nystateOne of the standard features of D&O insurance policy is the fraud exclusion, which these days typically provides that the exclusion is triggered only after a “final” judicial determination that the precluded conduct has occurred. But what is it that makes a determination “final”?

 

On June 23, 2015, in a decision that has a number of important implications, the New York (New York County) Supreme Court, Appellate Division, First Department, applying New York law, held that the imposition of a post-conviction criminal sentencing constitutes a “final judgment” that not only triggered the fraud exclusion in a D&O insurance policy but also required the convicted individual to reimburse the carrier for amounts it had already paid – even though the individual’s appeal of his criminal conviction was pending.

 

As discussed below, the court’s opinion has some important lessons for D&O insurance practitioners. A copy of the court’s opinion can be found here. Continue Reading D&O Insurance: A “Final” Analysis

Cohen photoAs I noted in a recent post (here), on June 11, 2015, the Delaware legislature passed legislation prohibiting fee-shifting bylaws for Delaware stock corporations. On June 24, 2015, Delaware’s governor signed the statute into law, as discussed here. As I noted in my blog post about the legislation, though the statute has been passed, a number of questions remain about fee-shifting bylaws, including in particular what the legislation’s impact might be for bylaws purporting to shift fees in connection with federal securities litigation. As discussed here, according to Columbia Law School Professor John Coffee, as a result of the statute’s wording, there may be unanswered questions whether the statute prohibits bylaws shifting fees in connection with securities litigation.

 

In the following guest post, Neil J. Cohen, Publisher, Bank and Corporate Governance Law Reporter, takes the position that there may be arguments that the new legislation is broad enough to preclude bylaws that purport to shift fees in connection with federal securities litigation. (Please note that Neil wrote and submitted his article before the Governor has sighed the statute into law.) The “Note” at the beginning of the guest post is part of Neil’s article.

 

I would like to thank Neil for his willingness to publish his article on this site. I welcome guest post submissions from responsible authors on topics of interest to readers of this site. Please contact me directly if you would like to submit an article. Here is Neil’s guest post.

 

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Note: The following article discusses a Delaware bill, passed by both the Senate and House, which prohibits a Board of Directors of a stock company from implementing fee-shifting provisions for “internal corporate claims.” The author asserts that securities fraud suits can fit within that category. The article is part of a Round Table on the Delaware legislation that includes Professors J. Robert Brown and John C. Coffee. The June, 2015 issue of the Bank and Corporate Governance Law Reporter containing the entire Round Table can be downloaded here.

The Governor of Delaware is expected to sign a bill, passed by the House and Senate, which prohibit fee-shifting provisions for “internal corporate claims”. The bill also contains a prohibition of bylaws or charter provisions that designate a forum other than Delaware as the exclusive forum. That provision would prevent corporations from choosing forums that allow fee-shifting provisions.

The legislators resisted a lobbing effort by the Chamber of Commerce’s Institute for Legal Reform to insert a provision expanding the Court of Chancery’s discretionary authority to shift to include cases that “plainly should not have been brought but that do not satisfy the extremely narrow ‘bad faith’ or ‘frivolousness’ exceptions”.

Assuming the Governor signs the bill, what is the outlook for fee-shifting provisions affecting securities fraud litigation?  Will plaintiffs file for a declaratory judgment in Chancery Court or in District Court to strike the fee-shifting provisions as facially invalid under the new Delaware law? If so, the specific questions are likely to be whether the general bylaw authority under Section 109 of the law allows such provisions and, if so, whether Section 115, dealing with “internal corporate claims,” exempts them. If they are not exempt plaintiffs will be forced to overcome a high standard of proof to demonstrate they are invalid as applied.  In the author’s opinion the best argument that the fee-shifting provisions are invalid is because they are exempt as “internal corporate claims” under Section 115 of the new law. Continue Reading Guest Post: Does Delaware Legislation Cover Fee Shifting in Securities Cases?

the dandodiaryWith this blog post, The D&O Diary is proud to launch its new look website. I hope  readers will find the cleaner, more open page design easier to read, and that the relocation of the search box and the alterations to other website functions will make the site easier for readers to use.

 

Though the website redesign represents a pretty significant change to The D&O Diary’s look, the bigger and more important changes to the site are actually behind the scenes.

 

The primary purpose for the redesign was to implement what is known as responsive web design, which should allow the website to be viewed across a wide range of devices without any loss of design integrity or functionality. In other words, the website should look about the same and function about the same regardless of whether you are viewing it on your phone, on your tablet, or on your computer.

