We are pleased to provide a posting from our colleagues, William K. Hill, a shareholder in Gunster’s Business Litigation practice group, and Joshua A. Levine, an associate in that practice group.

On January 22, 2016, as part of the Delaware Court of Chancery’s decision concerning the stockholder class action challenging Zillow’s acquisition of Trulia, see In re Trulia, Inc. Stockholder Litig., CV 10020-CB, 2016 WL 325008 (Del. Ch. 2016), the Delaware Court extensively discussed the phenomenon of “disclosure settlements” and the Court’s attitude and approach to them.

Courtesy md-signs.com
Courtesy md-signs.com

The Court wrote that, in today’s environment, a public announcement of virtually every transaction involving the acquisition of a public corporation provokes a “flurry” of class action lawsuits alleging that the target’s directors breached their fiduciary duties by agreeing to sell the corporation for an unfair price. The Court explained that the percentage of transactions of $100 million or more that have triggered stockholder litigation in the United States has gone from 39.3% in 2005 to a peak of 94.9% in 2014.

Far too often, the Court explained, such litigation serves no useful purpose for shareholders and only generates fees for “certain lawyers who are regular players in the enterprise of routinely filing hastily drafted complaints on behalf of stockholders.” The plaintiff leverages its threat of an injunction to prevent a transaction from closing, and defendants are incentivized to quickly settle in order to avoid the expense and distraction of litigation and to obtain comprehensive releases as a form of “deal insurance.” Defendants procure settlements by issuing supplemental disclosures to the target’s stockholders before they are asked to vote on the proposed transaction, under the theory that, by having this additional information, stockholders will be better informed when exercising their franchise rights. Once an agreement in principle is reached to settle for supplemental disclosures, the Court must evaluate the fairness of the proposed settlement.

Continue Reading Putting the Brakes on Disclosure Only Settlements

 

Florida corporation pushing the envelope with restrictive bylaws?
Photo by Stuart Rankin

How to stop frivolous plaintiff lawsuits?  Since 2010, when Vice Chancellor Laster of the Delaware Court of Chancery noted that “if boards of directors and stockholders believe that a particular forum would prove an efficient and value promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes,” many public companies have adopted bylaws provisions restricting frivolous derivative lawsuits.  As the ABA notes, these so called “forum selection bylaws” are extensions of the forum selection clauses that have long been upheld in contracts.

As anyone who has ever worked on a public merger well knows, within hours after a merger is announced, several plaintiff firms will announce an “investigation” and then file a derivative lawsuit (presumably based on the findings of their thorough “investigation”).  Of course, frivolous lawsuits aren’t limited to M&A transactions, but many of these lawsuits follow the same pattern.  As a result, public companies have had continued interest in restricting such lawsuits.  Forcing plaintiffs to sue in Delaware with a forum selection bylaw is one way to help restrict lawsuits.  But, more recently, some companies have become even more creative.  Here is a quick chronological summary of the movement to adopt restrictive bylaws:

Fee shifting bylaws moved to back burner
Photo by Sharon Drummond

In a case of first impression, the Delaware Supreme Court held that provisions contained in a nonstock corporation’s bylaws, requiring a plaintiff stockholder to reimburse the corporation’s legal expenses if the plaintiff loses on a claim it has brought against the corporation, are facially valid if adopted properly and for a proper purpose (i.e., not for the purpose of deterring meritorious litigation). The court reached its conclusion in its May 8, 2014 decision based on the following factors and analysis: 

  • the Delaware General Corporation Law (“DGCL”) and other Delaware statutes did not forbid the enactment of fee-shifting bylaws;
  • the fee-shifting bylaw related to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees because it related to the allocation of risk in connection with intra-corporation litigation (DGCL § 109(b)); 
  • a provision for fee-shifting was not required to be included in the charter and could therefore be adopted in the bylaws (DGCL § 102(a)); and 
  • because the Delaware Supreme Court has held that bylaws are treated as contracts among a corporation’s stockholders, it was permissible to modify the American attorney’s fees rule (i.e., that each party in litigation bears its own costs and expenses) by adopting a fee-shifting bylaw. 

Because of the statutory basis of the court’s decision, the holding was presumed to also apply to ordinary stock corporations. Thus, a fee-shifting bylaw would likely allow Delaware corporations to require the loser of an intra-corporate lawsuit to pay the corporation’s attorney expenses. 

In response to the Delaware Supreme Court’s ruling, the Delaware State Bar Association (with significant plaintiff’s attorney membership) was considering a proposed amendment to the DGCL would amend Section 102(b)(6) and add a new Section 331 to clarify that these costs cannot be borne by stockholders of stock corporations. The proposed legislation was expected to be presented to the Delaware General Assembly before the end of the current session and, if passed, would have become effective on August 1, 2014. 

