Corporate Securities Law Blog

California's Song-Beverly Credit Card Act prohibits the requesting and recording of personal information in connection with credit card transactions. The statute provides for civil penalties "not to exceed two hundred fifty dollars ($250) for the first violation and one thousand dollars ($1,000) for each subsequent violation . . ." Recently, two new trends in Song-Beverly litigation have emerged: (1) plaintiffs have filed suits against retailers over requests for zip codes; and (2) plaintiffs have sued retailers for requests for personal information during credit card return transactions.

In United States v. Stringer, 2008 WL 901563 (9th Cir. Apr. 4, 2008), the United States Court of Appeals for the Ninth Circuit vacated a final order of the United States District Court for the District of Oregon that had dismissed criminal indictments against three individual defendants.  Those defendants had argued successfully before the district court that their rights had been violated by the Securities & Exchange Commission (“SEC”) when they cooperated voluntarily with an SEC investigation allegedly without knowing that the SEC was working with federal prosecutors on a parallel criminal prosecution.  The Ninth Circuit also vacated the district court’s alternative order suppressing evidence obtained during an SEC civil investigation.  This decision paves the way for reinstatement of criminal charges against the defendants and likely will encourage further cooperation between prosecutors and SEC enforcement personnel to gain strategic and tactical advantages against investigation targets.

In Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 2008 WL 123801 (U.S. Jan. 15, 2008) (Kennedy, J.), the Supreme Court rejected an attempt by a class action plaintiff to assert securities fraud claims against suppliers and customers of an issuer in whose stock the plaintiff invested.  Those suppliers and customers, it was alleged, knowingly agreed to sham contracts with the issuer that the issuer improperly accounted for in its financial statements.  Because the suppliers and customers (as distinct from the issuer) made no public statements and owed no disclosure duties to the issuer’s investors, the investors could not state a claim against them on the ground that the plaintiff could not plead or prove reliance on the secondary actors’ conduct.  This decision reflects the Supreme Court’s intent to limit exposure to private securities fraud class action litigation to those who are directly responsible for making false or misleading statements to the investing public.

In Miller v. Thane Int’l, Inc., 2007 WL 4147327 (9th Cir. Nov. 26, 2007), the Ninth Circuit held that even “literally true” statements in a prospectus may be actionable under Section 12(a) of the Securities Act of 1933 and, for the first time in the Ninth Circuit, held that a representation by a company that it would be listed on NASDAQ is material to investors.  This decision serves to remind counsel advising companies on their public disclosures to investors that they cannot rely entirely upon the literal truth of the disclosures to protect them from liability under the federal securities laws.

In Ryan v. Gifford, C.A. No. 2213, 2007 WL 4259557 (Del. Ch. Nov. 30, 2007), the Delaware Chancery Court ruled that the presentation of a Special Committee report to the full Board of Directors of Maxim Integrated Products, Inc., including individual director defendants and their counsel, waived the attorney-client privilege as to all communications between the Special Committee and its lawyers.  This decision is significant because of its implications for special committee practice.  After Ryan, there is a considerable risk that the attorney-client privilege will not be available to a Special Committee and its counsel when conducting an internal investigation if the Special Committee chooses to give a report to the full board with named defendants in attendance.

In Ryan v. Gifford, C.A. No. 2213-CC (Del. Ch. Nov. 21, 2007), the Delaware Chancery Court ruled that it could not exercise personal jurisdiction over certain nonresident officers of a Delaware corporation pursuant to 10 Del. C. § 3114(b).  That statute authorizes the exercise of jurisdiction in Delaware over a nonresident officer of a Delaware corporation if the cause of action arises out of the allegedly wrongful conduct of that officer accrued after January 1, 2004 (Section 3114(b)’s effective date) and if the officer’s conduct was in his official capacity.  The decision is noteworthy because of the court’s fairly narrow reading of Section 3114(b).  Ryan stands for the proposition that passively receiving, holding and allowing to vest allegedly backdated stock options does not constitute a continuing wrong that might satisfy the post-January 1, 2004 conduct requirement of Section 3114(b).