 

The launch of this redesign is the culmination of several months of planning and implementation. I hope that readers like the changes, and in particular I hope that readers like being able to have the same experience when viewing the site, regardless of the device on which it is accessed. I welcome readers’ comments about the changes.

 

Along with the design changes, the feed URL for those who access the site using an RSS feed has been changed. Those readers who want to continue to subscribe via RSS should make sure to subscribe at the new feed URL https://www.dandodiary.com/feed

2015-06-22 18.45.28aThe D&O Diary was in Palo Alto, California this week for the annual Directors’ College at the Stanford Law School (depicted to the left). The keynote speaker on Tuesday morning was SEC Commissioner Daniel M. Gallagher, who recently announced that he will be stepping down from the Commission when his successor has been confirmed. As was the case with many of the panels at the conference, the focus of Gallagher’s speech was on the questions and concerns involving activist shareholders. The text of Gallagher’s June 23, 2015 speech can be found here.

 

Gallagher began his speech by rhetorically posing the question of whether shareholder activism is good or bad, a question that he contends is all too often answered based on a “binary view of the world” in which shareholder activism is viewed either as all good or all bad. For Gallagher, this view “is convenient, but it is also far too simplistic.” The question that needs to be answered in determining whether a specific instance of shareholder activism is either good or bad is whether or not it is aimed at creating long-term shareholder wealth and whether or not that effort is successful.

 

As for whether or not the SEC should be in the business of determining which activism is good and which is not, he said that “it doesn’t, and shouldn’t.” It is the SEC’s role to “create a level playing field, chiefly through disclosure”; it is up to the states to determine the substantive rights of shareholders. As for the SEC, while it has been a faithful groundskeeper over the years, the prudent division of responsibilities between the agency and the states has been eroded over the years as a result of marketplace changes and due to “our own overzealous implementation of legislative enactments.”

 

Shareholder activism is one of the areas where Gallagher sees the balance of responsibilities as having changed. In discussing this topic, Gallagher drew a distinction between shareholder proposal activism and hedge fund activism. With respect to shareholder proposal activism, Gallagher asserted that the current SEC process for administering the process is broken, both for shareholder activists and for the companies that they target. Specifically, Gallagher said, “the SEC’s shareholder proposal rule, Rule 14a-8, is being abused by special interest groups to advance idiosyncratic goals that may directly conflict with the interests of most shareholders.”

 

Gallagher would prefer to see the SEC get out of the business of policing shareholder proposals, and leave the entire issue to the respective states under their governing corporate laws. In the interim, which awaiting these types of changes, he would like to see the current Commission “no action” letter process, which is administered at the staff level,  to be “jettisoned” and converted into a process involving Commission advisory opinions, in which the Commission itself would issue opinions on major policy issues. The buck, Gallagher said, should stop with the political appointees at the Commission.

 

Hedge fund activism, by contrast to shareholder proposal activism, Gallagher said, is at least driven by profit motivation, but “the key question here is whether activist hedge funds drive long-term value creation, or whether short-term gains to activism are at the expense of long-term corporate growth.” Gallagher noted the debate within the academic and legal communities about the value of shareholder activism but expressed his doubt that answers to the value of activism can be found in econometrics.

 

The SEC’s role with respect to activist investors begins with its administration of the Section 13 reporting obligations that are triggered when an investor’s ownership share exceeds the 5% threshold. Gallagher observed that in the current trading environment an activist investor can quickly accumulate a 5% stake in a particular company, often using trading mechanisms and ownership structures.  However, even with a 5% stake, 95% of the ownership remains elsewhere and the activists are still subject to the requirements of the other investors.

 

The question then, according to Gallagher, is “how the other investors are conducting themselves vis-à-vis activists, and whether the SEC has done enough to ensure the integrity of this process.” In particular, Gallagher noted, institutional investors could make or break activist interventions, but they “paying insufficient attention to their fiduciary obligations to their clients when they determine whether to support a particular activist’s activity.” All too often the funds are simply deferring to the proxy advisory firms. The states and SEC are not doing enough to police the funds. The funds are “fiduciaries, they are in the markets we oversee, dealing with SEC registrants, and they should be held accountable for their activities.”

 

Gallagher said that better policing of advisors and funds is “hard, and it is controversial, ” but  it “falls to the SEC and the states to figure out how to empower the individuals and give them the information they need to hold their advisers to account, and to take action against the institutional scofflaws.”

