The D&O Diary

The D&O Diary


More Shareholder Litigation Involving Corporate Inversion Transactions

Posted in Shareholders Derivative Litigation

medtronicOne of the more distinctive business trends in recent months has been the surge of so-called corporate inversion transactions, in which a domestic U.S. company merges with a non-U.S. company, with the the successor company to be based in the foreign country in order to take advantage of a more favorable corporate tax regime. These transactions have drawn a great deal of criticism from Washington, and on September 22, 2014, the U.S. Treasury department issued regulations to deter companies from entering into these kinds of transactions.  But at least according to some press reports, while the new regulations may remove some of the benefits the transactions have offered in the past, may not end the transactions altogether.


While it might be expected that these transactions would be unpopular in Washington, you would think that shareholders would welcome these transactions, given the tax advantages that the transactions afforded. However, as I noted in a prior post, in some cases, the shareholders of some of these companies have filed lawsuits against the companies and senior management, complaining, for example about the immediate tax consequences for the individual shareholders that the transactions trigger.


Now a shareholder of Medtronic has filed another of these lawsuits, in connection with the company’s planned $42.9 billion merger with the Irish-based company, Covidien. As discussed in an October 6, 2014 St. Paul Pioneer Press article (here), on October 3, 2014, a Medtronic shareholder filed a derivative lawsuits against the company, as nominal defendant,  and certain of its directors and officers in connection with Medtronic’s planned “inversion” merger with Covidien.


In her complaint (here), the plaintiff asserts claims for breach of fiduciary duties, waste of corporate assets, and unjust enrichment. The crux of the plaintiff’s complaint is that the company’s board has agreed to make “gross-up” payments to certain officers and board members, in order to offset certain excise taxes these individuals will owe under the Internal Revenue Code as a result of the company’s inversion transaction. (The excise taxes are due under a revision to the Tax Code Congress enacted in 2004 to try to discourage inversion transactions.) The purpose of the gross up payments is to put the same position after tax that the individuals would have been in if the excise tax had not applied.


The plaintiff’s complaint alleges that the total cost to the company of these payments will total approximately $63 million, including $25 million to the company’s Chairman and CEO. Because the gross-up payments themselves represent taxable income to the individuals, and because the payments to the individuals includes further amounts to offset the additional  income tax expense, the cost to the company to provide the gross-up payments is far greater than the $32.7 million owed for the excise taxes.


The plaintiff alleges that the company has justified these payments on the ground that the affected individuals should not be discouraged from taking actions they believe to be in the best interests of the company because of their own personal tax situation. The plaintiff alleged that this justification showed that the Board was “incapable of acting in Medtronic’s best interests when their personal interests are at stake,” and therefore that a demand on the “self-serving” board would be futile.


The complaint seeks restitution from the individual defendants for all illicit and improper tax reimbursements, as well as corporate governance reforms to address what the plaintiff calls “self-dealing” by the board.


Lawmakers in Washington undoubtedly will continue to try to find ways to address concerns relating to these kinds of corporate inversion transactions. It remains to be seen whether other companies press ahead with these kinds of transactions after the latest round of regulatory changes out of the Treasury department. But if there are other transactions, companies engaging in inversion transactions not only risk attracting the ire of Washington lawmakers, but also may face the possibility of shareholder litigation, as this latest lawsuit shows.


Special thanks to a loyal reader for sending me a link to the news article about the lawsuit.


A Tale of Two FCPA Follow-On Securities Lawsuits

Posted in Foreign Corrupt Practices Act

judgmentI have frequently noted in prior posts that a frequent development after a company announces the existence of an FCPA investigation is the filing of a follow on civil action (refer, for example, here). But while plaintiffs’ lawyers often are eager to file these lawsuits, in many instances they prove to be unsuccessful (as discussed here). A recent ruling in the FCPA follow-on securities class action lawsuit involving Avon Products illustrates the hurdles companies face in trying to pursue these kinds of claim. At the same time, however, recent dismissal motion denial in the FCPA follow-on securities class action lawsuit involving Wal-Mart Stores illustrates what may be sufficient for these kinds of cases to survive the initial pleading hurdles.


Avon Products  

Avon, a beauty products company that earns much of its revenue from direct sales operations, derived significant sales revenue from direct sales operations in China. The Chinese direct sales operations were made possible by licenses granted by the Chinese government. On October 20, 2008, Avon disclosed in a SEC filing on Form 8-K that in June 2008 the company’s CEO had received a whistleblower letter suggesting that certain travel and entertainment expenses associated with the company’s operations in China may have violated the FCPA. The company also announced that it had launched an internal investigation.


Between October 2008 and October 2011, the company reported generally increasing sales through its Chinese operations. In October 2011, the company announced that the SEC had launched a formal investigation of the company. Later in 2011, the company announced that its CEO would step down from that role but would remain as Executive Chairwomen for two years. In early 2013, the company announced that its Chief Financial Strategy Officer had been terminated in connection with the ongoing bribery investigation.


In July 2011, plaintiff shareholders filed the first of several securities class action lawsuits against the company and certain of its directors and officers. The plaintiffs alleged that the company had failed to disclose prior to the October 2008 8-K filing that it allegedly had obtained its licenses for direct sales operations in China through bribery of Chinese officials and that in subsequent communications reporting the company’s growing revenues in China the company failed to disclose that the revenue was possible as a result of the allegedly improperly obtained licenses. The defendants moved to dismiss.


In a detailed September 29, 2014 opinion (here), Southern District of New York Judge Paul G. Gardephe granted the defendants’ motion to dismiss the plaintiffs’ consolidated complaint. He did grant the plaintiffs leave to file an amended complaint.


With respect to Avon’s disclosures prior to the October 2008 8-K filing, he found that the plaintiffs had failed to show that any of the misleading statements had been made with the knowledge or awareness of the existence of the allegedly improper payments. In particular, he found that the allegations that the company’s executives “must have known” or “had to have known” about the improper payments because of their senior positions and direct involvement in the negotiation of the Chinese licenses were insufficient to satisfy the state of mind pleading requirements. He found with respect to the statements after the October 2008 8-K filing that the plaintiffs had failed to show that the statements were materially false or misleading.



On December 8, 2011, Wal-Mart disclosed in an SEC filing that as a result of information disclosed in an internal review, the company had begun an internal investigation whether certain matters were in compliance with the FCPA, and that the company had engaged outside counsel in the investigation and had voluntarily disclosed the matter to the SEC and the DoJ. In the subsequent securities class action lawsuit, the shareholder plaintiffs alleged that the company had learned of suspected corruption in its Mexican operations as early as 2005 and had conducted an internal investigation in 2006. The plaintiffs alleged that the December 2011 filing was misleading because it left investors with the impression that Defendants had first learned of the suspected corruption at that time. In June 2012, when Wal-Mart disclosed the events in 2005 and 2006, its share price declined significantly.


The defendants moved to dismiss the plaintiffs’ consolidated complaint. In a September 26, 2014 order (here), Western District of Arkansas Susan O. Hickey entered an order adopting the report and recommendation of the Magistrate Judge in the case denying the defendants’ motion to dismiss. Judge Hickey expressly agreed with the Magistrate Judge’s conclusion that the plaintiff had sufficiently alleged that the omission from the 2011 statement of 2005-2006 events rendered the 2011 statement materially misleading. She further affirmed the Magistrate Judge’s finding that omission of the information concerning the 2005-2006 events could have left a reasonable investor with the impression that the defendants first learned of suspected corruption at the time of the December 2011 statement – “an impression that would be untrue.”


