shareholder derivative actions/ settlements and the ... · mergers & acquisitions and claims...

SHAREHOLDER DERIVATIVE ACTIONS/ SETTLEMENTS AND THE CHANGED

M&A LANDSCAPE: UNIQUE ISSUES AND RECENT TRENDS

Michael Bongiorno – WilmerHale Shayne Clinton – Bass, Berry & Sims Todd Greeley – Berkshire Hathaway Specialty Insurance Carey Meiners – Travelers Cos. John Shaw – Berkowitz Oliver Williams Shaw & Eisenbrandt LLP

October 1, 2014

Mergers & Acquisitions and Claims Arising From Such Activities

• Are “Strike suits” here to stay?: “For better or worse, after the announcement of a merger or acquisition, stockholder class action suits typically follow like mushrooms follow the rain.” Dias v. Purches, CIV.A.7199-VCG, 2012 WL 4503174 (Del. Ch. Oct. 1, 2012)

• In 2013 , 94% of M&A deals were challenged by shareholders The average was five lawsuits per deal (Cornerstone report- Olga Koumrian, Review of 2013 M&A Litigation, http://www.cornerstone.com/Shareholder-Litigation-Involving-M-and-A-2013-Filings)

• “Heigh ho, the derry-o, farming in the Dell”- 26 lawsuits challenged the Dell buyout, with 21 filed within a month after deal announced.

• Inversion cases, e.g. Covidien/Medtronic Litigation

Mergers & Acquisitions and Claims Arising From Such Activities (cont.)

http://www.cornerstone.com/Shareholder-Litigation-Involving-M-and-A-2013-Filings
















• What are the coverage issues being raised by relief being sought?

o Bump up claims and exclusions: (1) Is the bump up in share price itself covered; (2) Are plaintiff’s attorney’s fees for a settlement with a bump up component covered?; (3) Bump-up exclusion – broad v narrow; Side A applicability, post-close settlement applicability, plaintiffs’ fee award applicability

o Coverage for plaintiffs’ fees in disclosure-only settlements;

o Settlement value and plaintiffs’ fees in cash settlements or hybrid (cash & disclosure) settlements;

o Impact of litigation trends on Self Insured Retention


• Merger Objection Litigation Trends and Defenses

o Case studies

o Successful dispositive motions, see, e.g. In re: Mentor Corp. Shareholder Litigation, No. 1304357 (Cal. Ct. App. Sept. 17, 2014); Dent v. Ramtron Int'l Corp., 2014 Del. Ch. LEXIS 110 (Del. Ch. June 30, 2014).

o New standard of review available for controller buyouts under Delaware law. Kahn v. M&F Worldwide Corp., 88 A.3d 635, 645 (Del. 2014)


• Settlement of Merger Litigation

o Of the 2013 deals resolved before the deal closed, 88 percent were settled, 9 percent were withdrawn, 3 percent were dismissed by the courts (Cornerstone report- Olga Koumrian, Review of 2013 M&A Litigation, http://www.cornerstone.com/Shareholder-Litigation-Involving-M-and-A-2013-Filings)

o Settlement strategy- Is timing everything? o Settlement value

















• Disclosure issues - Make weight allegations and judicial response

o Adequacy of disclosures, Revlon duties, and deal protection devices revisited, Dent v. Ramtron Int'l Corp., 2014 Del. Ch. LEXIS 110 (Del. Ch. June 30, 2014)


• Mitigation of liability; best Board practices and procedures

o Fee shifting by-laws upheld ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014); but subject to legislative curtailment

o Arbitration bylaws upheld: Katz v. CommonWealth REIT, Case No. 24-C-13-001299 (Md. Cir. Ct. Feb. 19, 2014); Corvex Management LP v. CommonWealth REIT, 2013 WL 1915769 (Md. Cir. Ct. May 8, 2013); Delaware County Employees Retirement Fund v. CommonWealth REIT, No. 13-10405-DJC, 2014 WL 1271528 (D. Mass. Mar. 26, 2014)

o SEC’s view on bylaw arbitration provisions and possible carve-out of federal securities laws in any arbitration provision. See, e.g., Pfizer, Inc., SEC No-Action Letter, 2012 SEC No-Act. LEXIS 161 (February 22, 2012) (implementation of by-law arbitration proposal could cause company to violate federal law); The Carlyle Group L.P. (in 2012 the SEC rejected the company’s initial public offering containing an arbitration clause).


• Transaction coverage; separate coverage for M&A cases o Provides protection for buyers purchasing an entity with complex

contingencies; sellers are provided a path to exit from “post-closing” exposures

o Disagreements can and do arise from contingent exposures such as ongoing litigation, product liability and intellectual property disputes not to mention financial accounting issues; coverage such as this can address these voids

o Coverage can be constructed to consider specific exposures such as tax liability or a broader range of liabilities


• Transaction coverage; separate coverage for M&A cases (cont.) o Transactional risk insurance provides coverage for losses in connection with

alleged breaches of representations and warranties made in complex business transactions, including the sale of a company. For buyers, this insurance provides an additional layer of protection against the risk that the seller will not be able to remedy a breach of the representations and warranties it made in connection with the sale of the company or an asset. Transactional insurance benefits sellers of entities by providing a solution for them to transfer liabilities and exposures away from their financial equity position. Such coverage allows a mechanism for the parties to fill a void created by either disagreements over the magnitude of certain contingencies and exposures or concern over the complexities of the business world ranging from intellectual property valuation to tax treatments of assets being sold.

o This coverage is global in nature and can be written to specified exposures such as tax liability or contingent litigation. Alternatively, it can be written for a broader range of exposures that could also include intellectual property assertions, product liability reserves, accounting auditor assessment and executive compensation matters. Each of these exposures can manifest in later years after a transaction has closed, giving rise to the need for such transactional “post-closing” insurance.


