As I discussed in a blog post at the time, in June 2021 VW announced that a settlement had been reached in the D&O liability action that had been filed against the company’s executives in connection with the “Dieselgate” scandal. The settlement, which had an aggregate value of approximately $351 million, was approved by VW shareholders in July 2021. However, minority shareholders have now filed a legal action against VW in an effort to oppose the settlement. In the following guest post, Michael Hendricks and Burkhard Fassbach review the minority shareholders’ legal action and discuss its implications. Michael is the founder of the German D&O specialist broker hendricks GmbH and Burkhard is a D&O-lawyer in private practice in Germany. I would like to thank Michael and Burkhard for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Michael and Burkhard’s article. Continue Reading Guest Post: VW Dieselgate: Minority Shareholders File Suit Against D&O Settlement
Search results for: minority investor
Guest Post: SEC Definition of “Accredited Investor”: A Step Forward or Backward?
In the following guest post, David H. Topol of the Wiley law firm takes a look at the recent decision by the U.S. Securities and Exchange Commission to amend the agency’s operative definition of the term “accredited investor.” A copy of the agency’s final rule incorporating the revised definition can be found here. The agency’s August 26, 2020 press release about the change can be found here. I would like to thank David for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is David’s article. Continue Reading Guest Post: SEC Definition of “Accredited Investor”: A Step Forward or Backward?
Dutch Shareholder Foundation Seeks to Represent Global Class of VW Investors
Several years ago, when investors’ representatives used class claims settlement procedures available under Netherlands law to reach securities claim settlements involving Royal Dutch Shell (about which refer here) and Converium (about which refer here), there was a great deal of speculation whether the Dutch procedures could become an important vehicle for aggrieved investors to recover damages for alleged securities law violations.
This speculation was particularly magnified after the Amsterdam Court of Appeal, in connection with the Converium settlement, held that the Dutch settlement procedures could be used to resolve securities claims of non-Dutch investors against a non-Dutch company, in the form of judgment that is enforceable throughout the EU and among other European countries. Though many of these kinds of investor settlements were anticipated, the onslaught of securities settlements using the Dutch procedures never really did materialize.
However, a new initiative being organized in The Netherlands on behalf of Volkswagen securities holders whose investment interests were harmed as a result of the automobile company’s emissions-related scandal may represent the most significant effort since the Converium case to try to use the Netherlands procedures on behalf of an aggrieved class of investors. This initiative on behalf of Volkswagen’s securityholders has a number of interesting features. It also raises a number of potentially complicated questions about jurisdiction, priority, potential preemption, and international comity. Continue Reading Dutch Shareholder Foundation Seeks to Represent Global Class of VW Investors
Guest Post: Texas Supreme Court Guts Minority Shareholder Oppression Claims
On June 20, 2014, the Texas Supreme Court issued its opinion in Ritchie v. Rupe, in which the Court addressed the rights and remedies of minority shareholders of Texas companies. In the following guest post Kara Altenbaumer-Price, Vice President, Management & Professional Liability Counsel for USI Southwest / USI Northwest, takes a look at the decision and analyzes its implications.
I would like to thank Kara for her willingness to publish her post on this site. I welcome guest post submissions from responsible authors on topics of interest to readers of this blog. If you would like to submit a guest post, please contact me directly. Here is Kara’s guest post:
The Texas Supreme Court ruled in late June that minority shareholders in private companies in Texas cannot sue for shareholder oppression, even when majority shareholders attempt push them out of the business, dilute their shares, or otherwise act to lower the value of their investment. While some have heralded the decision as pro-business and an effort to keep the courts out of Texas boardrooms, others suggest that the case will discourage investment in Texas companies.
The ruling in Ritchie v. Rupe, which applies to businesses incorporated in Texas, held that not only does the Texas Business Organizations Code not prohibit oppression of minority shareholders, there is no common-law cause of action for minority shareholder oppression in Texas. Intermediate appellate courts in Texas had allowed such claims to be brought, but this was the first time the question had been addressed by the Texas Supreme Court. The Court’s ruling means that except in very narrow circumstances—addressed below—minority shareholders cannot sue unless they can allege that the complained-of actions were fraudulent, a breach of fiduciary duty, or another cause of action other than shareholder oppression.
