The D&O Diary

The D&O Diary


NERA Releases Canadian Securities Class Action Litigation Report

Posted in International D & O

can flag 2The number of securities class action lawsuit filed in Canada during 2014 was consistent with the recent annual average number of filings, and because case filings exceeded case resolutions, the aggregate total of unresolved class actions continued to grow during the year, according to a February 10, 2015 report from NERA Economic Consulting. According to the report, which is entitled “Trends in Canadian Securities Class Actions: 2014 Update” (here), there are now a total of 60 pending securities class action lawsuits in Canada representing more than $35 billion in total claims. NERA’s February 10, 2015 press release about the report can be found here.


According to the report, there were eleven securities class action lawsuits filed in Canada in 2014, the same number as in 2013. While the number of filings last year is consistent with the average annual number of filing during the period 2009-2013 (11.4), it is below the record number of filings in 2011 (when there were 15 new cases filed). Of the 123 Canadian securities class action lawsuits filed between 1997 and 2014, 68 (or 55 percent) were filed just in the last six years.


In addition, over the last six years a total of 46 class actions have been filed against companies listed on the Toronto Stock Exchange (TSX), representing about three percent of that average number of companies listed during that time, for an annual average litigation risk of approximately 0.5 percent. (By way of comparison, in its 2014 report of U.S. securities class action litigation activity, NERA reported that the probability of a U.S. listed company being sued in a securities class action lawsuit was about 4.2% in 2014.)


Of the eleven securities suits filed in 2014, eight were filed in Ontario; one was filed both in Alberta and British Columbia; one was filed only in British Columbia; and one was filed in Quebec. Historically, 78 percent of all new securities class action lawsuits involve a filing in Ontario; 24 percent involve a filing in Quebec; and 20 percent involve filings in provinces other than Quebec. About 23 percent involve filings in more than one province.


Four of the eleven new lawsuits filed in 2013 also involve parallel class action lawsuits in the U.S. At the same time, there were five other U.S. securities class action lawsuits filed against Canadian-domiciled companies where there was no equivalent lawsuit filed in Canada. Since 2006, approximately half of all U.S. filings against Canadian companies correspond to a parallel claim in Canada.


Unsurprisingly given the importance to the Canadian economy of the mining and the oil and gas sectors, cases involving companies in those sectors “continue to account for a substantial share of new filings.” Seven of the eleven 2014 securities suit filings involved companies in the energy and non-energy mineral sectors. On the other hand, filings against companies in the financial sector have declined compared to prior years. During the period 2010 to 2014, about 14 percent of all new filings involved companies in the financial sector, compared to about 31 percent during the period 1997 to 2009.


Almost all of the 2014 filings involved claims asserted under the secondary market civil liability provisions of the provincial securities acts. In 2014, ten of the 11 new filings were Statutory Secondary Market cases, consistent with the filing trends since the statutory provisions came into force at the end of 2005. There have now been 63 cases filed asserting claims under these statutory provisions.


Of the 123 securities class actions filed in Canada between 1997 and 2014, nine (7.3 percent) have been dismissed as of the end of 2014. Of the 63 Statutory Secondary Market cases, three (4.8 percent) have been dismissed so far.


During 2014, a total of six Canadian class action lawsuits settled, for a total of approximately $38.4. Both the median settlement and the average settlement during 2014 were $6.4 million. Five of the six cases settled during 2014 were Statutory Secondary Market cases, for which the average settlement was $5.7 million and the median was $5.9 million.  


For the 50 settlements in NERA’s database that were entered between 1997 and 2014, the median settlement is $10.7 million. The average settlement among those 50 cases is $79.5 million, a figure that is inflated by two very large settlements involving Nortel Networks Corp.


Of the 50 settlements, 22 resolved Statutory Secondary Market cases, with an average settlement of $8.7 million and a median settlement of $7.0 million. Of these 22 settlements, 15 were domestic only cases and seven were cross-border cases. The 15 domestic only settlements averaged $6.8 million and had a median settlement value of $3.9 million. The seven settlements involving cross-border actions had an average settlement of $12.8 million – “about twice the amount of the typical settlement in domestic-only cases.” The median settlement value of these cross-border cases was $9.5 million.


At the end of 2014, 60 Canadian securities class action lawsuit remained unresolved, the largest number ever, and more than double the number of cases pending just five years ago and nearly three times the number as of the end of 2006. The 60 unresolved cases represent more than $35 billion in claims, including both claims compensatory and punitive damages. All but six of the 60 pending cases were filed in 2007 or later. As of the end of 2014, there were also a total of 21 cases pending in the United States against Canadian domiciled companies.



The report concludes by noting that the oil and gas sector is under pressure, as are the Canadian and world economies in general. The report notes that in the U.S. class action lawsuit filings have tended to increase during periods of economic upheaval. The report states that “Whether we will see a similar increase in filing in Canada following the next episode of economic volatility remains to be seen.”

Corporate Governance Reform in Japan

Posted in International D & O

japanJapanese companies have not always had set the standard for corporate governance, but a current initiative of the current governmental administration is trying to change that. As part of ongoing  efforts to try to revitalize the Japanese economy, an advisory committee to the country’s Financial Services Agency (FSA) has introduced a draft proposed corporate governance code that, when finalized, will apply to all companies listed on Japanese exchanges.



The current draft of the code, published in December 2014 and entitled “Japan’s Corporate Governance Code: Seeking Sustainable Corporate Growth and Increase Corporate Value over the Mid- to Long Term” (here), is presently in a public comment period. The final code is scheduled to take effect on July 1, 2015. A February 2015 memo from the Jones Day law firm entitled “Japanese Corporate Governance is Changing with the Adoption of a New Code in 2015” and describing the current draft of the code can be found here.


Japanese Prime Minister Shinzō Abe’s economic revitalization policies place a priority on the corporate governance of Japanese companies. As part of his administration’s revitalization strategy, a committee, known as the Council of Experts Concerning the Corporate Governance Code, was formed in June 2014 to propose a revised corporate governance code. The Council introduced the current draft for public comment in December 2014. The final version of the code will be announced in March 2015 and it will take effect on June 1, 2015.


The current draft identifies the objectives of the Code as follows:


It is important that companies operate and manage themselves with the full recognition of responsibilities to a range of stakeholders, starting with fiduciary responsibility to shareholders who have entrusted the management. The Code seeks “growth-oriented governance” by promoting timely and decisive decision-making based upon transparent and fair decision-making through the fulfillment of companies’ accountability in relation to responsibilities to shareholders and stakeholders. The Code does not place excessive emphasis on avoiding and limiting risk or the prevention of corporate scandals. Rather, its primary purpose is to stimulate healthy corporate entrepreneurship, support sustainable corporate growth and increase corporate value over the mid- to long-term.


Because the code aims to allow governance to be adapted to each company’s particular situation, the code takes a “principles-based approach” rather than a rules-based approach. The code is not legally binding, but it does take a “comply or explain” approach, pursuant to which companies must either comply with a principle or explain the reasons why it has not done so.


The current draft of the code provides five General Principles, each of which has several specific supplemental principles. The five General Principles are: Shareholder Rights and Equal Treatment of Shareholders; Proper Cooperation with Stakeholders; Proper Disclosure and Transparency; Responsibilities of the Board; and Shareholder Engagement.


General Principle 4 specifies that company board will fulfill their responsibilities in three ways: setting the broad direction of corporate strategy; establishing an environment where appropriate risk-taking by the senior management is supported; and carrying out effective oversight of directors and management from an independent and objective standpoint. The code also addresses the board’s role in the appointment and dismissal of management as well as with respect to executive compensation.


Interestingly, with respect to executive compensation, the Council of Experts expressed their concern that Japanese companies are too risk averse, and they suggest that the code should send a clear message about risk-taking in business operations and that executive compensation should provide proper incentives for healthy entrepreneurship. The Council urges boards to strike the proper balance of cash and equity compensation, and proposes that the compensation policy should be clearly disclosed.


