In In re Digimarc Corporation Derivative Litigation, 2008 WL 5171347 (9th Cir. Dec. 11, 2008), the United States Court of Appeals for the Ninth Circuit held that Section 304 of the Sarbanes-Oxley Act (15 U.S.C. § 7243), which provides for the forfeiture of certain bonuses and profits when corporate officers fail to comply with securities law reporting requirements, does not create a private right of action.  Though several district courts had already arrived at the same conclusion, the issue was one of “first impression” for the Ninth Circuit Court of Appeals.  The ruling thus prevents individual shareholders from pursuing recovery of bonuses and stock sale proceeds from officers in situations where the company is required to issue a restatement of its financials as a result misconduct.Continue Reading Ninth Circuit Holds That Section 304 Of The Sarbanes Oxley Act Does Not Provide Litigants With A Private Right Of Action

In Glazer Capital Management, LP v. Magistri, 2008 WL 5003306 (9th Cir. Nov. 26, 2008), the United States Court of Appeals for the Ninth Circuit held that when pleading scienter as to a corporate defendant, the Private Securities Litigation Reform Act of 1995 (the “Reform Act”) “requires [plaintiff] to plead scienter with respect to those individuals who actually made the false statements.”  This ruling clarifies that in all but the most unusual cases, a plaintiff in this Circuit may not rely upon notions of “collective scienter” — that is, the idea that a corporation’s state of mind for purposes of pleading securities fraud can be inferred from the collective knowledge of the totality of its employees, instead of the knowledge of a particular officer or director — to state a claim for securities fraud against a corporate defendant.  In addition, Glazer reaffirms longstanding Ninth Circuit authority holding that, when alleging scienter as to an individual defendant, the Reform Act requires plaintiff to “plead, in great detail, facts that constitute strong circumstantial evidence of deliberately reckless or conscious misconduct” on the part of the defendant.Continue Reading Ninth Circuit Rejects Theory Of “Collective Scienter” And Reaffirms Pre-Tellabs Authority

In Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 2008 WL 4457544 (Del. Ch. Sept. 29, 2008), the Delaware Chancery Court, after an expedited six day trial, ruled that Hexion Specialty Chemicals, Inc. had breached various provisions of a July 2007 merger agreement.  By that agreement, Hexion, which is controlled by a private equity group, had agreed to acquire Huntsman Corp. in a leveraged cash transaction at a steep price following a bidding contest.  The terms of the merger agreement left Hexion with no “financing out” if it could not close due to a lack of funding.  Hexion’s efforts to extricate itself from the transaction arose in connection with the continuing crisis affecting the world-wide credit markets.  Hexion had sought to excuse any failure to close on its part by claiming that Huntsman’s operations had suffered a Material Adverse Effect (MAE) under the terms of the merger agreement and that the combined entity would be insolvent.  Issuing its decision before the merger agreement’s October 2, 2008 termination date, the court rejected these claims in a manner that suggested it found them pretextual and ordered Hexion to specifically perform all obligations necessary to close the deal (save the obligation to actually close, which the merger agreement exempted from a specific performance remedy).  This case is significant for its illustration of the approach that Delaware courts take in interpreting and applying a MAE clause when invoked to excuse performance under a merger agreement.  Also notable is the finding that Hexion had breached its covenant to use its reasonable best efforts to consummate the deal, a determination that required the court to reconcile a party’s contractual duty to use reasonable best efforts to consummate a transaction with that party’s alleged perceived need to avoid insolvency.  The case also demonstrates that Delaware courts will not hesitate to impose a specific performance remedy when a contract so provides, even when the consequences to one party may be ruinous.Continue Reading The Delaware Chancery Court Rejects Attempt By Acquirer To Cancel Merger Amid Worldwide Credit Crisis

In In re Heritage Bond Litigation, 2008 WL 4415172 (9th Cir. Oct. 1, 2008), the United States Court of Appeals for the Ninth Circuit held that a class action settlement bar limits only contribution, indemnity or other comparative fault claims against settling defendants where damages are calculated based on the amount of the non-settler’s liability to the class.  The appeal arose from a partial settlement in a securities fraud class action.  The district court’s broad bar order precluded non-settlers from bringing any future claims against settlers “arising out of or related to . . . any of the transactions or occurrences alleged.”  A non-settling defendant later brought breach of fiduciary duty, negligence, labor law and other claims against several settling defendants, including his former employer, and sought “both economic and reputational” damages.  The district court determined that its bar order precluded such claims.  The Ninth Circuit disagreed, vacating the order and remanded the matter to the district court.  The decision offers greater clarity on the scope of settlement bar orders, important mechanisms designed to encourage partial settlements but, at the same time, protect non-settlers’ rights.Continue Reading Ninth Circuit Limits Scope Of Settlement Bar Orders In Securities Class Action Settlement

In Millowitz v. Citigroup Global Markets, Inc., 2008 WL 4426412 (2d Cir. Sept. 30, 2008), the United States Court of Appeals for the Second Circuit held that the fraud-on-the-market doctrine established in Basic Inc. v. Levinson, 485 U.S. 224 (1988), applies in Rule 10b-5 suits challenging alleged misstatements contained in research analyst reports.  The fraud-on-the-market doctrine creates a presumption of reliance in 10b-5 securities fraud cases, and eliminates the need for plaintiffs to show individual reliance on the alleged fraudulent act.  In Millowitz, the Second Circuit concluded that the district court in the case had properly invoked the doctrine to decide whether common questions of law and fact predominated over individualized ones for purposes of certifying a class under Fed. R. Civ. P. 23(b)(3).  The Second Circuit also ruled that no showing of the analyst’s reports’ actual affect on the securities’ market price is required to trigger the presumption, something defendants had urged.  The decision is important because it may impose a risk of class action liability on public misstatements of fact even when the speaker is neither the issuer nor an agent of the issuer, provided the misstatement is material.Continue Reading Second Circuit Applies Fraud-On-The-Market Doctrine To Research Analyst Reports

The Emergency Economic Stabilization Act of 2008 ("EESA"), which President Bush signed into law on October 3, 2008, created the Troubled Asset Relief Program ("TARP") under which the United States Treasury (the "Treasury") is generally authorized to purchase troubled assets from certain financial institutions.  EESA establishes different sets of restrictions for financial institutions based on whether they sell troubled assets directly to the Treasury or whether they sell troubled assets through an auction process.  EESA also modified certain tax code provisions that placed limitations on the deductibility of compensation paid to certain executives.  This blog provides a brief overview of EESA provisions that address the executive compensation practices of financial institutions participating in TARP.Continue Reading Impact of the Emergency Economic Stabilization Act of 2008 on Executive Compensation Issues

Governor Schwarzenegger today vetoed AB2944. The bill would have provided that directors may consider the interests of specific corporate constituencies in addition to the shareholders. For a more detailed

Continue Reading Governor Vetoes California Legislation Allowing Directors to Consider Factors in Addition to the Interests of Shareholders

The NYSE and Nasdaq each recently amended the definition of "independent director" to increase from $100,000 to $120,000 the amount of compensation that an independent director may receive from a listed company in a 12-month period.  In addition, the NYSE amended the definition of "independent director" to allow an immediate family member of an independent director to be employed by the company’s auditor provided the immediate family member is not a partner of the auditor or working on the company’s audit.Continue Reading NYSE and Nasdaq Amend Tests for Director Independence