The defendants had argued that Magistrate Judge’s conclusion that the plaintiffs had satisfied the requirement to plead scienter were incorrect. Judge Hickey concluded that the plaintiff had sufficiently alleged that defendants knew or had access to information suggesting that the December 2011 statement was not entirely accurate. She noted that the plaintiff had alleged that in October 2005, a Wal-Mart attorney had had given the Vice Chairman of the company’s international operations a detailed report of the suspected corruption allegations and that the Vice Chairman had rejected calls in 2006 for an independent investigation and instead assigned the investigation to the very office implicated in the corruption scheme. The complaint alleges that the company only disclosed the 2005-2006 events after an article appeared in the New York Times discussing the circumstances. Judge Hickey said that “the inference that the Defendants intentionally omitted certain information is just as strong, of not stronger, than any competing plausible inference.”



The different outcomes of the two dismissal motions are obviously attributable to critical differences between the allegations in the two cases. Largely as a result of disclosures in the New York Times articles (and elsewhere) the plaintiff in the Wal-Mart case had a basis on which to allege that senior officials at Wal-Mart allegedly were aware of the alleged improper payments in Mexico prior to the SEC filing in December 2011, whereas the plaintiffs in the Avon case were able to allege only that the senior officials at the company must have known or should have known of the improper payments prior to the company’s October 2008 SEC filing.


The outcome of the dismissal motion in the Avon case shows that It will not be enough for securities class action plaintiffs to succeed for them to allege that the company was involved in significant bribery activities, and that even the existence of significant bribery allegations may not be enough to support a securities class action lawsuit, even where the revelation of the existence of bribery allegations results in a significant share price decline. To be sure, the plaintiffs in the Avon case have been given leave to amend their complaint, and their amended complaint may succeed in overcoming the initial pleading hurdles. But the ruling the case discussed above underscored how difficult it can be for plaintiffs to overcome the pleading hurdles.


The Wal-Mart case shows how significant and serious an FCPA follow-on lawsuit can be where the plaintiffs are able to present factual allegations sufficient to overcome the initial pleading hurdles. Of course, whether the plaintiff in the case ultimately will succeed remains to be seen. However, because surviving the initial pleading hurdles often is the name of the game for securities class action plaintiffs, the shareholder plaintiff in that case already has made it to a critical litigation milestone.


These cases are interesting in and of themselves. They are also interesting in the context of a changing global environment where a number of countries are becoming increasingly active in enforcing their own anti-bribery laws. Among other countries, Canada, China, Brazil, Italy and the UK have recently become more active in this area. For many years, anti-bribery enforcement had been an activity almost exclusively limited to U.S. authorities. As an increasing number of countries become active in this area, overall levels of anti-bribery activity will increase — a prospective development that could have a number of important implications.


Among these implications it the possibility that increase anti-bribery enforcement activity could lead to more of the kind of follow-on civil litigation these two cases exemplify – both here in the U.S. and perhaps even outside the U.S. as well. As the Avon case shows, it may be challenging for the plaintiffs in these follow-in civil lawsuits to succeed, but as the Wal-Mart case shows, with sufficient factual ammunition, the plaintiffs in these kinds of cases can raise sufficient allegations at least to survive initial pleading hurdles.  


Maybe This Really is the Last of the Mug Shots

Posted in Mug Shots

mugshot(4)As reflected in an August blog post (here), I had thought that the ever-popular D&O Diary mug shot series had finally come to end. But even after what seemed to be the final installment, I received even more mug shots from other readers. I have been holding onto these late-arriving pictures for a while in the hope that perhaps some other readers might send in even more pictures. But I don’t want the latest pictures to get stale, so I have published below this short form mug shot gallery. Although it remains to be seen, it is entirely possible that these pictures will truly be the last in the series.


Readers will recall that early last year, I offered to send out a D&O Diary coffee mug to anyone who requested one – for free – but only if the recipient agreed to send me back a picture of the mug and a description of the circumstances in which the picture was taken. In previous posts (here, here, here, here, here, here, here, here , here, here, here, here, here, here, here, here, here and here), I published prior rounds of readers’ pictures. I have posted the latest round of readers’ pictures below.


Our first picture comes to us from Claire Lofthouse, who is the Head of PIFI Claims at Catlin in London. I like how Claire cleverly arranged the mug and the object inside to depict an image of the statement “I love The D&O Diary.”




The next picture was sent in by Mary Margaret Fox of Clyde & Co.’s Toronto office. Mary Margaret took the picture at the Ladies’ Golf Club of Toronto, a venerable golf course in Toronto and North America’s lone women-only golf club. Although men are allowed on the course as guests during certain hours, the club has steadfastly maintained its exclusively distaff membership orientation throughout its storied history. The club was founded 90 years ago by pro women’s golfer Ada Mackenzie because of the discrimination women faced at traditional clubs. Golf Magazine had an article about the course earlier this year, here. (Rick Reilly wrote an amusing column in Sports Illustrated about the course a few years ago, but I couldn’t find a link to the actual article). Mary Margaret reports that she took this picture while at the club to play a round of golf with her Clyde & Co. colleague Paul Emerson, Chris Rain of Arch Insurance Canada and Warren Cooney of Axis Reinsurance (Canada).




The final pictures actually appeared previously on this blog, in the travel post about my recent visit to Singapore (here). As discussed in the post, I was in Singapore for a PLUS event, and while I was there, Ernest Heng, a financial lines underwriter with AIG, came up and introduced himself. Ernest had brought his D&O Diary mug to the event, and so he was able to take a mug shot with me. We also got another great picture with the mug and a number of younger brokers and underwriters from Singapore.



My thanks to everyone sent in a mug shot as part of this long-running series. It has been great fun receiving the pictures and seeing the amazing diversity of locations where people took their mug shots. There is still time for anyone who still wants to send along their own mug shot; nothing would make me happier than to be able to publish yet another round of pictures.  


Cheers to everyone who helped make this series so much fun. 


Fifth Circuit Reverses District Court, Holds Multiple Disclosures Establish Loss Causation Even if No Single Disclosure Alone Sufficient

Posted in Securities Litigation

fifcirsealA recurring question arising in class action securities litigation is what constitutes a “corrective disclosure” for purposes of satisfying the requirements for pleading loss causation. In the Amedisys securities class action litigation, the district court had examined the five partial disclosures on which the plaintiff sought to rely to establish loss causation and held that none of the five alone was sufficient to meet the loss causation pleading requirement. On that basis, the district court had granted the defendants’ motion to dismiss.


However, in an October 2, 2014 opinion (here), the Fifth Circuit held that a “corrective disclosure” does not need to involve a single disclosure; rather, it held, the truth can be gradually revealed through a series of disclosures and whether the disclosures taken collectively satisfy the loss causation pleading requirement is to be determined from the totality of the circumstances. Noting that sometimes the whole can be greater than the sum of the parts, the appellate court held here that the five partial disclosures taken collectively constituted a corrective disclosure and satisfied the requirements to plead loss causation.




Amedisys provides home health care services to patients with chronic health problems. In their securities class action complaint, the plaintiffs allege that the company made misrepresentations regarding its practices in connection with Medicare reimbursement. The plaintiffs contend that the truth about Ameidys’s misrepresentations became known through a series of five partial disclosures. The plaintiffs allege that as the truth leaked out about the company’s Medicare reimbursement practices, its share price declined.


