Case 3:16-cv RS Document 29 Filed 06/10/16 Page 1 of 33

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1 Case :-cv-00-rs Document Filed 0// Page of JORDAN ETH (CA SBN ) JEth@mofo.com MARK R.S. FOSTER (CA SBN ) MFoster@mofo.com ADAM M. REGOLI (CA SBN 0) ARegoli@mofo.com MORRISON & FOERSTER LLP Market Street San Francisco, California - Telephone:..000 Facsimile:.. Attorneys for Nominal Defendant Yahoo! Inc. UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION UFCW LOCAL 00 PENSION FUND, on behalf of itself and all others similarly situated, v. Plaintiff, YAHOO! INC., MARISSA MAYER, DAVID FILO, SUE JAMES, THOMAS J. MCINERNEY, CHARLES R. SCHWAB, H. LEE SCOTT, JR., JANE E. SHAW, MAYNARD WEBB, JR., KENNETH A. GOLDMAN, RONALD S. BELL, HENRIQUE DE CASTRO, and MAX R. LEVCHIN, and YAHOO! INC., Defendants, Nominal Defendant. Case No. :-cv-00-rs YAHOO! INC. S NOTICE OF MOTION AND MOTION TO DISMISS PLAINTIFF S VERIFIED FIRST AMENDED COMPLAINT; MEMORANDUM OF POINTS AND AUTHORITIES Date: August, Time: :0 p.m. Judge: Hon. Richard Seeborg Ctrm: th Floor CASE NO. :-CV-00-RS

2 Case :-cv-00-rs Document Filed 0// Page of NOTICE OF MOTION AND MOTION TO ALL PARTIES AND THEIR COUNSEL OF RECORD: PLEASE TAKE NOTICE THAT on August,, at :0 p.m., or at such other time as the matter may be heard, in the courtroom of the Honorable Richard Seeborg, located at 0 Golden Gate Avenue, San Francisco, California, Courtroom, th Floor, nominal defendant Yahoo! Inc. ( Yahoo ) will, and hereby does, move to dismiss Plaintiff s Verified First Amended Complaint (the Amended Complaint ) (Dkt. No. ) under Federal Rules of Civil Procedure (b)(),., and (b). This Motion is based upon this Notice and the accompanying Memorandum of Points and Authorities, the Motion to Dismiss filed on behalf of Defendants Yahoo! Inc., Marissa Mayer, David Filo, Sue James, Thomas J. McInerney, Charles R. Schwab, H. Lee Scott, Jr., Jane E. Shaw, Maynard Webb, Jr., Kenneth A. Goldman, Ronald S. Bell, Henrique de Castro, and Max R. Levchin (collectively Defendants ), in which nominal defendant Yahoo joins, the Declaration of Mark R.S. Foster and the exhibits attached thereto, the Request for Judicial Notice, the reply brief that will be filed, the papers on file in the action, the argument of counsel, and such other matters as may be considered by the Court before it takes the Motion under submission. CASE NO. :-CV-00-RS i

3 Case :-cv-00-rs Document Filed 0// Page of TABLE OF CONTENTS NOTICE OF MOTION AND MOTION... i Table of Authorities... iv INTRODUCTION... BACKGROUND... A. Yahoo Is a Leading Internet Destination.... B. In, Yahoo and SoftBank Corp. Formed Yahoo Japan.... Page C. In 00, the SEC Granted Yahoo a Permanent Exemption from the ICA.... D. In 0, Yahoo Invested in Alibaba.... E. During, Yahoo Considered a Spin-Off of Its Remaining Alibaba Stake.... F. Plaintiff Asserts Baseless Claims Based on Alleged ICA Violations.... ISSUES TO BE DECIDED... ARGUMENT... I. PLAINTIFF LACKS STANDING TO ASSERT ANY DERIVATIVE CLAIMS.... A. Plaintiff Must Allege Particularized Facts Showing That a Pre-Suit Demand on Yahoo s Board Is Excused as Futile.... B. Under Rales, Demand Is Not Excused as to Claims Based on Alleged Inaction..... Yahoo s exemption from the ICA prevents Plaintiff from showing that demand is futile for any derivative claim..... Demand is not excused as to Plaintiff s Caremark claim..... Demand is not excused as to Plaintiff s claim under ICA Section (b).... a. ICA Section (b) is remedial and does not allow for a private right of action.... b. The statute of limitations on the alleged ICA Section (b) violations has expired..... Demand is not excused as to the unjust enrichment claim..... Demand is not excused as to the claim under DGCL Section..... Demand is not excused as to Plaintiff s unfair competition law claim.... C. Under Aronson, Demand Is Not Excused as to the Claim About the Board s Decision to Suspend Work on the Alibaba Spin-Off.... CASE NO. :-CV-00-RS ii

4 Case :-cv-00-rs Document Filed 0// Page of. Plaintiff does not plead facts showing that any Current Director was interested or lacked independence..... The decision to suspend work on the spin-off is protected by the business judgment rule.... D. Plaintiff s Verification Is Not Sworn or Made Under Penalty of Perjury.... II. PLAINTIFF FAILS TO STATE A DIRECT CLAIM AGAINST YAHOO UNDER DGCL SECTION ().... CONCLUSION... CASE NO. :-CV-00-RS iii

5 Case :-cv-00-rs Document Filed 0// Page of TABLE OF AUTHORITIES Page(s) CASES Aleksick v. -Eleven, Inc., Cal. App. th ()... Apple Comput., Inc. v. Exponential Tech., Inc., WL (Del. Ch. Jan., )... Aronson v. Lewis, A.d 0 (Del. )...,, Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, A.d 0 (Del. 0) (en banc)...,,, Benihana of Tokyo, Inc. v. Benihana, Inc., 0 WL (Del. Ch. Dec., 0)... Blatt v. Merrill Lynch, Pierce, Fenner & Smith Inc., F. Supp. (D.N.J. )... Braddock v. Zimmerman, 0 A.d (Del. 0)... Brehm v. Eisner, A.d (Del. 00)...,, Carsanaro v. Bloodhound Techs., Inc., A.d (Del. Ch. )... Dillon v. NBCUniversal Media LLC, WL (C.D. Cal. June, )... Dollar Tree Stores Inc. v. Toyama Partners LLC, F. Supp. d (N.D. Cal. )... Fabozzi v. StubHub, Inc., WL 00 (N.D. Cal. Feb., )... Fleer Corp. v. Topps Chewing Gum, Inc., A.d 0 (Del. )... Friedlob v. Trs. of the Alpine Mut. Fund Tr., 0 F. Supp. (D. Colo. )... Grobow v. Perot, A.d 0 (Del. )... Gryl ex rel. Shire Pharm. Grp. PLC v. Shire Pharm. Grp. PLC, F.d (d Cir. 0)... CASE NO. :-CV-00-RS iv

