In SEC v. Contorinis, 2014 U.S. App. LEXIS 2927 (2d Cir. Feb. 18, 2014), the United States Court of Appeals for the Second Circuit upheld the authority of the Securities and Exchange Commission (“SEC”) to obtain “disgorgement” from a money manager profits earned by another party from trades based material nonpublic information known to the money manager, even though the manager did not receive any of those profits.  Citing the intangible benefits received by the manager and the underlying misuse of inside information, the appellate panel’s decision upheld a broad view of insider trading liability in civil enforcement actions brought by the SEC.
Continue Reading Second Circuit Upholds SEC’s Authority to Obtain Disgorgement from Non-Trading Insider Profits Earned by Portfolio Fund from Insider Trading

In In re Answers Corp. Shareholders Litigation, C.A. No. 6170-VCN, 2014 WL 463163 (Del. Ch. Feb. 3, 2014), the Delaware Court of Chancery (Noble, V.C.) granted summary judgment in favor of defendants in a stockholder class action for breach of fiduciary duty arising out of the merger of Answers Corporation (“Answers” or the “Company”) with AFCV Holdings, LLC (“AFCV”).  Because the undisputed material facts showed that a disinterested majority of the Board of Directors approved the transaction, plaintiffs were required to offer evidence that the Board consciously acted in bad faith or was controlled by an interested party to survive summary judgment.  Plaintiffs were unable to do so.  The Answers decision highlights the high burden stockholder plaintiffs face to proceed with breach of fiduciary duty claims where a merger is approved by an independent/non-controlled board, even where the sale process may have been flawed.  As the court explained, there is a vast difference between “a flawed inadequate effort to carry out fiduciary duties and a conscious disregard for them.”
Continue Reading Delaware Court of Chancery Grants Summary Judgment Dismissing Breach of Fiduciary Duty Claims In Absence of Evidence of Directors’ “Conscious Disregard” of Fiduciary Duties

In SEC v. Shields, No. 12-1438, 2014 U.S. App. LEXIS 3369 (10th Cir. Feb. 24, 2014), the United States Court of Appeals for the Tenth Circuit reversed the district court’s order granting defendants’ motion to dismiss, holding that the complaint alleged sufficient facts to (1) raise a plausible claim that the interests at issue involved are securities, and (2) rebut the presumption that an investment labeled as a “general partnership” is a “security.”  The Tenth Circuit’s holding reaffirms that although an investment may be labeled as a “general partnership” interest, courts must look beyond the labels to determine whether the investment constitutes a “security.”
Continue Reading Tenth Circuit Looks Past “General Partnership” Labels in Agreements to Determine Whether Certain Investments Constitute “Securities”

In Chadbourne & Parke LLP v. Troice, Nos. 12-79, 12-86 and 12-88, 2014 U.S. LEXIS 1644 (U.S. Feb. 26, 2014), the Supreme Court of the United States resolved a split in the circuits regarding whether alleged misrepresentations were made “in connection with the purchase or sale of a covered security” for purposes of the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C. § 78bb(f)(1)(A).  The Court held that a “misrepresentation or omission of a material fact” is made “in connection with the purchase or sale of a covered security” only if the misrepresentation is “material” to the plaintiff’s decision to buy or sell that covered security.  This decision narrows the scope of removal and preclusion of state law securities fraud class actions by the federal courts under SLUSA.
Continue Reading United States Supreme Court Resolves Circuit Split and Narrows Scope of SLUSA

A CEO receives an anonymous call claiming that someone is stealing company trade secrets or that an employee is taking kickbacks from a vendor.  A GC gets a call from the HR director who has an employee accusing the company of submitting false bills to a government agency.  You are served by a government agency with a subpoena seeking records indicating a criminal investigation is underway for violations of environmental laws, insider trading, tax laws or fraud. Your company receives a credible threat of litigation.  These are all real scenarios that occur daily in companies of all sizes all over the world.  They trigger critical internal investigations that require substantial time and resources.  Regardless of the nature of the investigation, it is vital that it be conducted efficiently, with clear direction and attention to preservation of the attorney-client privilege.  This article sets out best practices for doing so.
Continue Reading Corporate Internal Investigations: Best Practices