The facts in Ritchie v. Rupe involved a minority shareholder who inherited 18 percent of private company stock following the death of her husband. The majority shareholders had offered to purchase the shares for $1 million, but because the company had sales in excess of $150 million and assets in excess of $50 million, her attorney encouraged her to decline the “absurd” offer. Although the offer was ultimately raised to $1.7 million through negotiations, the minority shareholder continued to refuse what she believed was a too-low offer. She then found a third-party buyer to whom she wanted to sell the stock, but the majority shareholders objected and refused to meet with the potential third-party buyer for fear it would put the company at risk for securities fraud. This left the minority shareholder unable to market or monetize her shares. She sued, alleging that the majority shareholders engaged in “oppressive” conduct toward her. At trial, the company was ordered to purchase her shares at a jury-determined fair market value of $7.3 million. The majority shareholders appealed.
The Texas Supreme Court ruled that her claims were not valid under Texas common law or the Texas Business Organizations Code. Instead, the Court held that the only time a shareholder oppression claim could be brought against a private company in Texas is when a rehabilitative receiver has been appointed. Even within this narrow context of receivership, the standard for proving a shareholder oppression claim would be extremely high; a shareholder would have to show that he or she was intentionally harmed by officers and directors. As a practical matter, it is unlikely that forcing the company into rehabilitative receivership would benefit the minority shareholder seeking to get greater value for his or her shares. As a result, this is a hollow consolation at best.
As one Texas appellate lawyer described it, this ruling puts Texas “on an island.” Most states either overtly allow suits for minority shareholders oppression or don’t prohibit them. From a litigation perspective, the ruling is certainly positive for private companies in that it will very likely reduce the amount of shareholder litigation against them, or at the very least, make them more likely to prevail on suits that are filed on other grounds. While there are still avenues for minority shareholders to sue, as noted above, it may not make logical sense for them to sue for fear of even further reducing the value of their investment by pushing for rehabilitative receivership or because claims like fraud or breach of fiduciary duty are difficult to prevail on.
This ruling should not, however, cause private companies to abandon their D&O insurance for a number of reasons. First, as noted above, minority shareholders can still sue Texas companies; they just won’t be able to bring this relatively common cause of action unless they also seek to place the company into rehabilitative receivership. Plaintiffs lawyers are resourceful, and private companies will still need to defend themselves from disgruntled shareholders. Second, sophisticated investors—even if minority investors—will be likely to add minority shareholder protections contractually into their investor agreements as prerequisite to investing in a Texas corporation. They would be able to sue pursuant to these contractual provisions. Third, the Texas Legislature meets in a little less than six months and has the ability to change the Business Organizations Code to overrule the Court’s decision by statute. Finally—and most importantly—unlike public company D&O insurance, the coverage afforded under private company D&O insurance is very broad and can cover many non-investor claims, including those arising from vendors, business partners, lenders, and other third parties. It would be wise, however, for Texas private companies to use this reduced threat of shareholder litigation as leverage in renewal negotiations with carriers to push for improved terms and conditions or pricing.
N.Y. Derivative Suit Against China-Based Cayman Islands Company Settles for $300 Million
In one of the largest shareholder derivative lawsuit settlements ever, involving a very unusual derivative claim under Cayman Island law prosecuted in a U.S. court on behalf of a China-based Cayman Islands company, the parties to the Renren derivative litigation have agreed to settle the case for at least $300 million. The settlement is subject to a “true up” process that could increase the ultimate amount of the settlement payments. The settlement is also subject to court approval. The parties’ October 7, 2021 settlement stipulation can be found here. Renren’s October 8, 2021 press release about the settlement can be found here. An October 8, 2021 press release from the lead plaintiff’s counsel about the settlement can be found here. Continue Reading N.Y. Derivative Suit Against China-Based Cayman Islands Company Settles for $300 Million
Guest Post: Private Investment Fund Claims from an Insurance Perspective
Private investments funds (hedge funds, PE firms, venture capital funds and the like) are a significant part of the U.S. economy. From a management liability insurance perspective, private investment funds present unique underwriting and claims issues. In the following guest post, David Topol, takes a detailed look at these kinds of enterprises, and considers the relevant claims and insurance issues. David is a partner in the insurance practice at Wiley. He has substantial experience over the past fifteen years representing insurers as monitoring counsel and in coverage litigation on policies issued to investment advisers, private funds and broker-dealers. A version of this article will be published in a forthcoming issue of the Wiley law firm’s Executive Summary blog. I would like to thanks David for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is David’s article. Continue Reading Guest Post: Private Investment Fund Claims from an Insurance Perspective
