Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

Among the many consequences of an increasingly global economy is that investor interest in pursuing claims for securities wrongdoing has become a more nearly universal phenomenon. While collective-style lawsuits largely had been restricted to claims in U.S. courts under U.S. law, a growing list of countries are adopting at least some elements of U.S.-style securities lawsuits. Several recent articles, discussed below, have examined these developments.

First, in a May 19, 2008 article entitled “Global Realm of Securities Class Actions” (here), John J. Clarke Jr. and Keara M. Gordon of the DLA Piper law firm suggest that as U.S. courts “more carefully define the limits” of subject matter jurisdiction for securities lawsuits brought by foreign investors, “a growing list of nations in Europe and elsewhere are adopting procedures akin to American-style class actions.”

The authors find that the recent case law trend suggests “some reluctance by U.S. federal courts to assert jurisdiction over claims of securities fraud” brought by or on behalf of foreign investors who bought their shares in foreign-domiciled companies on foreign exchanges (so-called “f-cubed” litigants, about whom I have previously written here and here). At the same time, the authors note, “a number of nations have adopted procedural mechanisms similar to U.S. class actions in several respects.” The authors specifically examine developments in Australia, Canada, England and Wales, Germany and The Netherlands.

Second, an April 25, 2008 article by Sandeep Savla of Dewey & LeBoeuf entitled “Securities Class Actions in London” (here) suggests that “companies listed on a London exchange must prepare for a wave of securities lawsuits that will increasingly be instituted in England.” Savla cites three reasons why he predicts increasing numbers of English securities lawsuits:

1. A recent English judicial decision in which the court held that a third-party could buy a litigation claim, continue to pursue and fund the litigation and retain any damages awarded. Savla suggest that this decision will incent hedge funds and others to buy and sell securities claims and then litigate the cases for a profit.

2. Apart from acquiring an entire claim, third-parties can now, as a result of other English case law developments, fund litigation in exchange for an opportunity to share in litigation proceeds. Savla believes that private equity firms, hedge funds and other financial firms will be interested in funding litigation in exchange for a large cut of the damages, and that the availability of this funding will remove some of the litigation disincentives of the English “loser pays” attorneys’ fee principles.

3. New statutory liability of misstatements and enhanced rights to bring derivative claims under the Companies Act of 2006 will, Savla asserts, “spur class actions and derivative suits.”

Third, the recent subprime and credit-related crisis may provide an important impetus to these developments. A May 21, 2008 post (here) on the Pom Talk blog (which is published by the plaintiffs’ firm of Pomerantz Hudek Block Grossman & Gross) notes that “several large European banks have been hit with considerable losses stemming from their exposure to U.S. debt,” and these banks “will likely face intense regulatory scrutiny and a wave of litigation.” Many of these suits may wind up in courts outside the U.S. – “if a U.S. court bars foreign investors from suing here, their only recourse would be to sue the banks on their home turf.”

Notwithstanding the traditional reluctance of many countries’ courts to support this type of litigation, “the severity of the subprime impact and resultant losses could prompt otherwise hesitant investors to take action.”

Clearly, a key component of the developments outside the U.S. is the question whether or not the U.S. courts will or will not exercise subject matter jurisdiction over these claims involving foreign investors. A scholarly overview of the U.S. jurisdictional issues can be found in an article in the Winter 2008 issue of the New York International Law Review entitled “Ebb and Flow: The Changing Jurisdictional Tide of Global Litigation” (here).

The article, written by Perry Granof of Chubb and Richard Hans, Samaa Haridi and Jennifer Kozar of Thacher, Profitt and Wood, examines the extend to which “defendants are increasingly seeking to avoid securities class action litigation in the United States – employing both jurisdictional and forum non conveniens arguments.” At the same time, the authors note, “several courts have expressed concern that too restrictive an approach may render U.S. courts ineffective in addressing fraud in an increasingly global securities market.”

Auction Rate Securities Lawsuit Notes: In a recent post (here), I raised questions about the flood of auction rate securities class action lawsuits that have been coming in since mid-March. (My current tally of companies named as defendants in auction rate securities lawsuits, which may be accessed here, now stands at 17.) A May 27, 2008 Bloomberg article entitled “Auction Failure Damages Face Burden of Proof Eluding Lawyers” (here) raises the possibility that the lawyers filing these lawsuits “may be unable to prove their clients lost money or collect fees themselves.”

Among other things, the Bloomberg article quotes a former SEC attorney as saying, with respect to the penalty interest rates that many of the auction rate securities are now paying, “I don’t see how you can get around the fact that, for the most part, the investors are now doing better.” To be sure, investors’ biggest grievance is not the interest rate but the fact that they can’t sell the instruments right now, about which the article quote Columbia Law School Professor John Coffee as saying “I don’t know that you can easily measure liquidity.”

A separate issue pertaining to auction rate securities is how the instruments are to be valued for balance sheet purposes in the absence of a viable marketplace to trade the securities. As I recently noted (here), this problem afflicts a number of publicly traded companies, included quite a few companies entirely outside the financial sector.

A May 27, 2008 Wall Street Journal article entitled “Auction-Rate Securities Give Firms Grief” (here) reports that “hundreds of U.S. companies still are struggling to clean up the problems caused by the auction-rate securities.” The article reports that over 400 companies hold instruments originally valued at over $30 billion, and that “while some companies have written down the value of their auction-rate holdings, many others haven’t, even though market prices have fallen substantially.”  

Hat tip to the WSJ.com Law Blog (here) for the link to the Bloomberg article.

Updating the Options Backdating Lawsuit Count: As a result of a recent post (here) about options backdating settlements, I have had extensive communications with several individuals at NERA Economic Consulting about the total number of options backdating-related securities class action lawsuits. Based on the information NERA provided, I am revising my count of options backdating-related securities class action lawsuits from 36 to 38, by adding to the list Cyberonics (amended complaint here) and The Children’s Place Retail Stores (complaint here).

The revised list of all options backdating related lawsuits can be found here.

Special thanks to Svetlana Starykh and her colleagues at NERA for their friendly and helpful communication on this topic.

 Speak Not, Memory: A May 21, 2008 article in the Cleveland Plain Dealer entitled “Beachwood Man Reports Rate Ability Not to Forget” (here) describes a Beachwood, Ohio resident with a very rare and perhaps enviable talent. (Coincidentally, Beachwood is also the location of The D&O Diary’s intergalactic headquarters.) The article reports that:

Give Rick Baron a date, any date on the calendar, and neurons start firing. He leans his head back and flips through a mental calendar. Then, in an instant, the recollections spurt out.

It's not just that Baron remembers. He says he can't forget.

Dates and details sear into his mind with amazing clarity, so much so that he's being studied by researchers at the University of California-Irvine. He's one of only three people identified so far with such phenomenal autobiographical memory.