6 Case :-cv-00-rs Document Filed 0// Page of Guttman v. Huang, A.d (Del. Ch. 0)... Highlights for Children, Inc. v. Crown, A.d (Del. Ch. )... In re Accuray, Inc. S holder Deriv. Litig., F. Supp. d (N.D. Cal. )... In re Affiliated Comput. Servs., Inc. S holder Litig., 0 WL 0 (Del. Ch. Feb., 0)... In re Caremark Int l Inc. Deriv. Litig., A.d (Del. Ch. )... In re China Auto. Sys., Inc. Deriv. Litig., WL (Del. Ch. Aug. 0, )... In re Corinthian Colls., Inc. S holder Deriv. Litig., WL 0 (C.D. Cal. Jan. 0, )... In re The Dow Chem. Co. Deriv. Litig., WL (Del. Ch. Jan., )... In re ebay, Inc. Deriv. Litig., WL 0 (D. Del. Sept., )..., In re Gen. Motors Co., Deriv. Litig., WL (Del. Ch. June, ), aff d, A.d (Del. )...,, In re Goldman Sachs Grp., Inc. S holder Litig., WL (Del. Ch. Oct., )... In re HP Deriv. Litig., WL (N.D. Cal. Sept., )... In re J.P. Morgan Chase & Co. S holder Litig., 0 A.d 0 (Del. Ch. 0)... In re Oracle Corp. Deriv. Litig., WL (N.D. Cal. Nov., )...,,, In re Webkinz Antitrust Litig., F. Supp. d (N.D. Cal. )... In re Yahoo! Inc. S holder Deriv. Litig., WL 0, --- F. Supp. d ----, (N.D. Cal. Dec., )...,,,, Kamen v. Kemper Fin. Serv., Inc., 00 U.S. 0 ()... Kasky v. Nike, Inc., Cal. th (0)... CASE NO. :-CV-00-RS v

7 Case :-cv-00-rs Document Filed 0// Page of Laborers Local Pension Fund v. ishares Trust, F.d (th Cir. )... Levine v. Smith, A.d (Del. )... Linear Tech. Corp. v. Applied Materials, Inc., Cal. App. th (0)... Melzer v. CNET Networks, Inc., A.d (Del. Ch. 0)... Northstar Fin. Advisors v. Schwab Invs., F.d (th Cir. )..., Omni Fin. Corp. v. Cohen, WL (S.D.N.Y. Mar., )... Patriot Sci. Corp. v. Korodi, 0 F. Supp. d (S.D. Cal. 0)... Pogostin v. Rice, 0 A.d (Del. )..., Quinn v. Anvil Corp., F.d 0 (th Cir. )... Rales v. Blasband, A.d (Del. )...,,, Ret. Sys. v. SEC, F.d (d Cir. )... Rosenbloom v. Pyott, F.d (th Cir. )... Ryan v. Gursahaney, WL (Del. Ch. Apr., )... Sinclair Oil Corp. v. Levien, 0 A.d (Del. )... Smith ex rel. Apollo Grp., Inc. v. Sperling, WL 0 (D. Ariz. July, )... Smith v. Franklin/Templeton Distribs., Inc., WL (N.D. Cal. Oct., )... Smith v. Oppenheimer Funds Distrib., Inc., F. Supp. d (S.D.N.Y. )..., Southwest Funding Corp., SEC No-Action Letter, SEC No-Act LEXIS (Dec., )... CASE NO. :-CV-00-RS vi

8 Case :-cv-00-rs Document Filed 0// Page of Stagecoach Funds, et al., SEC No-Action Letter, SEC No-Act. LEXIS 0 (Nov., )... Stone ex rel. AmSouth Bancorporation v. Ritter, A.d (Del. 0) (en banc)...,,, Triton Constr. Co., Inc. v. E. Shore Elec. Servs., Inc., 0 WL (Del. Ch. May, 0)... White v. Panic, A.d (Del. 0)... Wood v. Baum, A.d (Del. 0)...,,, STATUTES & RULES Cal. Bus. & Prof. Code 0...,, Del. C. (b)()......,,,,, ()...,,, ()...,, U.S.C. 0a- [Section of the Investment Company Act of 0]... 0a-(a)()(C) [Section (a)()(c) of the Investment Company Act of 0]... 0a-(b)() [Section (b)() of the Investment Company Act of 0]... 0a-(b)()(B) [Section (b)()(b) of the Investment Company Act of 0]..., 0a- [Section of the Investment Company Act of 0]... 0a- [Section of the Investment Company Act of 0]... 0a-(b) [Section (b) of the Investment Company Act of 0]...,,,, U.S.C.... Fed. R. Civ. P. Rule....,,, Rule.(b)... OTHER AUTHORITIES David A. Drexler, et al., Delaware Corporation Law and Practice.0... CASE NO. :-CV-00-RS vii

