., 906 A.2d 766, 772 (Del. 2006) (emphasis

added). That definitive statement seems to begin and end the “direct vs. derivative”

inquiry. Of course, if it were that easy, I would have written a lot less leading up to

this point.

Despite the Delaware Supreme Court’s express acknowledgment in J.P.

Morgan that a proxy disclosure claim is direct, the court upheld dismissal of such

a claim because “plaintiffs cite[d] no authority that validate[d] conflating their

individual direct claim of liability for a duty of disclosure violation with the

compensatory damages flowing from the corporation’s separate and underlying

derivative claim.” Id. at 773. Under Delaware law, “to plead a direct (non-derivative

injury), a stockholder must demonstrate that the duty breached was owed to the

stockholder and that she or she can prevail without showing an injury to the

corporation.” Id. at 769–70 (emphasis added) (quotation omitted). Stated

differently, under Delaware law, a securities plaintiff has standing to assert a direct

claim against a corporation only when the plaintiff’s theory of liability and

damages are both direct.

As the Court of Chancery has explained:

It is possible for a claim to be both derivative and direct. To the

extent that the Plaintiffs complain about the alleged impact on their

ability to exercise their shareholder voting rights knowledgably, they

present a direct claim. When, however, they assert that bad things

happened to [the company] (i.e., financial disaster) because they were

induced into voting for [the challenged action], the Plaintiffs have

done nothing more than painted derivative claims with a disclosure

coating. To the extent that the Plaintiffs seek to recover for losses

suffered by [the company], those claims are derivative in nature

because any recovery would benefit the entity as a whole.

Thornton v. Bernard Techs., Inc., No. CIV.A 962-VCN, 2009 WL 426179, at *3

n.28 (Del. Ch. Feb. 20, 2009) (emphasis added) (citation omitted).7 Plaintiff does

not contest this legal landscape. Rather, Plaintiff seeks to distinguish its damages

theory from all the cases cited by Defendant in which an admittedly direct voting

rights claim was nevertheless dismissed for seeking derivative economic harm.

Plaintiff asserts that “[c]ontrary to Defendants’ ‘overpayment’ argument, the

alleged damages theory here focuses on the harm to shareholders due to the

decline in price of their shares.” Dkt. 329 at 10. But the problem with this

argument is that a drop in Plaintiff’s shares’ price is “‘an injury suffered by all

[McDermott] shareholders in proportion to their pro rata share ownership.’”

Smith, 407 F.3d at 385 (quoting Manzo v. Rite Aid, No. Civ. A. 18451–NC, 2002

WL 31926606, at *5 (Del. Ch. 2002), aff’d, 825 A.2d 239 (Del. 2003)). As the Fifth

Circuit has explained in applying Delaware law:

[W]hen a corporation, through its officers, [makes a material

misstatement], thereby causing a decline in the company’s share price

7 Thornton was a shareholder suit against a company’s directors following the company’s

Chapter 7 liquidation in bankruptcy court, but is nevertheless relevant insofar as

Delaware law guides the “direct vs. derivative” analysis.

when the truth is revealed, the corporation itself has been injured.

Here, the harm that befell [Plaintiff]—the drop in share price caused

by the untimely disclosure of unfavorable financial data—was a harm

that befell all of [McDermott]’s stockholders equally. Stated

differently, the misconduct alleged by [Plaintiff] did not injure

[Plaintiff] or any other shareholders directly, but instead only injured

them indirectly as a result of their ownership of [McDermott] shares.

As such, [Plaintiff] cannot prove [its] injury without also

simultaneously proving an injury to the corporation. Accordingly, in

light of Tooley, . . . [Plaintiff]’s claims are derivative under Delaware

law.

Id. (citing Tooley, 845 A.2d at 1033, 1035, 1039).

