In Hamilton Partners, L.P. v. Highland Capital Management, L.P., C.A. No. 6547-VCN, 2014 WL 1813340 (Del. Ch. May 7, 2014), the Court of Chancery, by Vice Chancellor Noble, in connection with a challenge to a going-private transaction whereby American HomePatient, Inc. (“AHP”) was acquired by an affiliate of one of its stockholders, Highland Capital Management, L.P. (“Highland”), refused to dismiss breach of fiduciary duty claims against Highland. The Court held that, for purposes of defendants’ motion to dismiss, plaintiff alleged facts sufficient to support an inference that Highland, which owned 48% of AHP’s stock and 82% of AHP’s debt, was the controlling stockholder of AHP and that the merger was not entirely fair.
Posts Tagged ‘Class actions’
In this year’s Foreword, Dougherty differentiates the need for directors to focus on their core mission of informed oversight and vigilance rather than merely reacting to the constant influx of “daily corporate governance commentary,” and explores other front-burner issues, such as the marked increase in SEC enforcement actions and other recent SEC initiatives; the continuing trend of class action suits as de facto settlement instruments; proxy advisory firm priorities for directors; and new guidance from the Public Company Accounting Oversight Board (PCAOB) that recommends that audit committee directors discuss internal auditing deficiencies with their auditors.
On June 23, 2014, the United States Supreme Court issued its much-anticipated decision in Halliburton Co. v. Erica P. John Fund, Inc. Halliburton called into question the very foundation of a securities class action—the presumption of class-wide reliance. A unanimous Court answered the question today, and the presumption of reliance lives. The Court’s decision may, however, have given defendants new opportunities to rebut the presumption in the earlier stages of a case.
The number of accounting case settlements in 2013 increased for the second year in a row, but remained low compared with the previous 10 years, according to Cornerstone Research’s latest report, Accounting Class Action Filings and Settlements—2013 Review and Analysis. While the number of securities class action filings that included accounting allegations (47) remained relatively constant in 2013 compared with 2012, the market capitalization losses associated with these filings more than doubled.
On February 26, 2014, the Supreme Court decided Chadbourne & Parke LLP v. Troice, 571 U.S. ___ (2014), ruling by a 7-2 vote that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) does not bar state-law securities class actions in which the plaintiffs allege that they purchased uncovered securities that the defendants misrepresented were backed by covered securities. The decision is the first in which the Court has held that a state-law suit pertaining to securities fraud is not precluded by SLUSA, suggesting that there are limits to the broad interpretation of SLUSA’s preclusion provision that the Court has recognized in previous cases. While Chadbourne leaves many questions unanswered concerning the precise contours of SLUSA preclusion, and could encourage plaintiffs to pursue securities-fraud claims under state-law theories, the unusual facts in Chadbourne could limit the reach of the holding and provide defendants with avenues for distinguishing more typical state-law claims in other cases.
On March 5, 2014, the U.S. Supreme Court heard oral argument in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, which presents whether to overrule or significantly limit plaintiffs’ ability to rely on the legal presumption that each would-be class member in a securities fraud class action relied on the statements challenged as fraudulent in the lawsuit. Without this so-called fraud-on-the-market presumption of classwide reliance, putative class action plaintiffs would face substantial barriers in maintaining securities fraud class actions. The Court’s decision in Halliburton, which is expected by June 2014, could lead to a significant change in the conduct of securities class actions. Even if the Court ultimately retains some formulation of the fraud-on-the-market presumption of reliance, the Court could increase defendants’ ability to contest what in practice has evolved into a virtually irrebuttable presumption.
Plaintiffs filed 166 new federal securities class actions in 2013, a 9 percent increase over 2012, according to Securities Class Action Filings—2013 Year in Review, an annual report prepared by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. The 2013 filings, although boosted by a second-half surge, are still 13 percent below the historical average from 1997 to 2012.
One possible explanation for filings remaining below the historical average in recent years is the decline in the number of unique companies listed on the NYSE and NASDAQ. A new analysis in the report shows that the number of companies on these exchanges has decreased 46 percent since 1998, providing fewer companies for plaintiffs to target as the subject of federal securities class actions.
Some corporate practitioners could have the impression that significant fee awards are granted as a matter of course in M&A class action litigation, even where the results obtained by class counsel were supplemental (and arguably routine) disclosures regarding the proposed transaction. Recent comments by the judges of the Delaware Court of Chancery, however, may suggest an increasing concern over what might be perceived as “default” fee awards in this context, as well as the value of purely supplemental, as opposed to remedial, disclosures.
In 2011, Vice Chancellor J. Travis Laster analyzed M&A fee awards in a published case titled In re Sauer-Danfoss Inc. Shareholders Litigation, 65 A.3d 1116 (Del. Ch. 2011). This undertaking, it reasonably could be hoped, would serve to promote consistency and establish reasonable expectations, especially in an area where precedent frequently lies in transcripts and unpublished orders. Of particular note, Vice Chancellor Laster wrote:
2013 proved to be a watershed year for securities litigation, and 2014 is shaping up to be a “career killing” year for plaintiffs’ lawyers specializing in 10b-5 class actions. In what may turn out to be one of the most important cases in the last three decades, the Supreme Court will address the long debated fraud-on-the-market theory in Halliburton II, and address head on whether the Court’s decades-old ruling in Basic v. Levinson establishing that theory should be overruled. The case for overruling Basic is a strong one, with at least four justices having expressed serious concerns about the fraud-on-the-market theory in the Court’s 2013 decision in Amgen. See “A Shot Across the Basic Bow,” in our 2013 Mid-Year Securities Litigation Update. If, as many court observers predict, the Court in fact overturns the fraud-on-the-market theory, securities class actions as we know them may be consigned to the dust heap.
The blogosphere is abuzz over Halliburton.  Will the Supreme Court overturn
Basic  and abolish the fraud-on-the-market presumption? Will the decision end shareholder class actions as we have known them? Presumably, by the Fourth of July, we will know.
The purpose of this post is not to predict the outcome of Halliburton. Rather, it is to begin thinking about ways in which the plaintiffs’ bar may respond if the Court does overturn Basic. Those who think that plaintiffs’ lawyers will go quiet into the night are, in my opinion, ignoring the lessons of history.