The five partial disclosures on which the plaintiff relied are as follows: (1) an August 12, 2008 online report by Citron Research raising questions about the company’s Medicare billing practices; (2) the September 3, 2009 resignation of the company’s CEO and its CIO, who were reported to have left “to pursue other interests”; (3) an April 26, 2010 Wall Street Journal article reporting a detailed expert analysis of the company’s Medicare reimbursement data, and stating that the company might be “taking advantage of the Medicare reimbursement system”; (4) the announcement between May and September 2010 of investigations of the company by the Senate Finance Committee, the SEC and the DoJ; (5) the company’s July 12, 2010 announcement of disappointing operating results.


Between August 11, 2008 and September 28, 2010, the company’s share price declined from $66.07 per share to $24.02 per share, a drop of 63.6%.


The defendants moved to dismiss the plaintiff’s complaint. The district court granted the defendants’ motion to dismiss on the ground that the plaintiff had failed to adequately plead loss causation. The district court reviewed each of the five partial disclosures on which the plaintiff relied and found that each one was insufficient to constitute a corrective disclosure for purposes of pleading loss causation. The plaintiffs appealed.


The October 2 Opinion 

In an October 2, 2014 opinion written by Judge James Rodney Gilstrap for a three-judge panel, the Fifth Circuit reversed the district court and remanded the case to the district court for further proceedings, expressly holding that the plaintiff has adequately pled loss causation.


The appellate court opened its analysis by examining the question of the extent to which fraud must become known to the market before it can constitute a corrective disclosure. The court said that the plaintiff must prove when the “relevant truth” about the fraud began to leak out, causing the plaintiff’s economic loss, which begs the question about the meaning of “relevant.” The Court said the test for “relevant truth simply means that the truth disclosed must make the existence of the actionable fraud more probable than it would be without that alleged fact.” In other words, the relevant truth need not reveal the fraud, it only need make the existence of the fraud more probable.


The Court then said that a corrective disclosure need not be contained in a single disclosure; rather, the Court said, “the truth can be gradually perceived in the marketplace through a series of partial disclosures.” With respect to several of the five disclosures on which the plaintiffs relied, the court said that even any one of the specific disclosures did not make actionable fraud more probable than not, “it must be considered with the totality of all such partial disclosures.”


The Court then reviewed the five disclosures on which the plaintiff sought to rely and said that the disclosures “collectively constitute and culminate in a corrective disclosure that adequately pleads loss causation.” This holding can “best be understood by simply observing that the whole is great than the sum of the parts” In summing up, the Court said “when this series of events is viewed together and with the context of Amedisys’s poor second quarter earnings, it is plausible that the market, which was unaware of Amedisys’s alleged Medicare fraud, had become aware of the fraud and incorporated that information into the price of Amedisys’s stock.”


With respect to the plaintiff’s attempt to rely on the disclosure of the governmental investigations, the appellate court noted that in general the commencement of a governmental investigation of suspected fraud does not standing alone constitute a corrective disclosure. However the court said the disclosure of the governmental investigations of the company’s Medicare billing practices “must be viewed together with the totality of the other alleged partial disclosures.” The court added that the district court erred in “imposing an overly rigid rule that government investigations can never constitute a corrective disclosure in the absence of a discovery of actual fraud.”


The court’s observation with respect to the Wall Street Journal article is also noteworthy. The defendants had attempted to argue that the article could not represent a disclosure because the article’s content was based on information that was already publicly available. The court noted that while the Medicare data on which the article was based may have been publicly available, expert analysis was required to understand its significance. The court noted that “it is plausible that … the efficient market was not aware of the hidden meaning of the Medicare data that required expert analysis [which] may not be readily digestible in the marketplace.”  



At a very basic level, the Fifth Circuit’s ruling in this case is noteworthy because it is the Fifth Circuit’s ruling. The Firth Circuit is not exactly known as the most plaintiff-friendly of courts.


As for the substance of the ruling, the court’s opinion is noteworthy for its conclusion that a series of disclosures can satisfy the loss causation requirement even if no single one of the disclosures standing alone would be sufficient. The court’s observation that the whole can be greater than the sum of its parts is significant and consistent with the realistic understanding that sometimes the truth leaks out gradually rather than coming out all at once.


The Court’s ruling with respect to the potential relevance of the disclosure of governmental investigations is also significant. Among other things, it shows that it is not the case that the disclosure of a governmental investigation is never relevant to the loss causation inquiry in the absence of disclosure of actual fraud. The court’s analysis suggests that the existence of a governmental investigation can be taken into account as part of the totality of circumstances as part of the loss causation analysis.


By the same token the court’s analysis of the significance of the Wall Street Journal article is also interesting, particularly the court’s analysis of the fact that the Medicare data on which the article was based is publicly available. The appellate court’s analysis highlights the fact that information may be publicly available but it may not be understood, or at least that its significance may not be understood. While this observation makes sense, it does raise interesting questions about one of the basic assumptions of the fraud on the market theory – that is, that in an efficient market at any given point in time, the company’s share price reflects all of the publicly available information about the company. The example of the publicly available but not full understood Medicate information suggests that even in an efficient market a company’s share price may not in fact reflect all of the information that is publicly available about the company. Specifically, when there is publicly available information that is not understood by the marketplace, the company’s share price may not reflect that information. This is an interesting point when considering the theoretical underpinnings of the fraud on the market theory.


The court’s observation that the partially revelatory disclosures must be viewed collectively, in totality and in context suggests the possibility of a wide-ranging inquiry that potentially could encompass broad time frames and a multitude of statements or disclosures. While there is nothing in the court’s opinion that would necessarily sanction the approach, there might be some reason to be concerned that plaintiffs in other cases who lack a single obvious corrective disclosure on which to rely may try to satisfy the loss causation requirement by trying to build up a mosaic of many disclosures to create the desired picture. The danger with this type of approach is that it could encourage some plaintiffs to try to bootstrap a collection of unrelated or innocuous statements in order to try to argue that the totality of the statements taken collectively satisfy the loss causation pleading requirement.


It is probably worth noting that the court’s analysis took place in the context of a massive but gradual share price decline that accompanied the piecemeal revelation of the Medicare billing problems at the company. The existence of the steep price decline and its connection to the partial revelations helps to explain the appellate court’s conclusion here. It could be that another court might not be as receptive to the kinds of arguments raised here if the share price decline had not been as steep or if it did not track with the purported pattern of disclosures. Plaintiffs trying to satisfy the loss causation requirement in the absence of these factors may find it harder to argue that, in their case, the whole is great than the sum of the parts. In other cases where these factors are lacking a court might conclude that the whole is no more sufficient that the insufficient separate parts.


Special thanks to John Browne of the Bernstein Litowitz firm for sending me a copy of the opinion. Bernstein Litowitz represents the plaintiff-appellant in the case and John briefed and argued the case in the Fifth Circuit.


Ninth Circuit Affirms Nvidia Securities Suit Dismissal, Holds Item 303 Disclosure Duties Are Not Actionable: In an October 2, 2014 opinion written by Judge Beverly Reid O’Connell for a three-judge panel (here), the Ninth Circuit affirmed the district court’s dismissal of the Nvidia securities class action lawsuit, concluding that the plaintiffs had not adequately pled scienter. In a particularly interesting part of its opinion, the Ninth Circuit, joining the Third Circuit on this point, held that the district court did not err in failing to consider plaintiffs’ allegations of scienter in the context of Item 303 of Regulation S-K, because, the appellate court held, Item 303’s disclosure duty is not actionable under Section 10(b) and Rule 10b-5.


