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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Second Circuit Clarifies that Allegations of Direct Fraudulent Representations Are Not Necessary for Market Manipulation Claims Under Section 10(b) and Rule 10b-5

In Fezzani v. Bear, Stearns & Co., Inc., No. 14-3983, 2015 WL 400547 (2d Cir. Jan. 30, 2015) (“Fezzani II”), the United States Court of Appeals for the Second Circuit clarified its opinion in Fezzani v. Bear, Stearns & Co., Inc., 716 F.3d 18 (2d Cir. 2013) (“Fezzani I”), ruling that its earlier decision did not require a plaintiff alleging market manipulation in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities & Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, to plead that a defendant directly communicated false information to a victim.  The Second Circuit’s decision in Fezzani II provides much-needed clarity on the standard for liability in market manipulation cases.

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SEC Staff To Express No Views On Conflicting Shareholder Proposals Under Rule 14a-8(i)(9)

On January 16, 2015, SEC Chair Mary Jo White issued a directive that the staff of the SEC review its position on Rule 14a-8(i)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”).  Concurrent with SEC Chair White’s directive, the Division of Corporation Finance announced that it will “express no views” on the application of Rule 14a-8(i)(9) for the current proxy season.

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Second Circuit Notes Split with Ninth Circuit Over Whether Failure to Make Adequate Disclosures Under Item 303 of Regulation S-K May Serve as Basis for a Section 10(b) Claim

In Stratte-McClure v. Morgan Stanley, No. 13-0627-cv, 2015 WL 136213 (2d Cir. Jan. 12, 2015), the United States Court of Appeals for the Second Circuit affirmed the dismissal of securities fraud claims against Morgan Stanley arising out of its exposure to and losses from a proprietary subprime mortgage trade in 2007.  In reaching its decision, the Second Circuit held that a failure to make a disclosure required by Item 303 of Regulation S-K, 17 C.F.R. § 229.303(a)(3)(ii), may serve as a basis for a securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities & Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder.  The Second Circuit recognized that its holding regarding Item 303 of Regulation S-K was directly “at odds” with the 2014 decision of the United States Court of Appeals for the Ninth Circuit in In re NVIDIA Corp. Securities Litigation, 768 F.3d 1046 (9th Cir. 2014).  Morgan Stanley establishes a circuit split between the Second and Ninth Circuits on the issue of whether failure to make adequate disclosures under Item 303 may serve as the basis for Section 10(b) claims, potentially warranting review by the United States Supreme Court.

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Higher Filing Thresholds for HSR Act Premerger Notifications and Interlocking Directorates Announced

1. Higher Thresholds For HSR Filings

On January 15, 2015, the Federal Trade Commission announced revised, higher thresholds for premerger filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The filing thresholds are revised annually, based on the change in gross national product and will be effective thirty days after publication in the Federal Register. Publication is expected within a week, so the new thresholds will most likely become effective in late February 2015. Acquisitions that have not closed by the effective date will be subject to the new thresholds.

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Delaware Supreme Court Confirms Chancery Court’s Broad Authority to Impose Use Restrictions on Information Obtained From Section 220 Books and Records Inspections

In United Technologies Corp. v. Treppel, No. 127, 2014, 2014 Del. LEXIS (Del. Dec. 23, 2014), the Delaware Supreme Court held that the Delaware Court of Chancery is authorized regulate how stockholders use information obtained through books and records inspections under Section 220 of the Delaware General Corporation Law (“Section 220”).  The defendant corporation, in opposing a stockholder’s Section 220 proceeding, had sought to bar the stockholder from using any obtained information in any legal action brought outside of Delaware.  The Vice Chancellor, however, expressed the belief that the Chancery Court lacked the statutory authority to impose such a restriction.  The Delaware Supreme Court reversed and identified the factors the Chancery Court should consider in exercising its discretion to impose the restriction on remand.  United Technologies reaffirms the Chancery Court’s important role in regulating books and records inspections in a manner that avoids inflicting unnecessary costs and burdens on corporations and their stockholders.

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Ninth Circuit Holds that Under Nevada Law, a Prior Stockholder’s Litigation of Demand Futility Precludes Another Stockholder From Litigating Demand Futility In a Subsequent Derivative Action

In Arduini v. Hart, 2014 WL 7156764 (9th Cir. Dec. 17, 2014), the United States Court of Appeals for the Ninth Circuit considered whether the doctrine of issue preclusion prevents a stockholder from relitigating a prior adverse determination concerning demand futility in derivative action brought by a different stockholder.  Applying Nevada law, the Court held that a subsequent stockholder cannot again litigate the issue of demand futility after prior adverse determination of the issue in an earlier derivative action concerning the same alleged wrongful conduct.

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California Court of Appeal Applies Delaware Law to Deny Discovery in Shareholder Derivative Action

In Jones v. Martinez, 230 Cal. App. 4th 1248 (2014), the California Court of Appeal, Second Division, held that a plaintiff asserting a shareholder derivative action against directors of a Delaware corporation in a California state court may not obtain discovery before the plaintiff establishes legal standing to sue derivatively as required under Delaware law.  Under Delaware law, a stockholder-plaintiff may not prosecute a derivative suit unless he alleges that he demanded that the directors pursue the claim and the directors have wrongfully refused to do so, or that such demand is excused because it would have been futile.  In order for pre-suit demand to be excused as futile, the stockholder-plaintiff must plead particularized facts creating reasonable doubt that the directors were unlikely to act in good faith in considering the demand.  Delaware courts hold routinely that a derivative plaintiff is not entitled to discovery unless and until he has met the threshold standard for pleading demand futility.  The decision in Jones marks the first time that a California appellate court has applied this rule to a derivative plaintiff suing in California state court under Delaware law.

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