Have Your Directors Met Their Revlon Duties? Delaware Court Dismisses Strike-Suit Allegations as Merely Cosmetic

In a virtual course on how to bring—or not bring—an M&A strike suit, on June 30, a Delaware Chancery Court dismissed all shareholder claims against a merger target and its acquirer, ending nearly two years of litigation.  Though the allegations are familiar in the strike-suit context, the 45-page opinion which this ~$100 million merger yielded is notable for its methodical tour of Delaware fiduciary-duty law, 102(b)(7) exculpatory provisions, and so-called Revlon duties.  The roadmap opinion should be required reading for directors considering a merger.

Defendants Ramtron International and Cypress Semiconductor both work in the technology industry and the two began their courtship in 2011.  Though shareholder-plaintiff Paul Dent couldn’t prevent the 2012 Ramtron-Cypress marriage, he continued to hold out for a better dowry, naming Ramtron’s board and Cypress in a suit alleging that Cypress aided and abetted Ramtron’s board in breaching its duty to shareholders, and seeking quasi-appraisal of his shares.  Vice Chancellor Parsons disposed of these claims, taking the time to explain in unusual detail why the allegations utterly failed. Read More

You Were Wrong, But Did You Know You Were Wrong? The Supreme Court to Resolve the Circuit Split On the Pleading Standard for Opinion-Based Allegations Under Section 11

Can a securities plaintiff satisfy Section 11 of the Securities Act simply by alleging that a statement of opinion was objectively false, or must the plaintiff also allege that the speaker subjectively knew the statement was false when it was made?  That is the question taken up by the Supreme Court earlier this month when it granted certiorari in Omnicare, Inc. v. The Laborers District Council Construction Industry Pension Fund and the Cement Masons Local 526 Combined Funds.  As we previously discussed, the Sixth Circuit decision on appeal runs contrary to decisions in the Second and Ninth Circuits, so all eyes are on the Court to settle the debate. Read More

You Better Forum-Shop Around . . . While You Still Can

On January 31, 2014, Chevron Corporation moved to certify to the Delaware Supreme Court the question of whether exclusive forum bylaws are valid under Delaware law.  Chevron filed its motion before the Honorable Jon S. Tigar of the Northern District of California.  If Judge Tigar certifies the question, it seems likely that the Delaware Supreme Court will affirm a recent Delaware Court of Chancery decision finding such bylaws to be valid under statutory and contractual law, given that the author of that decision, then-Chancellor Leo E. Strine, is now Chief Justice of the Delaware Supreme Court.

In 2013, plaintiffs filed suit in both the Delaware Court of Chancery and the Northern District of California challenging Chevron’s board-adopted forum exclusivity bylaw.  The case in the Northern District was stayed pending the outcome of the Delaware case, since both involved questions of Delaware state law.  The Delaware plaintiffs argued that the forum exclusivity bylaw was statutorily invalid under Delaware General Corporation Law (DGCL), and contractually invalid because it was adopted unilaterally without shareholder consent.  In June 2013, the Delaware Court of Chancery – in a decision by then-Chancellor Strine – found that the bylaw was enforceable, and that the Delaware Court of Chancery should be the sole and exclusive forum for (1)any derivative action brought on behalf of the Corporation, (2) any action asserting a claim of breach of a fiduciary duty, (3) any action asserting a claim arising pursuant to any provision of the DGCL, or (4) any action asserting a claim governed by the internal affairs doctrine. Read More

Back to the Drawing Board: the SEC Loses Another Insider Trading Trial

On January 7, 2014 the SEC lost an insider trading bench trial before Judge William Duffey of the U.S. District Court for the Northern District of Georgia.  In a thorough opinion, Judge Duffey found the SEC’s case to be entirely circumstantial, founded on no more than a pattern of trades that were made in close proximity to communications between the purported tipper and tippee.  This case shows how difficult insider trading claims are to prove, especially without wire taps, and may give the Commission pause in bringing cases to trial that rest on such circumstantial evidence.

On trial was Larry Schvacho, a retiree who spent much of his free time investing.  The SEC alleged Schvacho had misappropriated material, nonpublic information from Larry Enterline, a long time friend, who was then CEO and director of Comsys IT.  Although Schvacho had traded in Comsys stock for many years, the SEC’s case focused on trades Schvacho made during the run-up to an acquisition of Comsys by Manpower in early 2010.  As the SEC established at trial, Schvacho and Enterline had repeatedly communicated and socialized together during the period, and there were numerous phone calls, text messages, car rides, sailing trips, and dinners where Enterline could have given Schvacho information about the acquisition.  When news of the acquisition was eventually made public to the market, Schvacho made over $500,000 on his trades. Read More

Pack Your Bags: SEC and DOJ to Intensify the Spotlight on the Foreign Corrupt Practices Act

 

Comments made by Kara N. Brockmeyer, the Securities Exchange Commission’s chief of the Foreign Corruption Practices Act (FCPA) unit, and Charles E. Duross, deputy chief of the Department of Justice’s FCPA unit, at the recent International Conference on the FCPA suggest that both agencies are increasing their scrutiny of possible FCPA violations for the next year.  Both units have increased their resources for tackling investigations of possible FCPA violations.  Additionally, both agencies have increased awareness among other U.S. and international government agencies so that those agencies could also be on the lookout for possible FCPA violations.  Having strengthened their relationships with overseas regulators, both agencies are optimistic that they are in the position to bring significant FCPA cases in the following year.