In Huff Fund Investment Partnership v. CKx, Inc., Civil Action No. 6844-VCG, 2014 WL 545958 (Del. Ch. Feb. 12, 2014) (Glasscock, V.C.), the Delaware Court of Chancery denied a request by respondent CKx, Inc. (“CKx”) to compel the petitioning stockholder to accept the tender of an undisputed portion of the fair value of the petitioner’s shares in order to stop further accrual of prejudgment interest on that undisputed amount.  The court’s ruling gives petitioners in appraisal actions little incentive to prosecute appraisal actions expeditiously, as the prejudgment interest rate far exceeds prevailing fixed investment interest rates.
Continue Reading Delaware Chancery Court Declines to Apply Offer-of-Judgment Rule in Appraisal Proceedings

In American Capital Acquisition Partners, LLC v. LPL Holdings, Inc., CA NO. 9490-VCG, 2014 WL 354496 (Del. Ch. Feb. 3, 2014), the Delaware Court of Chancery applied the implied covenant of good faith and fair dealing to a merger agreement’s contingent purchase price provision.  The court held that under the implied covenant an acquiring entity must refrain from diverting revenue streams from its subsidiary post-merger in a manner that would depress the payment under the contingent purchase price provision.  The court also held, however, that the implied covenant did not require an acquiring entity actively to maximize revenue streams absent the inclusion of a best efforts provision in the merger agreement.  American Capital Acquisition Partners defines the contours of the implied covenant of good faith and fair dealing as applied to an acquiring entity’s actions affecting the application of a contingent purchase price provision in a merger agreement.
Continue Reading Delaware Court of Chancery Applies Implied Covenant of Good Faith and Fair Dealing to Prohibit An Acquiring Entity From Diverting Revenues to Depress Payouts Under a Contingent Purchase Price Provision

In Steginsky v. Xcelera Inc., Nos. 13-1327-cv, 13-1892-cv, 2014 WL 274419 (2d Cir. Jan. 27, 2014), the United States Court of Appeals for the Second Circuit held that even when a company’s securities are unregistered, federal law requires corporate insiders either to disclose material nonpublic information or abstain from trading in those securities.  The Court also held that the “fiduciary-like” duty to refrain from insider trading under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b), is imposed and defined by federal common law, not common law of the state (or here, country) of incorporation.  This decision marks the first time that the Second Circuit has explicitly announced that the duty against insider trading is rooted in federal common law, and it leaves no question that federal laws prohibiting insider trading apply even to securities that are unregistered.
Continue Reading Second Circuit Holds that Federal Common Law Prohibits Trading By Insiders of a Cayman Islands Corporation While In Possession of Material Nonpublic Information

In Roth v. The Goldman Sachs Group, Inc., No. 12-2509-cv, 2014 WL 305094 (2d Cir. Jan. 29, 2014), the United States Court of Appeals for the Second Circuit held that the short-swing profits rule imposed by Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), requiring corporate insiders (including ten-percent stockholders) to disgorge profits earned from certain purchases and sales of their company’s securities that take place within a six month period, does not apply where the purchaser was an insider when it wrote call options, but was no longer an insider by the time that the same options expired less than six months later.  This decision, which adopts the views expressed by the Securities and Exchange Commission (“SEC”) in an amicus curiae brief, also clarifies that the expiration of a call option within six months is considered a “purchase” within the meaning of Section 16(b), and that “purchase” is paired with the “sale” which is deemed to occur at the time when the option was originally written.
Continue Reading Second Circuit Affirms Dismissal of Short-Swing Profit Claim Against Goldman Sachs Arising from Six-Month Call Options