9 Case :-cv-00-rs Document Filed 0// Page of INTRODUCTION According to Plaintiff, Yahoo one of the most popular Internet destinations for over two decades is violating the Investment Company Act of 0 (the ICA or the Act ) by failing to register as an investment company. That registration, Plaintiff asserts, is required, in light of an investment Yahoo made in Alibaba, a Chinese company, back in 0. Based on Plaintiff s unsupported allegation about the ICA violation, Plaintiff claims that Yahoo was without legal capacity and power to engage in interstate commerce. Plaintiff purports to assert five derivative claims on Yahoo s behalf against certain current and former Yahoo officers and directors. Plaintiff also asserts a direct claim against Yahoo that is predicated on the alleged ICA violation. First and foremost: Yahoo is exempt from the ICA. In 00, Yahoo received a permanent order from the SEC exempting Yahoo from the ICA. That order remains in force. It forecloses Plaintiff s claims. Beyond that fatal defect, there are additional flaws that support dismissal of the Amended Complaint. Plaintiff, as a purported Yahoo stockholder, has no authority to prosecute the derivative claims on Yahoo s behalf. That authority belongs to Yahoo s board of directors. A stockholder cannot go forward with a derivative suit unless it meets the demanding requirements of Federal Rule of Civil Procedure. and controlling Delaware substantive law that require showing the futility of making a pre-suit litigation demand on the board. This rarely surmounted burden requires Plaintiff to plead with particularity that a majority of directors is interested in the underlying claim such that they received a personal benefit or face a substantial likelihood of liability, are beholden to a person who is interested, or made a business decision in bad faith. Plaintiff fails to establish that any director much less a majority faces a substantial likelihood of liability as to any derivative claim, because Yahoo is not in violation of the ICA. Accordingly, no director faces a substantial likelihood of liability for failing to register Yahoo under Plaintiff s slew of theories for alleged breach of fiduciary duty, for unjust enrichment, for violation of California s unfair competition laws, or under Delaware General Corporate Law ( DGCL ) section. CASE NO. :-CV-00-RS

10 Case :-cv-00-rs Document Filed 0// Page of Beyond the failure to show a violation of the ICA, Plaintiff s derivative claims suffer additional fatal flaws that preclude finding a substantial likelihood of liability as to any director. Plaintiff s claim that the Yahoo directors breached their fiduciary duties by failing to prevent an alleged violation of law is known as a Caremark claim and has been described by this Court in Oracle and others as the most difficult theory in corporate law upon which a plaintiff might hope to win a judgment. That is all the more true here given that there was no ICA violation. In any case, a Caremark claim also requires Plaintiff to plead particularized facts showing that directors acted in bad faith with scienter that they knew that Yahoo was violating the law. The Amended Complaint does not even attempt to meet this standard. As to the claim under Section (b) of the ICA, there is no private right of action, and any claim would be time-barred anyway. As to the unjust enrichment claim, all Plaintiff points to is payment of compensation, which cannot support an unjust enrichment claim as a matter of law. Plaintiff s unfair competition claim fails not only because there is no predicate violation, but also because the statute seeks to redress harm to competition and consumers, neither of which is at issue here. Plaintiff s claim under DGCL Section likewise fails because that statute targets one subject: ultra vires acts that is, acts in excess of the powers granted by a company s charter. No such act is alleged here. Section thus does not come into play. Plaintiff also seeks to excuse demand by challenging as a breach of fiduciary duty one decision by Yahoo s board to suspend work on spinning-off its investment in Alibaba which, according to Plaintiff, would have cured Yahoo s alleged ICA violation. At the outset, the claim fails because, again, there was no ICA violation. Further, that decision is protected by the business judgment rule, which presumes directors are informed and act in good faith. Plaintiff pleads no facts showing otherwise. Instead, Plaintiff speculates that certain Yahoo directors were motivated to entrench themselves in their positions. That sort of conjecture is routinely rejected. Plaintiff also did not submit a sworn verification with the Amended Complaint. This is independently fatal under Rule. as to all five of Plaintiff s derivative claims. CASE NO. :-CV-00-RS

11 Case :-cv-00-rs Document Filed 0// Page of Finally, Plaintiff s direct claim against Yahoo under DGCL Section fares no better. Yahoo did not violate its corporate charter in any way. There is, therefore, no ultra vires conduct to remedy. BACKGROUND A. Yahoo Is a Leading Internet Destination. Yahoo, a Delaware corporation, was founded in and is based in Sunnyvale. (,.) Yahoo is a global digital media company that provides, among other things, search and display advertising services for the Internet. ( -.) Yahoo s business is focused on informing, connecting, and entertaining its users with its search products, its communications tools (e.g., Yahoo Mail and Yahoo Messenger), and its digital content (e.g., Tumblr, Yahoo News, Yahoo Sports, Yahoo Finance, and Yahoo Lifestyle). (Ex. A at.) It generates billions of dollars annually from its global business operations. (See, e.g., Ex. A at 0-.) B. In, Yahoo and SoftBank Corp. Formed Yahoo Japan. In April, Yahoo entered into a joint venture with SoftBank Corp. under which Yahoo Japan was formed. (.) Yahoo Japan provides a Japanese version of some of Yahoo s Internet offerings. (Id.) Yahoo owns approximately.% of Yahoo Japan. (.) C. In 00, the SEC Granted Yahoo a Permanent Exemption from the ICA. On December,, Yahoo s stake in Yahoo Japan was worth approximately $. billion, accounting for over 0% of the value of Yahoo! s total assets. (Ex. at.) If this stake were deemed an investment security under the ICA, it is possible that, given the stake s size, Yahoo may have been considered an investment company under the ICA and subjected to the Act s provisions. (Id.) That outcome would have been contrary to the ICA s intent because Yahoo was not an investment company under the factors considered by the SEC, The facts in this Background section are drawn from Plaintiff s allegations, as well as the documents incorporated by reference into the Complaint or subject to the Request for Judicial Notice. Although Defendants dispute certain allegations in the Complaint, Defendants assume the allegations are true for purposes of this Motion. All references to Dkt. No. are to the docket numbers automatically assigned by PACER to documents filed in this action. All references to are to the paragraphs in the Complaint. All references to numbered exhibits are those attached to the Complaint, while all references to lettered exhibits are those attached to the declaration of Mark R.S. Foster ( Foster Decl. ). CASE NO. :-CV-00-RS

