As discussed in an earlier guest post on this site (here), entrepreneurial plaintiffs’ lawyers seem to have hit upon a new way to extract a fee from the fights over executive compensation. This new wave of executive comp suits, in which the plaintiff’s seek to enjoin upcoming shareholder votes on compensation or employee share plans on the grounds of inadequate or insufficient disclosure, have resulted in some success – at least for the plaintiffs’ lawyers involved. These new kinds of executive compensation–related lawsuits possibly may be “gaining steam,” according to a recent law firm study.
A November 19, 2010 memo from the Pillsbury law firm entitled “Plaintiffs’ Firms Gaining Steam in New Wave Say-on-Pay Lawsuits” (here) reviews the history of say-on-pay litigation that has followed in the wake of the Dodd Frank Act’s requirements for an advisory shareholder vote on executive compensation. The memo shows that of the at least 43 companies that experienced negative say-on-pay votes in 2011, at least 15 were hit with shareholder suits alleging, among other things, that the companies’ directors and officers had violated their fiduciary duties in connection with executive compensation. However, as is well documented in the law firm memo, these suits have not fared well in the courts; ten of the eleven of the 2011 suits that have reached the motion to dismiss stage have resulted in dismissals.
Faced with this poor track record on last year’s say-on-pay suits, plaintiffs’ lawyers have filed fewer of these kinds of suits this year against companies that experience negative votes. However, as the law firm memo explains, one plaintiffs’ firm has now “orchestrated a new strategy to hold companies liable: suits to enjoin the shareholder vote because the proxy statement failed to provide adequate disclosure concerning executive compensation proposals.” According to the memo, there have been at least 18 of these types of suits, with nine of them having been filed just in the month preceding the memo’s publication.
As detailed in Nate Raymond’s November 30, 2012 Reuters story entitled “Lawyers gain from ‘say-on-pay’ suits targeting U.S. firms” (here), these new style lawsuits (of which the article says some 20 have been filed) have met with some success. According to the article, at least six of these suits “have resulted in settlements in which the companies have agreed to give the shareholders more information on the pay of the executives.” These settlements have also “resulted in fees of up to $625,000 to the lawyers who brought the cases.” The article also notes, however, that while the settlements have provided additional disclosures and legal fees for the firm that has filed almost all of these suits, “they have netted no cash for shareholders.”
These new suits share certain characteristics with the M&A-related lawsuits that are another current litigation trend. (Refer here for background regarding the M&A-related litigation trends.) That is, they are filed at a time when the defendant company is under time pressure that motivates the company to settle quickly rather than deal with the lawsuit. Just as in the merger context, where the company wants to move the transaction forward and doesn’t want the lawsuit holding things up, companies facing these new style say-on-pay lawsuits, facing an imminent shareholder vote, are pressured to reach a quick settlement rather than risking a delay in the shareholder vote.
It is hard to disagree with the sentiment of one defense counsel, quoted in the Reuters article, that these lawsuits are nothing more than a “shakedown for a quick buck.” At least some companies are trying to resist these suits. For example, in a November 13, 2012 ruling, Alameda County (California)Superior Court Judge Wynne Carvill rejected the plaintiff’s injunction request, holding that there is “no risk of any interim, much less irreparable harm” if the say-on-pay vote went forward. A copy of the November 13 order can be found here.
A battleground issue that may be increasingly important, at least for the companies trying to fight these suits, will be venue. The plaintiffs’ firm that is leading the charge on these cases has chosen to file them in state courts outside of Delaware. The defendants usually seek to remove the cases to federal court, but, as discussed in Alison Frankel’s November 30, 2012 post on her On the Case blog (here), the plaintiffs have had some success in having the cases remanded to state court. As the statements of the defense attorneys quoted in Frankel’s blog post show, however, the defense attorneys have not conceded this issue, which they clearly view as a vital battleground in trying to fight these cases.
But while some companies and their attorneys may be fighting these cases, the plaintiffs’ firms pushing these suits seem likely to continue to file them as long as they can make money doing so. As the author of the Pillsbury memo notes, in a quote in the Reuters article, “Where the plaintiffs securities bar sees that they will get a return on their investment, they’re going to keep filing them.”