In describing general principles regarding appropriate information disclosure and transparency, the draft proposes that companies should “strive to actively provide information beyond that required by the law,” including not only financial information, but also non-financial information “such as business strategies and business issues, risk and governance.” Because the information will serve as the basis for a dialogue with shareholders, the board should ensure that the disclosed information “particularly non-financial information, is accurate, clear and useful.”


Among other things, the draft code proposes “in order to enhance transparency and fairness in decision-making and ensure effective corporate governance” that companies should provide information about company objective; the company’s policies and procedures in determining remuneration of senior management and of the directors; and board policies and procedures for the appointment of senior management as well as for the nomination of directors.


The draft code contains a number of specific principles that are of particular interest. For example, Principle 2.4, entitled “Ensuring Diversity, Including Active Participation of Women,” states that “companies should recognize that the existence of diverse perspectives and values reflecting a variety of experiences, skills and characteristics is a strength that supports their sustainable growth. As such, companies should promote diversity of personnel, including the active participation of women.” This principle is particularly interesting in light of what the Economist recently called the “lowly status” of women in the Japanese workforce.


Principle 2.5 addresses the issue of corporate whistleblowing. The provision states that “companies should establish an appropriate framework for whistleblowing such that employees can report illegal or inappropriate behavior, disclosures or any other serious concerns without fear of suffering from disadvantageous treatment.” 


Class Action Litigation Developments in Australia

Posted in International D & O

ausThere were a number of key class action litigation developments in Australia during 2014, according to a recent memo from the Jones Day law firm. Among other things, there were significant developments in particular in the securities class action litigation arena, according to the memo. The memo, which is entitled “Class Actions in Australia: 2014 in Review,” can be found here.


According to the memo, the largest class action settlement in Australia history took place in the 2014, in the Kilmore East-Kinglake bushfire class action. The case arise out of a 2009 fire in the state of Victoria in which 119 people died and many others were injured and over 1,800 homes and other properties were destroyed. The class action lawsuit was brought against the owner and operator of a power line, the company responsible for inspecting and maintaining the power line, and various entities of the State of Victoria responsible for managing forest lands, on behalf of those killed or injured or who suffered property damage in the fire. Following a 208-day trial, the case settled for A$494 million (including fees).


With respect to securities class action litigation, the memo states that “it remains clear that shareholder claims are very strong, with new entrants and established plaintiffs’ law firms and funders attempting to build class actions against a number of corporations.” The memo notes that “the first half of 2014 saw a spike in shareholder class actions, with a number of new entrants threatening or commencing proceedings, mainly around alleged continuous disclosure breaches.” In total during the year, nine actions were threatened and four were commenced.


The memo also discusses the A$69.45 million settlement of the Leighton Holdings Ltd. securities class action litigation. The claim was a follow-on lawsuit from a regulatory action taken by the Australian Securities Investment Commission which had resulted in A$300,000 in fines. The class action settlement amount is inclusive of A$3.9 for the applicant’s legal costs. The memo’s authors note that the Leighton class action provides “yet another example of regulatory action acting as a class action compass for plaintiffs law firms and litigation funders.”  The settlement, the memo notes, was noteworthy for a number of reasons, including in particular “the speed of the settlement” – the case had been subject to mediation within five months of commencement and the settlement had been reached within seven months of commencement.



As I have noted in the past, litigation funding is an important part of the class action litigation landscape in Australia. During 2014, there were a number of decisions from the Supreme Court of Victoria on the question of the roles that lawyers can take in funding class action litigation.


In the Treasury Wine Estates Limited litigation, a solicitor acting for the representative party that had commenced the shareholder litigation was also the representative party’s sole director and shareholder. The court found that in these circumstances there was a real risk that the solicitor could not give detached, independent and impartial advice, taking into account both the interests of the representative party and of the interests of group members. The trial court order that the solicitor be restrained from acting as solicitor for the class and that the proceedings be stayed while the individual acted in tandem as solicitor and shareholder.


The trial court declined to permanently stay the proceeding as an abuse of process.  However, the Court of Appeal ruled that because the litigation had been commenced for the purpose of generating legal fees rather than vindicating legal rights, it did represent an abuse of process and the action was permanently stayed.


In the Banksia Securities Class Action, the court was asked to consider whether a solicitor may properly act on behalf of representative party where the solicitor was the secretary and a director of the litigation funder. (The specific solicitor involved in the Banksia case was the same individual that had tried to act on behalf of the representative party in the Treasury Wine Estates Limited litigation.) The court held that a solicitor with a pecuniary interest in the outcome of the case, beyond their legal fees, should be retrained from acting for the lead plaintiff. The court found that the arrangement impinged – or had the appearance of impinging – on the integrity of the judicial process.


The authors note that in neither of these two cases did the courts find that the solicitor involved had actually violated a law or professional duty. Rather, the authors note, “the risk or appearance of a conflict was sufficient to require the lawyers to be restrained to protect the integrity of the judicial process.”


The memo suggests that “the debate over the funding of litigation, by both lawyers and third parties, will continue in 2015.”  

IPO-Related Securities Suit Filings Surge – in State Court?

Posted in IPOs

californiaA probable accompaniment of the increased IPO activity during 2013 and 2014 is an increase in IPO-related litigation, as I have previously noted. There has already been one high-profile IPO-related securities suit filed this year, the securities class action lawsuit filed last week against the Chinese e-commerce giant Alibaba. And if the two additional new filings late last week are any indication, we are likely to see further IPO-related securities suit activity involving the IPO classes of 2013 and 2014. But interestingly, though the two most recent IPO-related securities suits allege violation of the federal securities laws, the cases themselves were not filed in federal court. Instead, the cases were filed in state court, in California.


A little bit of background will help explain these recent developments. Section 22(a) of the Securities Act of 1933 provides for concurrent state court jurisdiction for civil actions alleging a violation of the ’33 Act’s liability provisions. Section 22(a) specifies further that when an action is brought in state court alleging a ’33 Act violation, the case shall not be removed to federal court.


These provisions were significantly litigated in connection with state court lawsuits filed during the financial crisis, as discussed here. One question in particular was whether the provisions of SLUSA, requiring “covered class actions” to be litigated in federal court, pre-empt the concurrent state court jurisdiction provisions in the ’33 Act.  Suffice it to say here that the determinations of these issues were not uniform, but that in the Ninth Circuit, the state of the law seems to be that ’33 Act cases filed in state court in reliance on Section 22’s concurrent jurisdiction provisions are not removable notwithstanding the provisions of SLUSA. (I will stipulate that there is probably a great deal more that might be said on all of these issues, I am trying to summarize here so that the context of the recently filed cases may be generally understood).


In apparent reliance on the concurrent jurisdiction provisions, plaintiffs filed two IPO-related securities class action lawsuits last week in California state court.


First, on February 5, 2015, plaintiffs filed a securities lawsuit in California (Santa Clara County) Superior Court against A10 Networks, Inc. and certain of its officers. A10 completed its IPO on March 21, 2014. According to the plaintiffs’ lawyers’ February 5, 2015 press release (here), the company sold nine million shares in the IPO at $15 per share, and certain “Selling Shareholders” sold another 3.855 million shares, including the underwriters’ overallotment. The lawsuit purports to be filed on behalf of a class consisting of all persons or entities who purchased A10 Networks securities pursuant and/or traceable to the Registration Statement and Prospectus issued in connection with A10’s initial public stock offering.


The press release states that the complaint alleges that on October 8, 2014, the Company announced third quarter revenue of approximately $43.0 million to $43.5 million, below the company’s prior guidance of $48.0 million to $50.0 million. On this news, shares of A10 Networks fell $3.35, or 42%, to close at $4.55 on October 8, 2014, or more than $10 per share below the company’s IPO share price.


Second, on February 6, 2015, plaintiffs filed a securities class action lawsuit in California (San Francisco County) Superior Court against Xoom Corp. and certain of its directors and officers. Xoom completed its IPO on February 14, 2013. The complaint purports to be filed on behalf of all shares purchased in or traceable to the initial public offering.