Seemingly trivial details from his life -- such as sitting for his sixth-grade picture (Oct. 10, 1968) or going on a date to Euclid's Lakeshore Cinema to catch the forgettable movie "Problem Child" (Sept. 5, 1990) -- easily flow from memory to mouth.

He delights in recalling historical events with near-encyclopedic precision. He says he remembers anything he reads, hears or sees. "Try me," he says. "Ask me anything."

When was Johnny Carson's last show? ("An easy one -- May 22, 1992.") When did militants seize the U.S. Embassy in Iran? ("You playing with me? Nov. 4, 1979.") When did former Cleveland Indian Duane Kuiper hit his only career home run? ("Aug. 29, 1977, off Steve Stone.")

"I don't dwell on the past," said Baron, 50. "It's just there."

Always.

At first impression, Mr. Baron, with his vast and perfect memory, seems like a truly enviable person. The frustrations of an unreliable memory are a fact of life for many of us, and are a reality that only becomes more insistent with age. The inconvenience of an occasional memory lapse usually sparks regret that we cannot remember more. Imagine how convenient it would be if we could now recall our college calculus as well as we knew it then, or we could recite procedural rules as precisely as we learned them for the bar exam.

The simple truth is that, for most of us at least, our brains are not wired to remember everything, and life would be immeasurably more difficult if we did.

In his short story, “Funes the Memorius,” Jorge Luis Borges explores these fundamental attributes of memory. In Borges’ story, Funes loses consciousness after falling from a horse. After recovering, he couldn’t forget anything he had seen or heard.

He remembered the shape of the clouds in the south at dawn on the 30th of April of 1882, and he could compare them in his recollection with the marbled grain in the design of a leather-bound book which he had seen only once…He could remember all his dreams, all his fancies. Two or three times he has reconstructed an entire day. He told me: I have more memories in myself alone than all men have had since the world was a world.

But this fabulous talent was not in the end an advantage for Funes; it was paralyzing:

I suspect that he was not very capable of thought. To think is to forget a difference, to generalize, to abstract. In the overly replete world of Funes, there were nothing but details, continuous details.

Indeed, the Plain Dealer article about Mr. Baron suggests some of the problems that a perfect memory might involve. The article reports that:

One of the others with the ability - a California woman named Jill Price, who recently released a book titled "The Woman Who Can't Forget" - described it as paralyzing. She likened her memories to home movies playing nonstop in her head.

Baron bristles at Price's portrayal of what he calls a gift. However, he acknowledged feeling like "an oddball" given his unusual talent.

He also described his days as "empty."

Our memories must be selective in order for us to be able to function. Our brains must sort and sift, to clear away until only what remains is that which matters. Imagine a marriage where your spouse remembered with clarity your every frailty and shortcoming. Or how hard it would be if you couldn’t put setbacks and defeats behind you, but had to remember them, eternally and perfectly. We forget our college calculus, and even the name of that girl across the classroom whose eye caught yours for that sweet and blessed instant so long ago, because we have to move on.

The process of forgetting is a kind of refinement, a distillation of the essence, that permits us to see our lives not as a crazy quilt of sights and sounds, but as a progression that has a more general meaning and purpose. If we saw all at once, we could not see the center.

And the most important thing about memory, the thing we must never forget, is …um…

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The growing importance of global anticorruption enforcement efforts was underscored this past week by the revelation of a cross-border investigation involving the French industrial giant Alstom and by developments in the continuing investigation involving Siemens. Moreover, the Siemens developments highlight the increasing significance of liabilities arising from anticorruption exposures for the D&O insurance industry.

First, in a May 6, 2008 article entitled “French Firm Scrutinized in Global Bribe Probe” (here), the Wall Street Journal reported that French and Swiss authorities are investigating whether officials acting on behalf of Alstom paid hundreds of millions of dollars between 1995 and 2003 to win contracts in Brazil, Venezuela, Singapore and Indonesia.

Then on May 9, 2008, German prosecutors announced that they will pursue a civil enforcement action against former Siemens chairman Heinrich von Pierer and several other (unnamed) former Siemens board members. (Refer here for background regarding the Siemens investigation). von Pierer served as Siemens’ chief executive from 1992 to 2005, and as its Chairman until April 2007. Prosecutors apparently have elected for the time at least not to pursue criminal charges against von Pierer.

According to a May 10, 2008 Wall Street Journal article (here), the company itself has also said that “it may seek financial compensation from former managers but didn’t name individuals.”

According to the Journal article about the Alstom investigation, the Alstom and Siemens investigations “suggest that Europe’s prosecutors have begun taking a tougher line on business practices that their U.S. counterparts have long treated as criminal.” It is not merely coincidental that these investigations are now emerging; they are in fact an outgrowth of relatively recent changes in the laws of both Germany and France.

For many years, under the laws of the two countries, corrupt payments were not only legal, but the amount of the payments were tax deductible. But both countries are signatories to the OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions. To implement the Convention, in 1999 Germany passed the German International Bribery Act. According to the Journal, “France outlawed bribery of foreign officials in July 2000.”

Both companies seem to have had difficulties adapting to the new legal prohibitions, as the conduct under investigation both preceded and followed the enactment of the new laws.

One particularly interesting aspect of the Alstom investigation is the way that the circumstances under review came to light. The investigation apparently arose as a result of an audit commissioned by the Swiss Federal Banking Commission of Tempus Privatbank AG, a small private bank. The audit uncovered documents concerning Alstom-related transactions that detailed the flow of about 20 million euros from Alstom to shell companies in Switzerland and Lichtenstein.

These investigations underscore the growing significance of cross-border anticorruption actions and highlight the fact that anticorruption efforts are no longer just a U.S. priority. Moreover, the potential exposures and liabilities are enormous. Siemens itself has already paid a fine of 201 mm euros.

There are also important implications arising from Siemens’ suggestion that it may pursue claims against its former managers. According to a May 5, 2008 Business Insurance article entitled “German Insurers Brace for Siemens Claim” (here), the company has notified its D&O insurers that it intends to file a claim under its D&O policies relating to the company’s antibribery related exposures. The article reports that the company carries D&O limits of 250 million euros. The article does not detail the specifics of the insurance claim or the matters for which the company claims or intends to claim coverage, so there is no way to assess the likelihood of the company’s eventual recovery under the policies.

It is far from certain that the company’s policies would actually cover the claimed amounts. But to the extent the policy’s limit is exhausted by the claims for coverage, it could, at least according to the Business Insurance article, have a substantial impact on the German market for D&O insurance.

The potential insurance implications from the developments in the Siemens investigation demonstrate the growing significance for the D&O insurance industry of the liabilities arising from anticorruption enforcement activity. As investigations like those involving Alstom and Siemens emerge and develop, and as litigation like that involving Alcoa (about which refer here) continues to arise, these issues necessarily will become a significant priority for companies and for D&O insurers. As I have previously suggested (here), anticorruption violations may well represent the “next corporate scandal.”

The May 9, 2008 Financial Times has an interesting editorial about the Alstom investigation and the expansion of anticorruption efforts, here.

