“Dead Hand Proxy Puts” Garner Increased Stockholder Scrutiny In Delaware

A ruling last fall by the Delaware Chancery Court has prompted a wave of 8 Del. C. § 220 books and records inspection demands on (and threatened litigation against) Delaware corporations that have entered into credit agreements containing so-called “dead hand proxy put” provisions.  A “dead hand proxy put” provision allows the corporation’s lenders to demand immediate payment of all outstanding debt if, within a specified measuring period, a majority of incumbent board members is replaced in a threatened or actual contested election.  In Pontiac General Employees Retirement System v. Healthways, Inc., C.A. No. 9789-VCL (Del. Ch. Oct. 14, 2014) (transcript ruling), the Court declined to dismiss a breach-of-fiduciary-duty challenge to a “dead hand proxy put,” even where the exercise of the provision was not imminent.  The Court held that the complaint adequately alleged facts showing the provision had caused a present injury to the corporation’s stockholders by deterring a possible stockholder-led proxy contest.  Other than the facts alleged, the ruling left uncertain the attendant circumstances needed to state a mature “dead hand proxy put” claim.  As a result, all public company boards with credit agreements containing “dead hand proxy puts” now face Section 220 books and records inspection demands, and potential litigation. Continue Reading

Second Circuit Narrows Scope of SLUSA Preclusion

In In re Kingate Management Ltd. Litigation, No. 11-1397, 2015 U.S. App. LEXIS 6725 (2d Cir. Apr. 23, 2015), the United States Court of Appeals for the Second Circuit held that in order for the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C. § 78bb(f), to preclude state law claims that fall within the anti-falsity provisions of the Securities Act of 1933 and Securities Exchange Act of 1934, (1) the claims must allege that the defendant, not some third party, engaged in the requisite false conduct and (2) the allegation of false conduct must be necessary to liability under the state laws alleged.  The Court also held that SLUSA does not require that an entire complaint be dismissed if only certain claims or parts of claims are precluded.  Those claims which are not covered by SLUSA must be allowed to proceed.  This decision clarifies the scope of SLUSA preclusion. Continue Reading

Delaware Chancery Court Holds that Creditor Plaintiffs in Derivative Suits May Satisfy Standing Requirement by Showing Corporation’s Insolvency at Time of Suit, Regardless of Later Solvency

In Quadrant Structured Products Co., Ltd. v. Vertin, C.A. No. 6990-VCL, 2015 WL 2062115 (Del. Ch. May 4, 2015), the Delaware Court of Chancery held that a creditor plaintiff needs only establish that a corporation was insolvent at the time the suit was filed in order to establish standing to sue derivatively on behalf of the corporation.  Creditors do not need to show that the corporation was continuously insolvent throughout the litigation to maintain standing, nor do they need to show that the corporation was “irretrievably insolvent.”  The decision clarifies a murky area of Delaware law regarding creditor-led derivative suits and may further broaden the situations in which creditors can assert derivative breach of fiduciary duty claims. Continue Reading

Delaware Supreme Court Holds That a Stockholder Plaintiff Must Plead a Non-Exculpated Claim to Avoid Section 102(b)(7)-Based Dismissal When Seeking Damages From Independent and Disinterested Directors

In the consolidated appeal In re Cornerstone Therapeutics Inc., Stockholder Litigation and In re Zhongpin Stockholders Litigation, Nos. 564, 2014 and 706, 2014, 2015 Del. LEXIS 231 (Del. May 14, 2015), the Delaware Supreme Court considered for the first time the pleading burden a stockholder plaintiff must meet when seeking to recover monetary damages from an independent and disinterested director who is protected by an exculpatory charter provision authorized under 8 Del. C. § 102(b)(7).  The Court held that to survive a motion to dismiss by that director, the complaint must plead a non-exculpated claim against that director, even if the underlying standard of review is entire fairness.  Cornerstone confirms the need for the Chancery Court to analyze exculpation on a director-by-director basis in all cases at the earliest practical time, including at the pleading stage, in order to fulfill Section 102(b)(7)’s legislative purpose. Continue Reading

