On February 6, 2013, Chancellor Strine of the Delaware Chancery Court issued a bench ruling addressing the duty of independent directors of a Delaware corporation with significant operations or assets outside the United States. In re Puda Coal, Inc. Stockholders Litigation, C.A. No. 6476-CS (Del. Ch. Feb. 6, 2013). In a short but important bench ruling, Chancellor Strine refused to dismiss a breach of fiduciary duty claim against independent directors of a Delaware corporation who had failed to discover the unauthorized sale of assets located in China by the company’s chairman. Importantly, Chancellor Strine’s remarks implicated the duty of loyalty, which creates a risk of personal liability for directors and, potentially, the absence of corporate indemnification. While the facts in the case were somewhat extreme, the ruling in Puda Coal highlights the risks and challenges that may exist for directors of Delaware corporations with significant foreign assets or operations. Although Chancellor Strine recognized that each situation is undoubtedly dependent on its facts and will turn on the nature of the foreign operations, his ruling did include the following remarks:
Posts Tagged ‘Tariq Mundiya’
On September 21, 2010, in S.E.C. v. Cuban, 2010 WL 3633059, No. 09-10996 (5th Cir.), a federal appeals court vacated a lower court decision that had dismissed the SEC’s well-publicized insider trading lawsuit against Mark Cuban. The Fifth Circuit held that it was at least “plausible,” based on the SEC’s allegations, that Cuban had violated a duty not to trade on material, nonpublic information and remanded the case for further proceedings.
Factual and Procedural Background
In November 2008, the SEC brought a civil enforcement action against Mark Cuban, the owner of the NBA’s Dallas Mavericks franchise. The action arose from Cuban’s June 2004 sale of his entire 6.3 percent ownership interest (600,000 shares) in Mamma.com Inc. (now Copernic, Inc.), a Canadian internet search company. According to the SEC’s complaint, during the spring of 2004, Mamma.com’s executives decided to initiate a private investment in public equity (“PIPE”) offering to raise additional capital. Because such offerings tend to dilute the value of existing shares, the company expected Cuban, its largest known shareholder at the time, to be unhappy. The company’s CEO telephoned Cuban, informing him of the PIPE offering. Cuban orally agreed to keep the information regarding the PIPE offering confidential, but allegedly ended his call with the CEO by saying, “Well, now I’m screwed. I can’t sell.” Nevertheless, following this telephone conversation and another discussion with the investment bank conducting the PIPE offering, Cuban instructed his broker to sell his entire stake in Mamma.com. The next day, the company publicly announced the PIPE offering, and the stock price of Mamma.com declined. By selling on the nonpublic information, Cuban avoided over $750,000 in losses.
Two recent U.S. federal district court decisions (In re Cadbury Shareholder Litig. and In re Alcon Shareholder Litig.) highlight how the common law doctrine of forum non conveniens can thwart class actions commenced by U.S. shareholders challenging cross-border merger transactions. Both decisions also reflect the trend of U.S. courts to refrain from adjudicating claims brought by U.S. shareholders impacting foreign sovereign interests and arising predominately under foreign laws. As the Alcon court noted, U.S. courts are increasingly attempting to “avert the unnecessary globalization of this Court’s jurisdiction that would occur if the mere trading of stock on the NYSE would expose foreign businesses to corporate governance challenges in this Court.”