Speakers’ Corner: On May 14, 2008, I will be speaking at the American Conference Institute’s D&O Liability Insurance Conference (refer to the agenda, here). I will be participating on a panel with my good friend Dan Bailey in a session entitled “Emerging Exposures Roundup: Fiduciary Litigation, Global Warming and More.”

Then on May 15, 2008, I will be in Toronto to participate in the Professional Liability Underwriting Society (PLUS) Canadian Chapter’s educational event regarding the subprime crisis. Information about the Toronto event can be found here. The other panelists include Dr. Arturo Cifuentes of R.W. Pressprich & Co., Denis Durand of Jarislowski Fraser, and Robert Murray of Chubb.

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The parties in the SCOR Holding (Switzerland) AG class action securities litigation seem to have devised a “global” settlement strategy to resolve the problems arising from the cross-border distribution of would-be class members.

First, some background. The lawsuit relates to alleged misrepresentations and omissions purportedly made by SCOR Holding’s predecessor in interest, Converium. Converium was domiciled outside the U.S .Its shares traded on the Swiss stock exchange, and its American Depositary Shares (ADS) traded on the NYSE.

In a March 6, 2008 order (here) in the SCOR Holding securities lawsuit, Judge Denise Cote had partially granted and partially denied the motion for class certification, as a result of which she certified a class consisting of U.S residents who had purchased Converium shares on the Swiss exchange, and any person who purchased Converium ADS’s on the NYSE. Excluded from the class were Non-U.S. residents who purchased Converium shares on the Swiss exchange.

The persons excluded from the class represent so-called “f-cubed” litigants – that is foreign shareholders of a foreign-domiciled company bought their shares on foreign exchanges. As I have discussed in prior posts (most recently here), courts have struggled with their response to the presence of  “f-cubed” litigants, which can involve complicated issues at the lead plaintiff stage (refer here) and at the motion to dismiss stage (refer here), as well as at the class certification stage, as the SCOR Holding case demonstrates.

But as Adam Savett noted here in a post on his Securities Litigation Watch blog (here) discussing the SCOR Holding class certification decision, the exclusion of the “f-cubed litigants” does raise the problem of how those erstwhile class members can seek compensation for their alleged injuries. As Savett discussed in a prior post on his blog (here), one possibility is that the excluded class members might launch a host of individual lawsuits, as Savett shows to be what happened in the Vivendi case.

The litigants in the SCOR Holdings case seem to have adopted a two-pronged approach to try to head the castoff foreign litigant problem off at the pass, in a settlement that might truly be described as “global.” At least, that certainly appears to the parties’ intent.

As discussed in a May 7, 2008 press release from the SCOR parent company (here), the SCOR Holding securities litigation has been settled through a two-part process. As stated in the press release, “SCOR reached an agreement to settle the claims of the certified class before the US court and the claims of non-US purchasers of Converium securities in a proceeding in the Netherlands for an aggregate amount of EUR 74 million (pre tax and before D&O recoveries).” A May 7, 2008 Business Insurance article describing the settlement can be found here. (74 mm euros is roughly $114.5 mm).

The description of the two-part settlement does not explain what portion of the aggregate total of 74 mm euros was allocable to which portion of the two separate proceedings. Nor does the press release elaborate on the Netherlands proceeding. Presumably the proceeding is similar to that employed in the much-discussed Royal Dutch Shell settlement. For detailed background on the $352.6 mm Royal Dutch Shell settlement, refer to the With Vigour and Zeal blog here and here.

The SCOR Holding litigants certainly deserve points for a creative way of avoiding the problems that arose in the Vivendi litigation with the proliferation of individual actions. They also seem to have come up with an alternative way of addressing the concerns of excluded class members desirous of obtaining relief of the kind available to U.S. resident investors.

The parties’ resort to the Netherlands proceeding does raise a number of interesting questions. One of these questions first arose at the time of the Royal Dutch Shell settlement, which is whether other litigants might try to avail themselves of the Netherlands procedures. The SCOR Holding settlement suggests that the answer is yes, and that the Netherlands procedures potentially could become an avenue for non-U.S. litigants to seek redress. Whether these procedures would be utilized without a prior U.S. based lawsuit still remains to be seen.

Another question is whether other litigants will seek to use the Netherlands procedures as part of a similar two-pronged strategy to try to achieve a settlement that resolves both U.S. and Non-U.S. investors’ claims. The extent to which the SCOR Holding settlement truly is successful in effecting a “global” settlement will clearly have some impact on whether other litigants might try to same approach. The limited information available at this point does not reveal on whose behalf the Netherlands procedure was going forward and how comprehensive the Netherlands settlement will be towards resolving all of the non-U.S. investors’ claims. To the extent the SCOR Holdings litigants’ two-pronged settlement achieves global peace, the settlement could well attract the interest and attention of litigants in other proceedings that also involve non-U.S. investors.

One final attraction of the approach employed in the SCOR Holdings settlement (and I suspect this attraction had something to do with how the approach came about) is that the two-pronged settlement enabled the plaintiffs’ counsel to corral together a larger group of aggrieved investors, which clearly would have some appeal to plaintiffs’ counsel who would not wish to litigants’ interests excluded or straying away into unrelated processes that would diminish the aggregate size of the investor interests on whose behalf the counsel can try to negotiate an aggregate settlement.

Auction Rate Securities Overview: Readers interested in a thorough background regarding auction rate securities and the events that triggered the current round of auction rate securities litigation will want to review the May 6, 2008 publication by NERA Economic Consulting entitled “Auction- Rate Securities: Bidder’s Remorse?”

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As various blue-ribbon committees have struggled with the competitiveness of the U.S. securities exchanges in the global financial marketplace (about which refer here and here), one issue on which they have focused is the aversion overseas companies may have for the U.S. litigation system. But while overseas companies may seek to avoid U.S.-style litigation, overseas investors seem eager to join in the fray. The most recent example involved the securities class action lawsuit against U.K.-based GlaxoSmithKline, in which on October 5, 2007, the court appointed (here) a U.K. pension fund to act as lead plaintiff.

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It is nothing new for corporate America to have to contend with activist investors. But an activist international institutional investor, backed by a sovereign nation and burgeoning oil wealth and committed to a broadly-based social and environmental agenda, represents a different level of activist pressure. The prototype for this international institutional investor is the Norwegian Government Pension Fund, which collects and invests surplus revenue from the country's petroleum production, and which at $300 billion in asset value represents the largest public pension fund in Europe. The Fund is prohibited from investing in Norway, so instead it owns what amounts to a considerable slice of the world.

The Norwegian Fund's impact is not merely financial. The Fund operates according to "ethical" investment principles, pursuant to which the Fund has divested ownership in companies that the Fund's Advisory Council on Ethics believes are involved in certain kinds of weapons production, environmental damage and human rights violations. The most prominent example of its divestitures for ethical reasons was its high profile divestiture of its $400 million investment in Wal-Mart because of alleged child labor law violations by WalMart suppliers (refer here).