SEC Takes Aggressive Approach to Fortify Dodd-Frank’s Whistleblower Rules

On April 1, 2015, the Securities & Exchange Commission (the “SEC” or “Commission”) fined a public company $130,000 for requiring employees involved in internal investigations to sign a confidentiality agreement that the Commission deemed violative of the whistleblower protections contained in the Dodd-Frank Act.  KBR, Inc., Exchange Act Release No. 74619 (Apr. 1, 2015).  This case was the first brought by the SEC involving anti-disclosure language of this type. Continue Reading

United States Supreme Court Resolves Circuit Split Regarding Section 11 Claims Predicated Upon Allegedly Misleading Statements of Opinion

In Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435, 2015 WL 1291916 (U.S. Mar. 24, 2015), the United States Supreme Court addressed the circumstances under which a claim alleging that an issuer made a false statement of opinion in a registration statement suffices to state a claim for relief under Section 11 of the Securities Act of 1933 (“1933 Act”), 15 U.S.C. § 77k.  The Court held that (1) a statement of opinion does not constitute an “untrue statement . . . of fact” in violation of Section 11 merely because it is ultimately proven incorrect and (2) a statement of opinion which omits material facts about the issuer’s knowledge may be misleading if the omitted facts conflict with what a reasonable investor would infer from reading the statement in context.  The Court’s decision resolved a split in the Circuits and may spawn a new wave of “omission” litigation under the 1933 Act. Continue Reading

California and Delaware Courts Agree: Amendments to Corporate Bylaws Do Not Apply Retroactively to Impair Pursuit of Previously Accrued Claims

Two recent decisions, one from the Delaware Court of Chancery and one from the California Court of Appeal, Fourth Appellate District, refused to apply bylaws that impaired a shareholder/member plaintiff’s ability to pursue his or her claims against the corporation where the the relevant bylaw was adopted after the plaintiff’s claims accrued. Continue Reading

SEC Requires FINRA Registration for High Frequency Traders

In an effort to keep pace with rapidly accelerating market technology, the Securities & Exchange Commission (“SEC”) has taken steps to expand oversight over high-frequency trading.  On March 25, 2015, the SEC unanimously approved a plan requiring that rapid-fire trading firms register with the Financial Industry Regulatory Authority (“FINRA”). Continue Reading

Second Circuit Holds That SIPA Does Not Permit an Inflation or Interest Adjustment to “Net Equity” Claims For Customer Property

In In re Bernard L. Madoff Investment Securities LLC, No. 14-97-bk(L), 2015 WL 727965 (2d Cir. Feb. 20, 2015), the United States Court of Appeals for the Second Circuit held that no adjustment for inflation or interest could be made under the Securities Investor Protection Act, 15 U.S.C. § 78aaa, et seq. (“SIPA”), in calculating “net equity” claims for customer property.  The Second Circuit’s opinion re-affirms that SIPA is not intended to shield investors from loss, and that its goal is limited to restoring customers of defunct broker-dealers to the pre-liquidation status quo. Continue Reading

Delaware Court of Chancery Rejects Share-Tracing Standing Requirement for Appraisal Petitioners

The Delaware Court of Chancery issued companion opinions clarifying Delaware’s standing requirements for appraisal petitions under 8 Del. C. § 262.  In In re Appraisal of Ancestry.com, Inc., C.A. No. 8173-VGC, 2015 WL 66825 (Del. Ch. Jan. 5, 2015), and Merion Capital LP v. BMC Software, Inc., C.A. No. 8900-VCG, 2015 WL 67586 (Del. Ch. Jan. 5, 2015), the court denied respondents’ motions for summary judgment and refused to read a “share-tracing” requirement into the appraisal statute’s standing procedures.  These cases clarify that, to perfect appraisal rights, beneficial holders of shares must show that the bulk record holder refrained from voting in favor of the merger at issue more shares than the petitioner seeks to have appraised.

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