© 2012 Winston & Strawn LLP · • Dura Pharmaceuticals, Inc. 2005: inflated purchase price/stock...
Transcript of © 2012 Winston & Strawn LLP · • Dura Pharmaceuticals, Inc. 2005: inflated purchase price/stock...
© 2012 Winston & Strawn LLP
© 2012 Winston & Strawn LLP
Securities Litigation in 2012 and Beyond: New Targets, New Solutions
Brought to you by Winston & Strawn’s Securities Litigation Practice Group
© 2012 Winston & Strawn LLP 3
Today’s eLunch Presenters: Topic 1
Casey Berger
LitigationHouston
John Roesser
LitigationNew York
Getting Out in Front of Shareholder Challenges to Mergers & Acquisitions
© 2012 Winston & Strawn LLP 4
Focus Has Shifted
Private Securities Litigation Reform Act of 1995 & recent Supreme Court decisions have made traditional stock drop cases much more difficult to allege
• Dura Pharmaceuticals, Inc. 2005: inflated purchase price/stock drop alone are insufficient to establish loss causation
• Tellabs 2007: inference of “scienter” (intent) must be more than merely “reasonable” or “permissible,” must be cogent & compelling
• Morrison 2010: limited extraterritorial application of securities laws
• Merck 2010: SOL begins running when plaintiffs actually or reasonably should have discovered facts forming claim
Financial Crisis Cases are on the decline
As a result, M&A cases are dramatically on the rise
© 2012 Winston & Strawn LLP 5
The Anatomy of a Typical Shareholder Challenge to a Merger or Acquisition
Transaction is announced
Multiple complaints filed soon thereafter (< 2 weeks)
Plaintiffs assert claims for breach of fiduciary duty against the board of directors, often alleging, initially, that the offer significantly undervalues company
Company has incentive to close transaction and thus seeks to quickly dispense with lawsuits
© 2012 Winston & Strawn LLP 6
The Overwhelming Majority of Deals Will Be Challenged
Chart taken from Cornerstone Research’s
“Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions”
© 2012 Winston & Strawn LLP 7
M&A Cases Are No New Phenomenon
Chart taken from Cornerstone Research’s
"Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions"
© 2012 Winston & Strawn LLP 8
M&A Deals Are Often the Subject of Multiple Lawsuits
Chart taken from Cornerstone Research’s
"Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions"
© 2012 Winston & Strawn LLP 9
Shareholders Act Quickly . . .
Chart taken from Cornerstone Research’s
"Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions"
© 2012 Winston & Strawn LLP 10
. . . And Their Lawyers Get Paid . . .
Chart taken from Cornerstone Research’s
"Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions"
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. . . Even When the Shareholders Don’t
57 investor class actions settled or otherwise concluded in Delaware in 2010 and 2011
40—or 70 percent—made money for plaintiffs’ lawyers but not shareholders (disclosures only)
Judges are growing critical of disclosure – only settlements
© 2012 Winston & Strawn LLP 12
The Other 30%
Chart taken from Cornerstone Research’s
"Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions"
© 2012 Winston & Strawn LLP 13
Plaintiffs Are Avoiding Federal Courts . . .
Chart taken from Cornerstone Research’s
"Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions"
© 2012 Winston & Strawn LLP 14
While Delaware Is The Most Prominent Non-Federal Venue . . .
Chart taken from Cornerstone Research’s
"Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions"
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Delaware Is No Walk in the Park
Complex law applied
Sophisticated, diligent, and thorough judges
Unwilling to sign off on standard & unearned fees
Little patience for meritless cases
• “I don’t think for a moment that 90 percent—or based on recent numbers, 95 percent of deals are the result of a breach of fiduciary duty. I think that there are market imbalances here and externalities that are being exploited. What this means is that this Court needs to think carefully about balancing.”