A May 4, 2007 New York Times article entitled in the print edition "Norway Backs Its Ethics With Its Cash" (here) discusses the Fund's ethical investing practices and their impact. The article quotes the Norwegian Finance Minister, Kristin Halvorsen, as saying "In a global economy, ownership of companies is the most important way to have influence." As many as 21 companies (so far) have felt this Norwegian "influence," twelve of them American.

Nor is the Fund's activist impact restricted to its investment activities. Norges Bank, the division of the Norwegian Central Bank responsible for managing the Fund's investments, has made its presence felt as a securities fraud lawsuit litigant. For example, Norges Bank was one of the prominent litigants that chose to opt-out of the Time Warner class action settlement (here). Norges Bank was also a major participant in the recent historic Royal Dutch Shell investor settlement (here).

The most prominent institutional investor activist in the U.S. has arguably been the California Public Employee Retirement System (Calpers), which with current investement assets of about $244 billion is actually smaller than the Norwegian Fund. Moreover, because Norway is the world's No. 3 oil exporter (behind Saudi Arabia and Russia), Norway's Fund will grow substantially in the years ahead. The Times article estimates that at the rate at which it is growing, the Fund could be worth $800 billion to $900 billion in a decade. With the Fund's growing size and activist agenda, its impact could be enormous, particularly given the Fund's apparent willingness to resort to litigation.

The Fund's growth will provide it with the powerful tools to drive its agenda. As a result, companies could face growing pressure to provide compliance and disclosure on a broad range of social and environmental issues. Readers of The D & O Diary will recall my recent post (here) on the growing importance of climate change disclosure; the Times article reports that the Norwegian Fund's next area of scrutiny will be companies that contribute to global warming. (There is of course some irony in a country which has grown wealthy from oil production presuming to lecture the rest of the world about global warming.)

The upshot is that public companies could face growing pressure on environmental and social issues, from the Norwegian Fund as well as other investors that follow their lead. Traditional notions of "good corporate governance" will necessarily evolve to adapt to these circumstances. These evolving issues represent risks that may not be apparent on companies' financial statements. Companies will face changing levels of reputational risk and even political risk as part of this evolving global investment dynamic. It will be increasingly important for companies to have tools to measure and control their exposure to these developing concerns, as well as to provide adequate disclosure of these issues to their shareholders.

Cross-Border Prosecutorial Collaboration: Along with the globalization of political and social issues, the increasing global collaboration of national regulatory and investigative personnel also represents a new and growing risk to companies in the global economy. The high-profile collaboration of a multinational investigative force in the Siemens bribery investigation (here) is a recent prominent example. Another example is illustrated in a May 4, 2007 Wall Street Journal article entitled "Cartel Arrests in U.S. Bolster Europe Probe" (here, subscription required).

According to the Journal, executives from companies in Italy, France, the United Kingdom and Japan were arrested in the U.S. this past week for their role in an alleged international cartel to fix prices for industrial hoses used in oil transportation. The arrests reportedly were "the result of a joint U.S. investigation with the European Union and U.K. agencies under a program of trans-Atlantic cooperation against bid rigging." The stumbling block for EU enforcement of its anti-cartel laws has been the lack of any personal liability for cartel participants under EU law. These limitations have restricted EU authorities' ability to pursue cartel activities. The enlistment of American authorities in the anti-cartel efforts circumvents these EU limitations by exposing individuals to personal liability under tougher American anti-cartel laws.

While these developments are perhaps socially desirable for their ability to punish and deter anticompetitive activity, the developments also carry some disturbing implications for officials at companies engaged in the global economy. Executives could face the threat of prosecution not only under the laws of their own country but under the laws of many other countries. The willingness of the U.S. to enforce its antibribery laws against foreign companies whose shares or ADRs trade on U.S. exchanges is another example of this extraterritorial impact of domestic laws. The result of this globalization of criminal enforcement could be a dramatic expansion of corporate executives' risk exposure.

Not only does this evolving globalization of criminal enforcement create a new category of risk management challenges, but it could create new challenges for the structure of the companies' D & O insurance program. Certainly, companies engaged in the global economy will want to understand their policy's potential protection for foreign investigations and proceedings, as well as the policy's protection for criminal processes such as extradition.

Be Here Now: As scientists and commentators have struggled to prefigure a future world beset with the consequences of global climate change, they have projected a litany of grave impacts: coastal erosion and subsidence from rising sea levels; extreme weather events; unprecedented economic impacts; and a deteriorating health environment.

Readers skeptical of these scenarios will want to consider these stories appearing in newspapers just this week alone: the seacoast of East Anglia in the U.K. is sliding into the sea because of rising sea levels (here); Australia's six year drought is now so serious that the country must restrict crop irrigation, while politicians struggle to respond (here); Germany will no longer apply seasonal adjustment to its unemployment statistics because the increasingly mild winters have a diminished employment impact (here); and the global incidence of asthma and hay fever has escalated as a result of the proliferation of allergens due to warming conditions (here).

After I wrote my post a few weeks ago about global climate change and D & O risk (here), I received some very skeptical and even derisive reactions. But the reality is that global climate change is not some distant theoretical construct. Its impacts are already being felt throughout the world. The answer to the question whether or not this will affect the risk profile of publicly traded companies is simply a reflection of the way you frame the issue. You can, as I think is the proper approach, regard global climate change as a separate category of risk to be analyzed as such. Or you can simply look at it as imbedded within numerous other risk categories, such as commodities pricing risk, political risk, and currency risk, as well as what insurers call parameter risk (the risk of events different than those that have occured in the past). Whether viewed separately or as a part of the overall panoply of corporate risk, global climate change will be an increasingly important part of the risk landscape that companies face. The influence of activist investors like the Norwegian Fund suggests that companies disregard these risks at their peril.

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On April 11, 2007, Royal Dutch Shell announced (here) that it had agreed to pay $352.6 million to non-U.S. investors who bought Shell shares outside the U.S., in connection with the company's 2004 oil resources accounting scandal. According to the Times (London), here, the agreement is "thought to represent the largest ever class action settlement in Europe." The agreement is subject to the approval of the Amsterdam Court of Appeals as we as to "agreed opt-out provisions."

Shell also announced that it will be seeking a proportional settlement in the U.S. class action proceeding. According to Bloomberg (here), the European settlement is "contingent on a U.S. judge's ruling not to include claims by non-U.S. investors within the existing class action claim."

Legal counsel for the European shareholder is New York-based Grant & Eisenhofer and the Dutch law firm Pels Rijcken & Drooglever Foruijn .

CFO.com has further information about the settlement, here.

