M. Todd Scott

Senior Associate

San Francisco

tscott@orrick.com

Read full biography at www.orrick.com

M. Todd Scott is a Senior Associate in the Securities Litigation & Corporate Governance team. His practice focuses on defending companies and their officers and directors in securities class actions, shareholder derivative suits, mergers and acquisition litigation, and other shareholder-related disputes, and advising clients on corporate governance and disclosure matters.

Todd regularly advises companies and their boards on corporate governance best practices and fiduciary and disclosure duties, and has extensive experience in responding to shareholder litigation demands and other shareholder activism.

Before joining the firm, Todd was an associate at the San Francisco office of Clifford Chance US LLP. In his spare time, Todd is a musician, screenwriter and father to three fantastic kids.

Posts by: M. Todd Scott

Going-Private Transaction With a Controlling Stockholder – What Standard of Review Applies?

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Chairs Around a Table

We previously discussed how important a special negotiating committee of independent directors can be when defending against stockholder challenges to change-of-control transactions – particularly for going private transactions with controlling stockholders, which usually require boards to be able to prove the “entire fairness” of the transaction. This week, in an important decision that may reach the Delaware Supreme Court, In re MFW Shareholders Litigation, the Delaware Court of Chancery again affirmed the importance of special committees in those circumstances, and offered a road map to companies and controlling stockholders on how to structure going private transactions.

Nearly two decades ago, in Kahn v. Lynch, the Delaware Supreme Court held that where (1) a special committee of independent directors or (2) a majority of the non-controlling stockholders approves a merger with a controlling stockholder, it shifts the burden of proving the entire fairness of the transaction from the defendants to the stockholder challenging the transaction. Last year, in Americas Mining Corp. v. Theriault, the Delaware Supreme Court reiterated that the use of a properly functioning special committee of independent directors is an integral part of the best practices that are used to establish the entire fairness of a merger with a controlling stockholder. READ MORE →

What’s the Right Way to Respond to a Shareholder Books and Records Request?

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Chairs Around a Table

Delaware law gives shareholders the right to request corporate books and records in order to investigate issues that are of interest to them. For several decades now, Delaware courts have encouraged shareholders to take advantage of this right as a matter of first course, to use the “tools at hand” and seek company records before filing litigation or making a litigation demand. In recent years, more shareholders (and their attorneys) have been following that advice, and the so-called “Section 220 books and records demand” is more common than ever.

Delaware courts have acknowledged, however, that the shareholder’s right to obtain corporate records must be balanced against the board’s right to manage the company’s business without undue interference. Accordingly, where a shareholder requests mundane company materials like stock ledgers or shareholder lists, the company generally must produce. But where the shareholder seeks more sensitive company records, the law puts the burden on the shareholder to show why the production is necessary. READ MORE →

“We’re Considering Selling the Company – How Can a Special Committee Help?”

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Chairs Around a Table

In any change-of-control business transaction, the decision by the target company’s board of directors to approve the deal is subject to heightened scrutiny by the courts. These days, virtually every M&A deal is sure to attract at least one strike suit challenging the board’s decision, so it is essential that the board’s decision-making process be robust and untainted by any conflicts of interest.

One way in which a board can insulate its decision-making process is to employ a special committee of independent, outside directors to evaluate and negotiate any potential sale. Although boards are not required by law to use special committees when brokering change of control transactions, Delaware courts have repeatedly held that the use of a special committee can be powerful evidence of a fair and adequate process. That is especially true where (i) the contemplated transaction is with a controlling stockholder or (ii) a majority of the directors are conflicted, two situations where courts will employ the even-more exacting “entire fairness” standard of review. As the Delaware Supreme Court recently noted, “the effective use of a properly functioning special committee of independent directors” is an “integral” part “of the best practices that are used to establish a fair dealing process.” READ MORE →

The SEC Says Cities (and City Officials!) Must Obey Securities Laws, Too

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Yesterday the SEC filed an Order Instituting Cease and Desist Proceedings against the City of Harrisburg, Pennsylvania for violations of Rule 10b-5. The City consented to entry of a Cease and Desist Order. The SEC also issued a Report of Investigation under Section 21(a) discussing “Potential Liability of Public Officials With Regard to Disclosure Obligations in the Secondary Market.”

