September is here. Labor Day has come and gone. That can mean only one thing – time to put away the surf boards, bungee cords, fencing foils, pogo sticks, nunchuks, hula hoops, light sabers, and unicycles, and get back to work. Yes, it is time to answer all those emails and return all of those phone messages. And most important of all, it is time to catch up on what has been happening in the world of directors’ and officers’ liability and insurance. Here is what happened while you were out.
Fourth Circuit Affirms Dismissal of All Claims Against Failed Bank’s Directors But Reinstates Negligence Claims Against Bank’s Officers: As discussed here, on August 18, 2015, in an interesting opinion that takes a close look at exculpatory bylaw issues and the business judgment rule under North Carolina law, the Fourth Circuit affirmed in part and reversed in part the district court’s dismissal of the failed bank lawsuit the FDIC had filed against former directors and officers of Cooperative Bank of Wilmington, N.C. The appellate court affirmed the dismissal of all of the claims against the director defendants but reversed the lower court’s dismissal of the negligence and breach of fiduciary duty claims against the officer defendants. The appellate court concluded that the bank’s exculpatory bylaw provision protected the directors. However, the court held, the bylaw does not apply to the officers. The appellate court concluded that the FDIC has presented sufficient evidence to rebut the presumption of the business judgment rule and remanded the case to the district court for further proceedings. The Fourth Circuit’s opinion can be found here.
Tenth Circuit Holds Insured vs. Insured Exclusion Precludes D&O Policy’s Coverage for FDIC Failed Bank Lawsuit: In an important decision concerning D&O insurance coverage in connection with FDIC failed bank claims, the Tenth Circuit, applying Kansas law, held that a D&O policy’s insured vs. insured exclusion unambiguously precluded coverage for claims brought by the FDIC as receiver of a failed bank against the bank’s former directors and officers. The Tenth Circuit’s decision contrasts with the Eleventh Circuit’s December 2014 decision in the Community Bank & Trust case (about which refer here), in which the Eleventh Circuit had held that the insured vs. insured exclusion at issue in that case was ambiguous with respect to the question of whether it precluded coverage for the FDIC’s failed bank claims. However, the specific language in the exclusion at issue in the Tenth Circuit case precluding coverage for claims brought by a “receiver” of the insured company – language not present in the policy the Eleventh Circuit considered — was a dispositive factor in the Tenth Circuit’s conclusion about the exclusion’s applicability. A copy of the Tenth Circuit’s August 6, 2015 decision can be found here. A discussion of the opinion can be found here.
Third Circuit Affirms FTC’s Authority to Pursue Data Breach Enforcement Action: On August 24, 2015, as discussed here, in a ruling that was much-anticipated because of its potential implications for the regulatory liability exposures of companies that have been hit with data breaches, the Third Circuit affirmed the authority of the Federal Trade Commission to pursue an enforcement action against Wyndham Worldwide Corp. and related entities alleging that the company and its affiliates had failed to make reasonable efforts to protect consumers’ private information. This ruling confirms that, in addition to the disruption and reputational harm that may follow in the wake of a successful cybersecurity, companies may also face a regulatory action from the FTC as well. The Third Circuit’s opinion can be found here.
Plaintiffs’ Data Breach-Related Securities Class Action Lawsuit Against Technology Service Company Providing Data Security Service to Company That Was Hacked: On August 5, 2015, as discussed here, a plaintiff shareholder filed a securities class action lawsuit in Santa Clara (California) Superior Court against MobileIron, Inc.; certain of its directors and officers; and its offering underwriters. MobileIron is an information technology company that provides a platform for companies to utilize secure mobile applications, content and devices. According to the plaintiff’s complaint (a copy of which can be found here), the day after MobileIron completed its IPO, press reports appeared stating that MobileIron’s customer, the UK-based insurance company Aviva, had its employees’ mobile devices hacked. The breach allegedly took place weeks before MobileIron’s IPO, but was not disclosed in the IPO offering documents. The complaint alleges that as a result the share price in the offering was inflated. The complaint seeks to recover damages on behalf of those who purchased shares in the offering.
Seventh Circuit Says Fear of Future Harm Sufficient to Provide Standing for Consumer Data Breach Class Action: On July 20, 2015, in a ruling that could provide an important boost future consumer data breach class action litigation, the Seventh Circuit reinstated the Neiman Marcus data breach consumer class action lawsuit, ruling that the district court erred in concluding that the plaintiffs’ fear of future harm from the breach was insufficient to establish standing to pursue their claims, as discussed here. The Seventh Circuit opinion can be found here. A recent guest post on this site discussing the possible insurance issues this case presents can be found here.
Delaware Passes Law Banning Fee-Shifting Bylaws: The Delaware legislature overwhelmingly passed S.B. 75, which prohibits Delaware stock corporations from adopting “loser pays” fee-shifting bylaws and which confirms that Delaware corporations may adopt bylaws designating Delaware courts as the exclusive forum for shareholder litigation. Delaware’s Governor signed the bill into law on June 24, 2015. The provisions in the bill became effective on August 1, 2015. A copy of the bill can be found here. A discussion of the legislation and the questions it left unanswered can be found here.