Would-be reformers of U.S. securities regulation, who routinely cite U.S. litigiousness as the justification for proposed reform, should note that this is a European settlement on behalf of European investors (from multiple countries) proceeding in a European court. I have long contended (most recently here) that differences in regulatory and even litigation regimes in advanced economies may well diminish over time, and, in particular, that investors overseas will increasingly seek legal means in local courts to obtain compensation for corporate misconduct. The Shell settlement is the most recent, and perhaps the most vivid, example of these phenomena.

The With Vigour and Zeal blog has interesting and important background on this settlement here as well as links to key resource documents and materials regarding the settlement here. The Best in Class blog also has an interesting post on the settlement here.

A Different Look at Backdating Luck: A central tenet of the backdating scandal has been the supposedly lucky timing of many of the questioned stock option grants (see my earlier post on Lucky Options grants here). A recent paper by NERA Economic Consulting entitled "Options Backdating: The Statistics of Luck" (here) takes a closer look at what role luck or chance might actually have played in many of the questioned option grants, and reaches the somewhat contrarian conclusion that "some of the grant patterns that at first appear extremely unlikely are actually likely and should be expected."

The study finds that just as there are companies that granted options on very favorable days, there are companies that granted on very unfavorable days. The article specifically states that the calculations presented in the Wall Street Journal articles that launched the backdating scandal "can be misleading," and in particular "overstate the number of D & O that have been very lucky."

Hat tip to Kelly Reyher for the link to the NERA article.

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In a recent post (here), I noted that the cross-border Siemens bribery investigation shows that regulators throughout the world increasingly recognize the importance of vigilance and scrutiny, and that the extent of alleged misconduct in that case could spur further efforts for oversight and reform. In that same vein, a February 15, 2007 New York Times article entitled "Germany Battling Rising Tide of Corporate Corruption" (here) notes with respect to the Siemens case and other investigations that "the current spate of scandals will prompt a serious, systemic effort by German companies to impose more stringent internal controls and systems of legal compliance to stop corruption from happening in the first place."

Whether the current wave of German corruption cases reflects lax legal compliance or simply more aggressive prosecution, it is clear that the number of cases is increasing. Germany did not have laws allowing prosecutors to bring bribery cases until 1997, by contrast to the United States, which has had the Foreign Corrupt Practices Act for over 30 years. One source quoted in the article says that in the last five years, "the notion that we need to prosecute economic criminality took on an entirely new dynamic."

This new dynamic clearly will influence both prosecutorial priorities, and by extension, expectations of corporate compliance. As I have previously noted (here), as these regulatory efforts elsewhere gain traction, differences in regulatory standards between the U.S. and other countries will diminish - a consideration that is clearly relevant to the current calls for regulatory reform in the U.S.

Ready, Fire, AIM: In prior posts, I have raised concerns (most recently here) about regulatory standards for London's Alternative Investment Market (AIM), and more recently (here) I have suggested that the AIM may be facing increasing pressure to tighten up. In a February 12, 2007 article in The Times (London) entitled "Most AIM Fundraisers Fail to Enrich Backers Over Three Years" (here) takes a look at the 802 companies that listed on the AIM during the three years ending on December 31, 2006, and finds that 52 percent were "either trading at or below their issue price, or have had their shares suspended."

The Times concludes that the "findings are likely to fuel criticism of AIM that, although it has been the most successful growth market in terms of new listings, it has often sacrificed quality for quantity."

Whatever conclusions may be drawn from the data about the quality of AIM listed companies, the fact that over half of the last three years' listings have failed to make money for investors does have important implications for the likelihood of the past level of listings to continue in the future. This is just one more example of the reasons why current global marketplace circumstances may well change for their own reasons, without any of the regulatory revisions for which the would-be reformers in the U.S. are clamoring.

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When the Committee on Capital Markets Regulation (popularly known as the Paulson Committee) in its Interim Report (here) recommended "setting a cap on auditor liability," the Committee relied for support on the steps in that direction that have been taken by the European Commission. In its latest effort along those lines, the European Commission on January 18, 2007 launched a "public consultation on whether there is a need to reform the rules on auditor liability in the EU." A copy of the Commission's press release can be found here. A copy of the Staff Working Paper can be found here.

In the Working Paper, the Commission's staff offered four alternative proposals to cap the liability accounting firms potentially face when auditing public companies. (The Commission is asking for comment on the four proposals by March 15, 2007.) The four proposals are: a fixed monetary cap on damages that could be sought from auditors; a cap based on the audited company's market capitalization; a cap based on a multiple of the audit fees charged; or the introduction of proportionate liability , which would hold the auditor responsible only for the damages that could be specifically attributed to them.

The initiative to afford accountants some form of liability protection is being led by Charlie McCreevy, the European Commissioner for Internal Market and Services. The initiative would potentially extend protections across the EU's 27 member countries, although the member countries would not be required to enact them. However, the Working Paper notes that "auditor's liability is currently capped in five Member States (Austria, Belgium, Germany, Greece and Slovenia)."

The Commission's motivation for exploring auditor liability caps is essentially the same as that noted by the Paulson Committee in its Interim Report. That is, the Commission is concerned that as the number of audit firms capable of auditing the largest companies has dwindled down to four, the potential consequences from the failure of one of the remaining firms would be harmful to investors. In an October 27, 2006 interview in the Financial Times (here), McCreevy expressed his concern that "further reduction in the number of global firms would make it very hard for companies to get accounts signed off and published - dealing a blow to investors." McCreevy himself advocates a cap on auditor liability.

A January 19, 2007 Wall Street Journal article entitled "EU Offers Plans for Accounting Firms' Audit-Liability Caps" (here, subscription required) suggests that the EU proposals "could help a push by the largest firms for similar protection in the U.S." The article goes on to note that the "adoption of a European auditor-liability shield, even if the member countries weren't required to enact it, would potentially add to a sense that U.S. markets are increasingly at a competitive disadvantage to those in Europe, and, in particular, London."

The competitiveness of the U.S. capital markets will be the theme of a conference that will convened in the spring by Treasury Secretary Henry Paulson. (For a description of the planned conference, announced on January 17, 2007, refer here.) The accounting industry will be one of the three major topics to be discussed at the conference, along with regulation and corporate governance. Robert Steel, the Treasury's undersecretary for domestic finance, in describing the conference's anticipated topics, said that (unnamed) officials are "concerned about the accounting industry," and that the conference will look at whether there are "structural issues" that hurt the industry, such as an "unattractive liability construction." Steel, along with Paulson, recently joined the Treasury Department from Goldman Sachs.

Is the PCAOB Shielding the Big Four?: With the anxiety surrounding the possible investor consequences to investors were another of the Big Four accounting firms to fail, could it be that regulators are treading softly around the "remaining Four?" As The D & O Diary noted in a prior post (here), the Public Company Accounting Oversight Board (PCAOB) does not reveal much about its inspections of the Big Four accounting firms. For example, the PCAOB does not reveal the number of Big Four audits it inspects as part of its annual inspection process, or the percentage of audits inspected that proved to have concerns - even though it releases this information for smaller firms.

