Tag: Shareholder suits


Deterring Frivolous Stockholder Suits Without Closing Doors to Legitimate Claims

The following post comes to us from Mark Lebovitch and Jeroen van Kwawegen of Bernstein Litowitz Berger & Grossmann LLP. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The following post comes to us from Mark Lebovitch and Jeroen van Kwawegen of Bernstein Litowitz Berger & Grossmann LLP. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The Delaware Supreme Court’s May 8, 2014 Opinion in ATP Tour, Inc. v. Deutscher Tennis Bund (“ATP”) marked a sudden and potentially transformative moment in the relationship among corporate boards, their stockholders, and the Delaware legal system. The article, Deterring Frivolous Stockholder Suits Without Closing Doors to Legitimate Claims, asserts that the “nuclear option” of allowing boards of public companies to employ fee-shifting bylaws against stockholders whose interests they are supposed to represent is poor policy and departs from well-established legal principles. Accordingly, the authors support the March 6, 2015 proposal from the Delaware Corporation Law Council to legislatively prohibit the use of fee-shifting provisions in the public company context. Rather than simply criticize ATP and support the legislative proposal, we propose a carefully tailored answer to frivolous litigation, which mitigates abuses, conforms to longstanding legal principles, and preserves the benefits of board accountability and meritorious stockholder litigation.

First, the article argues that directors must not be permitted to use their corporate and fiduciary powers as a weapon to avoid accountability to the stockholders whose assets they manage. The authors detail the policy and legal problems with the concept of allowing directors to impose fee shifting bylaws, putting in question the relationship between stockholders and boards that forms the foundation of the modern public corporation. If ATP applies to public corporations, the Delaware Supreme Court, sub silentio, reversed several bedrock principles of Delaware corporate law and upset the balance of powers between stockholders and boards that has been in existence for decades.

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Correcting Corporate Benefit: Curing What Ails Shareholder Litigation

The following post comes to us from Sean J. Griffith, T.J. Maloney Chair in Business Law at Fordham University School of Law, and is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The following post comes to us from Sean J. Griffith, T.J. Maloney Chair in Business Law at Fordham University School of Law, and is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Sometimes the remedy is worse than the disease. This, it seems, is the implicit view of the Delaware State Bar Association’s Corporation Law Council (the “Council”) with regard to fee-shifting in shareholder litigation. The Council’s second proposal on fee-shifting, circulated in early March 2015, [1] is much like their first, circulated in May 2014 in the wake of ATP Tour v. Deutscher Tennis Bund. [2] Both would prevent corporations from seeking to saddle shareholders with the cost of shareholder litigation by means of a fee-shifting provision, whether adopted in the charter or the bylaws.

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A Modest Strategy for Combatting Frivolous IPO Lawsuits

Boris Feldman is a member of Wilson Sonsini Goodrich & Rosati, P.C. The views expressed in this post are those of Mr. Feldman and do not reflect those of his firm or clients.

Boris Feldman is a member of Wilson Sonsini Goodrich & Rosati, P.C. The views expressed in this post are those of Mr. Feldman and do not reflect those of his firm or clients.

With a minor change to the customary lock-up agreement, issuers and underwriters may be better able to fight frivolous IPO lawsuits. By allowing non-registration statement shares to enter the market, underwriters may prevent Section 11 strike-suiters from “tracing” their shares to the IPO. This could enable ’33 Act defendants to knock out the lawsuits against them.

Basics of Section 11 Standing and Tracing

Section 11 of the Securities Act of 1933, 15 U.S. Code § 77k, provides a private remedy for those who purchase shares issued pursuant to a registration statement that is materially false or misleading. The remedy applies to “any person acquiring such security.” Section 11(a). That is, a person may assert a claim with respect to shares issued pursuant to the particular registration statement.

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Delaware (Again) Proposes Sledgehammering Fee-Shifting Bylaws

The following post comes to us from John L. Reed, chair of the Wilmington Litigation group and a partner in the Corporate and Litigation groups at DLA Piper LLP, and is based on a DLA Piper Corporate Governance Alert by Mr. Reed and Ed Batts. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The following post comes to us from John L. Reed, chair of the Wilmington Litigation group and a partner in the Corporate and Litigation groups at DLA Piper LLP, and is based on a DLA Piper Corporate Governance Alert by Mr. Reed and Ed Batts. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

As part of the annual update cycle for Delaware’s General Corporations Law (DGCL), the Delaware Bar has returned to last year’s controversy on fee-shifting provisions in bylaws and certificates of incorporation to propose, yet again, destroying the ability of Delaware corporations to, in their organizing documents, have the losing party in an intra-company (i.e. fiduciary duty) lawsuit pay the prevailing party’s legal fees.

The proposal is among several 2015 legislative changes to the DGCL proposed by the Council of the Corporation Law Section of the Delaware State Bar Association, which is the working-level body that, historically through consensus, creates changes to the DGCL.

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Vice Chancellor Laster and the Long-Term Rule

The following post comes to us from Covington & Burling LLP and is based on a Covington article by Jack Bodner, Leonard Chazen, and Donald Ross. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The following post comes to us from Covington & Burling LLP and is based on a Covington article by Jack Bodner, Leonard Chazen, and Donald Ross. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Vice Chancellor Laster has been writing for several years about the fiduciary duties of directors who represent the interests of a particular block of stockholders. In his opinion in the Trados Shareholder Litigation he found that directors, elected by the venture capital investors who held Trados’s preferred stock, had a conflict of interest in deciding on a sale of the corporation in which all the proceeds would be absorbed by the liquidation preference of the preferred and nothing would go to the common. [1] As a result of this finding, Vice Chancellor Laster applied the entire fairness standard of review to the Trados board’s decision. He concluded that while the directors failed to follow a fair process, the transaction was fair because the common stock had no economic value before the sale and so it was fair for the common stock to receive nothing from the sale. [2] In a recent Business Lawyer article which he co-authored with Delaware practitioner John Mark Zeberkiewicz, [3] Vice Chancellor Laster extended his Trados conflict of interest analysis to other situations in which directors represent stockholder constituencies with short-term investment horizons, including directors elected by activist stockholders seeking immediate steps to increase the near term stock price of the corporation. He states that such directors can face a conflict of interest between their duties to the corporation and their duties to the activists.

