A recent First Circuit decision raises the pleading bar for plaintiffs asserting violations of Section 11 of the Securities Act. Only would-be plaintiffs who acquired a security that is the direct subject of a prospectus and registration statement are entitled to sue under Section 11. That right to sue is limited to plaintiffs who either purchased their shares directly in the offering, or who otherwise can trace their shares back to the relevant offering. This has been referred to as the “traceability” requirement. Until now, Section 11 plaintiffs have generally sought to establish standing by pleading a simple statement to the effect that they “purchased shares of stock pursuant and/or traceable to the offering.” For companies whose stock is all traceable to a single offering, this pleading burden presents little burden, as all shares self-evidently derive from the offering. But when stock has been issued in multiple offerings, a plaintiff has to plead that his or her shares were issued under the allegedly false or misleading registration statement, and not some other registration statement.
Mintz Levin’s Institutional Investor Class Action Recovery practice recently launched a new blog: Class Action Recovery for Mutual Funds. This new blog will report on various happenings in class action cases that may not be covered in other securities litigation blogs or publications, and that will be of special interest to institutional investors. With the claims process itself becoming more adversarial, the blog will follow developments in the administration of claims, including ways in which defendants may be participating in the claims process with the intent to reduce valid claims Additionally, the blog will cover interesting developments in securities class action cases, such as noteworthy objections, motions and opt-outs, as well as new developments in non-U.S. securities actions that will be of interest to those seeking to recover in foreign jurisdictions against non-U.S. issuers.
Delaware recently enacted new legislation to prohibit stock corporations from adopting fee-shifting bylaws and charter provisions, among other amendments to the Delaware General Corporation Law. The fee-shifting ban ends a long-running controversy over whether Delaware corporations should be permitted to adopt rules enabling them, and their officers and directors, to recover their attorneys’ fees from shareholder plaintiffs who pursued unsuccessful lawsuits for breaches of fiduciary duty or related claims. The new legislation also authorizes Delaware corporations to adopt Delaware-only forum selection provisions for litigation involving companies’ internal affairs, and modifies the procedures for statutes concerning ratification of defective corporate acts and issuance of new corporate stock, among other changes. The new law was signed by Governor Jack Markell on June 24, 2015 and will take effect on August 1st. A synopsis of its provisions and its legislative history can be found here.
Home Depot was recently hit with a books-and-records suit in the Delaware Court of Chancery, Frohman v. Home Depot, which seeks documents relating to the giant retailer’s data security breach last September. The plaintiff, a Home Depot shareholder, is requesting information concerning how the company first learned of the breach, any analysis of how the breach occurred, and what steps it took thereafter, among other topics. Continue Reading Data Security Breach Documents Sought in Home Depot Books-and-Records Suit
A recent decision by Judge F. Dennis Saylor of the U.S. District Court for the District of Massachusetts, Butler v. Moore, C.A. No. 10-10207-FDS U.S. Dist. LEXIS 39416 (D. Mass. Mar. 26, 2015), offers an example of how fiduciary duties can continue to govern the conduct of participants in a closely held corporation or LLC under Massachusetts law, even where parties claim that those duties have been abrogated by contractual agreement. The decision offers a cautionary tale reminding shareholders and members in closely held companies of the fiduciary duties they owe to one another and to the company under Massachusetts law, and of the resulting requirement that they should be scrupulously fair and forthright, and carefully observe corporate formalities, in their dealings with one another.
Butler v. Moore will take an important place in the long line of Massachusetts decisions dealing with fiduciary duties in closely held entities. It offers a comprehensive overview of fiduciary duty law and carefully applies this law to a complex set of facts. In its breadth, depth, and human interest, it is comparable to previous landmark decisions in the field such as Demoulas v. Demoulas Super Markets, Inc., 424 Mass. 501, 677 N.E.2d 159 (1997). Judge Saylor’s opinion is particularly noteworthy for:
(1) its detailed findings chronicling how the individual defendants progressively siphoned assets and opportunities from Eastern Towers through “an extensive pattern of deceit, concealment, and manipulation”;
(2) its evaluation of the relationship between Eastern Towers, Inc. and Eastern Towers, LLC, holding that the two companies should be treated as a single entity in light of the failure to observe corporate formalities and their confused intermingling of operations and assets; and
(3) its close analysis of the intersection between the principals’ fiduciary duties and the Eastern Towers, LLC operating agreement, concluding that the operating agreement did not insulate the defendants from liability.
The decision presents a clear warning to entrepreneurs and leaders of start-up businesses that, where a company is closely held, negotiations with other shareholders or members concerning corporate governance and related party transactions must be carried out with transparency, full disclosure, and good faith, consonant with the fiduciary duties incumbent upon them as shareholders, members, and/or directors of closely held companies under Massachusetts law.