Guest Post: D&O Insurance Pricing Trends
As I have noted in prior posts, and as a result of a number of factors, the current marketplace for D&O insurance marketplace is disrupted, with many buyers experiencing significant price increases. In the following guest post, Jeff Hirsch, Head of Product at Scale Underwriting, takes a detailed look at current D&O insurance pricing trends. A version of this article previously was published on the Foundershield blog. I would like to thank Jeff and Foundershield for allowing me to publish this article. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Jeff’s article. Continue Reading Guest Post: D&O Insurance Pricing Trends
Guest Post: Underwriting Risk and Sovereign Wealth Fund Investment in U.S. Private Equity
In this guest post, Sarah Abrams, Head of Professional Liability Claims at Bowhead Specialty, examines Sovereign Wealth Funds’ increasing investment in U.S. private equity firms and considers whether there are unique regulatory and professional liability risk exposures for PE firms that partner with Sovereign Wealth Funds. I would like to thank Sarah for allowing me to publish her article on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
Institutional investors have been aggressively seeking out opportunities to direct and co-invest in recent years to have more control of private equity (PE) transactions and bypass hefty fees charged by commingled PE funds. These funds have a similar fee structure to that of hedge funds, typically consisting of a management fee (generally 2%) and a performance fee (usually 20%)[i]. Sovereign Wealth Funds (SWF) have not only sought out this control, but in the past year have surpassed US institutional investors in executing on this strategy.[ii]
All of this activity begs the question, are there unique regulatory and professional liability exposures to PE firms that partner with SWFs?
April 2023 PitchBook data revealed that the Limited Partners (LPs) completing the most buyout and growth investments outside of a fund last year were SWF managers based in the Middle East, Europe and Asia.[iii] The majority of the SWF transactions were co-investment and direct investment opportunities.[iv]
D&O underwriters of PE risk must consider the liability and regulatory exposure the increased SWF investment brings along with its capital. As with all foreign investment, there needs to be consideration as to whether a direct or co-investment would fall under scrutiny by the Committee on Foreign Investment in the United States (CFIUS).[v][vi]
CFIUS has the authority to review transactions that could result in foreign control of a US business, which includes certain investments in US companies by foreign investors, including SWFs. CFIUS operates pursuant to section 721 of the Defense Production Act of 1950, and, through Executive Order, allows for the agency to review transactions for national security risks. New CFIUS rules published February 13, 2020 under the Foreign Investment Risk Review Modernization Act (“FIRRMA”) overhauled how CFIUS will review inbound investments into the U.S.[vii] On September 15, 2022 President Biden issued Executive Order 14083 underscoring critical role of CFIUS in responding to foreign investment.[viii]
The 2022 Executive Order by President Biden provides formal Presidential direction on the risks to consider when reviewing a covered transaction. The five specific sets of factors include (1) effect on resilience of critical U.S. supply chains (2) effect on U.S. technological leadership in areas affecting U.S. national security (AI, biotech, climate adaption), (3) industry investment trends that may have impact on U.S. national security, (4) Cybersecurity risks that threaten to impair national security and (5) risks to U.S. persons’ sensitive data.[ix]
The FIRRMA rules must be considered by PE funds with SWF investors, as certain non-controlling minority investments will be subject CFIUS scrutiny including those involving advanced technologies, critical infrastructure, or significant personal data of U.S. residents. PE fund insurers should be asking whether a fund’s non-U.S. limited partner interests may be subject to CFIUS review, and whether a non-U.S. fund entity may still be deemed a U.S. person falling outside of CFIUS’s reach.[x]
Coverage under PE D&O insurance for CFIUS regulatory exposure is certainly a legal defense cost underwriting risk, particularly responding to CFIUS document and interview requests of foreign nationals. In addition, other PE firm investments may come under federal or investor scrutiny after data production and any settlement. Along with this D&O exposure comes the added professional liability exposure to PE GP investors.
According to PitchBook data, Singapore wealth fund GIC completed 148 such deals last year—the same number as French state bank Bpifrance. [xi] Other active LPs include Abu Dhabi’s sovereign wealth managers Mubadala Investment Company and Abu Dhabi Investment Authority.[xii] Given the number of deals that SWFs are closing with PE firms, the financial impact to non-SWF LPs should also be considered.
