Back in May we discussed ATP Tour, Inc. v. Deutscher Tennis Bund a seminal Delaware Supreme Court case that upheld a non-stock corporation’s “loser pays” fee-shifting bylaw. ATP Tour held that where a Delaware corporation adopts a fee-shifting bylaw, it can recover its fees and costs from any shareholder that brings a derivative lawsuit and loses. Many commentators have suggested the case would effectively kill derivative actions in Delaware and indeed, since the time of that decision, the Delaware Corporation Law Council has proposed amendments to the Delaware General Corporation Law that would limit its applicability to only non-stock corporations.
Last week the Oklahoma State Legislature went a step further than ATP Tour and amended the Oklahoma General Corporation Act to specifically require fee-shifting for all derivative lawsuits brought in the state, whether against an Oklahoma corporation or not. Unlike the fee provision in ATP Tour, however, the law also affords derivative plaintiffs the right to recover their fees and costs should they win final judgment.
The difference is likely substantial. For while the law will potentially chill unmeritorious derivative actions, also known as “strike suits,” it could also provide an incentive for derivative plaintiffs with strong claims. Where shareholders use the “tools at hand”—including books and records inspection requests—to carefully vet their claims before filing, the promise of a fee recovery could encourage shareholder plaintiffs to bring claims they otherwise might not.
Consider: in the typical derivative lawsuit, the shareholder plaintiff stands to gain nothing tangible if he or she wins. Because he or she is suing on behalf of the corporation, any recovery will inure to the corporation itself. Thus, under the old regime, even if a derivative lawsuit was successful, the plaintiff would receive, at most, any resulting increase in the value of his or her company stock. Under the new statute, that same plaintiff could stand to receive the not-insubstantial costs of his or her efforts.
In the past weeks, we’ve reported that while most companies are properly disclosing their exposure to cybersecurity threats, the increasing occurrence and severity of cyber attacks has the SEC considering even more stringent cybersecurity disclosure requirements. Now, another study reports that while 38% of Fortune 500 companies have disclosed that a potential cyber event would “adversely” impact their business, only six percent of those companies purchase cyber security insurance.
What of the other 94%? Should they be doing more to protect themselves against the growing cyber threat? Do their directors have a fiduciary obligation to do more?
In re Caremark International Inc. Derivative Litigation, a Delaware decision from 1996, sets forth a director’s obligations to monitor against threats such as cyber attacks. In short, as long as a director acts in good faith, as long as she exercises proper due care and does not exhibit gross negligence, she cannot be held liable for failing to anticipate or prevent a cyber attack. However, if a plaintiff can show that a director “failed to act in the face of a known duty to act, thereby demonstrating a conscious disregard for [her] responsibilities,” it could give rise to a claim for breach of fiduciary duty. READ MORE
Putting an end to shareholder derivative litigation arising from News Corp.’s phone-hacking scandal, the company’s directors agreed last week to a record-breaking $139 million cash settlement. According to the plaintiffs’ lawyers, the deal is the “largest cash derivative settlement on record.” The settlement will be funded by directors’ and officers’ insurance proceeds.
Plaintiffs initially filed suit in the Delaware Court of Chancery in March 2011, asserting claims based on the company’s proposed acquisition (since completed) of Shine Group Ltd., a television and movie production company owned by the daughter of News Corp. Chairman Rupert Murdoch. According to plaintiffs, the News Corp. directors breached their fiduciary duties by permitting the purchase of Shine at an excessive price. The court later consolidated various related cases, and plaintiffs’ allegations expanded to include claims that the company’s directors failed to properly investigate the UK phone-hacking allegations that led to the demise of News Corp.’s News of the World. READ MORE
In a recent decision, the Delaware Supreme Court reversed the Court of Chancery in Pyott, et al. v. Louisiana Mun. Police Emp. Ret. Sys., et al., holding that a derivative suit against Botox-maker Allergan, Inc. should be dismissed because Allergan had already secured a judgment in its favor in a nearly identical suit in California. The decision will make it more difficult for plaintiffs’ lawyers to pursue duplicative derivative litigation in multiple jurisdictions.
Shortly after Allergan entered into a $600 million settlement with the U.S. Department of Justice over alleged off-labeling marketing of Botox, separate groups of shareholders brought suit in Delaware and California. Before motions to dismiss in the Delaware derivative litigation were heard, a California Federal Court dismissed the California derivative suit, finding that plaintiffs could not support the inference that the Allergan directors conspired to violate the law, which prevented plaintiffs from showing that making a demand on the Board to investigate the matter would be futile. The Delaware Court of Chancery held that the California Judgment did not bar the Delaware action and denied Allergan’s motion to dismiss. The Court of Chancery’s decision that it was not required to give preclusive effect to the California judgment was based on two principles: first, under Delaware law, the shareholder plaintiffs in two jurisdictions were not in privity with each other, and second, the California shareholders were not adequate representatives of the corporation. READ MORE