The complaint against Xoom relates to the company’s January 5, 2015 filing on form 8-K (here), in which the company announced that “On December 30, 2014, Xoom Corporation (the “Company”) determined that it had been the victim of a criminal fraud. The incident involved employee impersonation and fraudulent requests targeting the Company’s finance department, resulting in the transfer of $30.8 million in corporate cash to overseas accounts. As a result, the Company expects to record a one-time charge of $30.8 million in its fourth quarter of 2014.” The Company also announced that its Chief Financial Officer had resigned and that the board’s audit committee had launched an independent investigation.


According to the plaintiff’s lawyers’ February 7, 2015 press release (here), the complaint alleges that the company and certain of its directors and officers “made false and misleading statements and failed to disclose that its internal controls were deficient.”


There are a number of interesting things about these two new lawsuits. I should hasten to add that at this point I have only seen the plaintiffs’ law firms’ press releases about the suits. I have not yet been able to get my hands on the actual complaints that were filed. (I would be grateful if any readers out there that have a copy of either complaint would be willing to forward me a copy. I will of course update this post with links once I do get copies of the complaints.)Based on the press releases, I note the following.


UPDATE: The Xoom state court complaint can be found here. Interestingly, and notwithstanding the non-removal provision in Section 22 and the current state of case law in the Ninth Circuit, the defendant has filed a petition to remove the Xoom state court action to United States District Court for the Northern District of California. Thanks to a loyal reader for sending me both documents.


FURTHER UPDATE: The A10 Networks state court complaint can be found here. Thanks to yet another loyal reader for sending me the A10 Networks complaint.


First, though I expect that the securities lawsuit against A10 was filed in reliance on the ’33 Act’s concurrent jurisdiction provision, the press release at least says not that action asserts liability claims under the ’33 Act; rather, the press release says that the complaint alleges “violations of the federal securities laws under the Securities Exchange Act of 1934.” I have to assume that this was an error in the press release. (There are, in fact, some other rather obvious errors in the press release; for example, the press release says that the complaint was filed in the “United States California Superior Court, Santa Clara County,” which obviously is a goof.) I suspect that contrary to the press release the complaint itself asserts claims not under the ’34 Act, but rather under the ’33 Act. It is not just that the claimants’ claims purport to relate to the company’s IPO, and therefore presumably would support ’33 Act claims, but also if the complaint asserts only ’34 Act claims, the claimants would not have benefit of Section 22’s non-removal provisions and the state court action would be immediately removable to federal court.  UPDATE: As expected, the A10 Networks complaint to which I linked above does indeed assert claims under the ’33 Act, not under the ’34 Act.


Second, although the facts that Xoom disclosed in its January 5 filing on Form 8-K are quite sensational, and although it may not be surprising that allegations of this type might lead to litigation, it is less than clear, at least from the plaintiff’s lawyers’ press release, that there is a link between the events reported in the 8-K and the company’s IPO. Obviously, the claimants have every incentive to try to invoke the company’s IPO in order to try to assert claims under the ’33 Act, with its lower standard of liability, and they also appear motivated to invoke the IPO in order to try to rely on the ’33 Act’s concurrent jurisdiction provision. However, the filing of the 8-K took place nearly 23 months after the IPO and the complaint was filed just a week short of two years after the IPO. The plaintiffs will have to show how the fraudulent transfers that are at the heart of the complaint are connected to the company’s IPO nearly two years prior. UPDATE: The state court complaint, to which I linked above, does not in fact shed all the much light on the connection that the plaintiff seeks to draw between events described in the Form 8-K and Xoom’s IPO offering documents. The complaint says only that the events described in the 8-K “are a result of seriously deficient internal controls at the Company, which the Company failed to disclose during [sic] in its Registration Statement and Prospectus.”


As I noted in connection with the recent lawsuit against Alibaba, well over 500 companies completed their IPOs during 2013 and 2014. Because companies within three years of their IPOs are susceptible to IPO-related securities suits, and because plaintiffs’ lawyers will be attracted to potential suits in which they can assert ’33 Act liability claims (which have a lower standard of liability than ’34 Act claims), it seems probable that in 2015 and even on into 2016 we will see an upsurge of IPO-related securities lawsuits. If these two most recent cases are any indication, some of these upcoming IPO-related securities suits will be filed in state court, at least where plaintiffs’ lawyers have a basis to file their suits in a state court in one of the states within the Ninth Circuit.


I would be very interested in hearing from readers out there on a question that has always puzzled me about these state court suits – that is, why is state court preferable for the plaintiffs’ lawyers? I guess I can understand it if the plaintiffs think there is some “home court” advantage to proceeding in the local state court courthouse. I also recall from when these issues were debated during the financial crisis that there is an argument that certain of the PSLRA’s requirements do not apply to actions filed in state court. (My recollection of this argument is that some of the PSLRA’s provisions apply by their own terms only to actions “filed in federal court,” so the argument is that these provisions do not apply to actions filed in state court.) I welcome comments from anyone who can shed any light on the supposed advantage the plaintiffs’ lawyers think they can gain by proceeding in state court rather than in federal court.


In any event, I note here a concern that I previously noted when these issues came up in connection with the financial crisis lawsuit filings. My concern has to do with the fact that while Ninth Circuit has held that neither SLUSA nor CAFA preempt Section 22’s non-removal provisions, other federal circuit courts (particularly the Second and Seventh Circuits) have held that SLUSA’s provisions or CAFA’s provisions should prevail over Section 22’s non-removal provisions. It is an uncomfortable situation when federal court jurisdictional provisions are not applied uniformly across the federal circuits. Given the United States Supreme Court’s recent enthusiasm for taking up securities cases, particularly where circuit splits are involved, it may be that this issue will eventually make its way to the Supreme Court at some point in the future.  


Management Liability Insurance: Who is a “Non-Executive” Director?

Posted in D & O Insurance

victoriaMany contemporary management liability insurance policies draw distinctions between types of directors. For example, many private company D&O insurance policies provide additional excess defense expense coverage for the benefit of “non-executive directors.” However, these kinds of provisions beg the question of who exactly is a “non-executive director”? A recent decision by an appellate court in the Australian state of Victoria construing this type of provision– in a case in which an individual director was seeking access to the excess defense cost protection available only to “non-executive directors” — underscores how difficult this determination can sometimes be. 


A copy of the Supreme Court of Victoria Court of Appeal’s December 16, 2014 opinion can be found here. Francis Kean’s February 9, 2015 post about the decision on the Willis Wire blog can be found here. A January 27, 2015 memo about the decision by Kathryn Rigney of the Colin Biggers and Paisley law firm in Sydney can be found here.



Australian Property Custodian Holdings Limited was the responsible entity for and trustee of a property unit trust owning retirement and aged care facilities. Many of the property management functions for the unit trust’s various properties were undertaken by entities that, while characterized by overlapping ownership, were separate companies from Holdings.


Kim Samuel Jacques was a director of Holdings. He and other members of the Holdings board were subject to various claims for alleged wrongful acts that allegedly took place during the period 2006-08.


Holdings maintained an Investment Management Insurance Policy at the time the claims were made. The defendants’ costs of defending themselves from the claims exhausted the policy’s $5 million limit. Jacques sought the protection of an additional $1 million excess defense cost limit that was available under the policy for the benefit of “non-executive directors.” The insurance carrier denied that Jacques had the right to access the $1 million limit, contending that at the critical period, Jacques was an executive director and not a non-executive director. Jacques filed an action against the insurer seeking a judicial declaration that he was entitled to the benefit of the additional $1 million excess defense expense limit.


The policy defined “Director” as “any person who was, now is, or during the policy period becomes, an executive or non-executive director” of Holdings. The policy defined a “Non-Executive Director” as “any natural person who serves as a non-executive director of” Holdings. The policy definitions did not specify any criteria to be used in determining whether or not a director is a non-executive director.


