WHEN SHAREHOLDERS REVOLT . . .
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Transcript of WHEN SHAREHOLDERS REVOLT . . .
© 2012
WHEN SHAREHOLDERS REVOLT . . .
Association of Corporate CounselAustin ChapterOctober 31, 2012
David D. Sterling
UNHAPPY SHAREHOLDERS ORDINARILY COME IN ONE OF THREE FLAVORS
1. INSTITUTIONAL INVESTORS (FREQUENTLY ACTIVISTS)
2. GADFLIES
3. FRONTS FOR LAW FIRMS THAT SPECIALIZE IN REPRESENTING SHAREHOLDERS
GENERALLY SPEAKING, SHAREHOLDERS MAY BRING FOUR DIFFERENT TYPES OF CASES
1. Securities class actions seeking damages
2. Derivative suits
3. Breach of fiduciary duty class actions
4. Proxy claims
SECURITIES CLASS ACTIONS
Section 10(b) and Rule 10b-5
Section 11
State Blue Sky laws
ELEMENTS OF A 10b-5 CLAIM
A material misrepresentation or omission
Made with scienter
In connection with a purchase or sale of securities
Reliance
Loss causation
Damages
WHAT IS "MATERIAL" ?
In order for a misrepresentation or omission to be material, it must be such that a reasonable investor would consider it important in the context of the overall mix of information in deciding whether to buy or sell.
WHAT IS "SCIENTER" ?
A state of mind somewhat akin to an intent to deceive
• Most courts say "severe recklessness" suffices
• Far beyond simple negligence
• Key scienter issues:
"Motive and opportunity" - - insider trading, company issuing stock as currency, etc. . . . important but not dispositive
Absent motive, standard for circumstantial proof higher - - usually particularized allegations of specific contemporaneous reports contradicting the company's public disclosures
HOW DO SHAREHOLDERS SHOW "RELIANCE"?
Individual, subjective reliance often impossible, and certainly not amenable to class treatment
In 1988, Supreme Court adopted the "fraud on the market" presumption of reliance, relying largely on the efficient market hypothesis
Easy to allege, not so easy (or cheap) to prove
WHAT IS "LOSS CAUSATION"?
It is not enough for shareholders to allege that they bought stock at an inflated price
Must also allege that they sold after the truth was in some way revealed
PROCEDURAL HURDLES TO A 10b-5 CLAIM
PSLRA precludes discovery until court rules on motion to dismiss
Ordinary plaintiff-friendly rules and conventions on deciding 12(b)(6) motions generally supplanted by PSLRA's special pleading rules
Class certification requirements also tightened through amendments to FRCP 23
Favorable case law
PRACTICAL CONSIDERATIONS FOR 10b-5 CASES
D&O coverage
Disclosure implications
2-year statute of limitations, 5-year statute of repose
Unique timeline going forward
LAW OF UNINTENDED CONSEQUENCES
State court attempts to circumvent federal law - Blue Sky laws and common law
Largely swatted down by SLUSA
Plaintiffs' firms shift their focus
SECTION 11 CLAIMS
Keyed to false or misleading prospectus
Very different (and easier) standards than 10b-5
Essentially a strict liability provision
Directors, underwriters, experts all potentially on the hook unless they can establish due diligence defense
1-year statute of limitations, 3-year statute of repose
DERIVATIVE SUITS
Suits by a shareholder on behalf of the company• Any recovery goes to the company
So what's in it for the shareholder?
Almost always against directors (and sometimes officers) for allegedly breaching fiduciary duties
DERIVATIVE SUITS: GENERALLY TWO FLAVORS
1. Challenging a board decision or action• Related party transactions• Executive compensation• Mergers
2. Challenging board inaction ("Caremark claims")• FCPA issues• Catastrophic events• Regulatory fines• Copycatting 10b-5 suits
SPECIAL PLEADING REQUIREMENTS FOR A DERVIATIVE SUIT
Deciding to instigate litigation on behalf of a company is typically within the province of the board
Two paths around this:
1. Make demand, then allege demand was unreasonably denied
Very high hurdles Texas caveat
2. Allege particularized facts demonstrating that at least half of the board could not independently consider demand
"INDEPENDENCE" FACTORS IN THE DERIVATIVE CONTEXT
Being on both sides of a transaction = Not independent Being dominated or controlled by someone who is on
both sides of a transaction = Not independent Receiving some material benefit not shared by
shareholders generally = Not independent Approving the challenged transaction, being named
as a defendant ≠ Not independent Allegations must show "a substantial threat of personal
liability" Exculpatory provisions
PRACTICAL CONSIDERATIONS FOR A DERIVATIVE SUIT
Standing requirements Venue issues D&O issues What to do if your motion to dismiss is denied, or
if you don't think you can win on a motion to dismiss - the SLC
Books + records demands under DGCL § 220 Statute of limitations depends on law of state of
incorporation
SLC ISSUES
Independence - committee, counsel, advisors
Full authority
Judicial right to second guess?
BREACH OF FIDUCIARY DUTY CLASS ACTIONS
Typically in the M+A context
The "3 Ps"
Venue issues
Timing considerations
D+O issues
Two Texas caveats
PROXY CLAIMS
Institutional investor v. Gadfly v. Fronts
Materiality standard
Post-vote claim requires vote to have been "an essential link" in the transaction
PSLRA applies if damages sought