 

Gallagher then turned to the topic of proxy advisory firms. He said that too many institutional investors simply rely on the proxy advisory firms. He said that the proxy advisory firms have done too little to address concerns about their sometimes shoddy research. The proxy advisory firms’ lack of progress could and probably should result in further action on the SEC’s part.

 

He then turned to corporate boards and management, which obviously have a critical role in the activist debate. In discussing the role of boards and management, Gallagher observed that there are two models of shareholder involvement, the first of which is based on a model of pure democracy in which the corporation is directly controlled by shareholder voting, by contrast to the republic model in which the shareholders elect the directors and the directors control the company. Which of these two models is to be preferred is a matter of state law. Gallagher said that the SEC action increasingly has disrespected that distinction and has become biased toward direct shareholder democracy. Gallagher said the SEC’s rules should be flexible enough to accommodate both approaches.

 

The pressure toward more shareholder democracy comes when boards are perceived as falling short. There may be, Gallagher noted, company boards that have become stale or too chummy with management, but a vigorous board that drives change “moots” the need for direct shareholder democracy.  Boards that are out in front and engaged with shareholders  by “communicating your company’s strategy and how the board is overseeing management’s execution of that strategy to investors, and in turn hearing what’s on your investors’ minds, can help demonstrate to the SEC that boards are a tool for investor protection, not an impediment to it.” This approach can also allow companies to get out in front of activist investors.

 

All of these constituencies can coexist on a level playing field, with activists putting pressure on companies that fall short. The problem, Gallagher said, is that the activist campaigns can involve short-term goals rather than a long-term focus. In the current low interest rate environment, activism has become popular, motivated by the desire for returns. In this environment, investors become focused on the short term, and so too are managers as they seek to stave off activists. The SEC, Gallagher said, has played a role, as its corporate governance rules are contributors to the short-termism. There is, Gallagher says, “enough blame to go around.”

 

Gallagher said that the pendulum may have started to shift as a bi-partisan view is emerging that the pervasive short-termism is destructive of long-term shareholder value. But as of yet there are no bi-partisan consensus on what to do about it. There are a number of ideas and proposals circulating. Gallagher referred approvingly to the proposals of Harvard Law School Professor Guhan Subramanian in his March 2015 Harvard Business Review article “Corporate Governance 2.0” (here), in which Subramanian suggested that using principles drawn from basic negotiation theory that concerned parties should engage in a process to re-conceptualize overall corporate governance, to develop an alternative to the activists’ incremental approach to corporate change.

 

Gallagher said that he hoped that the SEC “give life” to Professor Subramanian’s proposal and host a roundtable “where representatives from interested groups can sit down and try out this approach.” The agency is uniquely situated to provide a neutral forum could lead to the outline of a consensus. He noted that while it is this type of roundtable meeting unlikely to take place before his departure as Commissioner he hoped that his colleagues will “take up this banner and run with it if they so choose.”

……

I am grateful to have had the opportunity while at the conference to participate on a panel on the topic of Indemnification and D&O Insurance, with my good friends Priya Cherian Huskins of Woodruff-Sawyer and Jim Kramer of the Orrick law firm, as pictured below.

 

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The conference overall was great. It is always interesting to hearing the perspective and questions of the directors themselves. Congratulations to Stanford Law Professors Joseph Grundfest and Joe Siciliano and to the Directors’ College staff for another successful conference.

 

More Pictures:

Stanford University is so beautiful, it is a pleasure just to be there (note the circle of students enjoying the tree shade): 

 

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At Dinner in Palo Alto with my good friends Winnie Van (ABD) and Mike Hoy (Socius):

 

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Scenes from Glen Canyon Park, San Francisco:

 

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A view of the San Francisco Skyline, from Billy Goat Hill in Glen Park, San Francisco:

 

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homedepotAfter claimants filed shareholders’ data breach-related derivative suits against the boards of Target (here) and Wyndham Worldwide (here), a number of commentators (including me) asked whether we could see a wave of cybersecurity related D&O lawsuits. Interestingly, since these two lawsuits were filed more than a year ago, there have been no further lawsuits of this type filed, even though there have been a number of very high profile data breaches since that time – including, for instance, those involving Home Depot, Sony Pictures Entertainment, Anthem (not to mention the massive breach last week involving U.S. government personnel records).

 

The absence of new data breach-related D&O lawsuit filings for over a year and the October 2014 dismissal of the Wyndham lawsuit (here) made a  number of observers (including me) wonder whether the anticipated wave of D&O litigation might not materialize after all. (Although there are a number of commentators have continued to suggest that we should just be patient, the lawsuits will arrive sooner or later).

