Canadian Courts May Attract Securities Claims, But Claimants Still Must Show They Belong There: Much has been written (on this site and elsewhere) about the possibility that Canada might become a destination for would-be securities plaintiffs. That perspective gained an apparent boost in March 2012, when the Ontario Court of Appeals held that the liability regime under the Ontario securities laws applied to a company whose shares traded only on the NASDAQ stock market.
However, in a September 4, 2013 decision by the Quebec Superior Court in a securities class action lawsuit filed by a Facebook IPO investor underscores that would-be claimants must still meet jurisdictional requirements and show that the Canadian court is the appropriate forum. Though the case was decided under Quebec law, rather than the Ontario law that has applied in many of the recent Canadian securities cases, it still highlights that there are practical and prudential constraints on the availability of Canadian courts as a securities litigation destination.
As reflected in the Quebec court’s September 4, 2013 Judgment (here), a Canadian claimant who lost money investing in the Facebook IPO filed suit in Quebec against Facebook, certain of its directors and officers, and its offering underwriters. The claimant alleged that she had been induced to purchase Facebook shares based on misrepresentations in the offering documents.
The defendants moved to dismiss the case on the grounds that the claimants’ allegations lacked a sufficient connection to Quebec to support jurisdiction, and that even if the Court had jurisdiction, it should nevertheless dismiss the case in favor of similar cases already pending in New York, based on the doctrine of forum non conveniens. The claimant argued that her claims had a sufficient connection to the province to support jurisdiction in its courts, because she had suffered injury there. In support of her claims, the claimant offered statements from her brokerage account showing the purchase of the shares and the subsequent sale of the shares at a loss.
In its September 4 ruling, the court granted the defendants’ motion. The court held that the claimant’s brokerage account records did not show where her Facebook share transactions had occurred or where she paid for the shares. The court said that “nothing in the record indicates that the sales transactions occurred in Quebec,” adding that under Quebec statutory principles, “the Facebook shares would have been notionally delivered either at the NASDAQ exchange in New York or at Facebook’s head office in California.” On this basis, the court concluded that the claimant’s alleged overpayment and loss would have occurred in the United States. The court said that “there is no basis to conclude that a real and substantial connection exists between the alleged facts of her motion and this Court,” and so the Court lacked jurisdiction.
The court when on to say that even were there jurisdiction, the court would have declined the jurisdiction (“a tenuous jurisdiction at best”) in favor of the Southern District of New York, under the principles of forum non conveniens. The court noted that the consolidated New York actions raised the same allegations; that the putative class in the consolidated action included the claimant and the class of Quebec purchasers she purported to represent; that New York law would govern the claims; that the underwriting defendants are domiciled in New York; and that any judgment would have to be executed in the United States.
Canadian courts may still represent a potentially attractive forum for prospective securities law claimants. However, this case shows that there are certain basic requirements involved in order for would-be securities claimants to have access to its courts. To be sure, this action was decided under the law of Quebec, and not under the law of Ontario, where much of the high-profile securities litigation in Canada has taken place. However, the legal principles involved in this case are basic and do not appear to be unique to Quebec. While this case may have no precedential effect in Ontario or elsewhere in Canada, it does suggest that prospective securities litigants who want to try to pursue their claims in Canadian courts are going to have to meet some basic prerequisites.
What are the Legal Obligations That Reps and Warranties Insurance Insures?: As I have noted in prior posts, most recently here, M&A reps and warranties insurance is becoming an increasingly common component of M&A transactions. As I have also recently noted, the product is not always well understood. Among the elements that are not always fully understood are the legal undertakings in the merger agreement that provide the obligations to which the insurance applies.
An August 2012 memorandum from the Venable law firm entitled “What to Expect When You’re Selling Your Company – Indemnification” (here) explains the indemnification undertakings provided in the typical merger transaction. As the memo notes, the seller in the merger transaction provides the buyer with a host of representations and warranties about the seller’s business. The seller is required to stand behind those reps and warranties through an indemnification provision in which the seller agrees to reimburse the buyer for the losses it suffers as a result of the representations turning out to be inaccurate or untrue.
