Archive for the ‘Court Cases’ Category

Reliance by Directors: What’s a Conscientious Director to Do?

Posted by Peter Atkins, Skadden, Arps, Slate, Meagher & Flom LLP, on Friday April 11, 2014 at 9:01 am
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Editor’s Note: Peter Atkins is a partner of corporate and securities law matters at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden, Arps memorandum by Mr. Atkins. The views expressed in this post are those of Peter Atkins, a senior partner of the firm, and are not presented as those of the firm. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In its recent decision in In Re Rural Metro Corporation Stockholders Litigation, [1] the Delaware Court of Chancery, in a footnote, touches on what it means for directors to be “fully protected” by §141(e) of the Delaware General Corporation Law when they rely on information, opinions, reports or statements provided to them by officers, employees, board committees or experts. While not central to the Rural Metro decision, this is an issue that should be of interest to conscientious public company directors. Below I suggest that, as currently applied, §141(e) does not sufficiently protect conscientious directors, examine why that may be so, highlight the need for alternative approaches to provide truly full protection without undermining other important conduct imperatives Delaware law imposes on directors and others, and offer some suggestions toward that end.

…continue reading: Reliance by Directors: What’s a Conscientious Director to Do?

Rethinking Basic: Towards a Decision in Halliburton

Posted by Lucian Bebchuk and Allen Ferrell, Harvard Law School, on Wednesday April 9, 2014 at 9:02 am
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Editor’s Note: Lucian Bebchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Allen Ferrell is Greenfield Professor of Securities Law, Harvard Law School. They are co-authors of Rethinking Basic, a Harvard Law School Discussion Paper that is forthcoming in the May 2014 issue of The Business Lawyer and available here.

We have recently revised our paper Rethinking Basic (discussed earlier on the Forum here). Our revision, which will be published in the May issue of the Business Lawyer, takes into account, and relates our analysis to, the Justices’ questions at the Halliburton oral argument. As our revision explains, questions asked by some of the Justices at the oral argument suggest that the fraudulent distortion approach we support might appeal to the Court.

In the Halliburton case, the United States Supreme Court is expected to reconsider the Basic ruling that, twenty-five years ago, adopted the fraud-on-the-market theory, which has since facilitated securities class action litigation. Our paper seeks to contribute to this reconsideration by providing a conceptual and economic framework for a reexamination of the Basic rule.

…continue reading: Rethinking Basic: Towards a Decision in Halliburton

Three Courts Dismiss Lawsuits for Lack of Subject Matter Jurisdiction

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday April 6, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Yafit Cohn, Associate at Simpson Thacher & Bartlett LLP, and is based on a Simpson Thacher memorandum; the full text, including footnotes, is available here.

This proxy season, rather than following the traditional route of seeking no-action relief from the Securities and Exchange Commission (“SEC”) (or, in one instance, after receiving a no-action denial), at least four companies have filed lawsuits against activist investor John Chevedden, in each case requesting declaratory judgment that the company may properly exclude Chevedden’s proposed shareholder resolution from the proxy materials for its 2014 annual meeting. While companies have enjoyed judicial victories against Chevedden in the recent past (including during the current proxy season), this month, for the first time, three federal courts dismissed actions against Chevedden, citing lack of subject matter jurisdiction.

…continue reading: Three Courts Dismiss Lawsuits for Lack of Subject Matter Jurisdiction

Court Finds Financial Advisor Liable for Aiding and Abetting Fiduciary Duty Breaches

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday March 30, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Michael Kaplan, co-head of Davis Polk’s global Capital Markets Group, and is based on a Davis Polk client memorandum. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On March 7, 2014, Vice Chancellor Travis Laster of the Delaware Court of Chancery found a financial advisor liable for aiding and abetting breaches of fiduciary duties by the board of Rural/Metro Corporation in connection with the company’s 2011 sale to an affiliate of Warburg Pincus LLC. In its 91-page, post-trial opinion, the Court concluded that the financial advisor allowed its interests in pursuing buy-side financing roles in both the sales of Rural/Metro and Emergency Medical Services (“EMS”) to negatively affect the timing and structure of the company’s sales process, that the board was not aware of certain of these actual or potential conflicts of interest, and that the valuation analysis provided to the board was flawed in several respects. Both the Rural/Metro board of directors and a second financial advisor to Rural/Metro settled before trial for $6.6 million and $5.0 million, respectively.

…continue reading: Court Finds Financial Advisor Liable for Aiding and Abetting Fiduciary Duty Breaches

Forum Selection Clauses in the “Foreign” Court

Posted by Victor I. Lewkow, Cleary Gottlieb Steen & Hamilton LLP, on Saturday March 29, 2014 at 9:00 am
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Editor’s Note: Victor Lewkow is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Lewkow and Mitchell Lowenthal. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

It is now clear that, for Delaware companies, a charter or by-law forum selection clause (FSC) is a valid and promising response to the problems posed by multi-jurisdictional disputes involving claims based upon internal corporate affairs (such as M&A litigation and derivative actions). Three recent rulings by “foreign” courts—courts located outside of the forum selected in the charter or by-law (which is usually Delaware). In each case, the “foreign” court granted motions to dismiss based upon an FSC that selected Delaware as the exclusive forum. Still, as we have previously advocated, [1] the better course would be to include with an FSC a consent to jurisdiction and service provision for stockholders who commence the foreign litigation that would permit the defendants in the foreign case to enforce the forum selection clause in Delaware. [2]

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The Evolving Face of Deal Litigation

Editor’s Note: Daniel Wolf is a partner at Kirkland & Ellis focusing on mergers and acquisitions. The following post is based on a Kirkland memorandum by Mr. Wolf, Sarkis Jebejian, Yosef J. Riemer, and Matthew Solum.