o Vice Chancellor, J. Travis Laster, Stourbridge Investments, LLC v. Bersoff, C.A. No. 7300-VCL (Del. Ch. Mar. 13, 2012) (emphasis added)
© 2012 Winston & Strawn LLP 16
. . . Plaintiffs Are Forum Shopping to Avoid It
Chart taken from Cornerstone Research’s
"Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions"
© 2012 Winston & Strawn LLP 17
Post-Closing Litigation
Post-Closing litigation historically uncommon
Business Judgment Rule
Exculpation Provisions
Incentive for companies to settle prior to closing of transaction, particularly where plaintiffs seek to restrain closing
Plaintiffs instead pursue pre-closing settlements & disclosures
Judges are, however, growing increasingly critical of such cases and fear that they primarily result in attorneys’ fees
• 40 cases $32.4 million for lawyers & $0 for shareholders
• 17 M&A lawsuits only led to $350 million total for the shareholders
• Del Monte settled for $89.4 million $22.3 million in attorneys’ fees
Plaintiffs now willing to litigate given potential damages awards, especially if not in federal court or Delaware state courts
© 2012 Winston & Strawn LLP 18
M&A Litigation: Recent Example
In re El Paso Corporation Shareholder Litigation, C.A. No. 6949-CS (Del. Ch. Feb. 29, 2012)
© 2012 Winston & Strawn LLP 19
The Deal
El Paso Corporation (two main business lines: Pipeline and E&P) publically announced plan to spin-off the E&P business
Kinder Morgan submitted an offer to buy the entire company, but intended to spin-off E&P business to finance the deal
Merger talks begin August/September 2011 between El Paso & Kinder Morgan
El Paso’s longtime advisor Goldman Sachs was initially advising on E&P spin-off; due to potential conflicts, Morgan Stanley also brought in to advise on the Kinder Morgan Merger
El Paso CEO “undertook sole responsibility for negotiating the sale” to Kinder Morgan
Merger Agreement signed – October 16, 2011
© 2012 Winston & Strawn LLP 20
The Fallout
Multiple El Paso stockholders file class action suits challenging the Merger
22 putative class action lawsuits filed overall: 6 (DE) / 5 (TX) within 1 week
5 (DE) / 3 (TX) within 2 weeks
2 (DE) within 3 – 4 weeks
Cases consolidated in Delaware and lead counsel chosen
© 2012 Winston & Strawn LLP 21
Shareholders Take Issue
Shareholders file breach of fiduciary duty claims against Board and seek to enjoin the Merger. Key allegations: El Paso accepted a lower final bid ($25.91/share) than what was
previously offered ($27.55/share) $534M shortfall
Deal protection provisions
“No-shop” provision
$650 million termination fee and matching rights in event of Superior Proposal
Conflicts of interest with financial advisors and management
© 2012 Winston & Strawn LLP 22
The Conflicts
Conflicting motives of El Paso CEO: approached Kinder Morgan with proposal for management buy-out of E&Pbusiness late in process, which was not disclosed to Board
Goldman owned 19% of Kinder Morgan ($4 Billion)
Goldman controlled two Kinder Morgan Board seats
Goldman’s lead banker for El Paso had an undisclosed personal financial interest in Kinder Morgan worth $340,000
Morgan Stanley brought into immunize Goldman conflict; however, Morgan Stanley would only get paid if El Paso sold to Kinder Morgan (which would benefit original advisor Goldman)
© 2012 Winston & Strawn LLP 23
Unhappy Judge
Judge highly critical of players and process: Extremely “disturbing behavior” Board acted “weakly” during negotiations Revised lower bid that was ultimately accepted:
“Instead of telling Kinder [Morgan] where to put its drilling equipment, [the CEO] backed down.”
“Goldman’s friends in El Paso management—and this is what they seem to have been—easily gave in to Goldman”
Board and CEO “can be seen by a rational mind as oddly timid” “Some backbone might well have resulted in a better result” CEO’s “velvet glove negotiating strategy” viewed as having been
influenced by improper motive
© 2012 Winston & Strawn LLP 24
Business Judgment Protection May Be Compromised By Conflicts
Court reaffirms general Delaware notions that, under Revlon, so long as directors made reasonable decisions for a proper purpose, they met their duties and courts will not second-guess the board “Although a reasonable mind might debate the tactical choices
made by the El Paso Board, these choices would have little basis for enjoining a third-party merger approved by a board overwhelmingly comprised of independent directors”
Even so, the Court suggested that the customary deference to the Board in exercising its business judgment was undermined by the conflicts of the CEO and financial advisors upon which it relied
© 2012 Winston & Strawn LLP 25
No Injunction
Court determined that the shareholders had a reasonable probability of success on a claim that the Merger was tainted by breaches of fiduciary duty, however…
Injunction still denied – El Paso stockholders were sufficiently prepared to vote on the Merger and “decide for themselves”
Reasoning: injunction would cause more harm than good No rival bids existed
Roughly 35-45% premium over pre-announcement share price
Injunction would likely last beyond June 30, 2012, which is the drop-dead date in the Merger Agreement
Kinder Morgan would be allowed to walk away on that date
© 2012 Winston & Strawn LLP 26
Where Does the Deal Stand?