The memo points out that there a variety of considerations to be taking into account in providing the indemnification undertaking. These include the question of how long after the transaction the reps and warranties should “survive”; what “caps” or maximum amounts will be allowed for reps and warranties-related losses; whether or not there will be “baskets” (minimum threshold amounts) that must be suffered before the indemnification obligation is triggered; how the losses associated with third-party claims will be handled (including in particular, who will control the defense); and specification of the types of losses to which the indemnification applies (including in particular unanticipated losses).
The memo’s authors also note that another consideration with respect to the indemnification has to do with escrows or holdbacks, which are amounts set aside out of the transaction proceeds to provide a source of funds to pay indemnification amounts. This aspect of the indemnification arrangement is one place where the reps and warranties insurance can provide significant value for the deal participants, as the insurance may be accepted as an alternative to escrow amounts, allowing the parties to reduce the amount of funds required to be held in escrow.
The authors also highlight a number of other features that should be considered in connection with the indemnification provisions in the merger transaction documents, including for example an materiality requirement. As the authors note, the indemnification provisions can be critically important to how the merger transaction plays out after the closing. From my perspective, the potential benefits of the reps and warranties insurance should be an important part of that dialog. The authors’ memo provides a good, brief background of the context within which the insurance product fits.
Ways to Maximize Coverage for Corruption Probes: One of the significant trends over the past several years has been the growth in the number of Foreign Corrupt Practices Act investigations and enforcement actions. These types of regulatory and prosecutorial actions can be enormously expensive. For example, Wal-Mart Stores recently disclosed that it expects to spend more than $150 million in connection with anti-bribery investigations of its Mexican operations, on top of the $150 million it has already spent.
Given the magnitude of the expenses involved, companies have every incentive to try to ensure that they have taken steps to maximize the amount of insurance coverage available. A September 5, 2013 Law 360 article (here, subscription required) provides a number of “tips” for companies to consider in trying to allow companies to position themselves to maximize coverage.
The first of the tips discussed in the article is for the company to make sure that its D&O insurance policy does not have an express exclusion for loss relating to anti-bribery and corruption claims. These exclusions, sometimes referred to as the commissions exclusion (because the exclusion’s list of the types of things exclude often leads often by specifying “commissions”), formerly were a standard part of D&O insurance policies. Though these exclusions are now less common they still sometimes appear on some policies. Even where these exclusions appear, the insurers often will agree to remove them upon provision of a completed supplemental questionnaire. Even if the carrier will not agree to remove the exclusions, companies “should try to limit the FCPA exclusion to encompass limited types of conduct or seek carve-outs for nonindemnifiable claims against individual insureds.”
Because much of the expense associated with an anti-bribery event can arise from the company’s own internal investigation, the commentators quoted in the article also suggest the company’s try to ensure that their D&O insurance policies provide coverage for internal investigations. While this coverage is often subject to a sublimit, “some coverage is better than no coverage.”
The commentators also note that the question of who is insured may also be important, as they persons caught up in an anti-bribery investigation may or may not have officer or director titles, but nevertheless may be functioning in equivalent positions in other jurisdictions. A related issue is ensuring that the conduct of insured persons is severable, so that the misconduct of any on insured person does not preclude coverage for insured persons who were not involved in the misconduct.
The commentators also note that in this context, it may be particularly important for the companies caught up in the anti-bribery investigation to be attentive to the notice requirements under the policy. Even if at the outset the matter may not meet the policy’s definition of Claim, it could be very important to submit the matter as a notice of potential claim, to set a coverage anchor in the then-current policy. If the company waits until the matter matures into a full-blown claim, the company may then have to turn to an insurance policy that has been narrowed in the interim.