The parties agreed that Jacques has been a non-executive director of the company before April 6, 2004 and that he functioned as an executive director of the company after June 26, 2007. The issue at trial was whether Jacques was a non-executive director during the period between those two dates.


The trial court determined that there were two issues to be decided: first, the court had to decide the meaning of the phrase “non-executive director” in the policy; and second, the court had to make a factual determination whether Jacques met the definition during the relevant time period. The trial court said that for purposes of interpreting and applying the policy language the critical inquiry was whether the company approved or acquiesced in the assumption by the director of the powers of an executive director, or whether there is evidence that the delegation of executive function to that director.


Following trial, the trial judge held that Jacques was not an executive director during the relevant period and was entitled to the benefit of the excess defense cost limit under the policy. The insurer appealed.


The December 16, 2014 Opinion

On December 16, 2014, a three-judge panel of the Victorian Court of Appeal dismissed the insurer’s appeal and affirmed the lower court’s ruling.


The insurer had tried to argue on appeal that in addition to the issues considered by the trial court, the determination of whether or not Jacques was an executive director during the relevant time period, the court should also consider how Jacques’s role was portrayed to investors; how his role was perceived internally within Holdings; and how he perceived his own role. In support of these arguments, the insurer relied on documents that were provided to investors identifying him as an executive director and on board of directors’ minutes that described him as an executive director. The insurer also relied on testimony that Jacques had provided under oath in an Australian Securities and Investments Commission examination, in which he described his role during the relevant time period as that of an executive director.


The Court of Appeal essentially found that the views of the board itself or even of the director himself are of “limited relevance.” While the company’s records and documents may be relevant, they are relevant only to the extent they help to determine whether or not the individual was “performing executive functions in the management or administration of the company.” The Court of Appeal also found that the way a director’s status as depicted to investors obviously might be of relevance in other circumstances, it is of “limited relevance” for purposes of construing the meaning of the term “non-executive director” in the policy.


The “essential element” to be considered, the Court of Appeal said, for purposes of construing the term “non-executive director” in the policy is not necessarily how he is described but rather “whether the director is performing executive functions in the management and administration of the company.”


The Court of Appeal said that the various statements to investors, in board minutes and even by Jacques himself in his examination testimony fell short of providing evidence of any delegation to Jacques of authority to perform executive functions. The Court of Appeal said that while the record showed that Jacques was performing an operational role in the management of the retirement villages, the record did not establish that this was done as part of the business of Holdings, rather than for the separate business enterprise by which he was employed. The Court of Appeal rejected the appeal and affirmed the trial court.



I think that the language included in insurance policies drawing the distinctions between executive and non-executive directors (or similar language distinguishing “outside directors” or “independent directors”) is incorporated with an unconscious assumption that distinguishing between these types of directors will be clear or even self-evident. As this court found, there is not even that much case authority that is helpful on this issue, because, as Francis Kean notes in his memo about this case, under the common law all company directors are subject to the same duties and are judged by the same standard, so the need for judicial pronouncements in this area has been limited.


At a minimum, as the law firm memo to which I linked above puts it, this case “demonstrates” that “it is not always easy to determine whether a particular individual is acting as an executive director.”


You can certainly see how the carrier might have felt that Jacques was an executive director. After all, materials provided to investors identified him as an executive director. The company’s board minutes identified him as an executive director. He even testified under oath that during the relevant time period he was an executive director. (Jacques testified at trial in the insurance coverage action that his prior answer was wrong and that he had been confused in a stressful environment.)


The Court of Appeal said that these various instances in which Jacques was identified or described  –both externally and internally — as an executive director were not only not determinative but were of “limited relevance.” The more important was how he actually functioned and whether he participated in the management or administration of the company.


The larger question this case asks is how can parties to an insurance contract avoid these kinds of disputes. As the law firm memo puts it, “it is in the interests of both insurers and insureds to make sure that the relevant policy wording makes it clear which individuals are entitled to access the additional cover.”


So how can the parties avoid the kind of dispute that arose in this case? The law firm memo suggests that the way to solve the problem is to name the non-executive directors in a schedule to the policy. My experience suggests that this approach would be fraught with potential problems. For one thing, the inclusion of a list of specified individuals does not allow for the possibility that new non-executive directors might be added during the policy period. In addition, individuals might change their status during the policy period. Even worse, names can be omitted by oversight.


Compounding the difficulty of trying to solve this issue through policy language is the fact that, as this case makes clear, the question of whether or not a person was an executive director is highly factual issue. It really depends on how the individual functioned within the company.


It is possible that the policy could specify the criteria that are to be used in determining whether or not an individual was functioning as an executive director. My concern there is that the specific facts at different companies and for different individuals will vary – and will change over time. It might be very difficult to provide specific criteria that accurately encompass any given individual’s function at any given company. And as the specific facts of this case show, an individual’s function in an enterprise may change over time.  


While it may be difficult to eliminate these kinds of disputes through policy language alone, there may be things companies can to try to try to help avoid trouble. The first is for companies themselves to understand the differences between the various director roles and to be careful in maintaining the distinction between the roles, particularly in the ways in which directors are identified or described. If this company had been more attentive to the way Jacques was described, perhaps some of the trouble here could have been avoided. As Kean puts it in his blog post, “it is important to ensure that any transition from executive to non-executive function or vice versa is carefully and accurately reflected in the company documentation.”


In the end, it may be very difficult to avoid these kinds of disputes under the particular circumstances of a given individual and company. However, the possibility of avoiding these kinds of disputes begins with the understanding that the distinction between who is and who is not a non-executive director may not be self-evident. An appreciation for this fact will be the starting point for trying to find a solution and it can be hoped avoiding disputes in the future.


Special thanks to Francis Kean for calling my attention to this decision and for providing me with a link to his blog post.  


Winter Poems for the PLUS D&O Symposium

Posted in Blogging

Like many of this site’s regular readers, I am at the PLUS D&O Symposium this week. Because the activities at the Symposium have disrupted my normal opportunities to blog, I thought I would fill the gap with some poetry.


These two winter poems come to us from Lucy Griffiths, Age 9, of Arlington, Virginia. Lucy is the daughter of my good friends and former colleagues, Stacey McGraw, of the Troutman Sanders law firm, and John Griffiths, of the U.S. Department of Justice. Here are Lucy’s winter poems.



Whispers are spoken
as flurries fall

Secrets are broken
while the snow grows tall

Feet wander making tracks
all while the snowflakes start to pack

                 WINTER WIND

The winter wind is crisp to your cheeks

The wind calls like a bird’s beak

The winter wind wonders what to do,
Should it snap?
Should it crackle?
Should it flow into your shoe?

The winter wind blows through the trees

It will never do as you please

Lucy is an award-winning poet. Last year, one of her poems won first prize in the Arlington County Public Schools Dr. Martin Luther King Jr. Visual and Literary Arts Contest. Here is her prize-winning poem “How Will I Rid the World of Hate”:


How I will rid the world of hate?

Wandering, wondering

How will I rid the world of hate?

Hate won’t get you anywhere.

Hate will keep you in the hatred zone.


Love will give you happiness

as merry as a sunny day.

Love brings joy

as strong as a lifelong friendship.

Love warms your heart

like the warm sun that beats down on my face.


Love gives you the faith to get rid of hate.

If you’re lost in the hatred zone,

replace your hatred with love.


Dr. King, Nelson Mandela and Mahatma Gandhi were great leaders

they taught us it is our responsibility to

bring love to the world and be leaders.

Dr. King taught to us to treat all people fairly

Nelson Mandela taught us

 apartheid was treating people improperly


Gandhi taught us to act peacefully.

