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.
Posts Tagged ‘Jurisdiction’
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,  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. 
China Natural Resources, Inc. (“CHNR”), a natural resources company based in the People’s Republic of China (the “PRC”) with shares listed on the NASDAQ Capital Market, recently completed the spin-off (the “Spin-Off”) and listing by introduction (the “Listing by Introduction”) on The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) of its wholly-owned subsidiary, Feishang Anthracite Resources Limited (“Feishang Anthracite”), which operated CHNR’s coal mining and related businesses prior to the Spin-Off.  S&C represented CHNR and Feishang Anthracite in connection with the Spin-Off and Listing by Introduction, which is the first-of-its-kind where a U.S.-listed company successfully spun off and listed shares of its businesses on the Hong Kong Stock Exchange, including advising on the U.S. and Hong Kong legal issues that arose in connection with this transaction.
Today an enormous global civilization rests upon a jury-rigged financial frame rife with moral hazards, perverse incentives, and unintended consequences. This article, SIFIs and States, forthcoming in the Texas International Law Journal, addresses one aspect of that fragile structure. It argues for basic reform in the international management of financial institutions in distress, with a special emphasis on SIFIs (Systemically Important Financial Institutions). The goal is to examine public institutional arrangements for resolution of financial institutions in the midst of a crisis, rather than the substantive rules governing the resolution process. The proposition central to this article is that the resolution of major financial institutions in serious distress will generally require substantial infusions of public money, at least temporarily. The home jurisdiction for a given financial institution must furnish the bulk of the public funds necessary for the successful resolution of its financial distress. The positive effect is that other jurisdictions may be likely to acquiesce in the leadership of the funding jurisdiction in exchange for acceptance of that financial responsibility. On the other hand, acceptance of the funding obligation would have profound consequences for the state as well as the institution, because the default of a SIFI may threaten the financial stability of that state. Until the crisis of 2007-2008, all that was implicit and unexamined in the political process; to a large extent it remains so.
Among the many legalese-heavy paragraphs appearing under the “Miscellaneous” heading at the back of transaction agreements is a section that stipulates the laws of the state that will govern the purchase agreement as well as disputes relating to the deal. Often, it is coupled with a section that dictates which courts have jurisdiction over these disputes. While the state of incorporation or headquarters of one or both parties is sometimes selected, anecdotal as well as empirical evidence suggests that a healthy majority of larger transactions choose Delaware or New York law. Reasons cited include the significant number of companies incorporated in Delaware, the well-developed and therefore more predictable legal framework in these jurisdictions, the sophistication of the judiciary in these states, the perception of these being “neutral” jurisdictions in cases where each party might otherwise favor a “home” state, and the desired alignment with the governing law of related financing documents (usually New York).
The Delaware Chancery Court has issued three decisions in 2013 that demonstrate the court’s willingness to rein in the excessive and often frivolous litigation challenging public M&A transactions.
Recent trends in shareholder litigation illustrate the magnitude of the litigation issues facing corporations in public M&A transactions. Of the public company acquisition transactions with a value over $500 million that were announced in 2007, 53% were challenged in shareholder litigation. By 2012, 96% of such transactions were subject to shareholder suits, with an average of 5.4 suits filed for each deal. In addition, for Delaware target corporations valued at over $100 million, 65% of the M&A deals announced in 2012 were subject to litigation in Delaware and in at least one other jurisdiction (usually the jurisdiction where the corporation’s principal place of business is located). Finally, for shareholder suits in deals over $100 million that were announced in 2012 and ultimately settled, shareholders received only supplemental disclosures in 81% of such settlements (so-called “disclosure-only settlements”), with plaintiffs’ attorneys fees and expenses being the only cash paid out by defendants in such suits.