12 Case :-cv-00-rs Document Filed 0// Page of since Yahoo was primarily engaged in a non-investment company business. (Id. at.) On February, 00, to address any potential issues that could arise from these circumstances, Yahoo applied to the SEC for a permanent order of exemption from the Act. (Ex..) On April, 00, the SEC issued a temporary order exempting Yahoo! from all provisions of the Act until July, 00. (Id.) According to this temporary order, [p]rior to the issuance of a permanent order to Yahoo!, if any, a notice will be issued giving interested persons an opportunity to request a hearing. (Id.) The contemplated notice was issued on May, 00. It stated that [a]n order granting the application will be issued unless the Commission orders a hearing. (Ex. at.) Thereafter, [n]o request for a hearing [was] filed, and the [SEC] did not order a hearing. (Ex..) On June, 00, the SEC granted Yahoo s request for a permanent order exempting Yahoo from the ICA, subject to the conditions contained in [Yahoo s] application, as amended. (Id.) These conditions were that. Yahoo! will continue to allocate and utilize its accumulated cash and Cash Management Investments for bona fide business purposes and. Yahoo! will refrain from investing or trading in securities for short-term speculative purposes. (Ex. at.) D. In 0, Yahoo Invested in Alibaba. On October, 0, Yahoo acquired approximately % of the outstanding common stock of Alibaba for $ billion. (.) Alibaba is a Chinese e-commerce company. (Id.) At the time, Terry Semel, Yahoo s then-chairman and CEO, said that Yahoo s investment was based on thinking long-term about where we think the world is going. (.) Consistent with Mr. Semel s statement in 0, Yahoo still holds a large portion of its Alibaba stake today almost eleven years later. (.) The investment has been successful: Yahoo s remaining stake in Alibaba was, according to the Amended Complaint, as of the date this action was commenced, allegedly worth roughly $ billion. (Id.) These factors are (a) the company s historical development; (b) its public representations of policy; (c) the activities of its officers and directors; (d) the nature of its present assets; and (e) the sources of its present income. (Id.) CASE NO. :-CV-00-RS

13 Case :-cv-00-rs Document Filed 0// Page of E. During, Yahoo Considered a Spin-Off of Its Remaining Alibaba Stake. During the course of, Yahoo took steps to spin-off its remaining Alibaba stake into a new company. ( -.) A key component of any potential spin-off was that it be tax-free to Yahoo s shareholders. (See, e.g.,,,, 0.) To ensure a tax-efficient transaction, on February,, Yahoo submitted to the IRS a request for a private letter ruling concerning whether the proposed spin-off would satisfy Section of the Internal Revenue Code. (.) On July,, Yahoo announced the formation of a new company, Aabaco Holdings ( Aabaco ), which would provide Yahoo a means of potentially completing the contemplated spin-off of its Alibaba stake. (.) It was anticipated that Aabaco would hold Yahoo s remaining shares in Alibaba. ( 0.) Assuming completion of the spin-off, Aabaco was to be a new, independent company. ( -0.) As a new, separate company, Aabaco would not have the automatic benefit of Yahoo s ICA exemption. On September,, the IRS notified Yahoo s counsel that it had determined, in the exercise of its discretion, not to grant the requested ruling as to the tax-free nature of the contemplated spin-off. (.) This raised questions whether Yahoo would be able to make investors comfortable given the uncertainty about what the IRS might do. (.) On December,, Yahoo announced that its Board of Directors, after careful review and consideration of how to best drive long-term value for shareholders, ha[d] unanimously decided to suspend work on the potential spin-off of the Alibaba stake. ( 0.) In announcing this decision, the Board noted concern[s] about the market s perception of tax risk, which would have impaired the value of Aabaco stock until resolved. (Id.) To alleviate those risks, the Board stated that it would evaluate alternative transaction structures to separate the Alibaba stake, focusing specifically on a reverse of the previously announced spin transaction. (Id.) F. Plaintiff Asserts Baseless Claims Based on Alleged ICA Violations. On January,, Plaintiff filed a verified class action and derivative complaint, asserting various claims based on its allegation that Yahoo is an investment company under the ICA, but has failed to register as an investment company as required by the ICA. (Dkt. No..) Defendants moved to dismiss the complaint, pointing out, among other defects, that CASE NO. :-CV-00-RS

14 Case :-cv-00-rs Document Filed 0// Page of Yahoo was exempt from the ICA, and that the sections of the ICA under which Plaintiff sued did not provide private rights of action. (Dkt. Nos.,.) Plaintiff did not oppose those motions, but instead sought to amend its complaint. (Dkt. No..) On April,, Plaintiff filed the Amended Complaint. (Dkt. No..) The individuals named as defendants in the Amended Complaint are: (a) one former director at the time the original complaint was filed: Max R. Levchin, who resigned from the Board on December, ( ); (b) Yahoo s directors at the time the original complaint was filed: Marissa Mayer, David Filo, Sue James, Thomas J. McInerney, Charles R. Schwab, H. Lee Scott, Jr., Jane E. Shaw, and Maynard Webb, Jr. (together with Mr. Levchin, the Director Defendants ) ( -); and (c) several current and former officers: Kenneth A. Goldman (CFO), Ronald S. Bell (General Counsel), and Henrique de Castro (former COO) (collectively the Officer Defendants and together with the Director Defendants, the Individual Defendants ). ( -.) Yahoo is named as both a direct and nominal defendant. (.) The Amended Complaint alleges that Yahoo is and has been an investment company as defined by the ICA, but has failed to register as an investment company as required by the ICA[.] (.) Based on this erroneous assertion, Plaintiff asserts that Yahoo was without legal capacity and power to engage in interstate commerce and enter into contracts. (.) The Amended Complaint purports to assert five derivative claims against the Individual Defendants and one direct claim against Yahoo. ( -.) The five derivative claims are for: () alleged violation of ICA Section (b); () alleged breach of the fiduciary duty of loyalty; () alleged unjust enrichment; () alleged violation of DGCL Section (); and () alleged violation of Cal. Bus. & Prof. Code Sections 0, et seq. ( -.) The direct claim against Yahoo is for alleged violation of DGCL Section (). ( -.) The composition of Yahoo s Board of Directors has changed since the original complaint was filed on January,. On February,, Mr. Schwab resigned from his position. (.) On March,, Catherine J. Friedman and Eric K. Brandt were appointed to Yahoo s Board. (Ex. C.) Thereafter, on April,, four more directors were appointed to Yahoo s Board: Tor R. Braham, Eddy W. Hartenstein, Richard S. Hill, and Jeffrey C. Smith. (Ex. D.) CASE NO. :-CV-00-RS