Plaintiff tries to avoid this inevitable result by relying on Northstar

Financial Advisors Inc. v. Schwab Investments for the proposition that, in a

derivative action, “‘all current shareholders would participate in the

recovery . . . even if they were not shareholders during the relevant time period,

and injured former shareholders would not necessarily participate in the recovery

at all.” Dkt. 329 at 11 (quoting Northstar Fin. Advisors Inc. v. Schwab Invs., 779

F.3d 1036, 1060 (9th Cir. 2015)). Plaintiff contrasts this scenario with its alleged

damages—which would flow “to historical shareholders as of the Record Date

eligible to vote on the Merger” as opposed to “all current shareholders”—in an

attempt to demonstrate that its damages claim is direct. Id.

But Northstar dealt with whether investors could sue a mutual fund trustee

directly under Massachusetts law for “failing to ensure that the Fund was managed

in accordance with fundamental investment objectives and [for] changing the

Fund’s fundamental investment objectives without obtaining required shareholder

authorization.” 779 F.3d at 1056. Northstar has little to no applicability to this

case. To the extent that Northstar discussed Tooley and Delaware law, it

reaffirmed that “a corporate stockholder who brings a direct action ‘must

demonstrate that . . . [it] can prevail without showing an injury to the corporation.”

Id. at 1058–59 (quoting Tooley, 845 A.2d at 1039). In Northstar, “[t]he claim

support[ed] a direct action because the impact [wa]s directly on the investors in

the Fund and a recovery would not be dependent on demonstrating an injury to

the Schwab Trust.” Id. at 1058. That is not the case here. That Plaintiff would

restrict—via the class definition—the shareholders that can recover for the drop in

stock prices does not change the fact that the stock price drops affected all

shareholders equally and flows from harm done to McDermott.

Plaintiff offers only one case that addressed the issue at hand: In re Bank of

Am. Corp. Sec., Derivative, & Emp. Ret. Income Sec. Act (ERISA) Litig., 757 F.

Supp. 2d 260 (S.D.N.Y. 2010). Plaintiff relies on Bank of America for the

proposition that “if the value of the shareholder’s shares decreases as a result of

corrective disclosures, ‘that decrease is not necessarily co-extensive with injury to

the corporation,’ and the shareholder has a direct claim.” Dkt. 329 at 10 (quoting

757 F. Supp. 2d at 291–92). Plaintiff’s reliance of Bank of America is misplaced. In

denying Defendants’ motion to dismiss the § 14(a) claims, the Bank of America

court refused to certify the following question to the Delaware Supreme Court:

Where a Delaware corporation issues its own shares in a stock-for-

stock merger in exchange for shares held by the acquired company's

shareholders, do acquiring company shareholders who were allegedly

deprived of their right to cast an informed vote on the merger as a

result of a materially false or misleading proxy solicitation—but who

did not themselves buy, sell or exchange their shares in the merger—

have a direct claim under Delaware law against the acquiring

corporation and/or its officers or directors to recover damages for the

post-merger decline in the market price of the acquiring company's

shares when the allegedly misstated or omitted material facts were

publicly disclosed?

757 F. Supp. 2d at 292. That is the exact question in this case.

Yet, the Bank of America court avoided answering it—concluding that it was

“unnecessary” and allowing both direct and derivative § 14(a) claims to proceed

based on the conclusory assertion that a “decrease [in the acquiring company’s

shares] is not necessarily co-extensive with injury to the corporation.” Id. at 292.

The court went on to certify a § 14(a) class of direct and derivative claims, refusing

to revisit the issue of plaintiffs’ damages model. See In re Bank of Am. Corp. Sec.,

Derivative, & Emp. Ret. Income Sec. Act (ERISA) Litig., 281 F.R.D. 134, 140–42

(S.D.N.Y. 2012). The parties then settled (as parties are wont to do following class

certification), thus ending any meaningful discussion of this novel theory before it

could begin. See In re Bank of Am. Corp. Sec., Derivative, & Emp. Ret. Income Sec.

Act (ERISA) Litig., No. 09-md-2058, 2012 WL 13070626 (S.D.N.Y. Dec. 4, 2012).

Thus, if anything, Bank of America stands as the non-answer to the standing

question in this case.