The headline message from this proceeding is that the SEC found that the City had violated the securities laws through public statements made by public officials, as well as budget documents released during a certain time period, which allegedly failed to disclose material information about the City’s dire financial condition (primarily related to its obligations on certain waste-to-energy project bonds which the City had guaranteed). The reason these statements were deemed so significant is that during this period the City had fallen far behind in releasing its Comprehensive Annual Financial Reports (“CAFRs”), so that investors had no other available current financial information. The SEC used this proceeding and its Report of Investigation to re-emphasize the statements made in its 1994 Interpretive Guidance on the obligations of participants in the municipal securities markets, and its 1996 Report following the bankruptcy of Orange County, California, that statements made by public officials which might be “reasonably expected to reach investors and the trading markets” can be subject to antifraud rules, even when such statements are not part of a specific securities offering. READ MORE →

What Makes a Director “Independent”?

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Chairs Around a Table

What makes a director “independent”? That question is important, not only to investors who want to ensure that boards of directors exercise objective judgment on corporate affairs, but also to companies, who need assurance that their boards will not run afoul of exchange listing requirements, and to directors themselves, for protection against shareholder lawsuits challenging board decisions.

Listing requirements for both the New York Stock Exchange  and NASDAQ provide basic checklists for directors independence, and state generally that directors cannot be employed by the company, cannot have family members who are employed by the company and cannot have a controlling interest in the company’s substantial business partners. But the exchanges’ listing requirements also contemplate that the question of independence is far broader than any checklist. The NYSE’s listing requirements further note that directors should have “no material relationship” with the Company; NASDAQ’S requirements state directors should have no relationship which “would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.” READ MORE →

Orrick Releases the 25th Anniversary Edition of The Guide to Securities Litigation

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Orrick’s Securities Litigation & Regulatory Enforcement Group is proud to release the 25th Anniversary Edition of The Orrick Guide to Securities Litigation.

Users can download this innovative legal research tool on an iPad, Kindle or other electronic reading device to assist them with questions about federal securities class actions, shareholder derivative suits, SEC enforcement actions and other complex business litigation. The Guide offers carefully selected case cites, thoughtful discussion and pragmatic practice suggestions from Orrick’s distinguished securities litigation team.

More than a treatise and easier to use, the Orrick Guide to Securities Litigation represents 25 years of collective expertise, and is an invaluable resource for anyone practicing in the area (or simply interested in learning more about securities law).

To download a copy for your practice, visit www.orrick.com/seclitguide, or, you can download the ebook directly from iTunes or the Amazon Kindle Store.

Consenting Adults: D.C. Circuit Tells Press to Stay Out of SEC-AIG Relationship

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Ringed Book

What happens between a mature multinational insurance corporation and its regulator is nobody’s business, or so says the United States Court of Appeals for the D.C. Circuit, which issued an opinion in SEC v. AIG on February 1, telling the press that it couldn’t have reports prepared by an AIG consultant under a consent decree with the SEC.

In 2004—years before AIG would rise to infamy in the financial collapse—the SEC charged AIG with securities violations, and the result was a consent decree requiring, among other things, that AIG hire a consultant to review AIG’s transaction policies and procedures and to prepare reports. The court supervising the decree later allowed disclosure of the consultant’s reports twice: to the Office of Thrift Supervision and the House of Representatives. Sue Reisinger, a reporter for Corporate Counsel and American Lawyer, wanted to know what the consultant found at the government bailout recipient. Not being a regulator or constitutionally-created legislative body, Ms. Reisinger turned to the courts for access. The district court found that the consultant’s reports were “judicial records” to which Reisinger had a common law right of access. The court of appeals disagreed.

Whether something is a judicial record depends on the role it plays in the adjudicatory process. The court of appeals noted that the consultant’s reports were not relied upon by the district court in any way, and thus never found their way into the fabric of the court’s record or decision-making process. Though merely filing the reports with the court would not have been sufficient to transform them into the type of judicial records Reisinger sought, the court of appeals held that filing was “very much a prerequisite.” Thus, while the terms of the decree requiring a consultant were surely important to the district court, the court was agnostic as to the eventual content of the reports. In other words, Reisinger had the substantive cart before the procedural horse, and whatever those reports eventually contained, their import did not work to make them judicial records. READ MORE →

Shareholder Demands: Accepted, Refused or Deferred? Let’s ask RUSH.

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Chairs Around a Table

When a shareholder makes a demand on a company to pursue litigation, the company’s board can look to generally well-developed law to determine how to evaluate the demand. Though there is no one particular procedure a board must employ, there are numerous cases that explain how the board must inform itself about the demand in order to reach a good faith, “rational business decision” about whether to accept or refuse.

The rules for considering a shareholder demand are pragmatic, and afford corporate boards a dependable road map for responding to shareholder requests.

