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Posts by: Jim Kramer

Delaware Supreme Court Wastes No Words: Summarily Affirms In re Volcano Corp. Stockholder Litigation, Upholding Business Judgment Rule and Dismissing Remaining Waste Claim

On February 9, 2017, the Supreme Court of Delaware summarily affirmed the Court of Chancery’s decision in In re Volcano Corp. Stockholder Litigation which had dismissed plaintiffs’ complaint on defendants’ 12(b)(6) motion to dismiss.

Plaintiffs, former stockholders of Volcano Corporation, had brought an action against defendants for breaches of fiduciary duty arising from the all-cash merger between Volcano and Philips Holding USA Inc. The parties had disputed what standard of review the Court of Chancery should apply: the Revlon test, as plaintiffs claimed, because Volcano’s stockholders received cash for their shares, or the irrebuttable business judgment rule, as defendants argued, because Volcano’s stockholders were “fully informed, uncoerced, and disinterested” when they approved the merger by tendering a majority of Volacano’s shares into a tender offer.  As the Court of Chancery explained, if a business judgment rule is irrebuttable, plaintiffs could only challenge the transaction on the basis of waste.  Thus, plaintiffs also argued in the alternative that if the business judgment rule did apply, it should only be a rebuttable presumption.

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It’s Hunting Season. For Unicorns? Lawsuit Against Theranos Signals Trend In Investors Going After Late-Stage Start-ups

Map and Compass

Last week brought more bad news for private blood testing company Theranos Inc., as San Francisco-based Partner Fund Management L.P. (“PFM”) launched a suit claiming that it was duped into making a $96.1 million investment in Theranos in February 2014.  The complaint, filed in Delaware Court of Chancery, alleges common law fraud, securities fraud under California’s Corporations Code, and violations of Delaware’s Consumer Fraud Act and Deceptive Trade Practices Act, among other things, against Theranos, its Chief Executive Officer, Elizabeth Holmes, and its former Chief Operating Officer, Ramesh Balwani.

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Seventh Circuit Brands Disclosure-Only Settlement a “Racket” and Endorses Delaware Court of Chancery’s Stricter Standard for Approval of Disclosure-Only Settlements

settlement

In a 2-1 decision, the Seventh Circuit has joined the Delaware Court of Chancery’s call for enhanced scrutiny of “disclosure-only” M&A settlements that involve no monetary benefits to shareholders.  As previously discussed here, M&A litigation, typically alleging breach of fiduciary duty by directors and insufficient disclosures, often ends in settlement, with defendants agreeing to provide supplemental disclosures in exchange for broad releases of claims, while plaintiffs’ counsel “earns” large attorneys’ fees for providing the class with the “benefit” of the agreed-upon disclosures.  In In re Walgreen Company Stockholder Litigation (In re Walgreen Co.), the Seventh Circuit rejected such a settlement, endorsing the standard for approval of disclosure-only settlements articulated by the Delaware Court of Chancery in In re Trulia, Inc. Shareholder Litigation (In re Trulia).  In In re Trulia, the Court of Chancery held that disclosure-only settlements in M&A litigation will meet with disfavor unless they involve supplemental disclosures that address a “plainly material misrepresentation or omission” and any proposed release of claims accompanying the settlement encompasses only disclosure claims and/or fiduciary duty claims regarding the sale process.

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The Whistle Blows Again: SEC Pays Second Largest Whistleblower Bounty Award

whistleblower

On June 9, 2016, the Securities and Exchange Commission (‘SEC”) awarded the second largest whistleblower bounty – $17 million – granted under the Dodd-Frank whistleblower rules to date.  Previously, the highest whistleblower awards were a $30 million award in September 2014 and a $14 million award in October 2013.  The $17 million award comes on the heels of $26 million in whistleblower awards given to five anonymous individuals over the last month alone.  These awards serve as a warning to companies that the SEC takes its whistleblower program seriously and will continue to encourage and reward company insiders for coming forward with information that leads to successful enforcement actions.  As Sean X. McKessy, Chief of the SEC’s Office of the Whistleblower – a department created by the SEC to give whistleblowers a place to submit their tips – said, “[W]e hope these substantial awards encourage other individuals with knowledge of potential federal securities law violations to make the right choice to come forward and report the wrongdoing to the SEC.”

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Full Court Pressure: SEC OIG Finds No Undue Influence By ALJs in Favor of Government

The Securities and Exchange Commission’s Office of the Inspector General (“OIG”) recently released findings from its extensive investigation into allegations of potential bias against respondents in SEC administrative proceedings.  The OIG report comes at a time when the fairness of the SEC’s in-house administrative forum is under scrutiny from both inside and outside of the agency.

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The End of Disclosure Only Settlements in M&A Cases? Not So Fast.

Stock Ticker

Disclosure-only settlements have been popular in the past – last year, about 80% of settlements in M&A-related lawsuits were for disclosures only, according to Cornerstone Research – but lately they have come under scrutiny.  The Delaware Court of Chancery has issued opinions refusing disclosure-only settlement agreements before, noting that at times in these cases “there is simply little to commend the process of weighing the merits of a ‘settlement’ of litigation where the only continuing interest is that of the plaintiffs’ counsel in recovering a fee.”  The incentives of attorneys on both sides can be such that “the potential claims belonging to the class [are not] adequately or diligently investigated or pursued.”

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You Can’t Cover Up Fraud with TARP Funds: US Government Sues Bank President’s Estate

Pen and Calculator

On July 1, 2015, the United States for the District of Columbia sued the estate and trusts of the late Layton P. Stuart – the former owner of One Financial Corporation and its subsidiary One Bank & Trust– and the trust’s beneficiaries, for alleged fraud on the Treasury Department and its Troubled Asset Relief Program (“TARP”).  This civil suit is the latest in a growing list of cases brought by the government to recover TARP funds that it alleges were fraudulently procured.

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The SEC Criticizes One of Its Own

Even with the SEC’s home-court advantage in bringing enforcement actions in its administrative court rather than in federal court, the SEC will still criticize its own administrative law judges (“ALJ”) when an ALJ’s decision falls short of established legal standards.  On April 23, 2015, the SEC found that an ALJ’s decision to bar Gary L. McDuff from associating with a broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent or nationally recognized statistical rating organization was insufficient because it lacked enough evidence to establish a statutory requirement to support a sanctions analysis.  The SEC then remanded the matter to the same ALJ – no doubt in an effort to encourage him to revise his initial opinion.

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For Shareholder Inspection Demands, A Purpose Isn’t “Proper” When the Issue Has Already Been Decided

As we have previously discussed in prior posts, shareholder demands to inspect confidential corporate information are being made with increased frequency, and are forcing more and more companies to grapple with their legal obligations to respond.  Earlier this month in Fuchs Family Trust v. Parker Drilling, the Delaware Court of Chancery issued further guidance, and explained why in certain cases, companies need not provide any information at all.

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To Whom Must The Whistle Blow? SEC Asks Second Circuit for Deference on Scope of Dodd-Frank Whistleblower Protection

Whistle

In an amicus brief filed earlier this month in Berman v. [email protected] LCC, the SEC asked the Second Circuit to defer to the Commission and hold that individuals who report misconduct internally are covered by the anti-retaliation protections of the Dodd-Frank Act of 2002, regardless of whether they report the information to the SEC.

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