Guest Post: Give Notice on Your D&O Claim…Yesterday

Posted in D & O Insurance, Uncategorized

CS Business Descr. logo 286PMS-2Anderson Kill Logo (2014)(USE)A frequently recurring management liability insurance coverage issue involves the question of whether or not the policyholder has given timely notice as required under the policy, as I have discussed in prior posts on this blog (most recently here). Among the many kinds of notice issues that can arise are questions involving multiple or interrelated disputes. In the following guest post, Pamela Hans of the Anderson Kill law firm and Terrence Tracy and Heather Steinmiller of Conner Strong & Buckelew take a look at the steps companies can take to protect themselves when interrelated disputes arise.


I would like to thank Pamela, Terry and Heather for their willingness to publish their article on this site. I welcome guest post submissions from responsible authors on topics of interest to readers of this blog. Please contact me directly if you would like to publish a guest blog post. Here is Pamela, Terry and Heather’s guest post.




A ballgame isn’t over till it’s over.  All too often, an insurance company will treat a D&O Claim as if it began before it began.  You need to be ready for that possibility.

Most D&O policies contain some form of an “interrelated wrongful acts” provision that can effectively render timely notice requirements retroactive.  What this means for Policyholders is that you may have to give notice of a claim before it is made if it is related to claims that were previously made.  While policy language varies, one typical provision states, “[C]laims based upon or arising out of the same act, error or omission or related acts, errors or omissions shall be deemed to be a single claim . . . all such claims shall be deemed to be first made as of the date that the earliest of such Claims was first made.”  Paradigm Inc. Co. v. P&C Ins. Sys., 747 S. 2d 1040, 1042 (Fla. Dist. Ct. App. 2000).

When a claim is asserted against your company, it may be natural to assume that only the claims listed in a demand letter or complaint will be those that proceed in litigation.  However, it is common for a claimant to amend its claims and assert a new claim based upon the same set of facts that were originally alleged.  If the amended claims include claims against your company’s directors or officers or allegations that now trigger your D&O coverage, you may run into a coverage roadblock if you did not notify your D&O insurance company of the original statement of claim.  That is, the insurance company may take the position that you were required to give notice of a claim before that claim was actually made.

How can you protect your company from the potentially punishing application of the “interrelated wrongful acts” provision in a Directors and Officers insurance policy? 

Help Your Broker Spread a Wide Net When Reporting the Claim

When your company receives a claim, complaint or other demand, your immediate reflex may be to send a copy of that document to your broker so that “the appropriate” insurance companies may be notified.   Perhaps you direct your broker to notify “all appropriate insurance companies” and leave the decision on whom to notify entirely to your broker without providing the broker with all the necessary information.     

It is essential to provide all the information that may help your broker determine which policies are triggered and may be triggered.  That means sharing with your broker all of the information you have about the claim, including factual information about the claims, your company’s defenses and the general background facts that may not be contained in the demand.  If you do not provide all pertinent and potentially pertinent information to your broker, your broker may not realize that insurance policies other than the “obvious” ones may be triggered.

Indeed, it is those facts that may or may not be known or raised by the claimant at the initial pleading or demand stage that may cause the claimant to amend its demand to add additional claims.  If those newly asserted claims trigger coverage under your D&O insurance policies but you have not placed your D&O insurance company on notice of the initial demand – as opposed to the amended demand – you may be surprised to receive a denial from your insurance company on the basis that you failed to give timely notice.

Frank discussions with your trusted professionals about those “silent facts” can help you to avoid the pitfall of inadvertently failing to put all appropriate insurance companies on notice – not just those that may be the obvious choices based on the original demand or statement of claim.

Playing Games with the Policy Period

By projecting the start of a claim against your directors and officers back to the start of a prior and allegedly “related” claim, an insurance company may feel empowered not only to assert that the policyholder failed to provide timely notice but also that the claim occurred outside the policy period.

A typical notice provision requires notice “of any Claim as soon as practicable after the Company’s general counsel, risk manager, chief executive officer or chief financial officer (or equivalent positions) first becomes aware of such Claim, but in no event later than sixty (60) days after the end of the Policy Period.”

In the insuring agreement, the insurance company typically agrees to pay the loss for a “wrongful act” that takes place during the policy period.   A wrongful act may be defined as “any actual or alleged error, omission, misleading statement, misstatement, neglect, breach of duty or act negligently committed or attempted” by any Director or Officer while acting in their capacity.”

Consider the scenario in which you receive a demand from a claimant but decide not to give notice to your D&O insurance company because the demand does not clearly assert a claim against your Directors and Officers or a claim under the terms and conditions of the policy.  What happens if the claimants amend their initial demand a year or two later to allege new claims based upon the facts contained within the original demand? 

Even if the newly asserted claims fall within the policy period, if they arise out of the same set of facts as initially alleged, then the new claims, as one interrelated wrongful acts provision phrases it, may “be deemed to constitute a single Claim and shall be deemed to have been made at the earliest of the following times regardless of whether such date is before or during the Policy Period:  (a) the time at which the earliest Claim involving the same Wrongful Act or Interrelated Wrongful Act is first made; or (b) the time at which the Claim involving the same Wrongful Act or Interrelated Wrongful Act is first made.” 

If you become aware of a claim against your Directors and Officers after the end of the policy period, your insurance company may deny coverage because the claim was not reported during the policy period.  Even if you provide notice on a current policy promptly after becoming aware of a claim newly filed against your Directors and Officers, the insurance company may deem the claim to have occurred prior to the policy period, when the alleged “interrelated wrongful act” first occurred.

Further Steps To Avoid Late Notice Defenses

In addition to providing your broker with all relevant information when you receive notice of a claim, you can take further steps to avoid “interrelated wrongful acts” coverage defenses.  All of them involve understanding the claim against you as broadly as possible and casting the notice net as widely as possible.  They include: 

(1)     Have a candid discussion with your trusted counsel about the claims asserted, your company’s defenses, and claims that could be asserted based upon the facts as you know them to be.  This can help you understand the potential amendments to the stated claims and understand whether your Directors and Officers have potential liability down the road.

(2)    Communicate with your insurance broker — not only about the claim in question but about the scope of all your insurance policies.  Be sure that you understand the notice requirements in all of your insurance policies, particularly those policies that you may not initially consider to be triggered by a claim. 

(3)    Consult with trusted coverage counsel on the policy provisions regarding claims, notice and interrelated wrongful acts.  Understanding these provisions, including how courts have interpreted them, will assist you in evaluating the insurance coverage available for the claims asserted. 

(4)    When in doubt . . . notify.  Policyholders may be reluctant to notify insurance companies whose policies are not obviously triggered by a claim.  Factors motivating that reluctance to notify often include a belief that policy premiums will increase because of notice of a claim.  However, generally, notice only with no monies spent will not affect premium and on balance, even if the insurance company increases the policy premiums at renewal because of notice of a claim, generally that increase is small relative to the coverage that may be lost if notice is not given. 

(5)    Don’t keep your professionals in silos; let them talk to each other to fully protect your interests.  Your broker, defense counsel and coverage counsel should talk to one another to ensure all appropriate steps are taken.  

Read the claim, read the policy

Policyholders often fail to read their insurance policies until there is a loss.  However, the interrelated wrongful acts provision in many D&O insurance policies, combined with the notice requirements in those policies, highlights the importance of understanding the constraints your insurance policies may place on coverage if you decide not to provide notice of a claim.  One way to avoid inadvertently forfeiting coverage is by understanding the claims that are asserted – and those that could be asserted, as well as the notice and insuring agreement provisions in your insurance policies. 