As dealmakers put the finishing touches on public M&A transactions, the question is no longer if there will be a lawsuit, but rather when, how many and in what jurisdiction(s). And while many of the cases remain of the nuisance strike-suit variety, recently it seems every few weeks there is an important Delaware decision or other litigation development that potentially changes the face of deal litigation and introduces new risks for boards and their advisers. Now more than ever, dealmakers need to be aware of, and plan to mitigate, the resulting risks from the earliest stages of any transaction.

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Financial Advisor Liable for Aiding Board’s Breach of Fiduciary Duty

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday March 25, 2014 at 9:20 am
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Editor’s Note: The following post comes to us from James T. Lidbury, partner and co-head of the Investment Management practice group at Ropes & Gray LLP, and is based on a Ropes & Gray publication. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On March 7, the Delaware Court of Chancery published a post-trial opinion in In Re Rural Metro Corporation Stockholders Litigation (Rural Metro) finding Rural/Metro’s financial advisor RBC liable for aiding and abetting the Rural/Metro’s board of directors’ breach of its fiduciary duties in connection with the acquisition of Rural/Metro by Warburg Pincus. The decision is the latest in a series of Delaware opinions concerning conflicts of interest of banks and investment firms in advising companies in buy-out transactions.

…continue reading: Financial Advisor Liable for Aiding Board’s Breach of Fiduciary Duty

Court May Expand Officer/Shareholder Liability Resulting from US Customs Violations

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday March 25, 2014 at 9:19 am
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Editor’s Note: The following post comes to us from Sydney H. Mintzer, partner in the international trade practice at Mayer Brown LLP, and is based on a Mayer Brown Legal Update by Mr. Mintzer and Jing Zhang.

On March 5, 2014, the US Court of Appeals for the Federal Circuit agreed to constitute an en banc panel to reconsider a decision issued by the court in Trek Leather Inc. et al. v. United States. [1] The entire court will reconsider a July 30, 2013 decision issued by a three-judge panel holding that the government had to prove officers and/or shareholders had aided or abetted fraud, or otherwise took actions that justified piercing the corporate veil, in order to hold them personally liable for US customs law violations committed by a corporate entity. [2] If the full court overrules the three-judge panel, the benefits of incorporation would be mitigated with respect to an officer or shareholder’s actions that result in US customs law violations.

…continue reading: Court May Expand Officer/Shareholder Liability Resulting from US Customs Violations

Supreme Court Expands Sarbanes-Oxley Whistleblower Provision

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday March 24, 2014 at 9:25 am
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Editor’s Note: The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication by Robin D. Fessel, Julia M. Jordan, Theodore O. Rogers, Christina Andersen.

In Lawson v. FMR LLC, No. 12-3 (Mar. 4, 2014), the U.S. Supreme Court clarified the scope of whistleblower protection provided by the Sarbanes-Oxley Act of 2002 (“SOX”), holding that employees of private contractors and subcontractors of public companies are protected by the whistleblower provision set forth in 18 U.S.C. § 1514A of the Act. The Court, acknowledging that the language of the Act is ambiguous, interpreted it to allow persons employed by non-public contractors to public companies—such as lawyers or accounting firms—to bring whistleblower claims under the Act. In a strong dissent, Justice Sotomayor objected to the “stunning reach” of this interpretation. The majority opinion, responding to that criticism, cited “various limiting principles” proposed by the plaintiffs and Solicitor General, which employers will need to rely on in the future. Among other things, the “limiting principles” include that the types of contractors whose employees could make use of SOX are those “whose performance will take place over a significant period of time,” and that an employee of a contractor would only be able to invoke SOX as to complaints arising out of the contractor’s “fulfilling its role as contractor for the public company, not the contractor in some other capacity.” Ultimately, however, the Court declined to address the precise bounds of § 1514A, finding that the whistleblower claims at issue fell squarely within the “mainstream application” of the statute, as both plaintiffs claimed retaliation after reporting allegedly fraudulent activity that plainly implicated mutual funds’ shareholders.

…continue reading: Supreme Court Expands Sarbanes-Oxley Whistleblower Provision

Delaware Decision Reinforces Need for Proper Procedure in Squeeze-Out Merger

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday March 20, 2014 at 9:04 am
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Editor’s Note: The following post comes to us from David N. Shine, partner and co-head of the Mergers and Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP, and is based on a Fried Frank publication.

The private equity firm that was the controlling stockholder of Orchard Enterprises effected a squeeze-out merger of the minority public stockholders. Two years later, a Delaware appraisal proceeding determined that Orchard’s shares at the time of the merger were worth more than twice as much as was paid in the merger. Public shareholders then brought suit, claiming that the directors who had approved the merger and the controlling stockholder had breached their fiduciary duties and should be held liable for damages. The Orchard decision [1] issued by the Delaware Chancery Court this past Friday adjudicates the parties’ respective motions for summary judgment before trial.

…continue reading: Delaware Decision Reinforces Need for Proper Procedure in Squeeze-Out Merger

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