The Beginning of the End of the Merger Objection Lawsuit Curse?

del1One of the great curses of the corporate litigation environment in recent years has been the proliferation of merger objection suits, the incidence of which has gotten to the point that now just about every large merger deal draws at least one lawsuit, and sometimes several. However, if recent developments in the Delaware Chancery Court are any indication, the courts are as appalled by this seemingly undifferentiated mass of litigation as are the parties to the transactions. Two recent decisions may suggest that the Delaware courts, at least, are no longer willing simply to accept the standard “disclosure only” settlements that typically resolve these kinds of cases, which in turn may mean that the cases could become less attractive to the plaintiffs’ lawyers that bring these cases. Continue Reading

Advisen Report: Declining Corporate and Securities Litigation Filings Continued in Second Quarter, But Most Recent Quarterly Trend May be Upward

PrintThe recent annual trend toward declining numbers of corporate and securities lawsuit filings continued in the first half and second quarter of 2015, although second quarter activity did increase slightly compared to the prior quarter, according to a report from the insurance industry information firm, Advisen. If the increase in the second quarter numbers compared to the first were to continue for the remainder of the year, the number of new corporate and securities lawsuits during the year could see an annual increase for the first time in four years. The July 15, 2015 Advisen report, entitled “D&O Claims Trends: Q2 2015” can be found here. Continue Reading

A Visit to Prague

prague castle on monday morningThe D&O Diary finished up its recent European sojourn with a weekend visit to Prague. After a four-hour train ride northeastward from Munich through forests, farm fields, and low mountains, and a final stretch through the Vltava River valley (the river is known as the Moldau in German), we reached Prague, or Praha as the city is known to the natives. The Czech Republic’s capital and largest city is a bustling river metropolis with a rich cultural heritage and a vibrant night life. Continue Reading

Munich in Summer

munich english garden chinese tower beer gardenThe D&O Diary is on assignment in Europe this week, with the first stop in the southern German city of Munich, to attend Munich Re’s Global Casualty Claims Conference. This trip represented my first ever visit to Europe during the summer months. My prior visits have all taken place during other months of the year. Here’s what I discovered about visiting Europe in July; it is a lot more comfortable walking a city in the summer warmth than in colder months, and, even more importantly, a summer visit allows for very late evenings sitting at outdoor cafes and beer gardens in the warm and comfortable twilight that does not turn to darkness until well past 10:00 pm. Continue Reading

The Phones are Alive (With the Sound of Music)

Julie Andrews Sound of Music

This is me disregarding Apple Music and continuing to enjoy free music streaming on the Internet

By now most of you, like me, have had Apple Music downloaded on your iPhone, with the latest iOS update. Pretty presumptuous of Apple to just stick it on our phones, don’t you think? Personally I would have preferred to have been asked first. Turns out, Apple not only wants us to buy its phones, but they also want us to pay for streaming music content as well. Just to sample Apple Music during the three-month trial period, you have to select and agree to a payment plan (either individual for $9.99 a month or family for $12.99) that kicks in after the trial period ends.


I don’t know about the rest of you, but I am not willing to pay $120 a year to listen to streaming music. (Okay, okay, $119.88.) Fortunately, we don’t have to pay anything. There are a number of good free options available. The purpose of this post is to share my notes on the free music streaming sites and, I hope, to encourage others to share their own notes with me and others as well. Continue Reading

U.S. IPO Activity Remains at Heightened Levels in Year’s First Half

stockboardAlthough the IPO pace is off from last year’s sizzling levels, the number of companies completing IPOs on U.S. exchanges remains at heightened levels. In addition, the number of completed IPOs picked up as the year progressed, suggesting that IPO activity in the U.S. in the year’s second half will also be lively.


U.S.  IPO activity in 2014 was at the highest levels in more than a decade, when there were a total of 275 U.S. IPOs (as discussed here). According to Renaissance Capital (here), through the first six months of 2015, there have been a total of 104 completed IPOs, which is well below the 147 completed in the first half of 2014 (representing a decline of 29%). However, other than when compared with 2014, the number of U.S. IPOs completed in the first half of 2015 is the first half total since 2004.


The pace of completed IPOs has picked up as 2015 has progressed. The number of U.S. IPOs completed in June 2015 was the highest monthly total since July 2014, and the number of IPOs completed during the week ending on June 25, 2015 was the highest weekly total since October 2014, as discussed here. Moreover, the market for IPOs appears to be quite healthy as we head into the year’s second half. Seres Therapeutics, which debuted during the week ending June 25, 2015 soared 186% on its first day of trading, the highest post-IPO pop since January 2014. Continue Reading

Another U.S. Securities Suit Arising from Overseas Corruption Investigation

brazilIn an earlier post, I noted that a significant factor driving securities litigation filings so far this year has been the rising number of U.S. securities lawsuits involving non-U.S. companies. A number of different factors are contributing to the filing of these suits, but among the factors is the increasing numbers of U.S.-listed non-U.S. companies that have been caught up in corruption investigations in their home countries.