Among other things, Item 303 requires reporting companies to disclosure “known trends or uncertainties” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section of their SEC filings The plaintiff had asserted that Item 303 requires disclosure of specified information and that, if the information is material, failure to disclose the required information constitutes a material omission for purposes of Section 10(b) and Rule 10b-5.


In rejecting this argument, the Ninth Circuit cited with approval from a prior holding on the same issue by the Third Circuit, in which that court had said “Item 303’s disclosure requirement varies considerably from the general test for securities fraud materiality set out by the Supreme Court in Basic Inc. v. Levinson.” The Ninth Circuit added that “Management’s duty to disclose under Item 303 is much broader than what is required under the standard pronounced in Basic.” The court held that Item 303 does not create a duty to disclose for purposes of Section 10(b) and Rule 10b-5


For disussion of an interesting example where the Second Circuit arguably took a contrary position with respect to Item 303 disclosure duties in the Ikanos Communications securities litigation, refer here.The Ninth Circuit distinguised the Ikanos Communications case, primarily based on the fact that the Ikanos Communications, unlike the Nvidia case, arose under Section 11 of the ’33 Act rather than under Section 10(b) and Rule 10b-5.


I note as an aside that while Item 303 may not, as the Ninth Circuit held, create a duty to disclose, it does create an opportunity to disclose. Companies interested in avoiding the unwanted attention of plaintiffs’ lawyers can try to use the Management Discussion and Analysis section of their periodic filings as an opportunity to “bespeak caution.” I have long argued that the use of precautionary disclosure in the MD&A can be an important part of securities litigation risk management, because it provides a way for companies to try to avoid securities litigation altogether or to put themselves in a better position to defend themselves if securities litigation does arise.


Securities litigation loss prevention is a subject and dear to my heart but I am afraid it is a topic that is not always given the attention it deserves. While it may be a topic for another day, I would welcome the opportunity to reinvigorate the discussion of steps that well-advised companies can take to try to reduce their risks of securities litigation. 


Foreign Investors Who Bought BP Shares Overseas Can Pursue English Law Claims in U.S. Court

Posted in Securities Litigation

texasThe U.S. Supreme Court’s July 2010 decision in Morrison v. National Australia Bank seemed to sound the death knell for so-called “f-cubed” litigation – that is, lawsuits brought in U.S. courts under the U.S. securities laws by foreign investors who bought their shares in a foreign company on a foreign exchange. However, in an interesting development in the massive securities litigation filed against BP in the wake of the Deepwater Horison disaster, a federal judge has ruled that the lawsuit alleging brought against BP and related BP entities by foreign investors who purchased their BP shares on the London Stock Exchange can proceed in U.S. court — even though the plaintiffs are asserting claims based on English law.


A number of factors in the court’s decision are unique to the circumstances surrounding the Deepwater Horizon disaster. Nevertheless, the case does represent a significant instance where foreign claimants whose U.S. securities laws claims were precluded by Morrison have found a way to be able to pursue claims in U.S. courts on an alternative theory. More to the point, the ruling does present an example where “f-cubed” investors have been able to pursue their claims in U.S. courts, notwithstanding Morrison. A copy of Southern District of Texas Judge Keith P. Ellison’s September 30, 2014 memorandum and order can be found here.



Following the April 20, 2010 Deepwater Horizon oil spill, BP shareholders filed a number of lawsuits against the company and certain of its affiliates and officials seeking to recover for their financial losses. Among these lawsuits was a securities class action lawsuit filed under U.S. securities laws. Many of the allegations in the securities class action lawsuit survived the motion to dismiss; however, as discussed here, in February 2012, Judge  Ellison, in reliance on the U.S. Supreme Court’s decisions in Morrison, granted the defendants’ motion to dismiss the claims of putative class members who had purchased BP common shares on the London Stock Exchange (LSE).


Many of the investors who purchased their shares on the LSE then filed individual actions in the Southern District of Texas against the defendants, asserting claims not under the U.S. securities laws, but rather under English common law. In simple terms, Judge Ellison divided these individual investor claims into what he called “tranches.” The first tranche of claims involved lawsuits filed by U.S. domiciled investors who had purchased their BP shares on the LSE. The second tranche of claims involved lawsuits filed by foreign investors who had purchased their BP shares on the LSE. The defendants moved to dismiss these individual lawsuits.


Judge Ellison first dealt with the defendants’ motion to dismiss the first tranche investors’ claims. As discussed here, on September 30, 2013, Judge Ellison denied the defendants’ motion to dismiss. He held that even though English law governs the first tranche claimants’ common law and statutory claims, he could not conclude that an English court is a more appropriate forum for the claims.


Judge Ellison then turned to the defendants’ motion to dismiss the second tranche investors’ claims – that is, the claims asserted by foreign investors who purchased their shares in BP on the LSE. The motion to dismiss required Judge Ellison to consider whether or not the fact the investor claimants were domiciled outside the U.S. changed his analysis in denying the motion to dismiss the first tranche investors’ claims. He concluded that it did not.


The September 30, 2014 Ruling

In his September 30, 2014 opinion, Judge Ellison did grant the defendants’ motion to dismiss as to certain of the allegedly misleading statements and as to certain of the individual defendants, but otherwise the motion to dismiss was denied. In particular Judge Ellison declined to exercise his discretion to dismiss the foreign investors’ English law claims on the grounds of foreign non conveniens.


In denying the defendants’ motion to dismiss on the ground of forum non conveniens, Judge Ellison held that while a foreign plaintiffs’ choice of forum ordinarily is entitled to less deference than that of a domestic plaintiff, “this forum” – that is, Judge Ellison’s court – “is where these types of claims – claims with a distinctively American bent — have been brought and are being litigated against the Defendants.” He added that “the Court is unaware of any other forum where similar claims have been initiated.” He concluded that “given the legitimate connection between the English law claims of foreign plaintiffs and this MDL, the Court affords the foreign plaintiffs substantially the same level of deference previously accorded to the domestic plaintiffs in the first tranche.”


In weighing the plaintiffs’ choice of forum against the public and private interests, he noted that very few factors he had considered with respect to the domestic plaintiffs “change in the context of foreign plaintiffs,” adding that “those that do are not significant enough to disturb the Court’s previous decision” (that is, with respect to the domestic plaintiffs). Among other things, he noted that given his ruling in the domestic plaintiffs’ claims, he is already going to be called upon to preside over claims in the case under English law. In closing, he noted that:


The Court expects that dismissal of foreign plaintiffs’ claims will appreciably and immediately relieve congestion on its docket. This factor, combined with the need to apply foreign law, is enough to tip the scale in favor of England. But the private and public interest factors must weigh heavily in favor of England to disrupt the foreign plaintiffs’ choice of forum. Because it does not, the Court once again declines to dismiss English law, securities fraud claims asserted in this MDL under the doctrine of foreign non conveniens.


Interestingly, Judge Ellison also denied the defendants’ motion to dismiss the claims based on SLUSA. While SLUSA might potentially require the dismissal of claims asserted under “State law,” he concluded that SLUSA did not apply to require the dismissal of plaintiffs claims based on foreign law. While he acknowledged that this outcome might be inconsistent with the spirit of SLUSA, Judge Ellison concluded that he could not apply SLUSA to these plaintiffs claims in light of the clear language of the statute applying the preclusive effect only to “State law” claims.



