The week of June 24, 2024 may be remembered as one of the worst in recent memory for the SEC, which – along with the “administrative state” generally – was beaten up by some very significant decisions handed down by the U.S. federal courts.
Securities Fraud Claims Seeking Civil Penalties Must Be Brought in Federal
I’ve often said that lawyers representing corporations should never underestimate the creativity of the plaintiffs’ bar. However, it seems that the white collar criminal defense bar may not be slouches in the creativity department either.
I’m referring to a recent report in The Wall Street Journal that the legal team representing Elizabeth Holmes, the “disgraced Theranos founder,” is considering using her mental health (presumably, the lack thereof) as a defense in her upcoming federal trial for engaging in a variety of frauds.
I’m prepared to admit that I am totally if morbidly fascinated by the Theranos case: I’ve read the phenomenal book, Bad Blood, by John Carreyrou – twice, in fact – and will surely be among the first to see the movie (which reportedly will star Jennifer Lawrence as Holmes in what strikes me as the best casting choice ever); I’ve attended programs featuring Tyler Shultz, the whistleblower who blew the top off the fraud (and whose grandfather, former Secretary of State George Shultz, was on the Theranos board at the time in a family saga worthy of Aeschylus); I’ve listened to the podcast; I’ve watched the HBO documentary; and much more. Still, it seems just surreal.
Continue Reading Legal surrealism
A few weeks ago, I attended the “spring” meeting of the Council of Institutional Investors in Washington (the quotation marks signifying that it didn’t feel like spring – in fact, it snowed one evening). These meetings are always interesting, in part because over the 15+ years that I’ve been attending CII meetings, their tone has changed from general hostility towards the issuer community to a more selective approach and a general appreciation of engagement.
So what’s on the mind of our institutional owners? First, an overriding concern with capital structures that limit or eliminate voting rights of “common” shareholders. CII’s official position is that such structures should be subject to mandatory sunset provisions; that position strikes me as reasonable (particularly as opposed to seeking their outright ban), but it’s too soon to tell whether it will gain traction.Continue Reading News from the front
It may be nice to be your own boss, but setting your own compensation – and, at least arguably, giving yourself excessive pay – may get you in trouble. A number of boards of directors have found that out, as courts have given them judicial whacks upside the head for paying themselves too much. Not surprisingly, shareholders have gotten on the bandwagon as well.
Executive compensation – at least for public companies – has to be scrutinized and blessed by independent directors and, since the advent of Say on Pay, approved by shareholders (albeit on a non-binding basis). In contrast, directors have long set their own pay, with little or no scrutiny and no requirement for independent review, much less approval. (Director plans generally must get shareholder approval if they provide for equity grants, but neither the overall director compensation program nor specific awards have to be approved.)
Continue Reading Pigs and hogs — a note on director compensation
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.
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
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:
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:
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
More 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?
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