A January 18, 2007 post on CFO Blog (here) reports on a recent speech by PCAOB founder and board member Bill Gradison, in which Gradison suggests that the PCAOB considers itself a supervisory body rather than an enforcement agency, and so the agency wants to work with firms to restore "integrity" and even "luster" to the profession. For that reason, the PCAOB prefers to give the audit firms a 12-month grace period to fix problems, rather than to make them public when they happen, since "reputation is so important in a field like auditing."

While I am sure the accounting firm's appreciate this deference to their reputation, investors' interests are definitely forced into the back seat by this ordering of priorities. As my prior post linked above notes, the PCAOB's annual inspection report disclosure leaves a great deal to be desired from the investors' point of view. First and foremost, the PCAOB ought to inform investors what percentage of audits inspected produced inspection concerns. In addition, the PCAOB ought to tell the investing public how many of the audit concerns were material, which audit concerns were material, and what order of magnitude the material concerns represent.

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In my prior comments on the Paulson Committee's calls for regulatory reform (most recently, here), I have suggested that perhaps the U.S. securities markets may be better off without at least some of the companies that are avoiding the U.S. exchanges' tougher listing requirements. A recent report by a U.K. accounting firm contains interesting data that may be pertinent to this question.

BDO Stoy Hayward reports (here) that annual reported instances of fraud in the U.K. rose 33% between 2005 and 2006 and the value of the reported fraud rose almost 40%. (According to the firm's website, the full report will be available in February.) A January 8, 2007 New York Post article reporting on the BDO Stoy Howard study, entitled "Brits Get Bit: Lax British Marts Attract Fraud Along With U.S. Biz" (here), examines whether the increase in London-listed offerings by companies unwilling or unable to meet the U.S. listing requirements explains part of the increase in U.K. fraud. The article notes (as The D & O Diary has previously noted, here) that the London exchanges have "accepted scores of new listings of Chinese and Russian companies that may not have met New York exchanges' stricter rules." The article quotes the head of the BDO Stoy Hayward firm's fraud unit as saying that "I have no doubt that some businesses' plans have been deliberately optimistic, and property, including intellectual property falsely valued."

As Jack Ciesielski notes on the AAO Weblog (here), commenting on the New York Post article linked above, "Investors should be thankful that seedier companies have found the U.S. markets too difficult to easily game because of Section 404." And as I previously have noted (here and here), lowering standards to attract weaker companies is not a sustainable advantage. The valuation premium that companies listing on U.S. exchanges enjoy - because of the stricter regulatory environment - is a real and sustainable advantage.

UPDATE: The With Vigour and Zeal blog (here) adds an important additional perspective on this post. The WVZ blog does concede that the BDO Stoy Hayward study may be relevant to the question whether U.S. exchanges are better off without the companies drawn to London by lighter regulation; however, the WVZ blog also emphasizes that the BDO Stoy Hayward study is concerned with a very wide variety of frauds, not all of which involve listed companies. Among other things, the accountants' report is concerned with a species of tax fraud that is peculiar to the U.K. So, the WVZ blog concludeds, it is "therefore not wholly representative to discuss the report's findings in the context of the securities markets" or in connection with the question of the competitiveness of the U.S. securities markets. I don't disagree with the WVZ blog, but simply note that if the accountants' study is not entirely relevant, it is not entirely irrelevant either. Nevertheless, I agree that the WVZ adds an important additional gloss to this post, and for that reason, readers should refer to the WVZ blog for a more complete picture of the implications of the BDO Stoy Hayward report.

Speaking of the London markets, Legalweek.com has a recent article (here) discussing the potential liability of the London Stock Exchange's Alternative Investment Market's Nominated Advisors (or Nomads) in U.S. courts under U.S. securities laws. Hat tip to the With Vigour and Zeal blog (here) for the link to the Legalweek.com article.

Korea Adopts Securities Class Actions: Another cause the Paulson Committee cited as a reason foreign companies may be shunning U.S. exchanges is the U.S. litigation environment. But as I have previously argued (most recently, here), investors in other countries increasingly are demanding (and getting) the right to hold company management accountable in local courts, and as a result the differences between the U.S litigation environment and those of at least some other countries may be diminishing. The most recent example of another country moving toward a U.S. style class action litigation system is Republic of Korea, better known as South Korea.

According to a January 8, 2007 Korea Herald article entitled "Open Season for Securities-Related Class Actions" (here), South Korea adopted the Securities Related Class Action Act of 2005, subject to a "grace period" during which its enforcement was stayed. The grace period expired on December 31, 2006, meaning that companies listed on the South Korean stock exchanges (including the approximately 730 companies listed on the Korea Exchange), face potential securities class action exposure starting in 2007. At least based on the article, the new Korean class action sounds similar to the U.S.-style securities class action lawsuit, post PSLRA. The article's author, a Korean attorney, speculates that as many as 30 of Korea's 1,600 listed companies could face securities class actions annually.

An interesting discussion of the state of corporate governance reform in Korea, including a discussion of the new Act, can be found here.

The D & O Diary notes that one U.S.-listed Korean-based company, Pixelplus, was sued in a securities class action lawsuit in the U.S. (here) during 2006.

More on Short Selling in PIPE Financing Transactions: In a recent post (here), I reported on two recent SEC enforcement actions involving short selling by investment banks or broker dealers in connection with PIPE financing transaction. On January 4, 2007, the SEC filed yet another settled enforcement action (here) involving short selling in connection with a PIPE transaction, alleging alleged that a trader and a hedge fund entered into contracts to purchase shares in a PIPE offering and then sold those shares short. The SEC Actions blog has a detailed and interesting discussion (here) of the new enforcement action, as well as of the SEC's position regaring short selling in connection with PIPE transactions, including current SEC rule making regarding short selling in PIPE transactions.

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According to January 2, 2007 news reports (here and here), DaimlerChrysler AG has reached a settlement with its D & O insurers in connection with the $300 million settlement of the securities class action lawsuit that had been filed against the company.

The securities class action lawsuit was filed in May 2002, relating to the 1998 merger of Daimler Benz and Chrysler that formed the company. The securities lawsuit had alleged that the defendants issued statements assuring the markets that the transaction would be a "merger of equals," when defendants intended to turn Chrysler into a division of the merged company. The lawsuit cited an interview with former DaimlerChrysler Chairman Jurgen Schrempp in which he said that the transaction had been referred to as a merger of equals rather than as a takeover "for psychological reasons" only. In August 2003, the Company agreed to settle the securities lawsuit for $300 million (or about 240 million euros at the then applicable exchange rate). Further information regarding the securities litigation settlement can be found here.

The company sought to have its 200 milllion euros directors' and officers' liability insurance program cover the bulk of the settlement. According to news reports, only AIG agreed to contribute its limit (25 million euros). The eight remaining insurers on the D & O program declined to pay, apparently arguing that Schrempp's comments showed that the misrepresentations were intentional, which led to litigation between the Company and the remaining insurers. (The remaining insurers were led by ACE and are each named in the news reports linked above.)