In his prior ruling, Judge Ellison had already determined that the domestic investors English law claims could proceed in his court and would not be dismissed in preference to an English forum. In this decision, he simply extended his prior ruling to the foreign claimants’ claims. In both instances, the claimants had purchased their shares in a foreign company in a foreign country. In this ruling, he basically just held that it really didn’t make a difference to his analysis that these claimants are foreign domiciled.


Nevertheless, Judge Ellison’s ruling is very noteworthy because it represents a substantial instance where a set of foreign claimants whose U.S. securities laws claims were precluded under Morrison because they purchased their shares in a non-U.S. company on a foreign exchange were able to subject the non-U.S. company to a claim in U.S. courts. In other words, Judge Ellison’s ruling represents the rare instance when prospective foreign claimants have managed to side-step the implications of Morrison in order to subject a non-U.S. company to claims in a U.S. court. Indeed an October 1, 2014 Law 360 article about the case (here, subscription required) quotes counsel for certain of the foreign investors as saying that Judge Ellison’s ruling allowing the foreign investors claims to proceed “is a first-time occurrence in the wake of the Morrison decision in 2010.”


As I noted in discussing Judge Ellison’s denial of the defendants’ motion to dismiss the first tranche claimants’ claims (here), the plaintiffs’ success here in avoiding a dismissal on the ground of forum non conveniens is all the more noteworthy because in the separate BP Deepwater Horison shareholders’ derivate lawsuit, Judge Ellison had granted the defendants’ motion to dismiss on forum non conveniens grounds. As discussed here, in September 2011, Judge Ellison found that the balance of factors weighed in favor of the dismissal of the suit in preference for an English forum, as the derivative suit would involve considerations of the proper conduct under English law of the affairs of the board of an English company. Judge Ellison found that considerations of the internal affairs doctrine militated in favor of dismissal. As discussed here, in January 2013, the Fifth Circuit affirmed the dismissal of the BP Deepwater Horizon shareholders’ derivative lawsuit.


There are several factors that make it unlikely that the foreign plaintiffs’ approach here will become a playbook for other plaintiffs seeking to circumvent Morrison. There are certain factors of this case that are arguably unique. Among other things, there is a peculiarly local aspect of all of the Deepwater Horizon litigation – what Judge Ellison called referred to as the “distinctly American bent,” which, at least in Judge Ellison’s eyes, seemed to make it more reasonable for this case to go forward in his court. There is, he added, a “legitimate connection” between the foreign investors’ claims and the MDL Deepwater Horizon litigation already in his court. In the absence of these factors and connections, which are arguably unique to this situation, it seems likely that his analysis might have come out differently on the forum non conveniens analysis.


But while the plaintiffs’ approach here provides something less than a pattern of general applicability, Judge Ellison’s ruling nonetheless represents a noteworthy instance where foreign claimants whose federal securities law claims were barred under Morrison were still able to assert claims in a U.S. court against a non-U.S. company. It presents an occasion in which claimants may have succeeded in side-stepping Morrison in order to assert claims in a U.S. court against a non-U.S. company and is important for that reason.


There is one further aspect of this situation that makes this ruling noteworthy. That is, these lawsuits involve not only foreign claimants who purchased their shares in a foreign company on a foreign exchange, but they are asserting claims under foreign law. These are not only “f-cubed” claims, the foreign claims to the fourth power – yet they will still be proceeding in a U.S. court. Neither the claimant, the principal corporate defendant, the securities transaction nor the law on which the claimants are proceeding has any connection to the forum, yet because the oil spill happened nearby, the case will nonetheless go forward in Texas rather than England.


One final note about the fact that the foreign plaintiffs are asserting English law claims — that is the fact that the foreign claimants are relying on foreign law rather than on domestic U.S. law actually helped them keep their case in the U.S. court. If the foreign claimants had been asserting State law claims, then the claims would have been dismissed under SLUSA. Judge Ellison concluded that SLUSA does not preclude claims under foreign law, and so the foreign claimants’ claims will proceed – an ironic twist, where a factor that seemingly would make the case less likely to survive a dismissal motion actually helped to allow the case to go forward.


All of this underscores the fact that, as Judge Ellison’s ruling demonstrates, there are, notwithstanding Morrison, circumstances when foreign companies can still be hauled into a U.S. court to face claims by foreign investors who bought their shares in the company outside of the U.S. This is something for non-U.S. companies to note and consider as they assess their U.S. litigation risks, and it is something for their D&O underwriters to consider as they asses the risk profile of non-US. companies.  


Defendants Unable to Establish Absence of Price Impact, Class Certification Granted

Posted in Securities Litigation

floridaIn its long-awaited June 2014 decision in the Halliburton case, the U.S. Supreme Court declined to jettison the fraud on the market theory on which the presumption of reliance is based, but it did provide that defendants could attempt to rebut the presumption of reliance by showing that the alleged misrepresentation that is the basis of the plaintiffs securities claim did not impact the share price of the defendant company’s securities. Commentators have since debated what the opportunity for defendants to rebut the presumption of reliance by showing the absence of price impact will mean for securities cases.


While time will tell what the impact from this part of the Supreme Court’s holding in Halliburton will be, a September 29, 2014 order from the Southern District of Florida certifying a class in the Catalyst Pharmaceutical Partners securities class action lawsuit sheds some interesting light on the subject. The Court’s order can be found here.



On August 27, 2013, Catalyst issued a press release stating that its drug, Firdapse, which treats Lambert-Eaton Myasthenic Syndrome (LEMS), had been designated as a Breakthrough Therapy by the FDA and that there was no other effective and available treatment for LEMS. The company’s share price climbed 42% on the news. However, an article published on October 18, 2013 disclosed that another substance that had been available for years and that is nearly identical to Firdapse is an effective treatment for LEMS and is offered to LEMS patients free of charge. Following publication of the second article, the company’s share price declined 42%.


The plaintiffs filed a securities class action lawsuit against Catalyst and certain of its directors and officers on behalf of all investors who purchased their securities in Catalyst between August 27, 2013 and October 18, 2013. The plaintiffs filed a motion seeking class certification, which the defendants opposed, arguing among other things that the alleged misrepresentations on which the plaintiffs sought to rely did not impact the company’s share price.



In her September 29, 2014 order, Southern District of Florida Judge Ursula Ungaro granted the plaintiffs’ motion for class certification with respect to the purchasers of the company’s common stock, but she denied the motion as to purchasers of the company’s other securities, as the plaintiffs had not shown that the other securities traded in an efficient market.


In granting the plaintiffs’ motion, Judge Ungaro held that the plaintiffs had established that they were entitled to a presumption of reliance in support of their motion for class certification, which the defendants sought to rebut by showing that the alleged misrepresentation had not impacted the share price of the company’s common stock.


In attempting to establish the absence of price impact, the defendants raised three arguments: (1) that the “truth” (that is, that the alternative LEMS therapy was effective and available) was already known to the public not have affected the company’s share price (the so-called “truth on the market” argument); (2) that the 42% spike in the company’s share price following the August 27, announcement was in response to the accurate announcement of Firdapse’s Breakthrough Therapy status: and the 42% decline in share price was due to bad publicity and market overreaction; (3) that expert testimony showed that the rise in the company’s share price was entirely consistent with the rise in market capitalization of other companies that have announced Breakthrough Therapy designation. Judge Ungaro rejected each of these arguments.


