Corporate Securities Law Blog

Although the advantages and disadvantages of arbitration will continue to be debated, the California Supreme Court has now provided parties with an option that makes arbitration more attractive.  Previously, one of the chief disadvantages of arbitration was that there was only restricted appellate review of any factual or legal error the arbitrator may have made.  However, on August 25, 2008, in Cable Connection, Inc., et al. v. DirecTV, Inc., the California Supreme Court held that parties to an arbitration agreement can agree to have an arbitrator's decision reviewed on the merits under California law if the parties provided for such review in advance in their agreement.

In Ryan v. Lyondell Chemical Co., 2008 WL 2923427 (Del. Ch. July 29, 2008), a case involving an unsolicited, all cash offer from an unrelated strategic acquirer at a substantial premium to the market price, the Court denied the defendants’ motions for summary judgment on breach of fiduciary duties associated with the sale process and the deal protections.  The Court also allowed monetary damages claims against the directors to proceed to trial based on the possibility that the directors’ conduct may have been so far below the standards of care that it involved a lack of good faith – despite there being no conflicts of interest.  The Court was critical of the Board’s response to a filing that put the company “in play,” the seven-day negotiating process for the actual deal, the failure to conduct a pre-signing market check, the failure to negotiate successfully for a post signing "go-shop," and deal protections including a 3% break-up fee and matching rights for a superior proposal.

California has amended its corporations law to accommodate the SEC's e-proxy rules.  The amendment permits corporations to comply with the annual report delivery requirements under California law by complying with the federal rules permitting the electronic delivery of annual reports and proxy statements without prior shareholder consent.  The amendment eliminates a conflict between California and federal laws that had stymied certain corporations from taking full advantage of the technological improvements and cost savings afforded by the SEC's e-proxy rules.

In Edwards v. Arthur Andersen LLP, the California Supreme Court reaffirmed California's strong public policy against covenants not to compete.  The primary issue in the case was whether the Ninth Circuit's "narrow restraint" exception was a proper interpretation of California law.  Under the narrow restraint exception, employers could enforce non-competition agreements that did not "entirely preclude" an employee from practicing his or her trade.  The Supreme Court summarily rejected this exception.  The lesson for employers is that unless a covenant not to compete falls squarely within one of the statutory exceptions, it is not likely to be upheld by a California court.

Proposed legislation in California would expressly provide that directors may consider the interests of specific corporate constituencies in addition to the shareholders.  This legislation seeks to promote corporate social responsibility by removing the threat of shareholder lawsuits against directors who consider the interests of certain constituencies which may be inconsistent with the interests of the corporation's shareholders.  The bill further seeks to clarify the directors' standard of care in connection with acquisitions.  However, the bill is ambiguous as to whether it applies only to corporations formed under the laws of California or also applies to so-called "quasi-California corporations," corporations with significant ties to California.

In United States v. Finnerty, 2008 U.S. App. LEXIS 15296 (2d Cir. July 18, 2008), the United States Court of Appeals for the Second Circuit set aside a guilty verdict imposing securities fraud liability against a New York Stock Exchange Specialist who engaged in “interpositioning” and “trading ahead” transactions, on the ground that the prosecution failed to prove that the defendant’s conduct constituted deceptive conduct under the federal securities laws.  The court held that absent proof that the defendant actually conveyed a misleading impression to customers, finding securities fraud liability would “invite litigation beyond the immediate sphere of securities litigation.”  This decision provides yet another instance where courts have retained and applied traditional limits to securities fraud liability.

In Metzler Investment GMBH v. Corinthian Colleges, Inc., 2008 WL 2853402 (9th Cir. July 25, 2008), the United States Court of Appeals for the Ninth Circuit affirmed the dismissal with prejudice of a securities fraud class action, holding that plaintiffs had failed to plead the essential elements of loss causation, scienter and falsity consistent with the requirements of prevailing Supreme Court and Ninth Circuit authority.  Corinthian Colleges is the most recent in a long line of Ninth Circuit decisions since 1999 that apply strictly the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”).

NERA and Cornerstone Research (in cooperation with Stanford Law School’s Securities Class Action Clearinghouse) recently issued their respective assessments of securities litigation for the first half of 2008.  Both report that federal securities class action filings are up, due largely to the sub-prime mortgage, credit and auction rate securities crises.  The reports also note a correlation between increased market volatility and increased filings, as well as an increase in investor and market capitalization losses associated with the filed cases.  The increase in filings and losses in 2008 reflects a continuation of a trend that started in 2007 following the sharp decrease in securities litigation activity in 2005 and 2006.  Both summarize their findings and analyses in press releases (NERA, Cornerstone) issued on July 29, 2008.