3. Plaintiff Lacks Standing Under Rule 23.1

Defendants would have me find that Plaintiff’s “only theory of class-wide

damages confirms the derivative nature of its claim and its concomitant lack of

standing to recover for such derivative harm.” Dkt. 311 at 11. Persuasive as that

argument is, it overlooks the fact that “Plaintiffs have always asserted damages

based on the decline in the stock price,” Dkt. 329 at 9, a theory this Court upheld

in denying Defendants’ Motion to Dismiss. Thus, the current law of the case

compels a finding that the proposed class’s damages model “measure[s] only those

damages attributable to [its] theory [of liability].” Comcast, 569 U.S. at 35.

But the law of the case is not the immovable mountain Plaintiff makes it out

to be. The law of the case “yields to adequate reason.” Zarnow, 614 F.3d at 171

(quotation omitted). This Court is “free to reconsider and reverse its [motion to

dismiss] decision for any reason it deems sufficient.” Id. (quotation omitted). Here,

refusing to certify a class without standing strikes me as an adequate reason. So, I

recommend the Court change the law of the case.

Plaintiff’s theory of liability may be direct, but its damages claim is

derivative. Delaware law does not permit Plaintiff to paint its derivative damages

claim with a disclosure coating. There is no dispute that Plaintiff has not satisfied

Rule 23.1’s procedural requirements for bringing a derivative claim against

McDermott. Accordingly, Plaintiff lacks standing under Rule 23.1 and its proposed

class should not be certified.

B. THE MISMATCH BETWEEN PLAINTIFF’S DIRECT LIABILITY THEORY AND

DERIVATIVE CLAIM ALSO RUNS AFOUL OF THE PRIVATE SECURITIES

LITIGATION REFORM ACT (“PSLRA”) AND COMCAST

There is another reason the Court should change the law of this case.

Defendants ask me to find that “Plaintiff runs afoul of Comcast by attempting to

force the square peg of a Section 10(b) ‘inflation ribbon’ damages methodology into

the round hole of Plaintiff’s Section 14(a) claim.” Dkt. 311 at 17. This, too, is a

persuasive argument.9 But as with Defendants’ argument regarding Plaintiff’s (lack

of) standing, it overlooks that “Plaintiffs have always asserted damages based on

the decline in the stock price,” Dkt. 329 at 9, and this Court upheld that theory in

denying Defendants’ Motion to Dismiss. In doing so, this Court reasoned that

“a plaintiff satisfies [Section] 14(a)’s loss causation requirement by

demonstrating that [the] defendant’s misrepresentations induced a

disparity between the transaction price and the true investment

quality of the securities at the time of the transaction.” In re AOL Time

Warner, Inc. Secs. and ERISA Litig., 381 F. Supp. 2d 192, 231

(S.D.N.Y. 2004) (quotation marks omitted); see also Mills, 396 U.S.

at 388–89 (“[M]onetary relief might be afforded to the shareholders

[in a direct Section 14(a) action] if the merger resulted in a reduction

of the earnings or earnings potential of their holdings.”). Mississippi

has pled facts sufficient to establish that the merger between

McDermott and CB&I, and the misleading proxy materials that

facilitated it, led to drastic drops in McDermott’s stock price as the

truth about the Focus Projects became known. (Dkt. 98 at pp. 86–94)

These allegations are sufficient to plead loss causation.

Edwards, 2021 WL 1421603, at *6. I respectfully disagree.

9 That Delaware law does not allow securities plaintiffs to graft a direct disclosure

violation onto a derivative damages claim mirrors the requirement of the PSLRA that

plaintiffs bringing private actions under the Securities Exchange Act of 1934 [“the ‘34

Act”] allege economic harm and “‘loss causation,’ i.e., a causal connection between the

material misrepresentation and the [economic harm].” Dura Pharms., Inc. v. Broudo,

544 U.S. 336, 342 (2005) (quoting 15 U.S.C. § 87u-4(b)(4)). This requirement to plead

loss causation bleeds into the Supreme Court’s requirement that a proposed class’s

damages model at class certification “measure only those damages attributable to [its]

theory [of liability].” Comcast, 569 U.S. at 35. Thus, the mismatch between Plaintiff’s

liability and damages theory not only reveals the derivative nature of Plaintiff’s claim—it

also highlights Plaintiff’s failure to adequately allege loss causation, or to proffer a suitable

damages model.