WSJ (Mar. 9, 2012): El Paso shareholders voted overwhelmingly to approve the sale to
Kinder Morgan (95% of the shares voted endorsed the deal; shareholders holding about 79% of outstanding shares voted)
Kinder Morgan has agreed to sell the E&P business to private-equity firm Apollo Global Management
Court mentions the likely prospect of a damages trial against the El Paso CEO, other El Paso managers who might be added as defendants, and financial advisors NYTimes (Mar. 7, 2012): California State Teachers’ Retirement
System said it would vote to block Kinder Morgan’s $21 billion takeover of El Paso, citing a lack of transparency and conflicts of interest related to the deal
© 2012 Winston & Strawn LLP 27
Considerations after El Paso
Consider appointing a special committee of independent and disinterested directors; Board should be actively involved in the process
Legal team should include/consider litigation perspective
Vet financial advisors and assess the impact of their potential conflicts before and throughout retention; Board should be prepared to explain financial advisors’ capabilities and why they were retained
Clearly define the financial advisor’s role and actively police
Carefully consider the incentives created by fee arrangements with financial advisors
Be prepared to defend the process and demonstrate that it was not compromised by conflicts
© 2012 Winston & Strawn LLP 28
Today’s eLunch Presenters: Topic 2
Robb Adkins
LitigationSan Francisco
Jack Knight
LitigationCharlotte
Dodd-Frank, Whistleblower Rules, FCPA, and What To Do When the Feds Come Knocking
© 2012 Winston & Strawn LLP 29
Dodd-Frank (2010)
Comprehensive financial regulation and restructuring
CFTC and SEC have rule-making authority and power to regulate derivatives
Tightened regulation of credit-rating agencies – SEC Office of Credit Ratings
New whistleblower rules from SEC and CFTC – SEC Office of the Whistleblower
SEC Office of Market Intelligence
© 2012 Winston & Strawn LLP 30
Overlapping Regulation Today
Example: Whistleblowers
SOX – strict compliance with procedures for receiving and investigating allegations
Dodd-Frank – bounties for whistleblowers Any action, any agency, not confined to shareholder
protection
Need not report internally first to receive monetary award
Compliance personnel eligible in certain circumstances
Good corporate citizens: What is a public company to do?
© 2012 Winston & Strawn LLP 31
What is on the Horizon in Federal Regulation and Enforcement?
Greater parallel enforcement
Increased focus on predictive modeling and triage –impact of Dodd-Frank whistleblower rules
Greater emphasis on matters with potentially large monetary penalties or recoveries
© 2012 Winston & Strawn LLP 32
How the SEC and DOJ Come Knocking
A “visit” or request for interview by Special Agents or investigators
Written Notice of Investigation
Target Letter (DOJ)
Notice of informal investigation (SEC)
Notice of formal investigation (SEC)
Wells Notice (SEC)
Grand Jury Subpoena (DOJ)
Subpoena Duces Tecum
Testimony
Search Warrant (DOJ)
© 2012 Winston & Strawn LLP 33
The Parallel Players
Department of Justice (DOJ)
Antitrust (ATR), Civil (CIV), Civil Rights (CRT), Criminal (CRM), U.S. Attorney’s Office (USAO), FBI, Bureau of Alcohol Tobacco & Firearms (BATF), Drug Enforcement Administration (DEA), Bankruptcy Trustees
Securities and Exchange Commission (SEC) – Enforcement Division
Other federal investigators/regulators
CFTC, FTC, IRS-CI, USSS, USPIS, ICE, DOL, FDA, OCC, FDIC, FRB, NCUA, SIGTARP, FinCEN
Offices of the Inspector General
State Attorneys General/local District Attorneys
State Regulators
© 2012 Winston & Strawn LLP 34
Financial Fraud Enforcement Task Force
Executive Order signed by President Obama establishing the FFETF on 11/17/2009
More than 25 Federal Agencies
Local and State Partners
Criminal, Civil, and Administrative Remedies
Broad scope of FFETF
Equally broad mandate
© 2012 Winston & Strawn LLP 35
ENFORCEMENT COMMITTEE
FINANCIAL FRAUD ENFORCEMENT TASK FORCE
TRAINING AND
INFORMATION
SHARING
COMMITTEE
STEERING COMMITTEE
VICTIMS’ RIGHTS
COMMITTEE
MORTGAGE
FRAUD
SECURITIES
AND
COMMODITIES
FRAUD
RECOVERY
ACT
FRAUD
TARP
FRAUDDISCRIM.RMBS
“Financial
Crisis”
© 2012 Winston & Strawn LLP 36
DOJ Criminal Division
Eric Holder,AG
U.S. Attorney’s Offices
(94 districts)
Lanny Breuer,AAG, Criminal
Division
Greg Andres,DAAG, Criminal
Division
Denis McInerney,Chief, Fraud
Section
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SEC Division of Enforcement
Robert Khuzami,Director
Lorin Reisner,Deputy Director
Asset Management Unit
Foreign Corrupt Practices Unit
Market Abuse Unit
Municipal Securities and Public Pensions Unit
Structured and New Products Unit
Office of Market Intelligence
Office of the Whistleblower
Regional Offices
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New SEC Formal Investigations Fiscal Years 1997 – 2011
Source: SEC
265 275 282
345324
300
254 261 272255
229 233
496
531
0
100
200
300
400
500
600
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
578
2011
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SEC Enforcement Actions Filed Fiscal Years 2005 – 2011
Source: SEC
630
574
656
671664
681
520
540
560
580
600
620
640
660
680
700
2005 2006 2007 2008 2009 2010
735
2011
© 2012 Winston & Strawn LLP 40
The SEC Reorganization
Specialized Units:
Asset Management (investment advisers and hedge funds)
Market Abuse (insider trading and market manipulation)
Structured and New Products (derivative products)
Foreign Corrupt Practices Violations*
Municipal Securities and Public Pensions
New offices with focus on predictive modeling:
Office of Market Intelligence
Office of the Whistleblower
*New, unique SEC unit in San Francisco focused on FCPA.