First, with respect to the defendants attempt to rely on the “truth on the market” theory, Judge Ungaro said that this argument, “stripped down, is merely an argument that the alleged misrepresentation was immaterial in light of other information in the market.” Were defendants to succeed with the truth-on-the-market defense, it would “defeat materiality as to every putative class member and would thus end this controversy in its entirety” and therefore, she said, citing to the U.S. Supreme Court’s 2013 decision in the Amgen case (about which refer here), “for purposes of determining at this early stage in litigation whether the alleged misrepresentation had any impact on the price of Catalyst stock, the Court must disregard the evidence that the truth was known the public.” That issue, she said, is a matter for trial or for summary judgment.  


Second, with respect to the defendants’ argument that aspects of the August 27, 2013 and October 18, 2013 disclosures other than the alleged misrepresentation accounted for the spike and decline in the company’s share price, Judge Ungaro basically said that even if the other aspects of the disclosures were “substantially more important” than the alleged misrepresentation that there existed no effective and available treatment for LEMS, it does not follow that the misrepresentation did not account for any of the change in the share price. The defendants, she said, have not shown that the disclosure of the other therapy as an effective and available alternative “had no impact on the price of Catalyst stock.”


Third, with respect to the expert testimony that the rise in the company’s share price following the announcement that Firdapse had been given the Breatkthrough Therapy designation is consistent with the rise in share price of other company’s announcing the Breakthrough Therapy designation, she said that the mere fact that the price movement was consistent with the price movement of other company’s does not show that the alleged misrepresentation did not contribute at all to the 42% spike in the company’s share price.



As Judge Ungaro herself noted, this was always going to be a tough case for the defendants to try to show absence of price impact. She noted that in this case the burden on the defendants of establishing the absence of price impact is “particularly onerous.” She observed that “not only is there a clear and drastic spike following the alleged misrepresentation and an equally dramatic decline following the revelation of the truth, but all agree that the publications containing the misrepresentation and its revelation respectively caused those price swings.”


She added that under these circumstances, “proving an absence of price impact seems exceedingly difficult, especially at the class certification stage in which it must be assumed that the alleged misrepresentation was material.”


While the Halliburton decision undeniably gave the defendants a theoretically valuable tool with which to try to rebut the presumption of reliance in order to defeat a motion for class certification, it is clear that the defendants will not always succeed in establishing the absence of price impact required to rebut the presumption. Indeed, as this case shows, in at least some cases, it will be very difficult for defendants to show that the alleged misrepresentation had no impact at all on the company’s share price.


It is, as Judge Ungaro herself observed, particularly significant at the class certification stage that the Court must assume that the alleged misrepresentation is material. Where, as here, there have been discernible price swings following the key disclosures, it will be, as Judge Ungaro noted “exceedingly difficult” for the defendants to establish the absence of price impact. Since many cases involve discernible price swings, the ability to rebut the presumption of reliance through a showing of the absence of price impact may simply not be available in many cases. It may turn out that there only be a narrow category of cases where the ability to try to show the absence of price impact will turn out to make a difference. In any event, it may prove to be quite significant that defendants will not be able to establish absence of price impact by showing (or trying to show) absence of materiality.


In the wake of Halliburton, one uniform prediction was that the ability of the defendants to attempt to rebut the presumption of reliance through a showing of the absence of price impact would increase defense expenses, perhaps significantly. There is no way to know how much the ability to make this argument added to defense costs here, as the defendants would have opposed the motion for class certification in any event. While the arguments over the absence of price impact arguably only contributed to defense expense incrementally, there were additional costs associated with the argument. Among other things the defendants did retain an expert to try to support their argument. In some cases these kinds of additional expenses could be substantial.


It will be interesting to monitor is how significantly the assertion of these arguments contribute toward defense expenses and what impact that has on the insurance dynamic. At this point, carriers have proven eager to show that they will cover these costs; indeed, even before the Supreme Court ruled in Halliburton one carrier came out with an endorsement providing that no retention would apply to costs associated with trying to establish the absence of price impact. Since the decision, other carriers have followed suit. It will be interesting to see as the costs associated with these kinds of motions come into focus whether the carriers remain as willing to absorb these costs, particularly if it turns out that the expenditure of the costs is effective in only a smaller number of cases.


Special thanks to a loyal reader for sending me a copy of the ruling in this case.

PLUS London Symposium Notes

Posted in Travel Posts

017aI was fortunate this past week to be a part of the very successful Regional Professional Liability Symposium of the Professional Liability Underwriting  Society (PLUS) in London. About 180 people attended the sold out event, which featured a key note address from David Bermingham, one of the NatWest Three. The event was both well-attended and well-run. It was a privilege and an honor to be a part of such an excellent event. I congratulate everyone on the Europe Committee for their successful event, particularly Committee Chair Des McCavitt of Aspen (London). I also want to acknowledge and thank the many table sponsors who helped make the event’s success possible.


It is worth noting that all three of the events PLUS sponsored this year as part of its initiative to expand its international footprint – the three events were held in Hong Kong, Singapore and London — were highly successful and bode will for the future. The success of these events ensures that PLUS will continue its efforts to become a truly international membership organization.


I have added some picture of the event below. Additional Pictures can be found on the PLUS blog, here.


PLUS London. Gibson Hall, London 29/9/14 London. Gibson Hall, London 29/9/14



PLUS London. Gibson Hall, London 29/9/14 London. Gibson Hall, London 29/9/14


It was a good week to be in London and not just because of the great PLUS event. The weather was great as well. According to news reports, this past month was the driest September on record. Whether or not the weather conditions actually set a record, the conditions were great for walking around.








Supreme Court Will Not Consider the Securities Act Statute of Repose Issue in the Indy Mac Case After All

Posted in Securities Litigation

supctAs I had noted on this blog (here), one of the important securities law cases on the U.S. Supreme Court’s docket for the upcoming term involved the failed IndyMac bank. The Court had granted cert in the case to decide whether the three-year limitations period in Section 13 of the ’33 Act may be tolled by the filing of a putative securities class action (under a legal theory known as the American Pipe tolling doctrine), or rather is a statute of repose that cannot be tolled. Though seemingly technical, the case presented potentially significant issues.


The case was scheduled to be argued next Monday, October 6. However, on September 29, 2014, in an unexpected development, the U.S. Supreme Court entered an order dismissing the writ of certiorari as improvidently granted, based on settlement-related developments in the underlying case.


As discussed in greater detail here, the underlying securities lawsuit involves allegations that the failed IndyMac Bank misled investors in connection with its issuance of securities in over 100 different offerings. The District dismissed for lack of standing all claims in which the plaintiffs had not themselves purchased securities. Five investors who did purchase the securities sought to intervene. The district court denied the motion to intervene, on the grounds that the three year statute of repose had lapsed and was not extended by the American Pipe tolling doctrine and could not be extended under Fed. R. Civ. Proc. 15 (c). The proposed intervenors appealed.


In a June 27, 2013 opinion (here), the Second Circuit, in an opinion by Judge Jose A. Cabranes for a three-judge panel, held that the filing of a class action lawsuit does not toll Section 13’s statute of repose. The appellate court held that neither the equitable tolling principles under American Pipe nor the legal tolling principles could operate to extend the period of the statute of repose.