As we reported in May 2006 (link), prosecutors in recent years have been pressuring corporations to “cooperate” with prosecutions and investigations by denying indemnification and ceasing payment of defense costs of targeted individual officers and directors.  The Department of Justice was particularly proactive in pressing corporations to cease advancement of defense costs, citing a memorandum issued in 2003 to United States Attorneys by Deputy Attorney General Larry D. Thompson.  In the Thompson Memorandum, the DoJ indicated that “the corporation’s . . . willingness to cooperate in the investigation of its agents” would hinge, at least in part, on “whether the corporation appears to be protecting its culpable employees and agents” by, inter alia, advancing attorney fees.

In In re CheckFree Corporation Shareholders Litigation, No. 3193-CC (Del. Ch. Nov. 1, 2007), Delaware Chancellor Chandler denied plaintiff shareholders’ motion to preliminarily enjoin a merger between CheckFree Corporation and Fiserv, Inc.  In his opinion, Chancellor Chandler held that while “directors have a duty to disclose all material information in their possession to shareholders when seeking shareholder approval for some corporate action,” that duty does not go so far as to require disclosure of all of the internal projections prepared by management of the target corporation that were shared with the acquirer and the target’s financial adviser.  In addition, Chancellor Chandler noted that “the public interest requires an especially strong showing” by a shareholder plaintiff of a likelihood of success on the merits and a threat of irreparable harm where the transaction sought to be enjoined is “a premium transaction in the absence of a competing bid.”  The CheckFree decision largely reaffirms settled Delaware law on these and other issues, while sending a strong signal to the plaintiffs’ bar that shareholder plaintiffs face a very high burden when challenging “a premium transaction in the absence of a competing bid.”

In In re Tyson Foods, C.A. No. 1106-CC (Del. Ch. Aug. 15, 2007), Chancellor Chandler held that granting “spring-loaded” stock options to key directors and executives without full disclosure of the practice is a breach of the directors’ fiduciary duties.  In rejecting defendants’ motion for judgment on the pleadings dismissing the consolidated class action and derivative complaints, Chandler stated that the defendants failed to rebut the pleading stage inference that they “intended to conceal a pattern of unfairly stocking up insiders’ larders” with option grants right before the announcement of events likely to increase the company’s stock price.  This decision would seem to support the notion, often dismissed by commentators, that the practice of granting “spring-loaded” stock options is improper per se, particularly in the absence of detailed disclosures.

In the latest of a series of chats with high-profile securities lawyers, Securities Law 360 conducted a Q&A session with Sheppard Mullin partner Robert D. Rose. 

In Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007) (link) (Westlaw citation: 2007 WL 1773208), the Supreme Court for the first time addressed the heightened requirements for pleading scienter enacted in the Private Securities Litigation Reform Act of 1995 (the “Reform Act”).  Rejecting a relaxed “reasonable inference” approach adopted by the Seventh Circuit, the Supreme Court held that a securities fraud complaint will survive dismissal only if, based upon its factual allegations, the inference of defendant’s scienter is “cogent and at least as compelling as any opposing inference.”  In the majority opinion by Justice Ginsburg, the Court held that courts must consider at the pleadings stage plausible nonculpable explanations for the defendant’s conduct, as well as inferences favoring the plaintiff.  The inferences must be “cogent and compelling, and thus strong in light of other explanations.”

On June 8, 2006, the Delaware Supreme Court upheld the lower court’s decision in favor of the directors of The Walt Disney Company. Plaintiffs had claimed that the directors had breached their duty of care in approving an employment agreement with Michael Ovitz, which permitted Ovitz to receive a $140 million severance payment just 14 months after he joined the company. The lower court concluded that the defendant directors who had approved the terms of Ovitz’s employment agreement “did not act in bad faith, and were at most ordinarily negligent,” which was insufficient to constitute a breach of the duty of care. The Supreme Court held that the lower court’s “factual findings and legal rulings were correct and not erroneous in any respect.”

A California court has affirmed California's established policy against covenants not to compete. In Kelton v. Stravinski, the court limited a non-compete agreement between two partners to only those specific business activities described in the partnership agreement.