The Council of the Corporation Law Section of the Delaware State Bar Association recently released proposed amendments to the Delaware General Corporation Law (DGCL) that would prohibit fee-shifting provisions in a corporation’s charter or bylaws for litigation involving the corporation’s internal affairs, but authorize Delaware forum selection provisions. The proposal to ban fee-shifting provisions is particularly controversial and has generated significant debate over whether it is necessary to protect shareholder litigation or improperly deprives corporations of a needed tool to deter meritless suits. But the forum selection amendment also contains a thought-provoking element; while it permits Delaware corporations to designate courts in Delaware as the exclusive forum for certain types of corporate litigation, it would effectively prohibit them from selecting some other jurisdiction as the exclusive forum for that litigation. Continue Reading Delaware Bar Proposes Amendments to Ban Fee-Shifting Provisions and Allow Delaware-Only Forum Selection Provisions in Corporate Charters and Bylaws
In its opinion in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, released yesterday, the U.S. Supreme Court held that a securities issuer’s statement of opinion in a registration statement, even though sincerely believed, may still give rise to liability under Section 11 of the Securities Act of 1933 if it omits material conflicting facts about the issuer’s basis for the opinion that render it misleading: “if a registration statement omits material facts about the issuer’s inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself, then §11’s omissions clause creates liability.” The decision marks a significant departure from previous decisions by the U.S. Courts of Appeals for the Second and Ninth Circuits, which held that to maintain a Section 11 claim concerning a statement of opinion, a plaintiff must plead and prove that the issuer did not believe the statement of opinion at the time it was made. But it does not go so far as the Sixth Circuit’s underlying Omnicare opinion in the same case, which held that under Section 11 a plaintiff need only allege that a statement of opinion ultimately proved to be incorrect, regardless of the issuer’s knowledge at the time it was made. In the wake of the Supreme Court’s Omnicare decision, issuers and their counsel will have to pay close attention to statements of opinion in registration statements and carefully consider whether they have provided sufficient factual disclosure relating to any such statements. Continue Reading Supreme Court Holds That Issuers Can Be Liable for Omitting Material Facts From Statements of Opinion in Omnicare Case
Please join us at 12:30 p.m. on March 10, 2015 for a webinar titled, “Preparing for and Addressing Activist Shareholders: A Case Study from the Valeant/Pershing Square Bid for Allergan.” My colleague Joel Papernik and I will be discussing a topic that rose to prominence for many public companies in 2014 and that shows no signs of abating in 2015. Joel will begin the presentation with an overview of the existing landscape of shareholder activism, and then will launch into a discussion of the general defensive measures companies are taking even before being targeted by an activist shareholder. During the second half of the presentation, I will use the highly-publicized tender offer that Valeant and Pershing Square made to Allergan as a case study for exploring how the federal securities laws can be implicated in a proxy contest and tender offer. We are presenting this webinar in conjunction with the Northeast Chapter of the Association of Corporate Counsel. We hope you can tune in!
An increasingly popular hedge fund strategy, commonly referred to as “appraisal arbitrage,” recently received a significant boost from the Delaware Court of Chancery. Appraisal arbitrage refers to the practice of buying shares in a target corporation following announcement of a buyout transaction, and seeking value above the buyout price through the appraisal process. In In Re Appraisal of Ancestry.com, Inc. (January 5, 2015), the Court found that a beneficial owner had standing to seek appraisal in respect of an acquisition even though it had purchased its shares in the open market after the record date for the stockholder vote and was unable to show that its shares were not voted in favor of the transaction. In denying Ancestry’s motion for summary judgment, the Court reasoned that the record holder of the shares (here Cede & Co.) only needed to show that enough shares were not voted in favor of the acquisition to cover the number of shares for which it demanded appraisal. Once this hurdle is met, a beneficial owner of such shares (here Merion) does not need to show that its specific shares were among those not voted in favor of the acquisition in order to file the appraisal petition. Thus Merion had standing to pursue appraisal. As money continues to flow toward this strategy, it may result in more appraisal petitions and increased closing risk, as well as erosion of shareholder value in public M&A.
Previously we have discussed Delaware court decisions upholding forum selection bylaws requiring suits involving a corporation’s internal affairs to be filed in a specified court, such as the Delaware Court of Chancery (see posts here and here). Last week the Delaware Supreme Court gave corporate management another potential tool for controlling the forum for shareholder litigation, holding in United Technologies Corp. v. Treppel that the Delaware Court of Chancery has authority to limit the litigation forum where information obtained in a books and records action under Section 220 of the Delaware General Corporation Law can be used. Continue Reading Delaware Supreme Court Holds That Court of Chancery Can Restrict Forum Where Books and Records Can Be Used