The proposed intervenors filed a petition with the U.S. Supreme Court seeking a writ of certiorari. The intervenors argued that the Second Circuit’s opinion conflicted with a prior holding of the Tenth Circuit that American Pipe tolling does apply to Section 13’s statute of repose. The intervenors also argued that the Second Circuit’s holding unsettled long-standing class action practices with regard to the principles of tolling. The Court granted the petition and the case was fully briefed and ready to be argued.


All was set for the Supreme Court to address these important legal issues under the federal securities laws. However, on September 22, 2014, the plaintiffs in the underlying case notified the district court that they had reached a settlement with the underwriter defendants in the underlying case. As discussed in a September 23, 2014 post in her On the Case blog (here), Alison Frankel reported that the amount of the settlement was $340 million dollars. The settlement is of course subject to court of approval.


The U.S. Supreme Court got wind of this development and the justices likely were asking themselves that if the case has settled is there anything left of the case for the Court to consider? So on September 23, 2014, the Supreme Court entered an order in the case directing the parties to submit letter briefs addressing the issue ““What should be the effect, if any, of the proposed settlement agreement now pending before the district court on the matter pending before this Court?”


In response, lawyers for all of the parties in the case  of suggested that the case could go forward in the Court because there remained claims against one of the underwriting firms sued in the case — Goldman Sachs & Co.  Goldman Sachs had been dismissed as a defendant in the class action and didn’t participate in the proposed settlement.


However, as discussed in a September 29, 2014 post on the SCOTUS blog (here), the Court seems to have concluded that as a result of the settlement there was not enough of the case left of the case for the Court to hear – although the Supreme Court’s terse order dismissing the writ of certiorari in the case contains precious little explanation for the Court’s action.


The most immediate consequence of the Court’s order is that the Supreme Court appeal in the case will not go forward, meaning that the Second Circuit’s order in the case will remain standing – which in turn means that the split in the circuits that was the basis on which the Court had granted cert in the first place will continue. Because such a vast preponderance of securities cases are filed in the Second Circuit, the Second Circuit’s ruling that the filing of a class action does not toll the ’33 Act’s statute of repose will remain operative with respect to a very large number of securities cases that are filed.


In the merits briefs filed with the Supreme Court and in certain of the amicus briefs that were filed in support of the plaintiffs, the plaintiffs and the amici had argued that if the Second Circuit’s decision were allowed to stand, class members in many securities class actions would have to make wasteful “protective filings” in order to maintain their right to proceed independently and avoid being time-barred if class certification was subsequently denied.  These filings would drain judicial resources and impose costs on putative class members without any countervailing benefit. (This position is discussed in greater detail here.) Whether or not this will happen remains to be seen, but there is  no doubt that the fact that the Second Circuit’s decision in the case will be allowed to stand could have a significant impact on class action practice in ’33 Act case in the Second Circuit.


Though the U.S. Supreme Court has dismissed the IndyMac case from its docket, that does not mean that there won’t be any securities law action in the Court’s upcoming term. The Court still has another securities case on its docket. On November 3, 2014, the Court will hear argument in the Omnicare case.


As discussed here, in March 2014 the Supreme Court granted cert in the Omnicare case to take up the question whether or not to survive a dismissal motion it is sufficient for a plaintiff in a Section 11 case to allege that a statement of opinion was objectively false, or whether the plaintiff must also allege that the statement was subjectively false – that is, that the defendant did not believe the opinion at the time the statement was made. The Supreme Court’s consideration of the Omnicare case will resolve a split in the circuits between those (such as the Second and Ninth Circuits) holding that in a Section 11 case allegations of knowledge of falsity are required; and those (such as the Sixth Circuit, in the Omnicare case) holding that it is not required.


So the Supreme Court will be hearing and deciding an important securities law case in the upcoming term. It just won’t be getting to the ’33 Act statute of repose issue, at least not this term. Those of us who find the American Pipe tolling doctrine fascinating will have to find some other way to amuse ourselves.


And Finally: Two camels in a car. For all of you who have been wondering what would happen if you tried to put two camels in a car.  


The Travel Issue: Edinburgh Edition

Posted in Travel Posts

149aThe D&O Diary is on assignment in the United Kingdom this week, with the first stop in the venerable city of Edinburgh, for meetings and an event. Due to flight delays, cancellations and missed connections, my visit to Scotland’s capital city was cut short by a day, which compressed both my meetings and my opportunity to see the sights. Even with a shortened stay, I still managed to take in quite a bit of the city.


Edinburgh turned out to be quite a bit of surprise. Perhaps I was fortunate with the time of year of my visit and the pleasant weather that prevailed while I was there. Rather than the dark and gloomy domain perched on craggy peaks that I pictured, the city was (at least while I was there) bright, open and, while hilly, an uncommonly pleasant place in which to walk around.


With a population of about 470,000 (about the same size as145a Sacramento), Edinburgh is perched on the south side of the Firth of Forth, which opens out to the North Sea. The city’s name is pronounced with a distinctive Scottish flourish – it is “Edin-burra” not “Edin-burg.” The view within the city is dominated by the looming presence of the Edinburgh Castle (pictured at the top of the post), which stands at the top of the city’s Old Town. An architecturally interesting and beautiful cobblestone street, called the Royal Mile (pictured left), connects the Castle to the royal Palace of Holyroodhouse (pictured below). On a warm, sunny fall afternoon, the Royal Mile was thronged with tourists looking to buy kilts, tartans and whisky to take home with them.



067aEdinburgh is a topographically complicated city owing to the several craggy outcroppings, the remnants of ancient volcanic activity, within and adjacent to the city. Looming beyond Holyroodhouse is the craggy peak known as Arthur’s Seat, the highest point among the rocky outcroppings of the Salisbury Crags. On a clear day, the view from Arthur’s peak seemed almost limitless. To the east, the Firth of Forth stretched out to the North Sea. About twenty miles away, the soft, rolling beauty of the Pentland Hills framed the view to the southwest. To the north, Edinburgh castle soared about the city below.







Just days before my visit, Scotland had held a referendum on whether or057a not it should be an independent country. I saw the remnants of the independence campaign around the city. Though Edinburgh had voted “No” in much greater numbers that most of the rest of the country, most of the campaign remnants that I was were in support of the “Yes” vote. On Saturday evening, I was in a pub to which I had been drawn by the live acoustic music. Late in the evening, the musician played a song called “Caledonia.” Every single person in the place sang along to the lyrics that go like this: “Let me tell you that I love you/And I think about you all the time/Caledonia you’re calling me, now I’m going home/But if I should become a stranger/Know that it would make me more than sad/Caledonia’s been everything I’ve ever had.” And then when the song ended, in unison, everyone in the college age crowd in the pub stood and shouted “Yes! Yes! Yes! Yes!” It was so cool it gave me goosebumps and it also made me think that for many in Scotland the independence issue is not over and may never go away.




Whenever I spoke to anyone there, after hearing my American accent, whoever I was speaking to would say that I must be there for the Ryder Cup golf tournament (which was played over the weekend at Gleneagles, about an hour outside Edinburgh). The next topic for discussion was where I was from in the United States, and when I said Ohio, the standard response was “Aye, you’re the first person I ever met from Ohio.” I wanted to reply that, in fact, Ohio is 50% larger geographically than Scotland and has more than twice as many people. Of course, I also thought to myself that Scotland’s history, heritage and culture are many times greater and more distinctive than that of Ohio or just about any other U.S. state you might care to mention. So I kept the comparisons  between Scotland and Ohio to myself.