The lawsuit between the Company and the remaining D & O carriers was scheduled to go to trial on January 9, 2007 (here, in German), but according to the January 2 news reports linked above, the parties reached a settlement pursuant to which the eight carriers reportedly agreed to pay 168 million euros out of the remaining 175 million euros in limits.

According to Reuters (here), the head of ACE's European Operations said that he "hoped the settlement would spark a discussion in Germany about whether Directors' and Officers' liability insurance coverage was too broad."

The settlement of the securities class action lawsuits was unrelated to the separate but similar individual lawsuit brought by Tracinda Corporation (owned by Kirk Kirkorian) in Delaware federal court. Tracinda claimed that defendants' statements that the transaction was a "merger of equals" had deprived it of a merger premium for its Chrysler shares. The Tracinda lawsuit went to a bench trial between December 2003 and February 2004, and in April 2005, the court entered judgment in the defendants' favor, rejecting Tracinda's arguments. Tracinda's appeal to the Third Circuit remains pending. (Details regarding the Tracinda action can be found here and here.)

In 2004, a separate action was also filed in Delaware federal court on behalf of current of former DaimlerChrysler shareholders who are neither citizens or residents of the United States and who acquired their DaimlerChrysler shares through a foreign stock exchange. The district court dismissed the complaint in January 2006. The plaintiffs' appeal to the Third Circuit remains pending.

In addition, in 1999, former shareholders of Daimler Benz instituted a valuation proceeding against the merged company in Stuttgart district courts. The shareholders claimed that the exchange ratio used in the merger did not properly value their shares. An expert commissioned by the court issued a December 2005 report calculating a range of alternative values for the shares, and in August 2006, the court, in reliance on the expert's report, ruled that the company must pay the shareholders additional compensation which amounted in the aggregate to about 232 million euros. The company continues to contend that the original ratio used was appropriate. Details regarding the Stuttgart valuation action can be found in DaimlerChrysler's annual report, here (refer to pages 182 through 186).

Special thanks to the new With Vigor and Zeal blog (here) for the links to the news reports and other sources regarding the D & O insurance settlement.

An interesting Tuck School of Business at Dartmouth case study about the DaimlerChrysler merger, including an examination of the reasons why the merger failed, may be found here.

An excerpt from Taken for a Ride: How Daimler-Benz Drove Off With Chrysler, the book length examination of the merger, can be found here. The excerpt contains the following memorable description of Schrempp's departure from the first meeting between the managers of the two companies:

Schrempp and the group bellowed song after song until the wee hours. The German co-chairman led one final chorus of ''Bye, Bye, Miss American Pie.'' Then, with a wild gleam in his eye, Schrempp grabbed his ever-present assistant, Lydia Deininger, picked her up, and threw her over his shoulder. The room exploded in laughter as Schrempp snatched a bottle of champagne in his free hand, raised it in the air, and yelled out with a grin: ''See you later, boys!'' Then he carried her off, not to be seen for the rest of the night.

 

More Last Words on Skilling's Sentencing: We here at The D & O Diary would have thought that the last word on Jeffrey Skilling's sentencing had already been written, but a January 1, 2007 post on The New Yorker's website (here) by Malcolm Gladwell (author of Blink and The Tipping Point) sets out a dramatic retelling of the sentencing hearing, including Skilling's lawyer's unsuccessful attempt to have the sentence reduced 10 months so that Skilling could serve his sentence at a lower security facility. An interesting short commentary on the New Yorker column appears on Dealbreaker.com, here. The D & O Diary's prior comments on the Skilling sentencing can be found here.

The Art of Conversation: The current issue of The Economist magazine includes an examination on the dying art of conversation. The article (here, subscription required) warrants reading in full, but here is a selected sample:

The more modern the manual of conversation, the more concrete its advice is likely to be. Ms Shepherd offers seven quick ways to tell if you are boring your listeners, which include: "Never speak uninterrupted for more than four minutes at a time" and "If you are the only person who still has a plate full of food, stop talking." Her checklist of things best not said to the parent of a newborn baby should be memorised for future use. It comprises: "What's wrong with his nose?" "Should he be that colour?" "Isn't he awfully small?" "Shouldn't you be breast-feeding?" "Did you want a boy?" "Is he a good baby?" "He looks like Churchill!/She looks like ET!" "It's really cute!"

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Among the reasons behind the recent calls for regulatory reform, including the Paulson Committee's Interim Report (here), is the belief that foreign companies are declining to list their shares on U.S. exchanges because of the burdens of U.S class action securities litigation. While the U.S. propensity for litigation may be deter some foreign companies from listing in the U.S. now, it should also be noted that international investors increasingly are demanding management accountability, and increasingly are seeking redress in courts - both in the U.S. and in their own countries.

A December 5, 2006 Law.Com article entitled "A Wary Europe Moves a Step Closer to Class Actions" (here), examines the apparent trend for European countries to permit the consolidations of related claims in a single action. According to the article, England, Spain, Germany and the Netherlands have already adopted "some form of class litigation." A draft bill is before the French legislature to permit collective consumer litigation (as previously discussed on the D & O Diary, here), and the Irish, Italian and Finnish governments are considering legislation to permit collective litigation by multiple parties. Norway and Denmark are also considering the adoption of an opt-in class action procedure.

The new German collective-action procedure is examined in a December 2, 2006 New York Times article entitled "Collective Shareholder Lawsuits Reach European Courts" (here). The Times article takes a look at the action now pending under the new procedure against DaimlerChrysler. Interestingly, the plaintiff shareholder group includes investors from the U.S. According to the article, other companies that have also been sued under the new procedure include Deutsche Telecom and the aircraft maker European Aeronautics Defense & Space.

While these new procedures permit collective action in a single lawsuit, the actions lack many of the attributes of U.S. style class action litigation. In most jurisdictions, pre-trial discovery is unavailable or severely limited; the loser pays both sides' legal fees; and punitive damages are barred. As the Times article notes, a few cases "do not mean that the Continent is poised for a flood of litigation."

On the other hand, these new procedures represent a growing legislative recognition that investors are entitled to judicial means to compel accountability from corporate management. As The D & O Diary noted (here), the U.K. recently adopted new legislation that expanded shareholders' rights to pursue derivative lawsuits against corporate officials. And as the Times article noted, "the trend toward a greater number of collective lawsuits will not be reserved soon." The article quotes a Dutch lawyer as saying "the laws are changing and so are the attitudes." It might be more accurate to say that the changed laws reflect a changed attitude.

European investors are also showing an increased interest in becoming more involved in shareholder litigation in the U.S. As detailed in a December 4, 2006 post on the ISS Corporate Governance Blog entitled "Europeans Take a More Active Role in U.S. Cases" (here), European investors (particularly public pension funds) are seeking to serve as lead counsel in U.S. securities fraud class actions. Among other cases, European pension funds are serving as lead plaintiffs in the cases against Parmalat. European and other international investors are also leading U.S. based derivative litigation and are seeking U.S governance changes.

