California Court of Appeal Refuses to Permit an Action for Rescission of a Strategic Transaction, Holding That a Board Has No Duty Under California Law to Include a "Fiduciary Out"
In Monty v. Leis, 193 Cal. App. 4th 1367, 123 Cal. Rptr. 3d 641 (2011), the California Court of Appeal, Second District, affirmed the order of the California Superior Court, Santa Barbara County, denying a motion by shareholders of Pacific Capital Bancorp (“PCB”), a California corporation, for a preliminary injunction to enjoin or rescind a transaction by which Ford Financial Fund, L.P. (“Ford”) would acquire between 80 and 91 percent of PCB’s stock. The Court held that because the transaction closed while the motion was pending, the appeal of the preliminary injunction motion was moot, and that California law would not permit the shareholder plaintiffs to seek rescission of the transaction after it had been completed. The Court also rejected plaintiffs’ argument that the investment agreement constituted an improper defensive mechanism because it did not include a provision that allowed PCB to back out of the deal if a better offer was received. Instead, the Court held, there is no requirement under California law that the board of directors negotiate a “fiduciary out” before binding the company to particular strategic transaction. This decision, in which the Court declined to follow Delaware law, underscores the latitude given to a board of directors of a California corporation to cause the company to enter into a strategic transaction.
District of Columbia and Seventh Circuits Allow for Corporate Liability Under The Alien Tort Statute, Splitting With Second Circuit
In two recent decisions, the United States Courts of Appeals for the District of Columbia Circuit and the Seventh Circuit each split with the Second Circuit’s 2010 decision in Kiobel v. Royal Dutch Petroleum Co., 621 F.3d 111 (2d Cir. 2010), that corporations cannot be liable under the Alien Tort Statute (“ATS”), 28 U.S.C. § 1350. As we reported, the Second Circuit in Kiobel held that the scope of liability under the ATS does not extend to corporations because imposing liability on corporations for violations of the law of nations has not achieved a sufficiently “specific, universal, and obligatory” character so as to be considered a norm of customary international law. However, in Flomo v. Firestone Natural Rubber Co., No. 10-3675, 2011 WL 2675924 (7th Cir. July 11, 2011), and Doe VIII v. Exxon Mobil Corp., Nos. 09-7125, 09-7127, 09-7134, 09-7135, 2011 WL 2652384 (D.C. Cir. July 8, 2011), the D.C. and Seventh Circuits each concluded that the Second Circuit’s decision in Kiobel relied on factual inaccuracies and ignored the distinction between norms of conduct and remedies. The decisions deepen the circuit split on the question of corporate liability under the ATS, creating a likelihood that the conflict will be resolved by the United States Supreme Court.
Second Circuit Addresses Materiality at the Pleadings Stage in Two Recent Decisions
In two recent decisions issued less than one week apart, Hutchison v. Deutsche Bank Securities Inc., 2011 WL 3084969 (2d Cir. July 26, 2011), and SEC v. Gabelli, 2011 WL 3250556 (2d Cir. Aug. 1, 2011), the United States Court of Appeals for the Second Circuit addressed motions to dismiss securities law claims based upon the immateriality of the defendants’ alleged misstatements or omissions. Generally, the question of whether a misstatement or omission is “material” –– i.e., significant enough that a “a reasonable shareholder would consider it important in deciding how to act” –– is a fact-intensive inquiry not suitable for resolution on a motion to dismiss. The Second Circuit’s decisions confirm that although this holds true in most cases, in a proper case the immateriality of an alleged misstatement or omission can be decided at the pleadings stage.
