scales of justiceAmong the important parts of any securities class action lawsuit settlement agreement are the so-called “blow provisions,” which provide settling defendants with an option to terminate the settlement agreement if a specified threshold of investors elect to opt out of the settlement. Among other key consideration with respect to blow provisions is that the threshold specified must be carefully structured to allow defendants to terminate or renegotiate the class settlement when opt-outs reach an unacceptable level. In a December 8, 2016 research paper entitled “Considerations for Blow Provisions in Securities Class Action Settlements” (here), Cornerstone Research takes a look at the various ways that blow provisions can be structured, and identifies the pitfalls with the various alternatives.


According to the paper, the blow provision ideally would be structured so that the threshold trigger is tied directly to the dollar amount of the defendants’ potential exposure to opt outs. Under a dollar amount blow provision structure, if the recognized loss amount for opt-outs, calculated according to measures specified in the settlement notice, exceeds a certain dollar level, the defendants have the right to terminate the settlement agreement. This kind of approach can be particularly helpful if the claimed damages per share differ significantly among class members (and thus differ significantly among potential opt-out claimants). A blow provision that sets a specified dollar value for potential claimants has the advantage of less ambiguity about the calculation to be required to determine if the blow provision has been triggered. This in turn makes it more likely that the defendants will be able to terminate the class settlement agreement before the exposure to opt outs has exceeded an unacceptable level.


There are at least three other types of blow provision structures that are sometimes used, in addition the type described in the preceding paragraph based on the dollar amount of the potential claims. The three other types of blow provision structures may based on the percentage of the shares purchased by the class members; the percentage of the shares outstanding; or the percentage of the shares traded.


According to the paper, these three alternative structures each share the common flaw that they may lack a relationship to the actual opt-out exposure, because the actual number of shares purchased by class members is unknown at the time of the settlement, damages per share may vary widely, or because the plaintiff class may include investor who purchased securities other than common stock. These blow provisions may make it difficult to know whether the provision has been activated. As a result, the use of any one of these three alternative measures increases the likelihood that the blow provision will not be triggered before the exposure to opt-outs has exceeded an unacceptable amount.


The authors conclude that structuring the blow provision based on a specified dollar value of potential claims will result in a provision that is more closely related to the potential dollar amount of opt-out exposure. Because this type of provision also is less ambiguous, it is more likely that the defendants will be able to terminate the settlement agreement before the exposure to opt outs has exceeded an unacceptable amount.


I found the authors’ paper interesting and useful. However, I did find myself wondering how often the blow provisions actually come into to play. Is it a frequent occurrence for settlement agreement blow provisions to be triggered?


More About Opt Outs: In a report published earlier this fall, Cornerstone Research, in conjunction with the Latham & Watkins law firm, took a detailed look at the securities class action settlement opt-out phenomenon. In that prior paper (discussed here), the paper’s authors found that while  variable percentage of securities class action lawsuit settlements involved settlement opt-outs, the authors were unable to identify a discernable increase in the preponderance of opt-outs over time. The authors also found that large class action settlements “represent a disproportionate percentage of cases that ultimately face an opt-out.”


While it is interesting to know what percentage of settlements involves opt-outs and to know what kinds of cases are likelier to involve opt-outs, that is quite a bit different from knowing how many cases involve a sufficient number of opt-outs that the settlement agreement’s blow provisions are triggered.


There have been some noteworthy cases where the settlement opt-outs recovered very substantial sums. For example as discussed in the opt-out paper, in the Time-Warner settlement, the $764 million in opt-out settlements represented almost 31 percent of the class action settlement. The largest opt-out settlement as a percentage of the class action settlement involved Quest Communications International Inc., where the $411 opt-out settlement was 92 percent of the final total class action settlement amount.


The fact that opt-out on this massive of a scale took place apparently without the blow provisions in those settlements being triggered does raise the question of when if ever the blow provisions are triggered. This perhaps a topic for discussion in another paper.


Management Liability Exposures in Saudi Arabia: Here at The D&O Diary we try to keep a global perspective, and in particular to stay informed about D&O liability developments and exposures in other countries. It was in this vein that we were very interested to read an article that recently came across the transom about management liability exposures in Saudi Arabia, a country whose D&O issues had not previously caught our attention. The December 19, 2016 memo from the Alexander & Partner Rechtsanwälte law firm entitled “Liability of Managers and Directors under Saudi Arabian Law,” can be found here.


The memo interestingly points out that the “unlike the legal systems of its neighbors,” Saudi Arabian law is “based nearly entirely on Islamic law, as interpreted by the Hanbali school of law.” As a result, Saudi Arabian law is “governed much less by codifications and instead by Sharia law” – in other words, the Islamic law principles derived from an interpretation of the three sources of law accepted by the Hanbali school of Islamic law: the Quran; the Sunnah (i.e., the verbally transmitted record of the teachings and deeds of the prophet Muhammad); and the Ijma’ (i.e., the consensus of Islamic scholars).


While there are codifications in various areas of the law, these codifications are subordinate to Sharia law. Saudi Arabian corporate law is largely codified. However, since these codifications are interpreted in conjunction with Sharia principles and gaps filled by Sharia law, Islamic law “remains highly relevant in Saudi Arabian corporate law.”


Under Companies Laws revisions that went into effect in May 2016, company managers and directors can be liable to the company, to its shareholders, and to third parties for violations of their duties under the Companies Laws, breaches of company articles, and errors of management. Although the Companies Laws do not expressly mention management liability for fraudulent acts, the Laws contain statutes of limitations for fraudulent acts, and so the memo’s authors concludes that “it is clear” that the Laws’ provisions contemplate management liability for fraudulent acts.


The article reviews the management liability regime in greater detail and concludes that Saudi Arabian law comprises a management liability regime that, at least in principle, is “quite similar to that of European jurisdictions.” However, managements’ responsibilities with respect to preventing over-indebtedness under Saudi Arabia law are much stricter than in western jurisdictions, and the Saudi Arabian provision are similar to those of the other Gulf Cooperation Council companies in that regard.