WeWork may not have been able to complete its once-planned IPO, but even so it now has something that many IPO companies often experience – a shareholder class action lawsuit. On November 4, 2019, a WeWork investor filed a lawsuit in California state court on behalf the company’s minority shareholders as well as on behalf of the company itself. As discussed below, the shareholder complaint makes a number of interesting allegations and raises some interesting issues as well.
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Oracle Board Special Litigation Committee Recommends Shareholder’s Derivative Claims Proceed
It is not uncommon for corporate boards facing shareholder derivative litigation to appoint a special litigation committee to investigate the allegations that the plaintiff shareholder raised in the suit. However, in an unusual development in the shareholder derivative lawsuit pending in Delaware against directors and officers of Oracle, the company’s board’s special litigation committee (SLC) has advised the court that the committee of three independent directors believes it is in the company’s best interest to allow the lead plaintiff (rather than the committee itself) to proceed with the claims on behalf of Oracle. Alison Frankel’s August 19, 2019 post on her On the Case blog discussing the Oracle derivative lawsuit and the SLC’s letter to the court can be found here.
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Proposed Nevada Legislation Introduces Fee-Shifting in Shareholder Litigation
A short time ago, a storm of controversy briefly emerged after a Delaware court endorsed a firm’s adoption of a fee-shifting bylaw. The controversy quieted down after the Delaware legislature adopted a statutory provision prohibiting fee-shifting bylaws. The fee-shifting provision controversy could be back, albeit this time in a different state. A Nevada legislator has introduced a bill in the state senate that would explicitly allow Nevada corporations to adopt provisions requiring fee-shifting in unsuccessful M&A litigation, as long as the deals were approved by a shareholder majority. University of Nevada Las Vegas Law School Professor Benjamin Edwards describes the legislation in a March 18, 2019 post on the Business Law Prof Blog (here).
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Massive Settlement in Wells Fargo Bogus Account Scandal Derivative Suit
In one of the largest shareholder derivative lawsuit settlements ever, the parties to the consolidated Wells Fargo derivative suit arising out of the bank’s phony customer account scandal have agreed to settle the case for a variety of cash and non-cash benefits with a stated value to the company of $320 million, inclusive of a cash payment of $240 million. The $240 million cash portion of the settlement is to be paid by the bank’s D&O insurers, in what is, according to the plaintiffs’ counsel, “the largest insurer-funded cash component of any shareholder derivative settlement in history.” This settlement represents the latest in a series of derivative suit settlements with a significant cash component, a case resolution pattern in high-profile derivative suits that arguably represents the new normal in the world of D&O liability exposures.
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Guest Post: Back to Basics: Board and Special Litigation Committee Investigations in Shareholder Derivative Litigation
In the following guest post, Marc Casarino, a partner in the White & Williams law firm, and Doug Greene, the National Practice Leader of BakerHostetler’s Securities and Governance Litigation Team, take a look at the special litigation committee process and examine the ways in which the SLC process can be “robust, successful and efficient.” I would like to thank Marc and Doug for their willingness to allow me to publish their article as a guest post on my 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 Marc and Doug’s article.
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Massive Derivative Suit Settlement for Alleged Management Failure to Prevent Sexual Misconduct
The news headlines have been dominated in recent days by appalling revelations that leading politicians, entertainers, political candidates and others have engaged in sexual harassment, assault, and even worse behavior. As these stories have emerged, a dynamic has evolved in which the victims come forward with their stories and seek to hold the wrongdoers accountable for their misconduct. Now, a blockbuster settlement entered on Monday suggests that this dynamic may not be limited just to attempting to hold individuals to account but may also involve efforts to hold the wrongdoers’ companies’ executives accountable for allowing the misconduct or for turning a blind eye.
In what is one of the largest shareholder derivative settlements ever, senior officials of 21st Century Fox have agreed to a $90 million settlement (to be funded by insurance) of allegations the company’s management permitted a culture of sexual and racial harassment to permeate the company, ultimately resulting in financial and reputational harm to the company. The settlement includes provisions for interesting governance and compliance enhancements, including the creation of a Workplace Professionalism and Inclusion Council. As discussed below, the procedural circumstances of the settlement are interesting as well, as the settlement arises out of a lawsuit that had been threatened but not filed until the same day as the settlement agreement was submitted to the court.