• Multijurisdiction litigation and forum selection clauses o 62% of the 2013 deals challenged were

litigated in more than one court, but the percentage of deals litigated in three or more courts has declined by 50% since 2011 Cornerstone report

o Delaware, of course, is the leading forum, followed by New York, California, and Texas. But, cases even get filed in Kansas.


• Multijurisdiction litigation and forum selection clauses (cont.)

o Enforcement by other states of Delaware Forum Selection Clauses in the wake of Boilermakers Local 154 vs Chevron, 73 A.3d 934 (Del. Ch. 2013): (1) Hemg vs Aspen University, 2013 WL 5958388 (Sup. Ct. New York 2013) enforcing provision and dismissing shareholder derivative claims; (2) Miller vs Beam Inc., No. 2014 CH 00932 (Cook Cnty Ill. Ch. Ct. March 5, 2014) enforcing provision and dismissing merger objection claim; (3) Edgen vs Genoud, cv-9055-VCL (Del. Ch. Ct. Nov. 5 2013) (Vice Chancellor Laster denying Edgen’s motion for TRO to enjoin Louisiana state court merger objection litigation), but see Genoud vs Edgen, No. 625244 (La. Dist. Ct.-19th Dist. Jan. 17, 2014) (Louisiana state court ultimately enforces forum selection provision and dismisses case); (4) Groen vs. Safeway, No. RG14716641 (Super. Ct. Alameda Cnty Cal. May 14, 2014) (enforcing forum selection provision and dismisses merger objection litigation , specifically refusing to follow Galaviz v Berg, 763 F. Supp 1170 (N.D. Cal. 2011).

o Enforcement of North Carolina Forum Selection Clause by Delaware Chancery Court- City of Providence vs First Citizen’s Bancshares Inc., No. 9795-CB, -- A. 3d --, 2014 WL 4411604, 2014 WL 4409816 (Del. Ch. Ct. Sept. 8, 2014).


• Does Delaware “hog the lane” or is there room for others? o Pyott vs Lampers, 74 A.3d 612 (Del. Sup. Ct

2013), federalism, comity and finality prevail, and California ruling has preclusive impact.

o Depending on the issue, will Delaware law rule from afar- “Kansas courts have a long history of looking to the decisions of Delaware courts: Lightner v. Lightner, 46 Kan. App. 2d 540, 548, 266 P.3d 539 (2011).

o Pros/cons of selecting non-Delaware forum.

Shareholder Derivative Litigation • What Types of liabilities are covered?

o Allegations apart from M&A can include: • Waste of corporate assets • Violations of federal or state environmental statutes • Patent infringement • Foreign Corrupt Practices Act (FCPA allegations) • Improper disclosure over executive compensation • Improperly classifying employees as contractors

• Do derivative claims represent a severity risk? o A rising trend suggests they DO o Southern Peru Copper and News Corp. o Emerging allegations such as “harming the brand” are worth

watching

• Are plaintiffs’ fees covered Loss?

Shareholder Derivative Litigation • Special Litigation Committee Fees and Costs?

• Settlement value – carriers objecting to amount of settlement as being unreasonable in light of the facts of the case, and, in particular, settlements not reflecting the strength of the defenses (e.g., not reflecting business judgment rule and exculpatory provision defenses, particularly where there are no or very weak duty of loyalty allegations);

• Coverage for plaintiffs’ attorney fees – major issue in D&O world as some carriers have taken position that these fees are not covered because Side C – Entity Securities Claim Coverage – is not triggered;

• Coverage for SLC fees and costs;

• Defense costs – issues arise with respect to the amount of fees being incurred and, more substantively in my view, the need for multiple firms (is there an actual conflict?);

• Coverage for non-monetary costs of settlement or judgment – e.g., company agrees to retain an independent expert to review some part of the company’s operations or management;

• Indemnification for settlements

Shareholder Derivative Litigation (cont.)

• Demand Futility Motions to Dismiss continue to prevail o City of Roseville Employees’ Retirement System, et

al. v. Ellison, et al., No. 6900-CS (Del. Ch. Ct 2013), but see Cambridge Retirement System v. Bosnjak, No. 9178-CB, 2014 WL 2930869 (Del. Ch. June 26, 2014),);

o Business judgment rule allegations will not support demand futility: Freedman v. Redstone, No. 13-3372, 2014 WL 2219173, at *7–*9 (3d Cir. May 30, 2014); In re Maxwell Techs., Inc. Derivative Litig., No. 13-CV-966-BEN (RBB), 2014 WL 2212155, at *10–*13 (S.D. Cal. May 27, 2014).


• Caremark claims continue to be rebuffed

o See, e.g., Welch v. Havenstein, 553 F. App’x

54 (2d Cir. 2014); In re JPMorgan Chase & Co. Derivative Litig., No. 03878(GBD), 2014 WL 1297824 (S.D.N.Y. Mar. 31, 2014); In re Hecla Mining Co. Derivative Shareholder Litig., Nos. 2:12-cv-0097-REB, 2:12-cv-00098-CWD, 2:12-cv-000119-MHW, 2014 WL 689036 (D. Idaho Feb. 20, 2014).


• Cases to watch

o Steinberg vs Mozilo, Bank of America, et

al., 1:14-cv-02023 (S.D.N.Y 2014)

o In re Hewlett- Packard Shareholder Derivative Litigation, 12-cv-06003 (N.D. Cal. 2012)

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