103aWhile I was in Edinburgh, I took full advantage of the clement weather for some ambitious walking.  A friend back home upon learning that I was going to be visiting Edinburgh had told me that I had to make time to explore the footpath that winds along the Water of Leith, a stream that runs from the Pentland Hills to the port city of Leith. Though I didn’t walk the entire length of the walkway, I did walk from a point near my hotel all the way to Leith, Edinburgh’s historic port city, about five miles away. The pathway goes through a number of picturesque villages, including Stockbridge, Canonmills, and Dean Village. The stroll along the walkway’s heavily wooded, sunlight dappled pathway was quite a contrast to the crowded sidewalks near my hotel in the city’s shopping district.






The city is actually full of green space. Just a bit south of the Royal Mile is the University of Edinburgh, which itself is adjacent to a large open parkland called the Meadow. I roamed around the area after my meeting089a on Friday afternoon, and as I walked back toward town on the Meadow Path, a footpath that connects the campus to the historic city, I came upon two grandmotherly women who were holding up a map and obviously trying to figure out where they were. From the accents, I could tell they were American, so I offered to help.


It turns out that the two women, whom I later learned are sisters and are named Edna and Alice, had gone AWOL from their tour group, and had intended to walk on their own from their hotel to the Royal Mile. They been given surprisingly useless directions – they were told to “turn left at the Starbuck’s,” which, given the fact that there is a Starbuck’s on just about every street corner, virtually guaranteed that they would get lost. They weren’t far away from their destination, but the Royal Mile was about a half a mile away – and straight uphill.  From their reaction, it was clear that they didn’t think that after all of their wanderings they had enough left in the tank to make it up the hill. I suggested that they should go in the pub just across the way and call for a cab to take them back to their hotel. It was pretty clear they weren’t sure at all about the idea of going in a pub (they didn’t look like the types who, say, made a habit of going on pub crawls), so I said I would accompany them. The Doctors pub (apparently named for its proximity to the medical school) was quiet on a Saturday afternoon, with a few men in a corner watching the Ryder Cup on television.


I told the ladies that we might as well get comfortable while they waited for the cab and I suggested that they should make the most of their pub experience and have a pint of ale. They laughed at the idea, but the spirit of adventure got ahold of them, and they agreed to try a pint. To their surprise, they liked the ales the bartender recommended them, and after a time of convivial conversation, they decided it was their turn to buy me a round. I wouldn’t have thought that spending an afternoon drinking beer with a couple of American grandmothers would be the best way to spend the day, but I have to say I enjoyed meeting them. After the second round, I had to remind them that they had intended to call a cab to go back to their hotel. As they were leaving, they said that the visit to the pub had been the most fun they had on their entire trip and they couldn’t wait to tell the others in the tour group about their adventure. As is often the case while traveling, the unplanned events and encounters often are the best part.


My time in Edinburgh was all too brief, and I soon had to leave to head on to London. But I am glad I had the chance to catch a little glimpse of the Scottish city. I enjoyed the entire experience. As much as I enjoyed climbing up to the top of Arthur’s Seat and hiking along the Water of Leith pathway, the afternoon in the pub with Edna and Alice might have been the best part of the visit for me as well.


More Pictures of Edinburgh:



New Town













Here’s a video of the song “Caledonia”


Oklahoma Legislature Adopts Derivative Litigation Fee-Shifting Provision

Posted in Corporate Governance

oklachomaOne of the most interesting recent developments has been the onset of innovative litigation reform efforts in the form of bylaw revisions. Among the most intriguing of these efforts involves fee shifting bylaws, whereby an unsuccessful claimant in intracorporate litigation must pay the other party’s costs. As discussed here, earlier this year, the Delaware Supreme Court upheld the validity of a fee shifting bylaw, a judicial decision that immediately triggered a legislative initiative to limit the effect of the decision to non-stock companies. As discussed here, the Delaware legislative initiative has now been tabled until early next year.


But while the Delaware legislative initiative is on hold, at least one legislature has gone forward to provide for the awarding of fees against unsuccessful derivative lawsuit claimants. As discussed by University of Denver Law Professor J. Robert Brown in a September 24, 2014 post on the Race to the Bottom blog (here), the Oklahoma legislature has adopted a bill providing that in a shareholder initiated derivative action against a domestic or foreign corporation, the court “shall require the nonprevailing party or parties to pay the prevailing party or parties the reasonable expenses including attorneys’ fees, taxable as costs, incurred as a result of such action.” A copy of the Oklahoma legislation can be found here.


Professor Brown notes that the Oklahoma arrangements are, in a sense, narrower than what the Delaware Supreme Court approved, as the Oklahoma legislation only applies to derivative suits, and it is more balanced, as it provides for the awarding of attorneys fees for successful derivative plaintiffs.


Nevertheless the “loser pays’ model that the Oklahoma legislation adopts is extraordinary —  It represents a significant departure from what is general known as the American Rule, under which each party typically bears its own cost. And unlike the fee-shifting bylaws being debated in Delaware –which would in any event require each company to decide whether it was going to adopt the bylaw (and might therefore be subject to shareholder scrutiny) — the Oklahoma legislation applies to any derivative action in the state, even if the company involved is not an Oklahoma corporation.


As Professor Brown points out in his blog post, derivative actions are often dismissed on procedural grounds (for example, based upon the failure to make a demand on the board, without a judicial determination that demand would be futile), meaning that derivative lawsuit plaintiffs often do not prevail. Under this statute, a shareholder plaintiff that does not prevail “will be forced to pay the other side’s fees, something that can result in dollar amount s that stretch into six and seven figures.”


The risk of this possibility, according to Professor Brown “provides a significant disincentive to file a suit against the board for breach of fiduciary duties” – which, it seems to me, was the Oklahoma legislature’s intent. I don’t have a good sense of how many derivative lawsuits are actually filed in Oklahoma’s courts, but whatever the number is, now with this legislation in place, there are certainly going to be fewer derivative lawsuits filed in the Sooner State than there were in the past.


I know there are some who might say that is a good thing. For his part, Professor Brown says the effect of these fee shifting provisions is “to insulate challenges to boards for breach of the duty of loyalty, for bad faith, or for wasting corporate assets. In other words, it has the potential to render boards unaccountable for their actions as directors.”


Professor Brown says that Oklahoma is the “first state to intervene in the debate” about fee shifting in derivative litigation. His use of the word “first” is telling – he did not say “only.” For starters, we know that Delaware is going to get into the mix on these issues sometime in 2015. In addition, as things stand, there is a Delaware Supreme Court decision holding that fee shifting bylaws are valid. If the Delaware legislature fails to act, or winds up taking a different action than originally proposed, fee shifting bylaws might well become a regular bylaw provision for Delaware corporations. And while we will have to wait to see what Delaware’s legislature  will do, perhaps other states will, like Oklahoma, adopt  a “loser pays” rule, or permit companies incorporated in their jurisdiction to adopt fee shifting by laws.


I don’t expect that every state’s legislature would be willing to adopt a bill like the one Oklahoma’s legislature passed, but there are some other states that might. If this kind of legislation becomes widespread, the environment for litigating derivative lawsuits in this country could be substantially altered. In any event, there will be many more developments ahead as this particular story unfolds.


Break in the Action: Due to Travel Requirements, the D&O Diary will not be published for the next few days. Regular publication will resume once I am back in the office toward the end of next week.