Mills and AOL Time Warner both dealt with § 14(a) claims by shareholders

of the acquired company—a completely different posture than Plaintiff in this case.

For example, in AOL Time Warner, the district court found that the plaintiff

“adequately pled loss causation by alleging that during the Class Period,

defendants’ actions artificially propped up the price of [their] securities when they

were purchased, exchanged or otherwise acquired by [the plaintiff] class

members, causing [the plaintiff] and the Class to lose billions of dollars.” 381 F.

Supp. 2d at 231–32 (emphasis added).

But unlike Mills and AOL Time Warner, the proposed class here is based

solely on share ownership in the acquiring company, and the proposed class

definition is divorced from any transaction price. Specifically,

Lead Plaintiff’s expert, Dr. Michael Hartzmark, has detailed a

common methodology through which each Class member’s damages

may be calculated based on the diminution in the value of McDermott

shares, as measured by the stock price declines following the alleged

corrective disclosures. As Dr. Hartzmark explains, damages based on

the artificial inflation in McDermott’s common stock prices can be

determined for any member of the Class by applying the widely

accepted “out-of-pocket” measure of damages. As set forth in the

Hartzmark Report, damages can be calculated through an event study

methodology that first determines the inflation in McDermott

common stock based on the alleged corrective disclosures, and then

estimates the share price inflation on each day during the period of

April 4, 2018 through the announcement of McDermott’s bankruptcy

on January 21, 2020.

Dkt. 303 at 26–27 (citations omitted). The application of this stock-drop-loss

theory to the facts of this case has no legal basis—no court has ever awarded

damages under § 14(a) to the shareholders of an acquiring company based on a

drop in their share prices. It is true, as Plaintiffs repeatedly note, that the Bank of

America court certified a § 14(a) class of shareholders of an acquiring company.

See 281 F.R.D. at 140–42. But, as discussed above, the Bank of America court

certified a direct and derivative § 14(a) class, punting (twice) the opportunity to

address the very issue that Defendants raise here. The case settled before the court

ever tackled the issue, so Bank of America offers no support to Plaintiff here.

Plaintiff argues that this dichotomy between acquiror/acquired company

shareholders is “entirely novel.” Dkt. 329 at 18. Yet Plaintiff has no support for the

proposition that an out-of-pocket damages methodology can be superimposed

onto a claim unconnected to a transaction. For example, in its reply brief, Plaintiff

states: “‘Out-of-pocket’ losses are the standard measure of damages for Rule 10b–

5 and Section 14(a) claims.” Dkt. 329 at 14 n.6 (quoting In re Daimlerchrysler AG

Sec. Litig., 294 F. Supp. 2d 616, 626 (D. Del. 2003)). The Daimlerchrysler court

was quoting Tse v. Ventana Medical Systems, Inc., which offered this definition:

“Out-of-pocket losses are the standard measure of damages for a 10b–5 claim, and

are defined as: ‘the difference between the fair value of all that the seller received

and the fair value of what he would have received had there been no fraudulent

conduct.’” Tse v. Ventana Med. Sys., Inc.,123 F. Supp. 2d 213, 222 (D. Del. 2000)

(emphasis added) (quoting Affiliated Ute Citizens of Utah v. U.S., 406 U.S. 128,

155 (1972), aff’d, 297 F.3d 210 (3d Cir. 2002)). But here, no one received anything.

Thus, the damages methodology Plaintiff proposes, regardless of how labeled, is

not what courts mean when approving “out-of-pocket” loss methodologies.10

Plaintiff tries to avoid this conclusion by arguing that the “premise that

shareholders of the acquiring company ‘receive nothing’ and ‘merely hold’ the

acquiring company stock” is “erroneous.” Dkt. 329 at 18. But this assertion is made

without any legal support. Moreover, it is in stark contrast to one of the primary

cases on which Plaintiff relies for support.