15 Case :-cv-00-rs Document Filed 0// Page of When the Amended Complaint was filed, Yahoo s Board had directors consisting of: Mr. Braham, Mr. Brandt, Mr. Filo, Ms. Friedman, Mr. Hartenstein, Mr. Hill, Ms. James, Ms. Mayer, Mr. McInerney, Mr. Scott, Ms. Shaw, Mr. Smith, and Mr. Webb (the Current Directors or the Demand Board ). Only seven of the Current Directors are named as defendants in the Amended Complaint: Mr. Filo, Ms. James, Ms. Mayer, Mr. McInerney, Mr. Scott, Ms. Shaw, and Mr. Webb. Appendix A is a table that lists the membership of the Board as of various relevant times. Plaintiff claims that a pre-suit litigation demand on the Board would have been futile in light of the alleged ICA violation. ( 0.) ISSUES TO BE DECIDED. Does Plaintiff lack standing under Rule. to proceed with its derivative claims when it did not make a pre-suit litigation demand and does not allege with particularity that a majority of the Demand Board was disqualified from considering a pre-suit demand?. Does Plaintiff lack standing under Rule. to proceed with its derivative claims given Plaintiff s failure to submit a sworn verification with its Amended Complaint?. Does Plaintiff fail to state a claim against Yahoo for violation of DGCL Section ()? ARGUMENT I. PLAINTIFF LACKS STANDING TO ASSERT ANY DERIVATIVE CLAIMS. Plaintiff purports to assert five derivative claims against the Individual Defendants based on Plaintiff s contention that the Individual Defendants caused Yahoo to violate the ICA because the Company has been operating as an unregistered investment company within the meaning of the Act. (.) Plaintiff, however, lacks standing under Rule. to assert these claims given Plaintiff s failure to plead demand futility and its failure to provide a sworn verification. A. Plaintiff Must Allege Particularized Facts Showing That a Pre-Suit Demand on Yahoo s Board Is Excused as Futile. The purpose of a Rule. motion to dismiss is to determine who is entitled, as between the corporation and its shareholders, to assert the plaintiff s underlying substantive claim on the CASE NO. :-CV-00-RS

16 Case :-cv-00-rs Document Filed 0// Page of corporation s behalf. Rosenbloom v. Pyott, F.d, n. (th Cir. ). Given that the shareholder derivative suit is an extraordinary process and remedy of last resort, the pleading standard is stringent. Quinn v. Anvil Corp., F.d 0, (th Cir. ). As Yahoo is a Delaware corporation ( ), Delaware s substantive law applies. In re Yahoo! Inc. S holder Deriv. Litig., --- F. Supp. d ----, WL 0, at * (N.D. Cal. Dec., ) (citing Kamen v. Kemper Fin. Serv., Inc., 00 U.S. 0, 0 ()). It is a cardinal precept of Delaware law that boards of directors, not stockholders, manage a corporation s affairs. Aronson v. Lewis, A.d 0, (Del. ), overruled on other grounds by Brehm v. Eisner, A.d (Del. 00). In most situations, the board of directors has sole authority to initiate or to refrain from initiating legal actions asserting rights held by the corporation. White v. Panic, A.d, 0 (Del. 0). Where, as here, stockholders do not make a pre-suit demand on a board for action, they lack standing to bring derivative claims on the corporation s behalf unless they plead with particularity the reasons why such a demand would have been futile. Stone ex rel. AmSouth Bancorporation v. Ritter, A.d, (Del. 0) (en banc). This is a heavy burden that is more onerous than that required to withstand a Rule (b)() motion to dismiss. Levine v. Smith, A.d, (Del. ). There are two tests for determining whether the allegations of a complaint plead demand futility sufficiently. Wood v. Baum, A.d, 0 (Del. 0). The first test, the Rales test, applies where the derivative claim is not premised on a board decision. Under the Rales test, a plaintiff must plead particularized facts establishing a reasonable doubt that the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. Rales v. Blasband, A.d, (Del. ). The second test, the Aronson test, applies to claims involving a challenge to an affirmative board decision. The Aronson test requires that a plaintiff plead particularized facts creating a reasonable doubt that () the directors are disinterested and independent or that () the challenged transaction was otherwise the product of a valid exercise of business judgment. Aronson, A.d at. Plaintiff must show that these challenged actions were taken in CASE NO. :-CV-00-RS

17 Case :-cv-00-rs Document Filed 0// Page of bad faith to excuse demand. In re Gen. Motors Co. Deriv. Litig., WL, at * (Del. Ch. June, ), aff d, A.d (Del. ). Interest. Under either Rales or Aronson, a reasonable doubt that a majority of directors is capable of considering a demand based on alleged interest can arise only where a director receives a personal financial benefit from the challenged transaction not equally shared by the stockholders (Rales, A.d at (quotations omitted) (emphasis in original)) or faces a substantial likelihood of personal liability. Wood, A.d at n.. A mere threat of personal liability [alone] is insufficient. Id. Moreover, where, as here (Ex. B, Art. XI), directors are exculpated by their corporation s articles of incorporation for alleged breaches of their duty of care, consistent with Del. C. (b)(), a serious threat of liability may only be found to exist if the plaintiff pleads a non-exculpated claim against the directors. Wood, A.d at. Plaintiff thus must show fraudulent, illegal, or bad faith conduct, and plead particularized facts that demonstrate the directors acted with scienter. Id. Independence. If there is no interested person, courts do not even reach or comment on the... independence of the other directors. Brehm v. Eisner, A.d, (Del. 00). To raise a reasonable doubt of director independence, a plaintiff must allege with particularity that the directors were dominated and controlled by or beholden to an individual or entity interested in the transaction in the way described above. Aronson, A.d at. Majority of Directors. A complaint seeking to excuse demand must plead particularized facts overcoming the business judgment rule, which presumes that directors are faithful to their fiduciary duties, Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, A.d 0, (Del. 0) (en banc), and will consider a stockholder demand on an informed basis, in good faith. Aronson, A.d at. To excuse demand, then, Plaintiff must overcome this presumption with regard to a majority of directors. Beam, A.d at & n.,. Current Board. Although Yahoo s Board was composed of eight directors when this lawsuit was filed, it now has directors, as discussed above. Nevertheless, Plaintiff asserts that demand futility should be assessed using the Board [a]t the time the action was commenced. (.) Plaintiff is incorrect. CASE NO. :-CV-00-RS

