In our June 4, 2014 article on cyber security and cyber governance  we noted that for many reasons, boards of directors and executives of U.S. companies needed to reexamine how they protect (and respond to the successful hacking of) their most critical intellectual property and customer information. One of the reasons was that all signs out of Washington, D.C. pointed towards increasing federal regulation and oversight of cyber security for public and private companies, and particularly for those in the financial services sector. Further, we foresaw not only heightened scrutiny from regulators, but increasing class action litigation, with plaintiffs accusing boards and management of not taking the appropriate steps to protect company and client data. Our predictions were correct on all fronts.
Posts Tagged ‘David Schwartz’
In Southeastern Pennsylvania Transportation Authority v. Ernst Volgenau, et al  (the “SRA” decision), Vice Chancellor Noble continued a recent trend in Delaware case law involving acquisitions of companies with a controlling stockholder—if robust procedural protections are properly used (such as the recommendation of an empowered, disinterested special committee and the transaction is conditioned on a non-waivable vote of the majority of all minority target stockholders), the standard of judicial review applicable to such a transaction will be the deferential business judgment rule. Accordingly, when a target company is acquired by a third party unaffiliated with the target’s controlling stockholder, the target company can avoid “judicial review under the entire fairness standard and, perhaps in most instances, the burdens of trial.”
Only a few weeks ago, in a precedent setting decision, Chancellor Strine held that the standard of judicial review applicable to going private mergers with controlling stockholders (i.e., transactions in which the buyer is affiliated with or is the controlling stockholder) should also be the deferential business judgment rule if certain similar robust procedural protections were properly employed. 
On November 5, 2012, the United States Supreme Court heard oral argument in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds (No. 11-1085) (“Amgen”). In Amgen, Plaintiff/Respondent Connecticut Retirement Plans and Trust Funds (“Connecticut Retirement”) brought a putative class action under the Exchange Act of 1934, alleging that Defendant/Petitioner Amgen and several of its directors and officers misstated and failed to disclose safety information concerning two of its drugs. Amgen contends that it did not mislead investors and that the information it allegedly concealed was widely known.
Background of Amgen and Path to the Supreme Court
The issue in Amgen is the predominance requirement of Federal Rule of Civil Procedure (“Rule”) 23(b)(3), which states that a court may not certify a class for trial without determining that “questions of law or fact common to class members predominate over any questions affecting only individual members.” Because of the near-impossibility of establishing commonality of direct reliance on alleged misstatements in securities fraud litigations, plaintiffs typically rely on a rebuttable presumption of common indirect reliance on the integrity of the market price for the securities at issue. The Supreme Court first recognized this presumption in Basic Inc. v. Levinson, 485 U.S. 224, 241-47 (1988), relying in part on the “fraud-on-the-market” (“FOTM”) theory. The FOTM theory assumes that the market price of securities traded in an efficient market reflects all publicly-available material information, including any material misrepresentations.
In November 2012, the United States Supreme Court will again hear an appeal of a federal securities class action in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds (No. 11-1085) (“Amgen”). In the past two years, the Supreme Court has heard no less than five appeals arising from securities class actions.
Amgen requires the Court to reconsider its own landmark decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988), adopting a rebuttable classwide presumption of reliance based on the “fraud-on-the-market” (“FOTM”) theory. The FOTM theory assumes that the market price of securities traded in an efficient market reflects all publicly-available information, including any material misrepresentations. Twenty-five years later, the parties in Amgen ask the Court to resolve whether, in such a case, a district court must (1) “require proof of materiality” concerning the challenged statements and/or (2) “allow the defendant to present evidence rebutting the applicability of the fraud-on-the-market theory” before certifying a class under Fed. R. Civ. P. 23(b)(3). To fully understand the import of these questions, some background on the relevant concepts is helpful.
Years from now, when historians write the history of the Roberts Court, perhaps they will be able to explain why, in the second half of the first dozen years of the 21st Century, the Supreme Court suddenly became so interested in taking up cases under the federal securities laws. Indeed, a review of recent private 10b-5 jurisprudence reveals that the last two years have generated more United States Supreme Court precedent than the previous eighteen.  These cases could have profound implications for how public and private companies around the globe meet their reporting obligations, defend against class actions, and/or maintain their credibility in the eyes of regulators, judges, and investors. We discuss this plethora of recent Supreme Court cases below, concluding with a discussion of Amgen, Inc. v. Connecticut Retirement Plans & Trust Funds, which will be heard by the Supreme Court in November 2012.