Plaintiff contends its loss causation theory was upheld in In re Heckmann

Corp. Securities Litigation, No. 10-378, 2013 WL 2456104, at *8 (D. Del. June 6,

10 The notion that plaintiffs must point to a transaction in order to bring a direct action is

hardly novel. For example, § 10(b) plaintiffs’ claims are considered direct because their

alleged harm—purchasing their shares at artificially inflated prices—is “separate and

distinct from any harm to [the company].” City of Pontiac Gen. Emps.’ Ret. Sys. v. Wal-

Mart Stores, Inc., 278 F. Supp. 3d 1128, 1131 (W.D. Ark. 2017).

2013). Plaintiff cites Heckmann for the elementary proposition that an event study

is “a generally accepted practice in determining market efficiency.” See Dkt. 329 at

14; see also Dkt. 367 at 201–02 (citing Heckmann as one of “four cases . . . [where]

the class of Section 14(a) shareholders were of the acquiring company in a

merger”). Yet, the loss causation theory upheld in Heckmann derived from the

plaintiffs’ allegation “that the eligible Company shareholders were denied the IPO

proceeds they would have received once the Company failed to complete a

qualifying business transaction within the required twenty-four months.” In re

Heckmann Corp. Sec. Litig., 869 F. Supp. 2d 519, 542 (D. Del. 2012). Loss of

proceeds is a distinct harm that flowed directly to shareholders—it is easily

distinguished from the “ordinarily” derivative harm that “a stockholder suffers

from corporate action pursuant to a deceptive proxy solicitation.” J.I. Case v.

Borak, 377 U.S. 426, 432 (1964). Thus, Heckmann is unavailing to Plaintiff.

Plaintiff’s reliance on In re Alta Mesa Resources, Inc. Securities Litigation,

No. 4:19-cv-957 (S.D. Tex.), is similarly unavailing. In Alta Mesa, the § 14(a)

plaintiffs alleged that the misleading proxy prevented them “from the fully

informed opportunity to redeem their shares . . . valued in the Proxy at

approximately $10 per share.” See id. ECF No. 69 at 96 (Apr. 6, 2020). As in

Heckmann, this is a quintessentially direct claim because the $10 per share subject

to redemption is independent of any harm to the company’s stock price.

Equally futile is Plaintiff’s reliance on In re EQT Corp. Securities Litigation,

No. 2:19-cv-754, 2022 WL 3293518 (W.D. Pa. Aug. 11, 2022). In EQT, the nature

of plaintiffs’ claims does not appear to have been challenged at either the motion

to dismiss or the class certification stage. See id. (class certification); In re EQT

Corp. Sec. Litig., 504 F. Supp. 3d 474 (W.D. Pa. 2020) (motion to dismiss).

Moreover, at the class certification stage, the EQT court declined to “assess the

validity of Plaintiffs’ damages model.” 2022 WL 3293518, at *28. Thus, as with

Bank of America, the refusal of a district court in another circuit to engage with

the challenges presented by Defendants here cannot stand for any proposition of

relevance.

For all these reasons, Plaintiff’s Motion for Class Certification should be

denied.

CONCLUSION

For the reasons explained above, I recommend that Plaintiff’s Motion for

Class Certification (Dkt. 303) be DENIED.11

The parties have 14 days from service of this Memorandum and

Recommendation to file written objections. See 28 U.S.C. § 636(b)(1)(C); FED. R.

CIV. P. 72(b)(2). Failure to file timely objections will preclude appellate review of

factual findings and legal conclusions, except for plain error.

SIGNED this 11th of September 2023.

______________________________

ANDREW M. EDISON

UNITED STATES MAGISTRATE JUDGE

11 I think my recommendation on class certification, if adopted, means that Plaintiff’s

claims must be dismissed for lack of standing; but the parties can further brief that issue

at the appropriate time.