One open question (at least in Delaware, where it matters most) has been whether a board’s informed, good faith decision to defer action on a demand constitutes a “rational business decision” that is protected by the business judgment rule. Delaware courts have long held that while an informed board can refuse a demand, the one thing a board cannot do is nothing. At the same time, however, corporations often face the circumstance where there are follow-on shareholder litigation demands entirely duplicative of existing litigations or investigations. In those circumstances, a board could have any number of business justifications for wanting to defer action on the demand until the ongoing proceedings are resolved, but that would seem to violate the rule against doing nothing.

Genius rock lyricist Geddy Lee of RUSH once wrote “If you choose not to decide, you have still made a choice.”

Accordingly, the Ninth Circuit and certain federal district courts have recognized that a board’s informed, good faith decision to defer action on a demand during pending litigation or investigations is itself a decision that can be shielded by the business judgment rule. For example, in 2009, the Ninth Circuit found there was a “compelling” business justification for deferring action on a demand where the company’s pursuit of the demand’s allegations could be cast as an admission of wrongdoing in ongoing litigation. READ MORE →

SEC Is “Here to Stay” on Insider Trading

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It has been over three years since the SEC filed its insider trading charges against Galleon Management and Raj Rajaratnam. When that complaint was filed, the Director of the SEC’s Division of Enforcement, Robert Khuzami promised to “roll back the curtain” and “look at patterns across all markets” for illegal insider trading. Last month, Mr. Khuzami echoed those remarks when he announced that the SEC had filed its largest-ever insider trading case and warned “would-be insider traders” that the SEC is “here to stay.”

In that case, SEC v. CR Intrinsic Investors, LLC, the SEC alleges that a group of hedge funds and their managers made $276 million in illicit profits by improperly trading on insider information about pharmaceutical clinical trial results. One of the defendants, a medical consultant for an “expert network” firm who allegedly provided the inside information on which the trades were based, entered into a settlement with the SEC and a non-prosecution agreement with the Department of Justice. The case against the portfolio manager who allegedly made the trades, and the investment adviser with whom he was affiliated, is ongoing.

Last week, the SEC filed yet another insider trading complaint, this time against ten individuals who made stock trades in advance of four merger and acquisition transactions. In SEC v. Femenia, the SEC claims to have identified a “massive, serial insider trading scheme obtaining at least $11 million in illicit trading profits” centered around a former investment banker who misappropriated the information and “tipped” his personal friends about the upcoming deals. According to the SEC, those personal friends (who are also defendants in the case) traded on the information and paid a portion of their profits to the investment banker. In some instances, the information was even “tipped” a second time to friends and family members of the original “tippee.”

According to the SEC’s statistics, it has brought 58 enforcement actions for insider trading in 2012, the second-highest total in the last ten years and the most in any year since 2008.  Those numbers confirm that the SEC really is “here to stay” on insider trading.

SEC Commissioner Schapiro to Step Down After Four Tough Years

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Wall Street

The SEC announced last week that Commission chairman Mary L. Schapiro will end her tenure later this month. Previously an SEC commissioner from 1988 to 1994, Ms. Schapiro was appointed chairman by President Obama in January of 2009, in the wake of the financial crisis. She is the first woman to have held the chairman position full-time, and is also among the longest-serving commissioners in SEC history.

Ms. Schapiro’s four-year legacy is one of enforcement, and in each of the past two years the agency has brought more enforcement actions than ever before, including 735 enforcement actions in fiscal year 2011 and 734 actions in fiscal year 2012. One resulting victory was the SEC’s $550 million penalty against Goldman Sachs, the largest in SEC history, to settle claims related to Goldman’s involvement in the subprime mortgage meltdown. (Critics of Ms. Shapiro have downplayed the verdict, noting that no senior executives were singled out in the suit and that the penalty, while large, constituted only two weeks of Goldman’s earnings.) All told, Ms. Schapiro presided over the return of $6 billion to investors during her tenure.

Driven by tougher requirements of the Dodd-Frank Act, Ms. Schapiro also presided over one of the SEC’s busiest rulemaking periods in decades. In particular, she worked to pass a new rule creating a computerized monitoring system called the consolidated audit trail, or CAT, that will give the Commission unprecedented abilities to track trading activity. She also worked to streamline what many saw as an unnecessary bureaucracy, most notably eliminating a policy of her predecessor that required enforcement attorneys seek approval of the five member commission before opening any new inquiry.

Upon announcement of Ms. Schapiro’s resignation, President Obama immediately promoted current Commissioner Elisse B. Walter as her replacement. It remains to be seen whether Ms. Walter’s appointment will be on a permanent basis.