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 ‘Willkie’
In a matter of first impression, the United States Federal District Court for the Northern District of California recently denied motions to dismiss a derivative action for improper venue, finding the forum selection clause in the corporate bylaws of a Delaware corporation to be unenforceable. The decision in Galaviz v. Berg, No. 10-cv-3392, slip op. (N.D. Cal. Jan. 3, 2011), calls into question the ability of corporations to effectively mandate a chosen forum for the resolution of intra-company disputes.
The plaintiffs in Galaviz brought a claim in the Federal District Court for the Northern District of California against the directors of Oracle Corporation (“Oracle”) alleging that each director is individually liable for breach of fiduciary duty and abuse of control in connection with certain actions allegedly taken by Oracle from 1998 to 2006.
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.” 
Although enforcement of the Foreign Corrupt Practices Act (“FCPA”) has been trending upward for several years, the first quarter of 2010 saw unprecedented developments in the enforcement of the statute. In the first three months of 2010 alone, the U.S. government brought or resolved FCPA charges against thirty-six companies and individuals — thirty more than in the first quarter of 2009 and thirty-two more than in the first quarter of 2008. The U.S. Department of Justice (the “DOJ”) and the U.S. Securities and Exchange Commission (the “SEC”) settled five cases against corporations, including two settlements of long-term investigations of major non-U.S. corporations, BAE Systems plc and Daimler AG, involving hundreds of millions of dollars in fines and penalties. The DOJ also unveiled a multi-year FCPA undercover investigation with the simultaneous indictment and arrest of twenty-two individuals who allegedly agreed to pay bribes overseas while dealing with an undercover FBI agent and a cooperating witness.