In my view, both the kinds of say-on-pay lawsuits filed last year and the new style version of the suits that are hot right now are symptoms of a larger phenomenon, which is the attempt by the plaintiffs’ securities bar to diversify their product line. The root cause is that there are fewer traditional securities class action lawsuits these days and the ones that are filed are tougher to prosecute as a result of a string of U.S. Supreme Court decisions over the last several years, as well as the cumulative effect of Congressional reforms. Faced with fewer profit making opportunities in their traditional product line, the plaintiffs’ securities firms have been trying to diversity.
A number of current litigation trends are the result of the plaintiffs’ securities bar’s diversification efforts – not just the various kinds of say-on-pay lawsuits, but also the M&A-related litigation that has ramped up so much recently, as well as the class action opt-out litigation trends I noted in a recent post (here). (Indeed, you could argue that these diversification efforts first started with the options backdating cases, most of which were filed as derivative suits, rather than as securities class action lawsuits). The pressure on the plaintiffs’ firms to diversify will likely continue to lead to more lawyer-driven litigation of these kinds, including not only the varieties of lawsuits I have noted here but also perhaps other kinds of suits that will emerge in the months ahead.
To be sure, it could be argued that these evolving litigation trends are simply a reflection of the fact that we have an entrepreneurial and opportunistic plaintiffs’ bar in this country. An alternative point of view is that in a global economy our domestic companies are put at an enormous competitive disadvantage as a result of the unproductive costs our over-active litigation system imposes on them. Anybody making a list of unproductive costs accruing due to lawyer-driven litigation would have to put the expenses associated with these new wave say-on-pay suits right at the top of the list.
Second H-P Securities Suit Sweeps in a Broader Roster of Defendants: In a post last week, I noted that plaintiffs’ lawyers had quickly jumped on the Autonomy acquisition accounting scandal at H-P and had filed a securities class action lawsuit. As I noted in my post, the first suit filed, at least, named only H-P and certain of its current and former officers as defendants. In particular, I noted that the first complaint did not name as defendant Autonomy or any of its former officers or directors, nor did it name any of H-P’s outside advisors. However, I also noted that further lawsuit seemed likely, and noted the possibility that additional suits might include additional defendants.
Now further lawsuits have in fact been filed and the latest suits have expanded the roster of defendants. As reflected in plaintiffs’ lawyers November 30, 2012 press release (here), the latest suit to be filed names as defendants not only H-P and certain of its officers, but also H-P directors, Autonomy and Deloitte LLC, H-P’s auditors. The complaint can be found here. The individual defendants named in the complaint include not only H-P's former and current CEOs and its current CFO, as well as two other H-P's chief accounting officers, but also Michael Lynch, the former CEO of Autonomy, and Sushovan Hussain, Autonomy's former CFO. (Speical thanks to a loyal reader for providing a copy of the complaint.)
The H-P/Autonomy debacle continues to attract critical press scrutiny, including a November 30, 2012 New York Times article entitled “H-P’s Autonomy Blunder May be One for the Record Books” (here) in which James B. Stewart writes that H-P’s acquisition of Autonomy arguable ranks as one of the worst deals ever, ranking right up there with the disastrous Time Warner acquisition of AOL. Among other things, Stewart writes:
It’s true that H.P. directors and management can’t be blamed for a fraud that eluded teams of bankers and accountants, if that’s what it turns out to be. But the huge write-down and the disappointing results at Autonomy, combined with other missteps, have contributed to the widespread perception that H.P., once one of the country’s most admired companies, has lost its way.
Second Circuit Affirms Dismissal of Securities Suit Filed Against U.S.-Listed Chinese Company: Over the last several years, plaintiffs have filed dozens of securities suits against U.S.-Listed Chinese companies, alleging accounting misrepresentations as well as undisclosed transactions benefiting insiders. (This litigation phenomenon is detailed and discussed at greater length here.) Though some of these cases have survived dismissal motions, others have not survived the initial pleading hurdles. On November 29, 2012, the Second Circuit, in a summary order (here), affirmed the dismissal of one of these suits.