About the Authors:  Pamela D. Hans is the managing shareholder of Anderson Kill’s Philadelphia office. Her practice concentrates in the area of insurance coverage exclusively on behalf of policyholders. Her clients include utilities, mining companies, home builders, non-profit organizations, ethanol producers, commercial lenders, and hog processors, whom she has represented in disputes with their insurance companies.  Ms. Hans can be reached at (267) 216-2720 or at Terrence Tracy serves as Managing Director, Executive Vice President of Conner Strong & Buckelew, a leading insurance, risk management and employee benefits brokerage and consulting firm.  He leads the commercial insurance services operation.  Mr. Tracy can be reached at (267) 702-1458 or at  Heather A. Steinmiller serves as Senior Vice President and General Counsel for Conner Strong & Buckelew.  In additional to her corporate responsibilities, Ms. Steinmiller provides support to the Commercial Lines Division.  She can be reached at (267) 702-1366 or at




Chinese Internet Giant Alibaba Gets Hit with IPO-Related U.S. Securities Class Action Lawsuit

Posted in Securities Litigation

alibaba2The year just completed was a banner year for IPOs in the U.S., with more companies completing their initial public offerings on U.S. exchanges in 2014 than in any year since 2000 (as detailed here). But as I have previously noted (here), with an increase in IPO activity comes the likelihood of IPO-related securities class action litigation. The largest IPO of them all during 2014 was the high-profile launch of Chinese e-commerce giant Alibaba, whose September 2014 initial public offering was the largest IPO ever. Given the size and high-profile nature of the Alibaba offering, it may have been inevitable that the company’s IPO might attract the attention of plaintiffs’ lawyers.


On January 30, 2014, an Alibaba shareholder launched a securities class action lawsuit against the company in the Southern District of New York. A copy of the shareholders’ complaint can be found here. The plaintiffs’ lawyers January 30 press release can be found here.


Alibaba completed its IPO listing its American Depositary Shares on the New York Stock Exchange on September 19, 2014. After the offering underwriters exercised their “greenshoe” option, the amount the company raised in the offering reached $25 billion, making it the largest IPO ever, and giving the company a market capitalization at the time of its IPO of $231 billion.


As reported in a front-page article in the January 29, 2015 Wall Street Journal (here), the prior day China’s State Administration for Industry and Commerce posted on its website a white paper accusing Alibaba of failing to crack down on the sale of fake goods, bribery and other illegal activity on its web sites.  The Journal article reports that Alibaba has long grappled with allegations that Taobao, its biggest e-commerce platform, is rife with counterfeit goods. Though the white paper was not posted on the agency’s website until last week, the Journal article reports that it was based on discussions the agency has been having with the company since July, prior to the company’s IPO.  In response, the company accused a senior official at a government agency of misconduct and threatened to file a formal complaint.


A January 30, 2015 Marketwatch article (here) reported that the SAIC  said in a statement late Friday that it met with Alibaba’s executive chairman, Jack Ma, on Friday, resulting in an agreement to tackle fakes and boost consumer protection online. Alibaba agreed to “actively cooperate” with the SAIC to strengthen investment capital and technology and expand its anticounterfeit measures, the statement said. Alibaba also agreed to routine inspections of products sold on its site, the statement said. According to a January 30, 2015 Wall Street Journal article (here), the company claimed that this arrangement with the SAIC represented a “vindication” for the company.


Meanwhile, while these details regarding the company’s dispute with the government agency were circulating, the company released its financial results for the year. According to a January 29, 2015 Wall Street Journal article (here), “profit fell 28% from a year earlier for the quarter ended Dec. 31, a drop it largely attributed to expenses from giving shares to employees. But investors focused on its revenue growth, which—while sizable—disappointed analysts.”


On January 30, 2015, a holder of the Alibaba ADSs filed a securities class action lawsuit in the Southern District of New York against the company and four of its directors and officers, including Jack Ma, the company’s founder and Chairman. According to the plaintiff’s lawyers’ January 30, 2015 press release, the Complaint alleges “Alibaba failed to disclose that Company executives had met with China’s State Administration of Industry and Commerce (“SAIC”) in July 2014, just two months before Alibaba’s $25+ billion initial public offering in the United States (the “IPO”), and that regulators had then brought to Alibaba’s attention a variety of highly dubious – even illegal – business practices.” The complaint alleges, among other things, that in the offering Ma and Joseph Tsai, the company’s co-founders, sold millions of the personal holdings in the company’s stock in the offering.


The press release also states that the complaint alleges that:


On January 28, 2015, before the opening of trading, various members of the financial media reported that SAIC had released a white paper accusing Alibaba of engaging in the very illegal conduct disclosed to Alibaba executives in July 2014.  On this news, the complaint alleges that the price of Alibaba ADSs declined unusually high trading volume.  Then, the complaint alleges, on January 29, 2015, before the market opened, Alibaba issued a press release announcing its financial results for the quarter ended December 31, 2014.  The complaint alleges that revenue growth missed the target defendants had led the investment community to expect and that profits declined 28% from Alibaba’s fourth quarter 2013 results.


The complaint alleges that as a result of these disclosures, the price of Alibaba ADSs plummeted further and collectively the two drops erased more than $11 billion in market capitalization from the ADSs Class Period high.


Interestingly, though the complaint makes numerous references to the company’s IPO, the complaint alleges violations only of Sections 10 and 20 of the ’34 Act. The complaint does not allege violations of Sections 11, 12, and 15 of the ’33 Act as would typically be expected in a complaint filed against a recent IPO company. Indeed, the class period that the complaint proposes does not even extend all the way back to the company’s September 19, 2014 IPO – the proposed class period commences on October 21, 2014. Although there is no way to know for sure, I am guessing that the complaint does not assert ’33 Act claims and does not propose a class period including the IPO date and immediately following period because, I suspect, the named plaintiff did not buy shares in the offering or immediately afterward, but only purchased shares on or about October 21, 2014, the beginning date of the purported class period. If that is the case, one would expect other claimants to come forward who did purchase shares in the IPO. NOTE: Several readers have suggested that even after the disclosures the company’s share price remained above the price at which the stock debuted, which would explain the absence of a ’33 Act claim.  

This new lawsuit against Alibaba is merely the latest example of a securities litigation filing trend that was apparent during 2014, largely as a result of the uptick of IPO activity in 2013 and 2014, and that has been the increase in IPO-related securities class action litigation. During 2014, there were 17 securities lawsuit filed against IPO companies, representing 10% of all filings during the year.


Given the increase in the number of IPOs during 2013 and 2014 and in light of the usual lag time between the IPO date and the date of lawsuit filings, it seems probable that there will continue to be significant numbers of filings in the months ahead involving IPO companies. Alibaba may have been the largest of the recent IPOs – indeed the largest of all time – but it only one of the over 280 companies that completed initial offering on the U.S. exchanges in 2014, following 225 companies that completed U.S. IPOs in 2013. With over 500 newly listed companies just in that two-year period, it seems likely that there will be more IPO-related securities suits to follow. The Alibaba lawsuit may be the first of a host of IPO-related lawsuits to be filed this year.


Alibaba’s Fee-Shifting Provisions:  The shareholder filed this lawsuit against Alibaba notwithstanding the fact that Alibaba has a fee-shifting provision in its Articles of Association. (Alibaba is organized under the laws of the Grand Caymans.) As discussed at length in a recent post on the Race to the Bottom blog (here), Alibaba’s charter has a provision requiring a shareholder who initiates a claim against the company who does not prevail in a judgment on the merits to reimburse the company for its fees and costs (including attorneys’ fees) incurred in connection with the claim. Whether or not this provision ultimately becomes relevant remains to be seen, but it would have to be expected that the company’s lawyers could attempt to rely on this provision, if, for example the defendants were to prevail on a motion to dismiss. The plaintiff and their attorneys would of course resist any such effort, and, among other things, would rely on the language of the provision that limits its effect “to the extent permitted by law” and undoubtedly would attempt to raise a number of arguments that the provisions cannot be enforced in connection with a claim under the federal securities laws. It will be interesting to see the extent to which these issues actually come into play in connection with or as a consequence of this lawsuit. NOTE: One alert reader has suggested that the term”shareholder” as used in the company’s charter provision does not include ADS holders.


Because Alibaba is organized under the laws of the Grand Caymans, the legislation pending in the Delaware legislature with respect to fee-shifting bylaws would be irrelevant, regardless of what the Delaware legislature may ultimately decide to do.