On August 30, 2013, the United States Court of Appeals for the Second Circuit unanimously held that Section 10(b) of the Securities Exchange Act of 1934 (“Section 10(b)”) does not apply to extraterritorial conduct, “regardless of whether liability is sought criminally or civilly.” Interpreting the scope of the Supreme Court’s landmark ruling in Morrison v. National Australian Bank Ltd.,  the Second Circuit’s significant decision in United States v. Vilar, et al. means that a criminal defendant may be convicted of fraud under Section 10(b) only if the defendant engaged in fraud “in connection with” a security listed on a United States exchange or a security “purchased or sold” in the United States. In reaching its conclusion, the court rejected the government’s attempts to distinguish criminal liability under Section 10(b) from the civil liability at issue in Morrison, holding that “[a] statute either applies extraterritorially or it does not, and once it is determined that a statute does not apply extraterritorially, the only question we must answer in the individual case is whether the relevant conduct occurred in the territory of a foreign sovereign.”
Companies and their investors have been battling over the value of representative shareholder litigation since at least the 1940’s. Investors argue that managerial agency costs are high and that class actions and derivative suits are key shareholder monitoring mechanisms that they can deploy to keep managers in line. Companies believe that representative litigation claims are lawyer-driven, reflecting the agency costs that arise out of contingency fee suits that make the lawyer the real party in interest in these cases. Over the decades, there have been numerous skirmishes between these two sets of actors. Yet, even though one side or the other may temporarily gain the upper hand, the war continues today unabated.
The latest round of this extended fight comes over multijurisdictional deal litigation. Many M&A transactions attract shareholder litigation challenging the fairness of the economic terms of the deal for the target shareholders. Since the end of the financial crisis, however, there has been a documented increase in the number of jurisdictions in which each individual transaction is attacked. The potential for multijurisdictional litigation over a single deal arises because shareholders that wish to challenge the proposed terms of an M&A transaction can, under existing rules of civil procedure, choose to do so either in a state court in the target corporation’s state of incorporation, in a state court in the location of the company’s headquarters (assuming the defendants have the necessary presence in the jurisdiction), or in a federal court in one of those two jurisdictions.
The English scheme of arrangement has existed for over a century as a flexible tool for reorganising a company’s capital structure. Schemes of arrangement can be used in a wide variety of ways. In theory a scheme of arrangement can be a compromise or arrangement between a company and its creditors or members about anything which they can properly agree amongst themselves. It is common to see both member-focused schemes and creditor-focused schemes. In practice the most common schemes are those which seek to transfer control of a company, as an alternative to a takeover offer, and those which restructure the debts of a financially distressed company with a view to rescuing the company or its business.
In recent years schemes of arrangement have proved popular as a restructuring tool not only for English companies but also for non-English companies. A number of recent high profile cases have allowed non-English companies to make use of the English scheme jurisdiction to restructure their debts, including Re Rodenstock GmbH  EWHC 1104 (Ch), Primacom Holdings GmbH  EWHC 164 (Ch), Re NEF Telecom Co BV  EWHC 2944 (Comm), Re Cortefiel SA  EWHC 2998 (Ch) and Re Seat Pagine Gialle SpA  EWHC 3686 (Ch). Typically, these cases involve financially distressed companies registered in another EU Member State making use of an English scheme of arrangement without moving either their seat or Centre of Main Interest (COMI). In general, the main connection to England is the senior lenders’ choice of English law and English jurisdiction as governing their lending relationship with the company.
The multiplicity of cases brought on behalf of the same stockholder group (or as derivative actions) against the same defendants, based on the same conduct and asserting the same fiduciary duty claims is now well documented. The benefits of consolidating such litigation in a single forum have also been well established.
Most such litigation takes place in state courts, particularly where the litigation concerns transformative corporate events like mergers. Within the federal system, there is a specialized tribunal—the Judicial Panel on Multidistrict Litigation—charged with allocating business among the different federal district courts when the same or similar cases are pending in several such courts. There is nothing similar, however, in the state court systems that can allocate cases among courts of different states.