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Shareholder Litigation Involving Acquisitions of Public Companies

John Gould is senior vice president at Cornerstone Research. This post discusses a Cornerstone Research report by Olga Koumrian, titled “Shareholder Litigation Involving Acquisitions of Public Companies,” which is available in full here.

John Gould is senior vice president at Cornerstone Research. This post discusses a Cornerstone Research report by Olga Koumrian, titled “Shareholder Litigation Involving Acquisitions of Public Companies,” which is available in full here.

A new report shows that the percentage of 2014 lawsuits filed by shareholders in M&A deals remained consistent with the previous four years, while other key indicators suggest a slowdown. The report, Shareholder Litigation Involving Acquisitions of Public Companies, released February 25, 2015 by Cornerstone Research, reveals that investors contested 93 percent of M&A transactions in 2014. Despite this typically high percentage, shareholders brought a smaller number of competing lawsuits per deal and in fewer jurisdictions, challenged fewer deals valued below $1 billion, and took slightly longer to file lawsuits.

In a significant shift from recent years, 60 percent of contested M&A deals had lawsuits filed against them in only one jurisdiction. Just 4 percent of these deals were challenged in more than two courts, the lowest number since 2007.

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The State of Corporate Governance for 2015

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. The following post is based on a Sidley update.

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. The following post is based on a Sidley update.

The balance of power between shareholders and boards of directors is central to the U.S. public corporation’s success as an engine of economic growth, job creation and innovation. Yet that balance is under significant and increasing strain. In 2015, we expect to see continued growth in shareholder activism and engagement, as well as in the influence of shareholder initiatives, including advisory proposals and votes. Time will tell whether, over the long term, tipping the balance to greater shareholder influence will prove beneficial for corporations, their shareholders and our economy at large. In the near term, there is reason to question whether increased shareholder influence on matters that the law has traditionally apportioned to the board is at the expense of other values that are key to the sustainability of healthy corporations. These concerns underlie the issues that will define the state of governance in 2015 and likely beyond:

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Forum-Selection Bylaws Refracted Through an Agency Lens

The following post comes to us from Deborah A. DeMott, David F. Cavers Professor of Law at Duke University School of Law. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The following post comes to us from Deborah A. DeMott, David F. Cavers Professor of Law at Duke University School of Law. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Director-adopted bylaws that affect shareholders’ litigation rights have attracted both praise and controversy. Recent bylaws specify an exclusive judicial forum for litigation of corporate-governance claims, require that shareholder claims be arbitrated, and (most controversially) impose a one-way regime of fee shifting on shareholder litigants. To one degree or another, courts have legitimated each development, while commentators differ in their assessments. My paper, Forum-Selection Bylaws Refracted Through an Agency Lens, brings into clear focus issues so far blurred in the debate surrounding these types of bylaws.

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Delaware Court Reverses Preliminary Injunction Requiring Go-Shop

The following post comes to us from David L. Caplan, partner and global co-head of the mergers and acquisitions practice at Davis Polk & Wardwell LLP, and is based on a Davis Polk client memorandum. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The following post comes to us from David L. Caplan, partner and global co-head of the mergers and acquisitions practice at Davis Polk & Wardwell LLP, and is based on a Davis Polk client memorandum. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On Friday, December 19, 2014, the Delaware Supreme Court reversed a preliminary injunction entered by the Delaware Court of Chancery which had (a) barred, for 30 days, a stockholder vote to approve the combination of C&J Energy Services, Inc. and a division of Nabors Industries Ltd., (b) required C&J to conduct a “go-shop” during that period and (c) preemptively declared that such “go-shop” did not constitute a breach of the “no-shop” or other deal-protection provisions in the Nabors/C&J merger agreement. In reversing the injunction, the Supreme Court held that the C&J board likely satisfied its Revlon duties (to the extent such duties applied), notwithstanding the lack of a pre-signing market check, given that “[w]hen a board exercises its judgment in good faith, tests the transaction through a viable passive market check, and gives its stockholders a fully informed, uncoerced opportunity to vote to accept the deal, [Delaware courts] cannot conclude that the board likely violated its Revlon duties.”

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Delaware Court: 17.3% Stockholder/CEO may be a Controlling Stockholder

Toby Myerson is a partner in the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP and co-head of the firm’s Global Mergers and Acquisitions Group. The following post is based on a Paul Weiss memorandum. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Toby Myerson is a partner in the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP and co-head of the firm’s Global Mergers and Acquisitions Group. The following post is based on a Paul Weiss memorandum. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In In re Zhongpin Inc. S’holders Litig., the Delaware Court of Chancery denied motions to dismiss breach of fiduciary duty claims against an alleged controlling stockholder and members of the company’s board of directors, holding that the plaintiffs had raised reasonable inferences that (i) although the stockholder held only 17.3% of the company’s outstanding common stock, as CEO and Chairman of the Board, he possessed “both latent and active control” over the company, and (ii) the sales process was not entirely fair.

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