However, in a recent development, Continue Reading Fee-shifting bylaw proposal moved to the back burner pending further investigation

forum selection bylawsMore and more plaintiff lawyers are suing issuers outside of an issuer’s state of incorporation, which requires issuers to defend substantially identical claims in multiple forums at added expense with little to no benefit to the shareholders.  While plaintiff lawyers enjoy this lucrative source of revenue, the increasing amount of time and money expended on this multiforum shareholder litigation drives the need for a creative solution for issuers.  A 2010 Delaware court decision, provided such a solution by suggesting that Delaware corporations could amend their organizational documents to provide that Delaware courts are the exclusive jurisdiction for settling intracorporate disputes, including derivative claims.  Thus, dozens of issuers have adopted so called “forum selection” clauses in their bylaws.  Generally, these clauses are similar to Chevron’s:

Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the state of Delaware, in all cases subject to the court’s having personal jurisdiction over the indispensible parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article VII.

And while the 2010 Delaware court decision suggested these clauses were permissible, it was not until earlier this year that a Delaware court specifically ruled that the forum selection clause adopted by Chevron was valid. Although the Delaware Supreme Court hasn’t ruled on the issue (the plaintiff dropped its appeal in the Chevron case), it is clear that Delaware corporations have the power to adopt these forum selection clauses.  What is not clear is Continue Reading Do forum selection clauses in bylaws make sense for companies not incorporated in Delaware?

Bitcoins regulated by the SEC?Things are quickly getting real in the virtual currency world. Virtual currency providers have endured a series of recent shutdowns, prosecutions, restrictions, court decisions and investigations ranging from a ban on Bitcoin use by the Thai government to an investigation by the New York Department of Financial Services which in a memorandum called  the virtual currency space “a virtual Wild West for narcotrafficers and other criminals.” The U.S. Senate Committee on Homeland Security and Governmental Affairs announced that it has initiated an inquiry into Bitcoin and other virtual currencies and has requested a number of regulatory agencies to provide information on their role in preventing criminal activity in the digital currency space. Regulators seized the United States assets of Mount Gox, the largest global entity involved in exchanging Bitcoins for actual currency, and the SEC recently issued an Alert on some of the dangers of virtual currencies. And now, a federal court has ruled that Bitcoins are securities.

Bitcoin is the major player in the virtual currency industry. Bitcoin’s currency is a true virtual currency which is not sponsored or managed by any country or backed by any asset, and it is not regulated by any central bank or other agency. Bitcoins exist through an open-source software program. Users can buy Bitcoins through exchanges that convert real money into the virtual currency. Users of Bitcoins can keep their identities confidential and can participate in financial transactions on what appears to be a totally secret basis. The value of a Bitcoin is determined by a software algorithm which apparently monitors and controls the available supply of Bitcoins.

A recent federal court decision centered on Bitcoins will have interesting and far-reaching ramifications for virtual currencies and even has some important securities law implications. Trendon Shavers is one of the most visible and prominent players in the virtual currency industry and is heavily involved in Bitcoin matters. As part of his Bitcoin activities, Mr. Shavers formed First Pirate Savings & Trust, which he characterized as a “virtual hedge fund” based entirely on Bitcoins. He wisely Continue Reading Bitcoins as securities?: Tough times for virtual currencies in the real world

 Recently, a 5-4 United States Supreme Court held, in Janus Capital Group Inc. et al. v. First Derivative Traders, No. 09-525, 2011 WL 2297762 (U.S. June 13, 2011), that an investment advisor was not liable for fraud in the prospectus of a sponsored mutual fund because the investment advisor was not the “maker” of the fraudulent statements – even though the fund’s officers were all also employees of the advisor and even though the advisor prepared, filed, and distributed the prospectus.  Janus draws a bright line to protect public companies’ service providers, such as bankers, lawyers, accountants, investment advisors and financial advisors, who will not be liable to private plaintiffs for statements made by their client issuer, no matter how significant a role they played in advising or drafting such statements. The high court found that the only persons who can have direct liability in private lawsuits are those who have “ultimate authority over the statement, including its content and whether and how to communicate it.”  Only such persons are the “makers” of “statements” for purposes of direct liability in private Rule 10b-5 suits.  “Without control,” according to the Court, “a person or entity can merely suggest what to say, not ‘make’ a statement in its own right,” and therefore “[o]ne who prepares or publishes a statement on behalf of another is not its maker.”

The majority opinion was written by Justice Thomas and joined by Chief Justice John Roberts and Justices Antonin Scalia, Anthony Kennedy and Samuel Alito.  Justice Stephen Breyer wrote the dissent, in which Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan joined, and argued that, instead of a bright line rule, the Court should adopt a more flexible approach and determine whether a person is a “maker” of a statement based on the circumstances of each case. 

For more information about the author, Curtis Alva, click here.