Though the article does not discuss the issue, companies should also think about how their policies would respond to follow-on civil actions brought by shareholders, which are a frequent accompaniment of an FCPA investigation or enforcement action. These claims, which typically take the form of the traditional shareholder derivative action, are more likely to fall within the policy’s coverage – at least if the policy does not contain the kind of commissions exclusion noted above. Though these kinds of claims are more likely to be covered, the possibility of these kinds of claims do raise practical questions about the adequacy of limits of liability (if for example the follow-on claim were to arise at the same time as an FCPA enforcement action) as well as about policy structure (that is, ensuring that the company’s insurance program includes supplemental Side A coverage to protect against the non-indemnifiable settlement of any derivative claim).
The Origins of the Financial Crisis: On September 7, 2013, The Economist magazine posted the first of what will eventually be five articles on the origins and consequences of and the lessons of crisis. The first article, entitled “Crash Course” (here), focuses on the origins of the crisis.
The article of course focuses on the problems that financiers created. But though “failures in finance were at the heart of the crash,” the bankers “were not the only people to blame.” Among others, “central bankers and other regulators bear responsibility too, for mishandling the crisis, for failing to keep economic imbalances in check and for failing to exercise proper oversight of financial institutions.”
According to the article, the regulators ‘ “most dramatic error” was allowing Lehman Brothers to fail, because it multiplied the panic in markets. Ironically, the decision to allow Lehman to collapse “resulted in more government intervention, not less” because “regulators had to rescue scores of other companies.”
But, the article notes, regulators made mistakes long before Lehman failed, “most notably by tolerating global current-account imbalances and the housing bubbles that they helped to inflate.” Asia’s excess savings and European banks’ aggressive acquisition of “dodgy American securities” financed by borrowing from American money-market funds exacerbated the imbalances and fueled the real estate bubble. Internal imbalances within the Eurozone fueled credit flows from Europe’s core to its periphery, leading to overheated real estate markets in places like Ireland and Spain.
Central banks, the article says, could have done more to address all of this. The Fed did nothing to stem the housing bubble and the European Central Bank did nothing to restrain the credit surge on the periphery.
But of all of the regulators’ shortcomings, lax capital was the “biggest.’ Though international bodies had been redefining the amount of capital that banks had to set aside relative to their assets, the rules were not sufficiently rigid in defining capital strictly enough, and so the banks smuggled in forms of debt that lacked sufficient loss-absorbing capacity. Banks, in turn, operated with little equity, leaving them vulnerable when things went wrong.
In a concluding paragraph that suggests the likely direction of the next article in the series, the article notes that the central bankers and regulators were not along in making misjudgments. Politicians and humble consumers “joined in the collective delusion that lasting prosperity could be built on ever-bigger piles of debt.”
Upcoming PLUS Global Events: I want to make sure that all readers – particularly those based outside the U.S. -- are aware of a couple of upcoming PLUS events.
On October 9-10, 2013, PLUS will be sponsoring an educational and networking event in Zurich. The Professional Liability Regional Symposium will address a wide range of issues relating to the liabilities of directors and officers and to the insurance implications arising from those liabilities. The program includes a number of interesting sessions and a stellar lineup of speakers. I will be participating as a moderator of two of the panels at the event, including sessions addressing current and emerging D&O liability trends and liability and insurance issues arising from regulatory and investigative proceedings. The event’s first day will include a networking reception. I hope that D&O insurance professionals from around Europe and around the world will plan on attending and take advantage of the opportunity to attend the informative sessions and to meet industry colleagues. Further information about this event can be found here.
PLUS is also sponsoring an educational session in Hong Kong on September 24, 2013. This regional symposium includes a number of panels addressing important topics such as the lessons of the U.S. litigation against Chinese companies; the changing regulatory and enforcement environment; and the liability and insurance issues arising from White Collar crime investigations and prosecutions. The day’s events conclude with a networking session following the last panel. I attended the inaugural PLUS event in Hong Kong in April 2012, which was a terrific success. I hope that industry professionals from around the region will plan to attend this PLUS event. A good turnout will help to ensure that PLUS will continue to offer these kinds of events in the region. Further information about the event can be found here.