Big Developments in the Massive Market Manipulation Cases

Posted in Libor Scandal

stock tablesThe global financial markets have been rocked in recent years by revelations of market manipulations involving personnel from some of the world’s largest financial institutions. The scandals have included alleged manipulation of the Libor benchmark rates, of the foreign exchange benchmark rates, and of the metals trading markets. Relatedly, there have also been allegations of market manipulation through high frequency trading and through trading on dark pool platforms. These revelations have been followed by massive regulatory investigations as well as by significant civil litigation.


The first of these follow-on civil actions to go forward, involving the alleged manipulation of the Libor benchmark rates, hit a significant roadblock in March 2013, when Southern District of New York Judge Naomi Reice Buchwald  dismissed the consolidated Libor antitrust action based on her determination that the plaintiffs had not alleged an antitrust injury (as discussed here). This ruling seemed to represent a setback for the claimants in the other market manipulation civil lawsuits as well.


However, a series of developments over the last several days in both the consolidated Foreign Exchange Benchmark Rates Antitrust Litigation and in the consolidated Libor antitrust litigation appear to have changed the environment for these cases. Notwithstanding Judge Buchwald’s 2013 decision in the Libor antitrust case, on January 28, 2015, Southern District of New York Judge Lorna Schofield denied the motion to dismiss in the consolidated foreign exchange benchmark rates case, in a decision that expressly said that Judge Buchwald’s reasoning on the antitrust injury issue was “unpersuasive.” A copy of Judge Schofield’s opinion can be found here.


In addition, in Libor antitrust litigation, a unanimous January 21, 2015 opinion written by Justice Ruth Bader Ginsburg, the U.S. Supreme Court ruled that the Second Circuit had erred in dismissing the appeal by the plaintiffs of Judge Buchwald’s dismissal ruling. A copy of the U.S. Supreme Court’s opinion can be found here. As a result, the plaintiffs’ appeal of Judge Buchwald’s ruling will now go forward in the Second Circuit. And as Alison Frankel suggests in her January 29, 2015 post on her On the Case blog (here), Judge Schofield’s analysis in denying the motion to dismiss in the foreign exchange litigation may provide the Libor antitrust lawsuit plaintiffs a “roadmap” of arguments to follow in seeking to have Judge Buchwald’s dismissal of their case overturned.


The Consolidated Foreign Exchange Benchmark Rates Antitrust Litigation  

In this consolidated action, the plaintiffs allege that the twelve defendant banks conspired to manipulate the benchmark rates for the foreign currency exchange market. The plaintiffs allege that the defendants used a variety of concerted trading strategies to manipulate the daily benchmark currency exchange rate (the “Fix”) which is published each afternoon by WM/Reuters. Among other things, the plaintiffs allege that currency traders for various of the defendant banks communicated through online chat rooms with names such as “The Cartel,” “The Bandits Club,” and “The Mafia.” The plaintiffs allege that the defendants’ concerted activities violated the Sections 1 and 3 of the Sherman Antitrust Act. The defendants moved to dismiss.


In her January 28 opinion, Judge Schofield denied the defendants’ motion to dismiss, finding that the plaintiffs had sufficiently alleged the existence of a conspiracy and that all of the defendants were part of that conspiracy. Among other things, she noted that names of the traders’ chat room groups, as well as the settlements several of the defendants have reached in the parallel regulatory investigations to support the inference of anticompetitive activity. She said that the plaintiffs allegations “plausibly alleges a price-fixing conspiracy among horizontal competitors, a per se violation of the antitrust laws.”


In concluding that the plaintiffs had also sufficiently alleged an antitrust injury, Judge Schofield declined to follow the analysis of Judge Buchwald in her ruling dismissing the Libor antitrust litigation. Judge Schofield “respectfully disagreed” with Judge Buchwald’s conclusion about the absence of antitrust injury, saying that Judge Buchwald’s analysis “blurs the lines” between two analytic categories (that is, the sufficiency of the pleading under Twombley and antitrust injury).


Judge Schofield also said that Judge Buchwald’s conclusion that the antitrust injury analysis should be conducted at the pleading stage is “unpersuasive” because it relied on two “inapposite” U.S. Supreme Court cases – Atlantic Richfield v. USA Petroleum and Brunswick v. Pueblo Bowl-o-Matic — neither of which, Judge Schofield said, addressed the sufficiency of a complaint on a motion to dismiss. In the Atlantic Richfield and Brunswick cases, the U.S. Supreme Court based its decision on a factual record following the completion of discovery. Judge Schofield noted that if Judge Buchwald’s reasoning in the Libor case “would doom almost every price-fixing claim at the pleading stage.”


Judge Schofield also noted other differences between the conspiracies alleged in the two cases, including the competition for customers among traders in the foreign currency exchange market, even while the defendants allegedly were conspiring to rig the “Fix.” Judge Schofield concluded that the result of the plaintiffs alleged from the price-fixing conspiracy represented “the quintessential antitrust injury.”


The Libor Antitrust Litigation 

Judge Schofield’s ruling followed shortly after a significant development in the Libor antitrust litigation. On January 21, 2015, a unanimous U.S. Supreme Court ruled that the Second Circuit had erred in refusing to hear the plaintiffs’ appeal of Judge Buchwald’s dismissal ruling in their case. The Court held that Judge Buchwald’s dismissal with prejudice of the plaintiffs’ antitrust claims triggered the plaintiffs’ right to appeal even though other claims in the multidistrict litigation pending before Judge Buchwald are continuing to go forward.


The case has now been returned to the Second Circuit, which will now hear the plaintiffs appeal. Other litigants whose antitrust claims were also dismissed by Judge Buchwald’s ruling but who have other claims continuing in the district court have asked Judge Buchwald for leave to participate in the appeal, as discussed in a January 26, 2015 Law 360 article (here, subscription required).


As Alison Frankel noted in her blog post to which I linked above, Judge Schofield in her ruling in the foreign exchange litigation “provided the Libor plaintiffs with invaluable guidance for their arguments before the 2nd Circuit.” Judge Schofield’s opinion, the title of Frankel’s article suggests, provides the Libor litigation plaintiffs with a “roadmap” for their appeal. Judge Schofield’s reasoning, Frankel said, “should give the 2nd Circuit something to think about when it hears the Libor appeal.”



There was a time when the prospects for the various market manipulation cases did not appear particularly promising, as I noted in an earlier blog post (here). The claimants nevertheless continued to press on, and indeed new claimants have even joined the fray (refer here). The recent developments s seem to have breathed new life into the market manipulation cases. While the plaintiffs in the Libor antitrust litigation have merely won only the right to appeal and are still a long way from seeing their antitrust claims reinstated, Judge Schofield’s ruling may give them reason to be positive.


The Libor plaintiffs may be hoping they can follow a similar path to the one that the plaintiffs in the Libor scandal-related securities class action lawsuit that Barclays shareholders filed against the company and certain of its directors and officers. As discussed here, Southern District of New York Judge Shira Scheindlin had originally granted the defendants’ motion to dismiss in that case. However, as discussed here, on appeal, the Second Circuit reversed the district court’s dismissal of the securities lawsuit. In October 2014, after the case was remanded to the district court, Judge Scheindlin denied the defendants’ renewed motion to dismiss (as discussed here).


As apparent recognition that the prospects for the claimants in the market manipulation cases may have improved, some of the defendants are taken steps to reach settlements with the plaintiffs. As discussed here, in October 2014 (that is, even before the more recent developments in the case), Barclays notified the court that it had reached an agreement with the plaintiffs in the consolidated Libor antitrust litigation to pay $19.975 million to settle the claims against the bank. And on January 30, 2015, J.P. Morgan filed a motion with the court seeking approval for its agreement to pay $99.5 million in settlement of the claims against it in the Foreign Exchange Benchmark Rates Antitrust Litigation, as discussed here.


At a minimum, these individual settlements will provide the claimants with a war chest to draw upon to continue wage their battles with the other defendants. More generally, the settlements, along with the developments described above, will hearten the claimants and encourage the claimants to press on.