On March 21, 2006, the Supreme Court in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006), ruled that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) pre-empts “covered class actions” purportedly brought under state law on behalf of persons who neither purchased or sold securities, but instead claim that they were defrauded into refraining from purchasing or selling securities. In doing so, the Supreme Court reaffirmed long-standing policy considerations underlying the application and interpretation of the federal securities laws which recognize that “litigation under Rule 10b-5 presents a danger of vexatiousness different in degree and in kind from that which accompanies litigation in general.”

The federal sentencing guidelines were recently amended to remove a suggestion that corporations be required to waive the attorney-client privilege and attorney work product doctrine in order to receive a reduced sentence. Though welcomed by the business community, this revision does not affect previously issued guidance by the Department of Justice requiring prosecutors to consider a corporation’s voluntary waiver of the attorney-client privilege and work product doctrine in determining whether to bring charges against the corporation in the first place.

It is well recognized that the ability of a corporation to attract and retain quality directors, officers and employees depends in large part on the corporation’s willingness to indemnify such individuals for personal losses suffered as a result of claims relating to actions taken in their corporate capacity. For example, Section 145 of the Delaware General Corporation Law specifically authorizes Delaware corporations to indemnify agents acting on behalf of the corporation. Included in these indemnification obligations is the requirement to advance or pay for the costs incurred in defending the individuals. These obligations ordinarily continue until entry of a final, nonappealable judgment against the individual finding that he or she engaged in intentional fraudulent or criminal conduct.

In March, Nasdaq advised Applied Materials (NMS-AMAT) that a member of its audit committee, Y.S. Liu, failed to meet Nasdaq's independence requirements. Mr. Liu promptly resigned as a member of the committee. The basis upon which Mr. Liu was disqualified suggests that Nasdaq interprets independence strictly. Nasdaq's action also suggests that it intends to monitor SEC filings aggressively to police compliance with its listing requirements. Nasdaq can be expected to make use of its newly obtained right to issue public letters of reprimand in its enforcement efforts.

In late 2005, the SEC charged 16 individuals with providing false vendor confirmations to the auditors of Royal Ahold. These cases highlight the care that must be taken in providing third-party auditor confirmations.

In December 2005, the SEC granted Nasdaq the right to issue public letters of reprimand to listed companies for relatively minor violations of certain Nasdaq rules where delisting would be too harsh. In a recent Form 8-K, Paula Financial announced the receipt of the first letter of reprimand.

Material Adverse Effect or MAE Clauses ("MAE Clause")  that allow a buyer to terminate a transaction in the event of a material adverse change in the business being sold between signing and closing of a transaction are commonly used in acquisition agreements as a condition to closing.  Courts have recently made it more difficult for parties to rely on MAE Clauses as a means of abandoning a deal to which they have committed.

A recent Delaware Chancery Court ruling, ABRY Partners v. F&W, reflects the tension between promoting freedom of contract, and protecting parties from fraud.  The court reiterated the principle that a contract cannot insulate a seller who either deliberately lies or knows that the entity being sold has lied.  The court also found, however, that between sophisticated parties, a contract can be crafted to insulate a seller from a rescission claim based upon false statements made unintentionally.

Earlier this year, the SEC and DOJ settled parallel criminal and civil enforcement actions against Titan Corporation ("Titan") under the Foreign Corrupt Practices Act ("FCPA"). Titan agreed to pay the largest FCPA penalty to date of $28.5 million. This case is a reminder that companies need to adopt and enforce FCPA compliance policies before the discovery of FCPA problems leads to the unraveling of potential merger discussions and creates financial and reputational risk for the company, both of which occurred in Titan's case. The SEC's investigation of Titan also highlights future potential enforcement actions under the antifraud and proxy provisions of the federal securities laws for publication of false or misleading material disclosures regarding provisions in merger and other agreements filed with the SEC by an "issuer." See Related Resources

On May 31, 2005, the United States Supreme Court reversed Arthur Andersen's 2002 conviction for evidence tampering. That vindication does not alter the core lesson of the Andersen prosecution: a document retention policy must be drafted and implemented carefully to serve its purpose of protecting a company against a charge of evidence tampering. Prudent companies should adopt document retention policies that halt document destruction in the face of government investigations, train employees about document retention policies routinely rather than in response to crisis situations, and exercise caution in email content.