© 2012 Winston & Strawn LLP 41
Tactical Considerations in Defending Parallel
Proceedings
Questions to Consider Cooperate and assist or prepare to defend?
If you cooperate, are you creating a roadmap for plaintiffs?
If you do not cooperate and assist, do you risk charges of obstruction?
By cooperating, do you risk waiving the attorney-client privilege?
Document Production
Witness Summaries
Written Report
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FCPA Trend No. 1: More and More FCPA
Dramatic increase in FCPA enforcement, with large surge in the past five years
Reportedly there are approximately 150 ongoing FCPA investigations by DOJ alone
© 2012 Winston & Strawn LLP 43
FCPA Trend No. 2: Continued Large Monetary Resolutions – Why?
A few examples of FCPA fines and disgorgement:
BAE Systems plc: $400 million criminal fine
Snamprogetti Netherlands B.V./ENI S.p.A.: $365 million ($240 million criminal penalty and, with former parent ENI, $125 million in disgorgement)
Technip S.A.: $338 million ($240 million criminal penalty and $98 million in disgorgement)
Daimler AG (along with two subsidiaries): $185 million ($93.6 million criminal penalty and $91.4 million in disgorgement)
Alcatel-Lucent S.A. (along with three subsidiaries): $137.4 million ($92 million criminal penalty and $45.4 million in disgorgement and interest)
Panalpina World Transport (Holding) Ltd. and Panalpina Inc.: $81.9 million ($70.6 million in criminal fines and $11.3 million in disgorgement)
JGC Corporation of Japan: $218.8 million in criminal fines
IBM: $10 million ($2 million civil penalty, disgorgement of $5.3 million and $2.7 million in prejudgment interest)
Maxwell Technologies: $14.4 million ($8 million in criminal penalties, as well as $6.4 million to settle SEC civil charges)
Comverse: $2.8 million ($1.6 million disgorgement to SEC and $1.2 million criminal fine)
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Other FCPA Perils
Shareholder Lawsuits
Faro Technologies: $444,492 in alleged bribes led to $3 million in penalties and resulted in over $7 million settlement with shareholders
Immucor: $19,000 in alleged bribes led to $30,000 in penalties and resulted in $2.5 million settlement with shareholders
Syncor: $113,007 in admitted bribes led to $2 million in penalties and resulted in $15 million settlement with shareholders 7 years later
Internal Investigation Costs
Avon: Spent over $150 million in legal fees on an FCPA investigation, and a shareholder lawsuit is underway
Claims by Foreign Governments
Royal Dutch Shell: after settling with U.S. authorities, required to pay $10 million by the Nigerian government
Alcatel-Lucent: after settling with U.S. authorities, required to pay $10 million by the Costa Rican government
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FCPA Trend No. 3: Prosecuting Individuals
As a primary means of deterring bribery, the DOJ has begun to emphasize prosecution of individuals
Numerous individuals settled FCPA-related charges in 2011, including one settlement in which the individual forfeited nearly $149 million, the largest FCPA-related forfeiture imposed on an individual to date (Jeffrey Tesler)
4
5
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FCPA Trend No. 4: Widespread Compliance Retooling
Expanding FCPA enforcement, internationalization of business, and Dodd-Frank whistleblower rules have led to massive revision of compliance policies and procedures, including: (i) devising and updating written policies and procedures;
(ii) providing employees and third parties with documented training and certifications;
(iii) performing due diligence on third parties, including distributors, partners, joint ventures, and purported charities;
(iv) vetting the provision of gifts, meals, and other hospitalities to officials in both the public and private sector; and
(v) effectively evaluating and investigating red flags and whistleblower reports.
© 2012 Winston & Strawn LLP
Questions?
© 2012 Winston & Strawn LLP 48
Contact Information
Robb AdkinsLitigation
San Francisco(415) 591-1411
Jack KnightLitigationCharlotte
(704) [email protected]
Neal MarderLitigation
Los Angeles(213) 615-1728
[email protected] Roesser
LitigationNew York
(212) [email protected]
Casey BergerLitigationHouston
(713) [email protected]
© 2012 Winston & Strawn LLP
Thank You.