The highest profile company among the firms involved in corruption probes is the Brazilian petroleum company, Petrobras, which has been the target of growing Operação Lava Jato (Operation Car Wash) corruption investigation in Brazil. Petrobras, whose ADSs trade on the NYSE, was hit with a class action securities lawsuit in the U.S. in December 2014 (as discussed here).


The continuing Petrobras investigation has spread to a number of other Brazilian companies. Among other things, the investigation has led to the recent arrests of two high profile executives in the construction industry in Brazil, as discussed here. The leaders of the nation’s two largest engineering and construction companies, Marcelo Odebrecht, head of Odebrecht SA, and Otavio Marques Azevedo, head of Andrade Gutierrez, were taken into custody in raids linked to the Petrobras scandal.


The investigation has now led to yet another U.S. securities class action lawsuit against yet another Brazilian company. On July 1, 2015, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Braskem, S.A. and certain of its directors and officers. Braskem, which is based in Brazil, is Latin America’s largest petrochemical company. Continue Reading

Controversy Surrounds SEC’s New Proposed Dodd-Frank Executive Compensation Clawback Rules

seclogoOn July 1, 2015, a divided SEC voted 3-2 to propose rules directing the securities exchanges to adopt standards requiring listed companies to adopt policies requiring the companies’ executive officers to pay back incentive-based compensation in the event the company restates its financials for the year in which the compensation was awarded. The proposed rules, which Dodd Frank Act Section 954 required the agency to adopt, are now subject to a 60-day comment period, have already generated a great deal of discussion. If the final rules bear any resemblance to the currently proposed version, the rules could prove controversial and could lead to disputes and disruption.


The SEC’s 198-pages of proposed rules can be found here. The SEC’s July 1, 2015 press release (including a “fact sheet” summarizing the proposed rules) can be found here. A good summary of the proposed rules by the Dorsey & Whitney law firm can be found here. A summary from the Ropes & Gray law firm set up in a Q&A format can be found here.  Unusually, all five of the commissioners issued separate statements about the proposed rules, including two sharply worded dissents by Commissioners Michael S. Picower (here) and Daniel M. Gallagher (here).


Under the proposed rules, the national securities exchanges are required to develop listing standards requiring companies to develop and implement policies to “claw back” incentive-based compensation that “later is shown to have been awarded in error.” The proposed rules are designed to “improve the quality of financial reporting and benefit investors by providing enhanced accountability.”


Recovery would be required from current and former “executive officers” who received incentive-based compensation during the three fiscal years preceding the date on which the company is required to prepare an accounting restatement. The recovery is required on a “no fault” basis, without regard to whether any misconduct occurred or to an executive officer’s responsibility for the erroneous financial statements. The amount of recovery is to be measured by the amount of the compensation exceeds what the officer would have received had the compensation been based on the restated financials.


For purposes of these rules, the definition of “executive officer” is very broad, and includes not only a company’s president and principal financial officer, but also the principal accounting officer, any vice-president in charge of a principal business unit, division or function, and any other person who performs policy-making functions at the company.


Companies would have discretion not to recover the excess incentive-based compensation if the expenses of enforcing the recovery would exceed the amount of the recovery. In addition, foreign private issuers would not have to enforce the recovery if recovery would violate their home country law.


The proposed rules specify that each listed company would be required to file its compensation recovery policy as an exhibit to its Exchange Act annual report.


Of significant interest for readers of this blog, under the proposed rules issuers are not permitted to indemnify officers against any amounts recovered under its clawback policies or to pay premiums on an insurance policy covering an officer’s potential clawback obligations.


The proposal requires the exchanges to file their proposed listing rules no later than 90 days after the publication of the final rules that the agency ultimately adopts, and requires the listing rules to become effective no later than one year following the publication date.



As required by the Dodd-Frank Act, these proposed rules are considerably broader than the existing executive compensation clawback requirements under the Sarbanes-Oxley Act. The SOX clawback rules applied only to the CEO and the CFO; these rules apply to a much broader range of executive officers. In his dissent, Commissioner Gallagher argued that the list of officers to whom the rules would apply is much broader than the Dodd-Frank Act required.


From my perspective, these rules continue a deeply troublesome trend in which our system of laws increasingly seeks to impose liability without culpability. As I have previously noted on this site (most recently here), there is an unfortunate willingness to impose penalties on those who neither engaged in wrongdoing nor were even aware that wrongdoing had even occurred, contrary to our legal system’s long-standing tradition that punishments were only administered on those who were somehow at fault or at least had a guilty mind.