Notably, a November 2022 FinReg paper review concluded with a large sample of international data showing that sovereign wealth funds (SWFs) earn lower returns and are slower to fully liquidate their positions relative to other types of institutional investors.[xiii] The involvement of SWFs as a limited partner is associated with a lower Internal Rate of Return (IRR) and Total Value Paid-In (TVPI) relative to the capital invested.[xiv]
Data presented in an October 2022 paper by business school professors Douglas Cumming and Pedro Monteiro indicates that SWFs are longer-term investors when compared to their counterparts, including pension funds, endowments, insurance companies, and banks.[xv] The investment horizon of the alternative asset fund may be longer when SWFs are involved if there is a political and strategic benefit to delay investment.
This is in contrast to the institutional, usually US based PE limited partners who generally prefer a shorter investment horizon as they may have liquidity constraints. Because, SWFs are longer-term investors when compared to their counterparts, including pension funds, endowments, insurance companies, and banks[xvi], PE firms disclosure to LPs tied to deals with SWFs should be done to level set return expectations.
PE firm underwriters of blended policies including E&O coverage for investment should be aware of both the lower return and slower liquidation timeline that may stem from SWF direct and co-investment. While the outside investment in current market conditions may be attractive, consideration of future E&O liabilities must be considered by financial lines underwriters. LPs seeking the increased and shorter returns may Monday morning quarterback firm GP decisions to include SWFs.
Financial lines underwriters armed with this recent trend should ask about SWF investment in client PE firms. Of critical importance if SWFs are coinvesting or direct investing, will be partner law firms with CFIUS experience to assist in minimizing regulatory exposure. In addition, disclosure to non-SWFs LPs to level set return expectations may decrease E&O risk.
[i] Private Equity Management Fees and Regulations (investopedia.com)
[ii] The 20 most active LPs in direct PE investments | PitchBook
[iii] The 20 most active LPs in direct PE investments | PitchBook
[iv] Co-investments allow SWFs to back individual PE deals alongside a deal and direct investing allows SWFs to target a specific fund asset for acquisition often independent of the traditional PE general-limited partner (GP)(LP) relationship.
[v] CFIUS is a US government interagency committee that reviews certain transactions involving foreign investment in the United States to determine their effect on national security.
[vi] The Committee on Foreign Investment in the United States (CFIUS) | U.S. Department of the Treasury
[vii] Summary-of-FIRRMA.pdf (treasury.gov)
[viii] The Committee on Foreign Investment in the United States (CFIUS) | U.S. Department of the Treasury
[ix] FACT SHEET: President Biden Signs Executive Order to Ensure Robust Reviews of Evolving National Security Risks by the Committee on Foreign Investment in the United States | The White House
[x] New Rules for CFIUS: How Investment Funds Can React and Take Advantage | Paul Hastings LLP
[xi] The 20 most active LPs in direct PE investments | PitchBook
[xiii] Sovereign Wealth Fund Investment in Venture Capital, Private Equity, and Real Asset Funds – The FinReg Blog (duke.edu)
[xv] Cumming, Douglas J. and Monteiro, Pedro, Sovereign Wealth Fund Investment in Venture Capital, Private Equity, and Real Asset Funds (October 24, 2022). Available at SSRN: https://ssrn.com/abstract=4258254 or http://dx.doi.org/10.2139/ssrn.4258254
[xvi] Sovereign Wealth Fund Investment in Venture Capital, Private Equity, and Real Asset Funds – The FinReg Blog (duke.edu)
Guest Post: The State of Private Equity in 2023: Is a Maelstrom on the Horizon?
In the following guest post, Brian Baney, Senior Vice President, Head of Management and Professional Liability Claims, Ascot Group, Peter Trochev, Senior Vice President, Financial Institutions, Ascot Group, Elan Kandel, Member, Bailey Cavalieri LLC and James Talbert, Associate, Bailey Cavalieri LLC, survey the current risk environment for private equity firms. I would like to thank the authors for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers Please contact me directly if you would like to submit a guest post. Here is the author’s article.Continue Reading Guest Post: The State of Private Equity in 2023: Is a Maelstrom on the Horizon?
The Top Ten D&O Stories of 2022
The directors’ and officers’ liability environment is always changing, but 2022 was a particularly eventful year, with important consequences for the D&O insurance marketplace. The past year’s many developments also have significant implications for what may lie ahead in 2023 – and possibly for years to come. I have set out below the Top Ten D&O Stories of 2022, with a focus on future implications. Please note that on Thursday, January 12, 2023 at 11:00 AM EST, my colleagues Marissa Streckfus, Chris Bertola, and I will be conducting a free, hour-long webinar in which we will discuss The Top Ten D&O Stories of 2022. Registration for the webinar can be found here. I hope you will please join us for the webinar.Continue Reading The Top Ten D&O Stories of 2022