On October 26, 2010, Mecox Lane Limited issued over 11 million American Depositary Receipts in an IPO. As discussed here, on December 3, 2010, following company disclosures, investors filed an action against Mecox, certain of its directors and officers, and its offering underwriter, alleging that the Company's gross margins had been adversely impacted by increased costs and expenses which made it impossible for Mecox Lane to achieve the results defendants projected at the time of the IPO. On March 5, 2012, Southern District of New York Judge Robert Sweet granted the defendants’ motion to dismiss. The plaintiff appealed.
In the November 29 summary order affirming the dismissal, a three judge panel of the Second Circuit noted that:
Even taking all of the Complaint’s allegations as true and drawing all reasonable inferences in favor of the Plaintiffs, the statements that they point to as untrue or misleading are neither. The Complaint does not mention undisclosed information, but points to nothing to show that disclosures were required.
More About the U.S.-Listed Chinese Companies: The Mecox Lane case is the second of the recent securities suits involving U.S.-listed Chinese companies to reach the Second Circuit. As discussed here, in August 2012, the Second Circuit revived a securities suit that had been filed against China North Petroleum Holding that had been dismissed by the District Court.
In addition to the revived securities suit, China North Petroleum has other problems as well. As described in its November 30, 2012 litigation release (here), the SEC has filed a civil enforcement action in the Southern District of New York against the company, its CEO and former Chairman, and its founder and former director, as well as other officers and the family members of one of the officers.
The SEC alleges, in connection with the company’s two 2009 stock offerings, that the CEO and the founder, as well as the other officers, “diverted offering proceeds to the personal accounts of corporate insiders and their immediate family members, and also engaged in fraudulent conduct in connection with at least 176 undisclosed transactions between the company and its insiders or their immediate family members, otherwise known as related-party transactions.” The SEC alleges that the transactions totaled approximately $59 million during 2009.
More About Law Firm Management Liability Insurance: As I noted in a prior post (here, second item), unsecured creditors of the bankrupt Dewey LeBoeuf law firm have sought the bankruptcy court’s leave to file an action against three of the law firm’s former managing partners, accusing them of law firm management misconduct and seeking to recover under the law firm’s management liability insurance policy.
As discussed in a November 29, 2012 Am Law Daily article (here), the bankruptcy court has granted the creditors leave to pursue the claims. However, as the article also discusses, the claimants could face barriers attempting to recover under the insurance policy. As the article notes, “the lead insurer connected to the policy … has said such suits may not be covered because Dewey, as the policyholder, is essentially suing itself.” The article does not explain the basis on which the carrier is contending that the claims of the creditors represent the claims of Dewey itself. However, given the stakes involved, it seems likely that these issues will be sorted out as the creditors press their claims.
Special thanks to a loyal reader for sending me a link to the Am Law Daily article.
Deconstructing “Skyfall”: (Spoiler Alert, these comments will give away key plot element of the movie, so don’t read this if you haven’t seen the movie).
1. Can I just say that Bond’s idea of luring Raoul Silva northward to Bond’s childhood home was a really crappy plan? Not only did it directly result in M’s death, but M16 never did recover the stolen list of undercover agents. The entire sequence conclusively proved that Bond is no longer qualified for service, as the M16 tests earlier in the movie showed. M chose to disregard what the tests clearly established, which ultimately cost her her life.
2. Shortly after we were informed that Bond’s childhood home had been sold, the structure was first strafed with automatic gunfire from a helicopter gunship and then blown up. At the real estate closing, it is going to be a disappointing walk-through for the property’s buyers, that’s for sure.
3. In case you were wondering, the poem M said she had learned from her late husband and that she recited (in part) to the Parliamentary committee (just before armed gunmen burst into the Committee room) is “Ulysses” by Alfred, Lord Tennyson. Here is the portion she quoted:
Though much is taken, much abides; and though
We are not now that strength which in the old days
Moved earth and heaven; that which we are, we are,
One equal-temper of heroic hearts,
Made weak by time and fate, but strong in will
To strive, to seek, to find, and not to yield.
4. So we know for sure that Judi Dench will not be in the next Bond movie. But how about Daniel Craig? Most of Skyfall seemed to be a variation on the theme that Bond is getting old and might just be over the hill. And in the scenes where Bond was unshaven, Craig sure was looking pretty scraggly. I am not making any predictions, but don’t be surprised if Craig isn’t there next time Bond is back.