18 Case :-cv-00-rs Document Filed 0// Page of When a derivative complaint is amended, demand must be made (or excused) on the board in place at the time of the amended complaint, unless the claims asserted in the amended complaint were already validly in litigation. Braddock v. Zimmerman, 0 A.d, (Del. 0). For a claim to be validly in litigation, Plaintiff must show, among other things, that the first complaint would have survived a Rule. motion to dismiss. In re Affiliated Comput. Servs., Inc. S holder Litig., 0 WL 0, at * (Del. Ch. Feb., 0). The first complaint asserted only two claims derivatively and would not have come close to satisfying Rule.. (See Dkt. No..) Accordingly, demand futility as to all five purported derivative claims must be assessed in light of Yahoo s current -member Board of Directors. That means Plaintiff must show that at least seven (more than half) of these Current Directors were conflicted from considering a pre-suit demand. Beam, A.d at & n.,. Because the Amended Complaint has allegations about only seven Current Directors, in order for demand to be excused, Plaintiff must establish that every one of these seven Current Directors (i.e. a majority of the Demand Board) was conflicted from considering a pre-suit demand. Plaintiff does not meet this burden for even one Current Director, let alone seven. B. Under Rales, Demand Is Not Excused as to Claims Based on Alleged Inaction. Plaintiff s allegations are premised on the alleged failure to comply with the ICA. Because these allegations are not premised on a Board decision, the Rales test applies. See Stone, A.d at ( The standards for determining demand futility in the absence of a business decision are set forth in Rales. ). Plaintiff fails to show that any Current Director, much less a majority, is interested or lacking in independence, as shown below.. Yahoo s exemption from the ICA prevents Plaintiff from showing that demand is futile for any derivative claim. Each of Plaintiff s derivative claims is based on the allegation that the Individual Defendants caused Yahoo to violate the ICA. (See, e.g., (ICA Section (b) claim); 0(d) (breach of fiduciary duty of loyalty claim); (unjust enrichment claim); In any event, no matter which Board members are considered, Plaintiff fails to show that demand would be futile. CASE NO. :-CV-00-RS

19 Case :-cv-00-rs Document Filed 0// Page of (DGCL () claim); (Cal. Bus. & Prof. Code 0 claim).) But Plaintiff fails to establish that any Current Director faces a substantial likelihood of liability under Rales for any of these individual claims for the simple reason that Yahoo is not in violation of the ICA: In 00, the SEC exempted Yahoo from the Act. That exemption remains in force today. Congress enacted the ICA in 0 to provide comprehensive regulation of investment companies and the mutual fund industry. Northstar Fin. Advisors v. Schwab Invs., F.d, (th Cir. ). The term investment company is statutorily defined. See U.S.C. 0a-. Among other things, an investment company is any issuer which () is engaged in the business of investing, reinvesting, owning, holding, or trading in securities, and () owns or proposes to acquire investment securities having a value exceeding 0 per centum of the value of such issuer s total assets. U.S.C. 0a-(a)()(C). Because this definition could inadvertently reach companies that make investments but are not actually investment companies and were not meant to be regulated by the ICA the ICA allows the SEC to exempt companies from the Act. See U.S.C. 0a-(b)(). Specifically, Section of the ICA provides that none of the following persons is an investment company within the meaning of this subchapter: [a]ny issuer which the [SEC], upon application by such issuer, finds and by order declares to be primarily engaged in a business other than that of investing. Id.; see also Northstar, F.d at ( Congress granted the SEC discretion to make exemptions [from the ICA] consistent with public interest and policy. ). After an exemption is issued, under statute, it is the SEC that may revoke the exemption [w]henever upon its own motion or upon application, [it] finds that the circumstances which gave rise to the issuance of the exemption no longer exist[.] See U.S.C. 0a-(b)()(B). The SEC granted Yahoo a permanent exemption from the ICA in 00. (Exs. -.) The permanent exemption order contained no expiration date. Instead, it stated only that it was subject to the conditions contained in the application, as amended. (Ex..) Plaintiff does (See Ex. ( Yahoo! [] sought a temporary order under section (b)() to permit the Commission to make a final determination upon the request for a permanent order. ) (emphasis added); Ex. (issuing order).) CASE NO. :-CV-00-RS

20 Case :-cv-00-rs Document Filed 0// Page of not and cannot allege that the SEC has ever revoked Yahoo s exemption pursuant to U.S.C. 0a-(b)()(B). Accordingly, Yahoo s exemption from the ICA remains in force. Despite this, Plaintiff asserts that in order for Yahoo s exemption to have remained in force upon the growth of Yahoo s Alibaba investment, Yahoo was required to engage in some purported no-action letter process with the SEC. ( -.) In making this assertion, Plaintiff concocts from thin air an argument that the SEC has made clear that applicants who seek to apply an exemption order to changed facts must present those changed facts to the SEC staff pursuant to the no-action letter process. It is clearly the obligation of the exemption order recipient to seek no-action relief or a new exemption order when facts and conditions have changed. ( - (emphasis added).) Plaintiff s argument fails on every level. First, Plaintiff s argument betrays a lack of understanding regarding the SEC s noaction letter process. Id. By its terms, the process is completely discretionary: An individual or entity who is not certain whether a[n] action would constitute a violation of the federal securities law may request a no-action letter from the SEC staff. See Securities & Exchange Commission, No-Action Letters, (last visited June, ) (emphasis added). Contrary to Plaintiff s suggestion, a party is never obligated to request a no-action letter, and in cases like this one, has no reason to do so when it has not taken, and does not plan to take, any action that may violate the federal securities laws. Second, any purported SEC policy statements that Plaintiff attempts to divine from no-action letters issued in other matters are meaningless here. (.) A no-action letter is an informal response, and does not amount to an official statement of the SEC s views. N.Y. City Emps. Ret. Sys. v. SEC, F.d, (d Cir. ) (citing C.F.R..(d)). SEC no-action letters constitute neither agency rule-making nor adjudication and thus are entitled to no deference beyond whatever persuasive value they might have. Gryl ex rel. Shire Pharm. Grp. PLC v. Shire Pharm. Grp. PLC, F.d, (d Cir. 0). Moreover, any no-action relief is limited to the requester and the specific facts and circumstances set forth in the request. SEC, No-Action Letters, CASE NO. :-CV-00-RS