The dissenting commissioners have numerous other criticisms of the proposed rules. Commissioner Gallagher (whom I learned from his recent speech at Stanford Law School Director’s College — which I attended — is a colorful speaker and writer), referred to the rules as the Commission’s “newest Goya, tortured and nightmarish.” Commissioner Picower criticized the rules as “likely to impose a substantial commitment of shareholder resources and, unintentionally, result in a further increase in executive compensation,” as companies move away from incentive-based compensation that would be subject to clawbacks. In a sign of the deep divisions with the agency, both dissenters also objected to the way that the final proposed rules were put forward and proposed. Commission Picower objected to that way that “at the very end, significant changes are agreed upon by the Chair’s office in ways that diverge from Congressional intent.”


The depth of division reflected in the dissents and the level of rancor at the commission that the tenor of the dissents reflects is frankly a little disturbing. The dysfunction these divisions suggest are arguably even more disturbing given the high-profile criticism the current SEC chair has faced – from within the same party as the President who nominated her – for not moving aggressively enough.


Setting aside the debate over the merits of the proposed rules, the rules as proposed could prove to be very difficult to administer as a practical matter. As discussed in at July 1, 2015 Law 360 article entitled “SEC Clawback Plan to Create Enforcement Nightmares” (here, subscription required), the implementation of the rules’ requirements in the event of a restatement could present a  host of challenges. Among other things calculating the difference between the compensation that was awarded and the compensation that should have been awarded based on the restate financials could produce some difficult calculations, particularly for types of compensation based on total shareholder return.


There is also the “open question about how companies will go about getting back money once they determined who owes what.” As one commentator quoted in the article states, the rules “create a potentially awkward dynamic.” In addition, companies who want to determine whether or not they fall into the rules’ exception which exempts clawbacks if recovery costs exceed potential recoveries could get caught up in preliminary calculations about likely recovery costs. Many companies, eyeing the rules’ complexity and challenges, may switch to forms of compensation that would not be subject to clawback, so that less of executives’ compensation is at risk.


There are two specific features of the proposed rules that D&O practitioners will want to note. The first is that given the requirement that the rules requirement that clawback could be imposed without respect to fault, the effort to enforce the clawback may not involve an actual or alleged Wrongful Act within the usual meaning of a D&O insurance policy. (This potential issue could be circumvented to the extent the definition of the term Wrongful Act also incorporates a provision including within the term any matter claimed against them as a result of their status as such as a director or officer of the company.).


Practitioners will also want to note that the under the proposed rules issuers would not be permitted to pay premiums on an insurance policy covering an officer’s potential clawback obligations. There have been various efforts over the past several years within the D&O insurance industry to try to come up with insurance solutions that would address corporate officials’ risk of compensation clawback. These provisions of the new rules would seem to suggest that these insurance measures are no longer feasible – except that the way the proposed rules are written, they would only prohibit the company from paying the premium for the insurance; they do not appear to prohibit an individual from paying the premium for the insurance.


In any event, the rules’ prohibition seems to extend only to the payment of premium for insurance protecting against the actual clawback itself, not for the payment of premium for insurance providing defense cost protection in the event a corporate official is hit with a claim for compensation clawback. (However, another potential problem for coverage of even just the defense costs is the fact that the clawback claim is likely to come from the company itself, and therefore potentially could be subject to the insured vs. insured exclusion.)


Coming Soon: Direct Sales to the Business Insurance Industry?: In case you didn’t see it over the holiday weekend, on July 3, 2015, the Wall Street Journal had an interesting article entitled “Buffett Re-Examines Reinsurance” (here) discussing how changes in the reinsurance industry and the amount of investment capital that has been drawn into the reinsurance space has made reinsurance a less attractive proposition for Berkshire Hathaway than it has been in the past. As a result of these changes, Berkshire has moved into the direct insurance business.


Of even greater potential interest to readers of this blog, the article mentioned that Berkshire’s new insurance strategy includes a direct sales model for business insurance, along the lines that Berkshire unit Geico uses for auto insurance. Among other things, the article stated that “By next year, Berkshire plans to sell insurance to small and medium-size businesses directly over the Internet, bypassing the industry’s middlemen.” The article also stated that “Berkshire’s other big initiative is a planned move into online insurance. To be called Berkshire Hathaway Direct, it will target small and midsize businesses. Traditionally, insurers have relied on agents and brokers to sell their products, but Mr. [Agit] Jain is taking a page out of the Geico direct-to-consumer playbook, convinced the industry is ripe for disruption from this effort.”


To say that there are big changes afoot in the insurance industry these days would be one of the understatements of the year.

An Active First Half for Securities Class Action Litigation

gavelnewThe first half of 2015 was an active period for new securities class action lawsuit filings. The filings through the year’s first six months suggest we are on pace for the highest annual number of new filings since 2011. The heightened levels of lawsuits involving non-U.S. companies and IPO companies contributed to the uptick in securities suit filings in the year’s first half. Continue Reading