In Chadbourne & Parke LLP v. Troice, Nos. 12-79, 12-86 and 12-88, 2014 U.S. LEXIS 1644 (U.S. Feb. 26, 2014), the Supreme Court of the United States resolved a split in the circuits regarding whether alleged misrepresentations were made “in connection with the purchase or sale of a covered security” for purposes of the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C. § 78bb(f)(1)(A). The Court held that a “misrepresentation or omission of a material fact” is made “in connection with the purchase or sale of a covered security” only if the misrepresentation is “material” to the plaintiff’s decision to buy or sell that covered security. This decision narrows the scope of removal and preclusion of state law securities fraud class actions by the federal courts under SLUSA.
A CEO receives an anonymous call claiming that someone is stealing company trade secrets or that an employee is taking kickbacks from a vendor. A GC gets a call from the HR director who has an employee accusing the company of submitting false bills to a government agency. You are served by a government agency with a subpoena seeking records indicating a criminal investigation is underway for violations of environmental laws, insider trading, tax laws or fraud. Your company receives a credible threat of litigation. These are all real scenarios that occur daily in companies of all sizes all over the world. They trigger critical internal investigations that require substantial time and resources. Regardless of the nature of the investigation, it is vital that it be conducted efficiently, with clear direction and attention to preservation of the attorney-client privilege. This article sets out best practices for doing so.
For those of you still easing into 2014, we thought that now would be a good time to help you plot out your regulatory and internal compliance schedules for the upcoming calendar year.
In Huff Fund Investment Partnership v. CKx, Inc., Civil Action No. 6844-VCG, 2014 WL 545958 (Del. Ch. Feb. 12, 2014) (Glasscock, V.C.), the Delaware Court of Chancery denied a request by respondent CKx, Inc. (“CKx”) to compel the petitioning stockholder to accept the tender of an undisputed portion of the fair value of the petitioner’s shares in order to stop further accrual of prejudgment interest on that undisputed amount. The court’s ruling gives petitioners in appraisal actions little incentive to prosecute appraisal actions expeditiously, as the prejudgment interest rate far exceeds prevailing fixed investment interest rates.
In American Capital Acquisition Partners, LLC v. LPL Holdings, Inc., CA NO. 9490-VCG, 2014 WL 354496 (Del. Ch. Feb. 3, 2014), the Delaware Court of Chancery applied the implied covenant of good faith and fair dealing to a merger agreement’s contingent purchase price provision. The court held that under the implied covenant an acquiring entity must refrain from diverting revenue streams from its subsidiary post-merger in a manner that would depress the payment under the contingent purchase price provision. The court also held, however, that the implied covenant did not require an acquiring entity actively to maximize revenue streams absent the inclusion of a best efforts provision in the merger agreement. American Capital Acquisition Partners defines the contours of the implied covenant of good faith and fair dealing as applied to an acquiring entity’s actions affecting the application of a contingent purchase price provision in a merger agreement.
In Steginsky v. Xcelera Inc., Nos. 13-1327-cv, 13-1892-cv, 2014 WL 274419 (2d Cir. Jan. 27, 2014), the United States Court of Appeals for the Second Circuit held that even when a company’s securities are unregistered, federal law requires corporate insiders either to disclose material nonpublic information or abstain from trading in those securities. The Court also held that the “fiduciary-like” duty to refrain from insider trading under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b), is imposed and defined by federal common law, not common law of the state (or here, country) of incorporation. This decision marks the first time that the Second Circuit has explicitly announced that the duty against insider trading is rooted in federal common law, and it leaves no question that federal laws prohibiting insider trading apply even to securities that are unregistered.
In Roth v. The Goldman Sachs Group, Inc., No. 12-2509-cv, 2014 WL 305094 (2d Cir. Jan. 29, 2014), the United States Court of Appeals for the Second Circuit held that the short-swing profits rule imposed by Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), requiring corporate insiders (including ten-percent stockholders) to disgorge profits earned from certain purchases and sales of their company’s securities that take place within a six month period, does not apply where the purchaser was an insider when it wrote call options, but was no longer an insider by the time that the same options expired less than six months later. This decision, which adopts the views expressed by the Securities and Exchange Commission (“SEC”) in an amicus curiae brief, also clarifies that the expiration of a call option within six months is considered a “purchase” within the meaning of Section 16(b), and that “purchase” is paired with the “sale” which is deemed to occur at the time when the option was originally written.
In Starr International Co. v. Federal Reserve Bank of New York, No. 12-5022-cv, 2014 U.S. App. LEXIS 1770 (2d. Cir. Jan. 29, 2014), the United States Court of Appeals for the Second Circuit affirmed the dismissal of claims against the Federal Reserve Bank of New York (“FRBNY”) for alleged breaches of its fiduciary duties, holding that federal common law preempted state fiduciary duty law. This decision provides an example of circumstances in which federal common law preempts state law. Where, as here, a uniquely federal interest in the stability of the economy conflicts with state law, federal common law will prevail.
In Blaustein v. Lord Baltimore Capital Corp., No. 272, 2013, 2014 Del. LEXIS 30 (Del. Jan. 21, 2014), the Delaware Supreme Court held that a closely-held corporation’s directors owe no fiduciary duty to decide, free from conflicts of interest, whether a corporation will repurchase a minority stockholder’s shares in the corporation. Additionally, the Supreme Court held that the implied covenant of good faith and fair dealing contained in a shareholders agreement did not give a minority stockholder the right to a good faith, conflict-free negotiation over the repurchase of her stock. If a minority stockholder wishes to have the right to put his or her stock to the corporation at a fair price to be set through negotiations with independent and disinterested decision makers at the corporation, the stockholder must contract for that right expressly in advance.
In Daimler AG v. Bauman, No. 11-965, 2014 U.S. LEXIS 644 (U.S. Jan. 14, 2014) (Ginsburg, J.), the Supreme Court of the United States held that a court may not exercise general personal jurisdiction over a non-U.S. corporation unless that corporation’s contacts with the forum state are so continuous and systematic as to render the corporation “at home” there. The Supreme Court also held that a non-U.S. corporation will not be subject to a state’s general jurisdiction simply because the corporation’s subsidiary is “at home” in the forum state and the subsidiary’s contacts with the state are imputed to the corporation. Daimler limits the situations under which a large, multinational corporation will be subject to general personal jurisdiction. As a result, plaintiffs may have more difficulty establishing jurisdiction over an foreign corporation when the claims sued upon do not arise in or relate to the forum state.