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Should Shareholder Derivative Litigation Be Eliminated?
Shareholder derivative lawsuits are notoriously difficult for claimants. In order to pursue a derivative suit, a shareholder plaintiff must overcome numerous procedural and pleading hurdles. Even when cases survive the initial obstacles, the ultimate outcome often consists of little more than the payment of the plaintiff’s attorney’s fees with slight benefit to the company in whose name the claim was ostensibly was pursued. In light of these considerations, UCLA law professor Stephen Bainbridge has a modest proposal: Eliminate derivative litigation altogether. In a brief October 3, 2017 post on his ProfessorBainbridge.com blog (here), Bainbridge suggests that we just do away with the whole inefficient process. Bainbridge raises a number of interesting points, but, as discussed below, while I agree with some of his concerns, I am not sure I agree with his proposed solution.
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Delaware Chancery Court Ruling Could Allow a Second Chance on Demand Futility Rulings
If a “fast filer” plaintiff races to the courthouse in one jurisdiction to file a derivative suit without prior due diligence, should a dismissal of the lawsuit for failure to plead demand futility preclude a separate derivative lawsuit brought be a different , more diligent plaintiff who files in a second forum? On the one hand, considerations of judicial efficiency and conservation of public resources argues in favor of precluding the second claim. On the other hand, policies in favor of greater pre-suit care prior to filing a lawsuit would militate in allowing the more diligent plaintiff’s claim to go forward.
In an interesting July 25, 2017 opinion (here) in which he reviewed these questions of the prior derivate suit dismissal’s claim preclusive effects on subsequent non-party claimant derivative claims, Chancellor Andre Bouchard concluded, in a break with the Court’s prior practices, the prior derivative suit dismissal on grounds of failure to plead demand futility does not preclude the claims of a subsequent claimant. This new approach to the issue of non-party preclusion in derivative litigation has important practical implications, as discussed below.
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Delaware Chancellor Rejects Disclosure-Only Settlement, Signals What’s Next for Merger Objection Suits
In a January 22, 2016 Delaware Court of Chancery decision that likely will prove to be significant because of the light it sheds on the future of disclosure-only settlements in merger objection lawsuits in Delaware, Chancellor Andre Bouchard rejected the proposed settlement in the litigation arising out of Zillow’s acquisition of Trulia, saying that because the “none of the supplemental disclosures were material or even helpful to Trulia’s stockholder,” the proposed settlement “does not afford them meaningful consideration to warrant providing a claim release.”
In reaching these conclusions, Bouchard reviewed the dynamics that have led to the “proliferation of disclosure settlements” and the problems these kinds of settlements present. Bouchard also offered his perspective on the ways that remedial disclosure assertions in deal litigation could optimally be litigated. At a minimum, Bouchard’s opinion represents a warning to the plaintiffs’ bar that to the extent they continue to pursue disclosure settlements, they can “expect that the Court will be increasingly vigilant in scrutinizing the ‘give’ and the ‘get’ of such settlements to ensure that they are genuinely fair and reasonable to the absent class members.” Chancellor Bouchard’s January 22, 2016 opinion in the Trulia case can be found here.
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Big Changes in the Merger Objection Litigation Marketplace
Since merger objection litigation became one of the most distinctive phenomena on the corporate and securities landscape, it has been both chronicled and measured in a series of annual papers by Matthew Cain, now an SEC economist, and Steven Davidoff Solomon, a law professor at the U.C. Berkeley. In their latest update, “Takeover Litigation in 2015” (here), published last week, the authors confirm that while merger objection litigation continued to be filed at significant levels last year, the litigation levels declined compared to recent years. Of particular note, starting in the Fall 2015, after Delaware Vice Chancellor Laster rejected the disclosure only settlement in the Aruba/H-P merger lawsuit, the filings of the merger objection lawsuits showed a decline that was “sharp and significant” and that the authors expect will continue in the new year.
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