21 Case :-cv-00-rs Document Filed 0// Page of Third, while meaningless, the no-action letters involving other companies that Plaintiff cites do not support Plaintiff s position and are irrelevant. Plaintiff cites Southwest Funding Corp., SEC No-Action Letter, SEC No-Act LEXIS (Dec., ), for the proposition that [e]ven a minor change in the represented facts may exceed the scope of the prior exemption order and render it invalid. (.) Southwest Funding says no such thing. Instead, it merely states we are unable to assure you that we would not recommend that the [SEC] take enforcement action if Southwest potentially violates the conditions of a prior exemption. SEC No-ACT LEXIS, at *. Plaintiff also cites Stagecoach Funds, et al., SEC No-Action Letter, SEC No-Act. LEXIS 0, at * n. (Nov., ), for the statement that the SEC s Division of Investment Management believes that generally it is appropriate to modify or delete conditions to an [exemption] order only by means of an amended order. (.) This is irrelevant: Yahoo has not requested that the conditions of its permanent exemption be amended. Because Yahoo is exempt from the ICA, Yahoo has not violated the ICA and no Individual Defendant could have caused it to do so. See Laborers Local Pension Fund v. ishares Trust, F.d, 0 (th Cir. ) (affirming dismissal of ICA claim where SEC s 0 exemption order authorize[d] transactions that would have otherwise been prohibited). For this reason alone, no Current Director faces a substantial likelihood of liability for any of Plaintiff s derivative claims and Plaintiff cannot establish that demand should be excused.. Demand is not excused as to Plaintiff s Caremark claim. Plaintiff fails to show that a majority of Current Directors face a substantial likelihood of liability for allegedly failing to register Yahoo as an investment company when they were aware that Yahoo met the definition of an investment company under the ICA. ( 0(d).) Claims that a director acts with the intent to violate applicable positive law or intentionally The conditions were that:. Yahoo! will continue to allocate and utilize its accumulated cash and Cash Management Investments for bona fide business purposes and. Yahoo! will refrain from investing or trading in securities for short-term speculative purposes. (Ex. at.) The Complaint contains no facts demonstrating that Yahoo did not allocate and utilize its cash for bona fide business purposes. Further, Yahoo s Alibaba investment, made in 0, has not been a short-term, speculative investment. To the contrary, Yahoo still holds a significant portion of it. (.) CASE NO. :-CV-00-RS

22 Case :-cv-00-rs Document Filed 0// Page of fails to act in the face of a known duty to act are branches of what is known as a Caremark claim. Stone, A.d at (Del. 0). Courts, including this one, have recognized that Caremark claims are possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment. Stone, A.d at ; In re Oracle Corp. Deriv. Litig., WL, at * (N.D. Cal. Nov., ) (same); In re Yahoo! Inc., WL 0, at * (same). Plaintiff s Caremark claim fails out of the gates because there was no ICA violation, as shown above. But even if there were an ICA violation, the claim would still fail for a second independent reason. Where, as here (Ex. B, Art. XI), directors are contractually or otherwise exculpated from liability for certain conduct, then a serious threat of liability may only be found to exist if the plaintiff pleads a non-exculpated claim against the directors based on particularized facts. Wood, A.d at (quotation omitted) (emphasis in original). This requires that Plaintiff plead particularized facts showing that a majority of Current Directors acted in bad faith. Id. To act in bad faith, there must be scienter on the part of the defendant director. In re Goldman Sachs Grp., Inc. S holder Litig., WL, at * (Del. Ch. Oct., ). To show scienter, Plaintiff must plead particularized facts demonstrating each Current Director had actual or constructive knowledge that their conduct was legally improper. Wood, A.d at. Plaintiff does not come close to doing so with respect to any Current Director. Because Yahoo is not in violation of any applicable positive law, it necessarily follows that no Current Director has acted with the intent to violate applicable positive law. Stone, A.d at. This alone is fatal. Also, Plaintiff does not allege any specific information that each Current Director knew and ignored concerning Yahoo s ICA compliance in any event. The Delaware Supreme Court confronted similarly defective allegations in Wood. There, the plaintiffs complained of many violations of federal securities and tax laws, but did not plead with particularity the specific conduct in which each defendant knowingly engaged or that the defendants knew that such conduct was illegal. Wood, A.d at. In affirming dismissal, the Wood court observed: CASE NO. :-CV-00-RS

23 Case :-cv-00-rs Document Filed 0// Page of This case is but another replay of other similar cases where the plaintiff failed to allege with particularity any facts from which it could be inferred that particular directors knew or should have been on notice of alleged [wrongdoing], and any facts suggesting that the board knowingly allowed or participated in a violation of law. Id. at. This, too, is yet another replay of the same type of case rejected in Wood. In attempting to plead bad faith, Plaintiff doubles-down on its mistaken assertion that there is some mandatory SEC no-action process under the ICA ( ) and argues that the Current Directors [f]ailure to adhere to SEC announced policy was deliberate and in bad faith. (.) This argument fails in the first instance, of course, because there is no such SEC policy, as shown above. Even setting this aside, however, Plaintiff s allegations of bad faith still fail because they amount to nothing more than conclusory allegations that the Current Directors must have known about this policy and must have known that Yahoo was in violation of it. (.) Such conclusory allegations are inadequate. See, e.g., Guttman v. Huang, A.d, 0-0 (Del. Ch. 0) (dismissing conclusory complaint that was empty of the kind of fact pleading that is critical to a Caremark claim ); In re Yahoo!, WL 0, at * (dismissing complaint given failure to show that Yahoo directors had knowledge that their conduct was legally improper ); In re Accuray, Inc. S holder Deriv. Litig., F. Supp. d, (N.D. Cal. ) ( Plaintiffs have not alleged any specific information that each director knew and ignored ). Rejection of Caremark claims follows even in the face of claims by the government, and the payment of multimillion-dollar fines or settlements. See, e.g., Stone, A.d at (affirming dismissal of Caremark claim premised on violations of money-laundering laws that resulted in payment of $0 million in fines and $ million in civil penalties to resolve government investigations); In re Oracle, WL, at *- (dismissal of Caremark claim premised on violations of the False Claims Act asserted by government resulting in settlement of approximately $0 million). Nothing like that is alleged here. It s just the opposite: the government has exempted Yahoo from the ICA. Because the Amended Complaint does not come close to pleading particularized facts that any Current Director acted in bad faith in purportedly causing Yahoo to violate the ICA, Plaintiff CASE NO. :-CV-00-RS

