Whistleblowers receive protection
Photo by Kai Schreiber

We are pleased to provide a posting from our colleague, Holly L. Griffin, an attorney in Gunster’s Labor and Employment practice group.

Within the course of one week, the SEC took administrative action against two companies for language contained within severance agreements which restricted employee rights to obtain a monetary award for reports of potential law violations to the SEC. The SEC took aim at two types of provisions which commonly appear in severance agreements: the confidentiality clause and the waiver of rights.

Background

In one of the cases, the company required all employees accepting severance pay to sign an agreement that contained a clause prohibiting disclosure of company confidential information and trade secrets, except when the employee is compelled by law to disclose the information.  In the event the employee was required to disclose company confidential information, the agreement required the employee to provide notice to the company.  The SEC determined that the confidentiality agreement put former employees between a rock and a hard place if they wanted to report potential law violations; they could either identify themselves as a whistleblower to the company by providing notice, or risk breaching the agreement and forfeiting severance by disclosing confidential information.

In both matters, the companies required all employees accepting severance to sign an agreement that contained a waiver of rights. Although the severance agreements did not prohibit the employees from reporting or participating in an investigation into a potential law violation, they explicitly prohibited the employees from receiving monetary compensation for such reports.  The SEC found both companies in violation of an SEC Rule which prohibits public companies from taking action which impede a whistleblower from communicating with the SEC regarding possible law violations.  Congress enacted the “Dodd-Frank Act with the stated purpose of encouraging whistleblowers to report potential law violations to the SEC, by offering financial incentives or awards for reports.  The SEC determined that requiring employees to waive their right to financial recovery undermines the public policy purpose behind the Dodd-Frank Act and violates SEC rules.

Both companies were required to notify former employees of the ruling and to pay monetary civil penalties, totaling hundreds of thousands of dollars each. One company was also required to amend its severance agreements to include a section titled “Protected Rights,” which notified employees of the right to report any suspected law violation to a governmental agency and to receive an award for providing such information.

What it means 
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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.


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