Corporate Securities Law Blog

In the latest of a series of chats with high-profile securities lawyers, Law 360 conducted a Q&A session with Sheppard Mullin partner and head of the firm's Corporate/Securities Litigation team, John P. Stigi III.

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 2009. Both appear to report that federal securities class action filings, which had increased in 2008, have stabilized or dropped, due largely to a sharp decline in filings during the second quarter. 

Corporations, including publicly-traded companies may wish to review their procedures for addressing unclaimed stock in light of a recent California Supreme Court decision. In Azure Limited v. I-Flow Corp (Dkt. No. S164884, July 16, 2009), the Court held that a corporation holding unclaimed stock, which failed to send a shareholder notice of potential escheat prior to issuing a duplicate stock certificate to the state controller in accordance with the Unclaimed Property Law (Cal. Civ. Proc. Cd. §§1500-1582) (the "UPL"), was liable for damages equal to the difference between the amount for which the controller sold the stock and the stock's value at the time of the shareholder's claim for return.
 

Two recent cases have given members of an LLC greater ability to avoid the passive activity loss limitations. Under Garnett, decided by the Tax Court in June, and now Thompson, decided July 20 by the Court of Federal Claims, a member of an LLC cannot be automatically treated as a "limited partner" under the passive loss regulations.
 

In Biltmore Assocs., LLC v. Twin City Fire Insurance Co., 2009 WL 1976071 (9th Cir. July 10, 2009), the United States Court of Appeals for the Ninth Circuit applied the “insured versus insured” exclusion, common in directors’ and officers’ insurance policies (“D&O insurance”), to prevent a creditors’ trust from collecting on a D&O insurance policy under a claim assigned to it from a debtor-in-possession. The Ninth Circuit held that a post-bankruptcy debtor-in-possession should be treated as the same entity as a pre-bankruptcy corporation for purposes of the D&O insurance policy. Because the underlying claim was brought by the debtor-in-possession against directors and officers of the company, the “insured versus insured” exclusion prevented any assignee of the debtors’ claim against the insurance company from collecting. The court held that the trustee of the creditors’ trust stood in the debtor’s shoes for the purposes of the action and, because the debtor-in-possession was still an insured under the D&O policy, the trustee could not collect on the claim.

In Berger v. Pubco Corporation, Case No. 509, 2009 WL 1976529(Del. July 9, 2009), the Delaware Supreme Court held that minority stockholders are entitled to a “quasi-appraisal” remedy to recover the difference between the fair value of their shares and the merger price. The Court also held that these stockholders did not have to opt-in to the appraisal proceedings or to escrow proceeds received from the merger. The decision in Berger resolves an important question, previously unclear under Delaware law, regarding the nature and scope of the remedies available to minority stockholders who allege misconduct by directors in connection with short form mergers.

The Securities and Exchange Commission (SEC) recently approved a New York Stock Exchange (NYSE) proposed amendment to NYSE Rule 452 to prohibit broker's from exercising "discretionary voting" in all director elections. The amendment will apply to shareholder meetings held on or after January 1, 2010. Importantly, the NYSE Rules apply to NYSE member brokers in all of their discretionary voting activities, including voting for publicly –traded companies whose shares are not listed on NYSE. The amendment does not apply to companies that are registered under the Investment Act of 1940.