According to Andrew Ceresney, co-director of the SEC’s enforcement division, the SEC also expects that FCPA violations will be “increasingly fertile ground” for the Dodd-Frank whistle-blower program.  The SEC received 149 FCPA violation tips from whistle-blowers in just the last year and the SEC expects more enforcement cases to arise from whistle-blowers. Read More

A Bird in the Hand is Worth … Nothing if you Can’t Really Sell it

A pair of investment firms recently filed suit against Twitter in the Southern District of New York, alleging that Twitter had fraudulently refused to allow them to sell its private stock in advance of its much-anticipated IPO.  If that sentence looks somewhat bizarre, it is because the allegations themselves are bizarre, at best.

In short, the plaintiff investment firms allege that a managing partner of GSV Asset Management, who was a Twitter shareholder, engaged them to market a fund that would purchase and hold nearly $300 million in private Twitter shares from the Company’s early-stage shareholders.  Plaintiffs then embarked on an “international roadshow” to line up investors in the fund.  Plaintiffs allege that, on the roadshow, “there was substantial interest in purchasing [the private] Twitter shares at $19 per share.” Read More

NBA Team Owner Mark Cuban “Talks Trash” After Defense Verdict

Following a defense verdict in the insider trading case brought against him by the SEC, Dallas Mavericks owner Mark Cuban has not been sitting on the bench—but rather using his blog to stay on the offensive.  Since the October 16, 2013 verdict, Cuban continues to post about the case on his blog—including, just a few days ago, blogging about when his own blog became the focus of the trial.  According to his October 26 post, an SEC attorney asked him during trial if everything he posted on his blog was true information, to which he replied that it was meant more “to communicate a point” and stimulate discussion.  Following up, the SEC attorney  asked: “If you post on your blog that you think the Lakers are going to stink in 2013 . . . you’re not telling this jury that that’s an opinion you don’t honestly hold, right?”   Cuban posted that the courtroom “cracked up” when he replied “This year?”, before going on to answer: “Well, no.  In 2004, I wouldn’t say it.  They had Shaq, they had Kobe, they actually went to the finals . . . To answer your question, if I said in 2004 that they stink, I didn’t believe it.”  In an earlier blog entry, Cuban also poked fun at the former Head of Enforcement—posting about internal emails, disclosed earlier in the case, in which SEC attorneys commented on photos of Cuban. Read More

Lookout for the SEC: After First Demanding More Admissions, the SEC is Additionally Increasing Monetary Penalties and Giving Advice to Defense Counsel

After first announcing a change on June 18 of this year to demand more admissions in SEC actions, an SEC leader recently made further comments echoing that same sentiment, as well as referencing the SEC’s intended use of stiffer monetary penalties.  On October 1, at a Practising Law Institute conference, SEC Enforcement Division Co-Director Andrew Ceresney discussed the new SEC regime’s motto of strict enforcement and provided concrete, practical advice for defense lawyers on how to effectively interact with the SEC’s enforcement personnel.

Given the SEC’s ongoing commitment to deter current and future violations, Mr. Ceresney stated that the SEC will continue to increase penalties in an aggressive bid to deter misconduct.  He stated that “[t]here is room for bolder actions” and monetary penalties are a deterrent that everyone understands.  Mr. Ceresney also advised defense lawyers on how to handle meetings with SEC enforcement personnel.  He stated that defense lawyers should focus on a case’s broad policy or legal arguments, including the circumstances surrounding the case, the client’s settlement position, and any flaws in the legal theory and policy implications of the case.  Most importantly, stated Mr. Ceresney, defense lawyers must answer the SEC’s questions, must be trustworthy, and must not attempt to intimidate the SEC. Read More

Second Circuit to Issuers: You Need Not Disclose Every Single Asset in Your Registration Statements

That was the Second Circuit’s message to companies in a September 25, 2013 order by upholding dismissal of claims against defendant Royal Bank of Scotland (“RBS”) for alleged failure to disclose enough information about its exposure to subprime mortgages. In so doing, the Court reaffirmed longstanding principles at the heart the securities laws and issued an opinion as applicable to technology companies as it is to banks.

RBS had issued five offering documents in 2005 and 2006, which plaintiff alleged contained a number of misstatements and omissions. Among others, the complaint alleged RBS had misstated its exposure to subprime mortgages, falsely claimed it had effective risk controls, and failed to disclose an inadequate capital base. Read More

How Much Latitude Do Directors Have In Setting Executive Compensation?

Executive compensation decisions are core functions of a board of directors and, absent unusual circumstances, are protected by the business judgment rule.  As Delaware courts have repeatedly recognized, the size and structure of executive compensation are inherently matters of business judgment, and so, appropriately, directors have broad discretion in their executive compensation decisions.  In light of the broad deference given to directors’ executive compensation decisions, courts rarely second-guess those decisions.  That is particularly so when the board or committee setting executive compensation retains and relies on the advice of an independent compensation consultant.

Nevertheless, despite the high hurdle to challenging compensation packages, shareholder plaintiffs continue to aggressively challenge executive compensation decisions, in particular at companies that have performed poorly and received negative or low say-on-pay advisory votes. Read More