24 Case :-cv-00-rs Document Filed 0// Page of therefore fails to establish that any Director faces a substantial likelihood of liability for this claim. Given this failure, Plaintiff has failed to support a reasonable doubt that a majority of the board was disqualified from considering a demand on the ground that they were not disinterested. Oracle, WL, at * (emphasis added).. Demand is not excused as to Plaintiff s claim under ICA Section (b). Demand is not excused as to Plaintiff s claim under ICA Section (b) to void the employment contracts with the Individual Defendants in light of the alleged ICA violation. ( -.) Beyond Plaintiff s failure to plead facts showing any ICA violation, Plaintiff fails to establish that any Current Director faces a substantial likelihood of liability as to Plaintiff s claim under ICA Section (b) for two additional, independent reasons: (a) Section (b) does not allow for private rights of action; and (b) the statute of limitations has run. a. ICA Section (b) is remedial and does not allow for a private right of action. Section (b) is not an available remedy here and thus does not threaten any Current Director with a substantial likelihood of liability. As discussed in Defendants Motion to Dismiss, courts have held that Section (b) is merely remedial and requires a predicate ICA violation before it may be enforced. (Individual Defs. Mot. at -.) However, Plaintiff does not assert a claim under any other section of ICA. Accordingly, there is no ICA cause of action for which ICA Section (b) may serve as a remedy, and the section is therefore inapplicable here. See, e.g., Smith v. Oppenheimer Funds Distrib., Inc., F. Supp. d, (S.D.N.Y. ) ( [W]hen courts dismiss claims that allege ICA violations as predicates to a section (b) claim, those courts also dismiss the section (b) claim. ). Although in describing its cause of action under Section (b) Plaintiff insinuates that there were violations of ICA Sections and ( -), Plaintiff no longer asserts claims under these sections, and they therefore cannot provide a basis for Section (b) remedial relief. Even if Plaintiff still asserted claims under ICA Section or, any such claim would still provide no basis for Section (b) remedial relief. As described in Defendants Motion to Dismiss, Sections and do not allow for private rights of action. (Individual Defs. Mot. at CASE NO. :-CV-00-RS

25 Case :-cv-00-rs Document Filed 0// Page of -); Northstar, F.d at. And Section (b) cannot be invoked by reference to alleged predicate violations that do not give rise to a private right of action. See, e.g., Oppenheimer, F. Supp. d at ( [T]he ICA s remedial scheme expressly provides for private rights of action only for specific, narrowly defined offenses, and specifies SEC enforcement for other offenses. Allowing section (b) to endow all the ICA s substantive violations with a private right of action would override this careful allocation of remedies. ); see also Smith v. Franklin/Templeton Distribs., Inc., WL, at *- (N.D. Cal. Oct., ) (dismissing claim under Section (b) where alleged predicate ICA violations did not provide for private rights of action). Because ICA Section (b) is remedial and Plaintiff does not allege any predicate ICA violation, no Current Director faces a substantial likelihood of liability under ICA Section (b). b. The statute of limitations on the alleged ICA Section (b) violations has expired. Even if Plaintiff could assert a claim on Yahoo s behalf under ICA Section (b), Plaintiff s allegations would still fail to give rise to a substantial likelihood of liability for any Current Director because the statute of limitations for any such claim has expired. Before implied private rights of action under the ICA were foreclosed (see Individual Defs. Mot. at - & n.), courts allowing such actions imposed a one-year statute of limitations. See Friedlob v. Trs. of the Alpine Mut. Fund Tr., 0 F. Supp., - (D. Colo. ) (collecting cases). Here, based on Yahoo s own financial statements, Plaintiff alleges the purported ICA violations began in early. (.) The financial statements on which Plaintiff bases this allegation were filed with the SEC (and publicly available) on February,. (Ex. A.) Plaintiff alleges that three Current Directors Ms. James, Ms. Shaw, and Mr. Webb face a substantial likelihood of liability for approving employment agreements for Ms. Mayer and other officers. ( 0.) The claim that these three Current Directors approved the compensation in violation of Section (b) is a mislabeled fiduciary duty claim. It fails just like the others because Plaintiff, among other things, does not plead facts showing that the approval was in bad faith. Wood, A.d at ; In re Gen. Motors, WL, at *. And, in any event, this allegation is only directed at three Current Directors. In no event, then, can Plaintiff meet its burden of showing that a majority of Current Directors face a substantial likelihood of liability. Beam, A.d at n.. CASE NO. :-CV-00-RS

26 Case :-cv-00-rs Document Filed 0// Page of Accordingly, the statute of limitations on any alleged ICA violations expired no later than one year after that, on February,. Plaintiff s ICA claims first asserted on January, (Dkt. No. ) are therefore untimely. See, e.g., Omni Fin. Corp. v. Cohen, WL, at * (S.D.N.Y. Mar., ) (dismissing ICA claims where underlying facts were made known in various filings with SEC and in annual reports to shareholders more than a year before the plaintiff filed its complaint).. Demand is not excused as to the unjust enrichment claim. Plaintiff fails to excuse demand as to the unjust enrichment claim. This claim is based on the same theory as Plaintiff s breach of fiduciary duty claim. ( -.) The failure to allege demand futility as to a breach of fiduciary duty claim is fatal to an unjust enrichment claim. In re China Auto. Sys., Inc. Deriv. Litig., WL, at * (Del. Ch. Aug. 0, ). Moreover, Plaintiff fails to plead the basic elements of an unjust enrichment claim. Unjust enrichment is the unjust retention of a benefit to the loss of another, or the retention of money or property of another against the fundamental principles of justice or equity and good conscience. Fleer Corp. v. Topps Chewing Gum, Inc., A.d 0, (Del. ). Plaintiff does not plead any particularized facts showing that the compensation paid to any Current Director was without justification and against the fundamental principles of justice or equity and good conscience. Id. The receipt of salary and benefits as compensation for work performed which is all that is alleged does not constitute unjust enrichment. See Triton Constr. Co., Inc. v. E. Shore Elec. Servs., Inc., 0 WL, at * (Del. Ch. May, 0).. Demand is not excused as to the claim under DGCL Section. Plaintiff fails to show that any Current Director faces a substantial likelihood of liability This is especially true given that Plaintiff s ICA claims are all based on Yahoo s purported failure to register under the ICA. The statute of limitations for any such claim even if a private right of action could be pursued is not subject to the discovery rule and instead begins to run at the time of the alleged violation. See Blatt v. Merrill Lynch, Pierce, Fenner & Smith Inc., F. Supp., - (D.N.J. ) (dismissing nonregistration claims under the ICA as time-barred and refusing to apply the discovery rule because an investment company cannot conceal the fact that it is unregistered ). CASE NO. :-CV-00-RS