books and records

No Longer a Mirage: FCPA Compliance and Cooperation Has Its Benefits

On September 12, 2016, the SEC announced that it had reached a settlement with Jun Ping Zhang (“Ping”), a former executive of a Chinese subsidiary of Harris Corporation (“Harris”), regarding alleged violations of the Foreign Corrupt Practices Act (“FCPA”). The settlement was unusual, in that the SEC declined to also bring charges against Harris, an international communications and information technology company.

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Delaware Chancery Court Finds that Director Defendants Can Not “Merge Their Way Out of” Breach of Fiduciary Claims

court decision

On July 28, 2016, the Delaware Chancery Court allowed claims of unfair dealing against the Board of property management company Riverstone National Inc. to survive where the directors facilitated a merger that forestalled a derivative suit against them.  The court held that by orchestrating a merger that extinguished a possible derivative action, the director defendants obtained a special benefit for themselves.  As a result, the directors were interested in the transaction, thereby rebutting the presumption of the business judgment rule, and triggering application of the “entire fairness” doctrine.

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Out of Control: SEC Says Lack of Internal Controls Led to HP Paying More Than $108 Million to Settle FCPA Actions

On April 9, 2014, the Securities and Exchange Commission announced that Hewlett-Packard had agreed to pay more than $108 million to settle Foreign Corrupt Practices Act actions brought by the SEC and the Department of Justice.  These actions were based on HP’s subsidiaries’ alleged payments of more than $3.6 million to Russian, Polish, and Mexican government officials to obtain or maintain lucrative public contracts.  The settlement is important because it highlights the SEC’s and DOJ’s continued focus on companies’ internal controls, particularly in the FCPA arena.  It also shows that the SEC may be able to use lesser, non-fraud offenses in which the underlying conduct involves a fairly de minimis amount of money to police behavior and subject companies to significant financial consequences. READ MORE

Shareholder Books and Records Requests to Become More Frequent, and More Potent

Spreadsheet

As we previously detailed, a shareholder’s request for corporate books and records can raise competing concerns for the company and its directors.  On the one hand, shareholders have a legal right under Section 220 to seek company records, and have been repeatedly encouraged by Delaware courts to exercise that right. On the other hand, because Section 220 requests are often a precursor to litigation – and because even innocuous documents can sometimes be used to bolster an otherwise baseless lawsuit – fiduciaries must ensure their response protects shareholder interests as a whole.

A string of recent Delaware decisions have added a new layer of complexity to these concerns.  Going forward, Section 220 requests will likely become more common, and will potentially carry a larger downside for companies that fail to properly respond.

First, Delaware courts are increasingly insistent that shareholders seek corporate records before filing suit.  In fact, the Delaware Court of Chancery recently went so far as to hold that if a shareholder fails to seek books and records before filing a derivative complaint, the court can assume that shareholder is unable to “provide adequate representation for the corporation.”  That decision was later overturned by the Delaware Supreme Court, but by acknowledging “the trial court’s concerns,” the Supreme Court yet again reiterated its expectation that shareholders should request company records as a matter of first course. READ MORE