U.S. based plaintiffs' lawyers understand their opportunity and have begun what plaintiffs' lawyer Adam Savett at the Lies, Damned Lies blog has called an "arms race"(here) in their efforts to attract international institutional clients. Several U.S. plaintiffs' firms have announced that they are opening European offices or forming partnerships with U.S. firms. The European institutions for their part are interested in assuring that they are maximizing their opportunity to protect their beneficiaries' interests.

International investors clearly are becoming more accustomed to using the courts to compel accountability both in their own countries and in the U.S. These investors are already successfully compelling changes to their legal systems as they press for means to enforce accountability. As procedures evolve and as these investors become more reliant on their own courts to compel corporate accountability, the differences between the systems may diminish. That process already seems to be underway.

Rubles Without A Cause?: Among the primary concerns to which the Paulson Committee's proposed reforms are addressed is the U.S. exchanges' loss of global IPO market share, particularly to the London exchanges. As the Paulson Committee's Interim Report notes, many of the foreign companies listing on the London exchanges are Russian. The Report acknowledges the possibility that many companies from Russia (and elsewhere) may represent "unacceptable risks," but the Report makes no attempt to exclude "unacceptable risks" from their calculation of what U.S. exchanges have "lost."

A December 5, 2006 Wall Street Journal article entitled "British Spy Probe Turns to Émigrés" (here, subscription required) sheds an interesting light on this issue. The article is accompanied by a chart showing how many Russian companies have listed their shares on the London Stock Exchange in recent years. Just the seven deals completed in 2006 alone total 15.23 billion pounds. The article's details about the Russian émigrés' lifestyle are about equal parts amusing and appalling; the article's details about some of the Russian companies whose shares trade in London are basically just appalling:

Earlier this year, in a huge offering, state-controlled Russian oil company OAO Rosneft listed its global depositary receipts on the London Stock Exchange. Underscoring the disputes from Russia that have spilled over into London, the stock offering came about only after lawyers from Russian oil company OAO Yukos failed to stop the listing after claiming that Rosneft's assets came from the unlawful seizures and sales of Yukos.

Wall Street's bankers may well lament the loss of underwriting fees for these kinds of deals to their counterparts in The City, but readers will decide for themselves how sorry we should be that the stringency of U.S. regulations discourages companies of this type from listing on U.S. exchanges. The D & O Diary wonders on what basis the "failure" of U.S. exchanges to "attract" offerings of this type could possibly justify diminishing regulatory rigor in the U.S. It seems to me that the quickest way to eliminate the valuation premium that foreign companies now enjoy by listing their shares on U.S. exchanges would be for the U.S. to lower its standards so that lower quality companies feel more comfortable listing on U.S. exchanges. (My prior post on the valuation premium may be found here. )

A December 6, 2006 Wall Street Journal article entitled "At Lukoil, an Executive's Death Exposes Network of Inside Deals" (here, subscription required) provides a more detailed look inside another Russian company.



Backdating Up North Too, Eh?: According to a recent press report (here), Canadian companies may also have an options backdating problem. An academic study of options grants between June 2003 and October 2006 at 66 of Canada's largest publicly traded companies found options grant patterns that "may be consistent with backdating" and also that many options grants are not being reported as quickly as required under Canadian law. The final version of the report is due later this month.

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On November 8, 2006, a sweeping bill affecting U.K. companies went into affect when the Companies Bill, which at 696 pages is Britain's longest piece of legislation, received royal approval. (The House of Lords site reflecting all information pertaining to the Bill may be found here.) The Bill contains a statutory statement of directors' general duties and extended authority for shareholders to sue directors for negligence, default, breach of duty or breach of trust - a broader range of conduct than under prior law.

The Bill's statutory statement of directors' general duties sets out seven duties:

• The duty to act within the company's powers;
• The duty to promote the success of the company;
• The duty to exercise independent judgment;
• The duty to exercise reasonable care, skill and diligence;
• The duty to avoid conflicts of interest;
• The duty not to accept benefits from third parties; and
• The duty to declare any interest in any proposed transaction or arrangement with the company.

The new general statutory duty to "promote the success of the company" is the most controversial clause in the Bill, and includes many considerations of which directors must now take into account - not only the long term business consequences of any decision, but also "the impact of the company's operations on the community and the environment." This new statutory duty requires directors to consider wider social responsibility factors when making decisions. The various statutory requirements may create obligations that conflict. But the decision of what constitutes the company's best interests will not be set aside if made in good faith and the directors have exercised reasonable care, diligence and skill.

The Bill extends existing shareholder rights to bring derivative claims. The new statutory procedure enables a shareholder to bring a claim with respect to any actual or alleged negligence, default, breach of duty (including the new statutorily codified duties) or breach of trust. A shareholder seeking to bring a claim must petition the court for the right to proceed, based upon a showing of good faith and taking into account whether the company decided not to pursue the claim. If leave to continue is granted, the company must reimburse the shareholder for brining the action; if not, the shareholder bears his or her own costs.

According to a detailed review (here) of the Bill by the Norton Rose law firm, the absence of the risk of costs if leave to pursue the derivative claim is granted "may make shareholders more likely to bring an action under the new procedure." The new right to bring an action for breach of any duty, including the new statutory duties, "provides another tool for use by activist shareholders to push for change at underperforming companies." But how useful this tool will be depends on "the court's willingness to exercise its discretion to intervene in what, in many cases, will be simply commercial decision making by the company, its directors and majority shareholders." In light of these considerations, the Norton Rose firm's memo suggests that "boards should review the wording of their D & O policies to ensure that defending derivative claims is covered."

A summary of other aspects of the Bill may be found at the CorporateCounsel.net, here.

A Private Conspiracy?: According to a November 15, 2006 Bloomberg.com article entitled "KKR, Carlyle, 11 Other Accused of Rigging Buyouts" (here), the law of Wolf, Haldenstein, Adler, Freeman & Herz has brought a purported class action accusing 13 private equity firms of rigging the market to take companies private. The complaint purportedly alleges that investors did not receive full value for their shares because of a conspiracy that violated antitrust laws. The purported class potentially represents tens of thousands of shareholders in dozens of deals in which public companies were taken private. Among the specific transactions named are deals involving Univision, HCA and Harrah's Entertainment. The list of defendants reads like a who's who in the world of private equity, including KKR, Carlyle, Thomas H. Lee Partners, Blackstone Group, Bain Capital, Apollo Management, Texas Pacific Group, and others.

Prior press reports had disclosed that the antitrust division of the U.S. Deparment of Justice in Manhattan is examing potential antitrust violations by private equity firms engaged in "club deals" to acquire public companies. An October 11, 2006 Wall Street Journal article entitled "Probe Brings 'Club Deals' to the Fore" can be found here (subscription required.)

Best Commercial Ever?: You decide. Roll the tape, here.

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