It is interesting to note that though many of the Libor rate-setting banks are located outside the U.S., so far the civil litigation arising out of the scandal has been concentrated in the U.S. There are signs that some of the foreign banks may be facing claims outside the U.S. as well (refer for example here).


In any event, it seems clear that civil litigation surrounding these various market manipulation scandals will continue. There undoubtedly are many other significant procedural developments in these cases ahead. It will be interesting to see whether other individual banks decide that it is might be in their best interests to seek to a settlement of the claims against them.


Special thanks to a loyal reader for providing me with a copy of Judge Schofield’s opinion.


The Week Ahead: This week, I will be attending the annual Professional Liability Underwriting Society D&O Symposium in New York. While I am on travel, there will be a brief interruption in The D&O Diary’s publishing schedule. The regular schedule will resume at the end of the week.


I know that many readers will also be at the Symposium. If you see me at the conference, I hope you will take a moment and say hello, particularly if we have not met before. I always enjoy the chance to meet readers in person.


In the afternoon on Wednesday, February 4, 2014, I will be moderating a panel at the conference on International D&O. Joining me on the panel will be my friends Arati Varma (Chubb Singapore), Cris Baez (QBE Paris), Marcus Smithson (Generali, Sao Paulo) and Andrea Orviss (Marsh Vancouver). We have spent a great deal of time and effort preparing for this session (in several conference calls that set a record for sheer time zone complexity). Everyone attending the Symposium will want to sure to attend the panel, which is going to be excellent. I am looking forward to this session as much as any other event I have ever participated in.


I look forward to seeing everyone in New York.

Another Litigation Reform Bylaw Variant: The Minimum Stake to Sue Bylaw

Posted in Corporate Governance

floridaIn prior posts, I have noted the growing phenomenon of companies adopting various types of bylaws as a self-help version of litigation reform. Delaware’s courts have already approved the facially validity of both forum-selection bylaws and of fee-shifting bylaws, although measures pending in Delaware legislature in 2015 could address the fee-shifting bylaw. Other courts have considered mandatory arbitration bylaws as well (as discussed here). Now, add another type of bylaw to this list – the minimum-stake-to-sue bylaw.


As Alison Frankel noted in a January 21, 2015 post on her On the Case blog (here), life insurance settlement company Imperial Holdings has adopted an “apparently unique tactic to rein in suits by shareholders.” The company has amended its bylaws to require shareholders to deliver written consents representing at least three percent of the company’s outstanding shares in order to bring a class action or derivative suit.


Imperial Holdings has itself previously been the target of a derivative lawsuit. The case ultimately settled for $13.6 million (although as Frankel notes most of the settlement amount was paid to resolve a parallel securities class action lawsuit). After the earlier case settled, the company adopted the minimum-stake-to-sue bylaw, which a company representative told Frankel was “intended to stop shareholders without a real financial interest in the outcome of their own case from hijacking deals and forcing the company to defend meritless litigation.” Frankel quotes the company’s chairman as saying that “the bylaws are like a cooling-off period. We’re saying ‘Slow down, get support from other shareholders.’” Frankel’s article also notes that a similar minimum-stake to sue bylaw has been adopted by two other companies on whose boards Imperial’s Chairman also serves.


At least one Imperial Holdings shareholder has a problem with the new bylaw. On January 16, 2015, the named plaintiff from the earlier lawsuit filed a new action against the company and its directors in the Palm Beach County (Florida) Circuit Court, seeking a judicial declaration that the minimum-stake-to-sue bylaw was adopted illegally under Florida law, as well as an injunction against the provision’s enforcement.


The complaint in the new lawsuit (which can be found here) alleges that the bylaw was adopted in breach of the directors’ fiduciary duties because their “sole intent was to reduce their risk of being held accountable to the Company or its shareholders for any violation of law, including criminal law, breaches of fiduciary duties or other misconduct.” The complaint asserts that the pre-filing requirement is “so onerous” that it “effectively guarantees that, notwithstanding the provisions of state and federal law, no class or derivative action can be filed against Defendants, no matter how egregious their conduct may be.” The complaint alleges that the directors “acted disloyally and in bad faith and placed their own interests in avoiding liability to shareholders over the interests of both the Company and the public shareholders to who they owe fiduciary duties.”


In her article, Frankel quotes a statement from the company’s Chairman as saying that the new lawsuit is “exactly what the bylaw is supposed to prevent.” He also noted that the bylaw had been adopted with the advice of counsel and that the company’s shareholders will have a chance to vote on the measure at the company’s shareholder meeting in the spring. The plaintiffs counsel, in turn argues that the bylaw should have been put to shareholder vote before it was adopted. He also argues that even if a majority of shareholders approve the bylaw, it is still impermissible, arguing that “the federal and state securities laws do not permit the tyranny of the majority when it comes to shareholder rights.”


The complaint in the lawsuit has only just been filed; indeed, at the time Frankel spoke to the company’s Chairman, the company still had not yet even been served with the complaint. It remains to be seen how the lawsuit challenging the bylaw will fare. The case will of course be decided primarily on the basis of Florida law, so the outcome of the case will not necessarily be determinative of the question whether or not companies organized under the laws of other states could adopt a minimum-right-to-sue bylaw. Many publicly traded companies in the U.S. are organized under the laws of Delaware and at least at this point there is not way of knowing whether a bylaw of this type would survive scrutiny under Delaware law.


While it remains to be seen how the new lawsuit will fare and whether or not the validity of this type of bylaw will be upheld as a matter of Florida law, it is in any event clear that companies are continuing to experiment with the possibilities of litigation reform through bylaw revision. The fact that this case involves a Florida corporation and Florida law underscores the fact that these issues involve more than just considerations of Delaware law, and even the pending developments in the Delaware legislature regarding fee-shifting bylaws will not necessarily be determinative of the issue, as developments in other states could overtake the developments on these questions.


At a minimum, this company’s adoption of these new types of litigation reform bylaws shows that the phenomenon of the adoption of litigation reform bylaw has significant momentum. It is clear that companies will continue to experiment and new types of litigation reform bylaws are likely to continue to appear. Whether the various types of bylaws ultimately will survive judicial scrutiny remains to be seen, but if the courts confirm the validity of any of the various litigation reform bylaws under discussion, there could be some various significant changes in the shareholder litigation environment. Stay tuned, because depending on how all of this plays out, the D&O litigation arena could be entirely transformed.


Federal Preemption and Fee-Shifting Bylaws: While as noted above the various kinds of litigation reform bylaws under discussion could transform the litigation environment, there are a number of important considerations that could militate against this transformation. As discussed in a January 26, 2015 post on the CLS Blue Sky Blog (here), Columbia Law School Professor John Coffee believes that few companies will attempt to use board-only approved fee-shifting bylaws, because the major proxy advisory firms have made it clear that they will oppose the re-election of any board that approves the adopting of such a bylaw. Accordingly, Coffee suggests that the likelier future scenario is that IPO companies will insert fee-shifting bylaw provisions in the corporate charters.


Coffee contends that the attempt to adopt these kinds of bylaws through corporate charter provisions raises a number of concerns, including the possibility that this issue may be preempted by federal law, at least with respect to the application of such a provision in federal court. Coffee notes that the federal preemption issues will inevitably have to be litigated regardless of what the Delaware legislature ultimately does on the pending fee-shifting bylaw issues, because even if the Delaware legislature votes to curb the use of fee-shifting bylaws by Delaware corporations, issuers organized under the laws of other jurisdictions have already adopted these kinds of provisions.


As the type of bylaw discussed above, this issue is not just a question of the laws of one particular jurisdiction and is not just a question of one type of bylaw. The whole topic of litigation reform bylaws is likely to continue to percolate for some time to come. As Professor Coffee’s article demonstrates, there are a number of questions surrounding the enforceability of these types of bylaws that will have to be sorted out. But at this point, the smart money is betting that these issues will become increasingly common and that courts will increasingly be called on to address these kinds of issues.


I will say that the developments involving litigation reform bylaws may be among the most interesting developments in the corporate and securities litigation arena in many years.