Delaware Court Questions Disclosure-Only Settlement of Merger Objection Lawsuit: As discussed here, in a July 8, 2015 decision in Acevedo v. Aeroflex Holding Corp., Delaware Vice Chancellor Travis Laster rejected an unopposed motion for a final settlement and attorneys’ fees in a case challenging Cobham PLC’s $1.5 billion acquisition of the microelectronics company Aeroflex. The parties had proposed to settle the case based on the defendants’ agreement to supplement the deal disclosures, some changes to the break-up fee, and other procedural deal terms, as well as the payment of the plaintiffs’ attorneys’ fees. Laster said that while settlements of this type “have long been approved on a relatively routine basis,” he refused to approve the settlement of this case. He questioned whether the plaintiffs’ attorneys’ negotiation of the additional terms merited the $825,000 fee they sought. He also concluded that the relief obtained was insufficient to support the “intergalactic” settlement release the defendants sought, noting that it provided a “broad class-wide release” that extinguished all claims against the defendants. Commentators have said that this development could be interpreted to suggest that Delaware courts 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.
Delaware Court Awards $148 Million Against Dole CEO and General Counsel: If the Delaware courts have shown that they may be skeptical about dubious settlements in merger objection cases, they have also shown that in cases with substance, they are prepared to hold the responsible persons accountable and award significant damages. On August 27, 2015, in a massive 108-page post-trial opinion (here), Vice Chancellor Travis Laster held that Dole’s CEO David Murdock, and General Counsel C. Michael Carter breached their fiduciary duties in connection with the November 2013 transaction in which an entity Murdock controlled acquired the 60% of Dole’s shares that Murdock did not already own. Laster’s opinion found that Murdock and Carter engaged in “fraud” that prevented Dole’s shareholders from receiving a fairer price in the transaction. Laster held Murdock and Carter jointly and severally liable for damages of $148.1 million, plus pre- and post-judgment interest.
SEC Adopts Pay Ratio Rules: On August 5, 2015 the SEC adopted the agency’s long-awaited Pay Ratio Disclosure Rules. As discussed in the agency’s August 5, 2015 press release (here), the rules, which the agency was required to adopt by the Dodd-Frank Act, will “require a public company to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees.” The press release contains a fact sheet about the rules. The final rules 294-page adopting release can be found here. The agency’s delays in adopting the rules had been the target of criticism from more liberal members of Congress. For example, as discussed here, Senator Elizabeth Warren had sent SEC Chair Mary Jo White a scathing letter in which the Senator criticized White for, among other things, the delays in the final Pay Ratio rules’ release. However, as discussed here, the proposed rules were controversial from the time of their promulgation back in 2013. And in the end, when the rules were finally issued this past week, they were only approved over stinging dissents from the two Republican SEC Commissioners Daniel Gallagher (whose dissenting statement can be found here) and Michael Piwowar (whose two dissenting statements can be found here and here). The rules are not effective until each reporting company’s first fiscal year after January 1, 2017. The requirements will not apply to emerging growth companies, smaller reporting companies, foreign private issuers, filers under the U.S.-Canadian Multijurisdictional Disclosure System and registered investment companies.
SEC Proposes Compensation Clawback Rules: As discussed here, on July 1, 2015, a divided SEC voted 3-2 to propose rules directing the securities exchanges to create standards that in turn call for 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 subject to a 60-day comment period. 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. 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).
Petrobras Corruption Scandal Ensnares Other U.S-Listed Brazilian Companies: Petrobras, the Brazilian state energy company, has been caught up in a long-running corruption investigation that among other things has led to the filing of a U.S. securities class action lawsuit. Now other U.S.-listed Brazilian companies have been caught up in the scandal and have also been hit with U.S. securities class action lawsuits. As discussed here, 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. Then, as discussed here, on July 22, 2015, a plaintiff shareholder filed a separate securities class action lawsuit against Centrais Eletricas Brasileiras S.A. (Eletrobras), a Brazilian utility. These cases are only the latest examples of cases where non-U.S. companies have been sued in U.S. securities laws in relation to corruption investigations in their home countries. In the meantime, as discussed here, in a July 30, 2015 order, Southern District of New York Judge Jed Rakoff largely denied the defendants’ motion to dismiss in the securities class action lawsuit filed against Petrobras – although Rakoff did hold that the claims filed in the suit under Brazilian law on behalf of those who purchased their Petrobras shares on the Sao Paulo stock exchange were subject to the mandatory arbitration provisions in the company’s bylaws.
Selections from the Off-Topic Archives: Speaking of Brazil, The D&O Diary was in São Paulo in June, as memorialized in this travel post (here). The D&O Diary was also in Palo Alto, California in June, for the Stanford Law School Directors’ College, as described here. In July, The D&O Diary travelled to Europe, with stops in Munich (here) and Prague (here). The D&O Diary also visited Pentwater, Michigan as well, as noted with sentimentality (and pictures) here.
Speaking of Munich, an interview in which I participated while at an event in Munich at Munich Re’s headquarters was published last week on the Munich Re website, here.
The D&O Diary even published, as a tribute to the men and women who perished in the Great War, a list of its recommended books about World War I (here).
Preview of Coming Attractions: The D&O Diary will be publishing its annual survey “What to Watch Now in the World of D&O” later this week.
And Finally, Some Ohio Humor: Can you identify which are the names of Knights of the Round Table and which are the names of colleges in Ohio? Test your knowledge here.