 

Though there have not been any further liability lawsuits filed, there have been developments that suggest we might soon see a lawsuit arising out of the Home Depot data breach. As discussed in a June 15, 2015 Law 360 article (here, subscription required), a plaintiff shareholder has filed an action in Delaware Chancery Court seeking to review Home Depot’s books and records related to the massive data breach the company sustained last year. (I do not have a copy of the plaintiff’s books and records complaint; if any reader can provide me with a copy, I will add a link to the complaint to this post.  UPDATE: Thanks to the helpful response of a loyal reader, the complaint can be found here. )

 

The plaintiff reportedly seeks to inspect the records to determine whether the company’s directors and officers breached their fiduciary duties by failing to adequately protect customer credit card information on its data systems despite the many high profile cybersecurity problems that other retailers had previously experienced. The plaintiff apparently sent the company a request under Section 220 of the Delaware Corporations Code in September 2014. Two months later, in response to the request, the company produced over 500 pages of documents, but in her recent complaint, the plaintiff complained that this production was incomplete and that many of the documents were redacted. The company and the plaintiff’s attorney apparently had been in negotiations to arrange for the plaintiff’s counsel to review the redacted documents but apparently frustrated by the process the plaintiff filed the recent Delaware Chancery Court action to compel inspection.

 

The Law 360 article includes a statement from a Home Depot representative with respect to the books and records action that “we look forward to resolving the matter.”

 

The parties may (or may not) be able to work out the issues surrounding the books and records inspection, but it seems likely that in any event, the sequence of events eventually will lead to the filing of a liability lawsuit against Home Depot and its executives. Among other things, the plaintiff alleges in her books and records suit that “There is a credible basis to believe that officers and directors of Home Depot were aware of the risks that the company faced from a cyberattack but in breach of their fiduciary duties the board has failed in its responsibilities to implement systems and internal controls to properly protect the company from this threat,” and that “[T]he allegations of lax cybersecurity at the company, the pending government investigations, together with numerous lawsuits claiming misconduct at Home Depot, provide a credible basis from which mismanagement at the company can be inferred.”

 

It is clearly not too much of a stretch to suggest that the books and records action is merely prefatory to a later liability lawsuit that will be filed eventually. To be sure, there is always the chance that the lawsuit may not materialize, but just as the battle does not always go to the strong nor the race to the swift, that’s the way you bet. I am not a betting man, but if I were I would be that sooner or later we will see a D&O lawsuit related to the Home Depot data breach. Either way it will be interesting to watch and see what happens because it could tell us something about whether the much anticipated data breach-related D&O litigation will arise.

 

For an earlier post discussing the possible reasons why we have not seen data breach securities class action litigation so far and whether or not we may see these kinds of securities suits in the future, refer here.

2015-06-18 13.22.54aThe D&O Diary was on assignment in São Paulo last week, for meetings and for a little bit of a look around. I had never before been to Brazil, or for that matter, to South America. São Paulo turned out to be a bit of a revelation. For one thing, São Paulo, the financial capital of Brazil, is huge; with a  population of about 21 million, São Paulo is the world’s 10th largest city. For another thing, in the middle of June when I arrived, São Paulo was entering the Southern Hemisphere winter. My June visit to the city came just before the winter solstice. Many of the stores and shops were having festival de inverno sales while I was visiting.

 

Because the city is located at 23 degrees southern latitude — by way of comparison, Key West is at 24 degrees northern latitude — São Paulo winter does not involve frigid temperatures. In fact, on the day I arrived it was quite warm and sunny. Unfortunately for me, the sunshine did not last. Though I visited São Paulo during the dry season and in the midst of a record drought, it absolutely poured rain the first full day I was there, and much of the remainder of my visit was cooler and cloudy, as many of my pictures show.

 

Because São Paulo is so massive, it encompasses a multitude of different districts and neighborhoods. My2015-06-14 11.22.57a hotel was located on a leafy, tree-lined street a block away from the Avienda Paulista (pictured right),  a 1.7 mile thoroughfare lined with the headquarters of a large number of financial institutions, as well as an extensive shopping area and Latin America’s most comprehensive fine-art museum, Museu de Arte de Sao Paulo (MASP). The street also runs a strikingly philosophical course between two stations on Sao Paulo’s subway, the Metrô, from Paraíso (Paradise) to Consolação (Consolation).

 

The Metrô itself is quite impressive. It is clean, quiet, easy to use, and inexpensive (at current exchange rates, a single ride costs the equivalent of slightly more than one U.S. dollar). The Metrô can be quite busy at peak times (as shown in the first picture below) but it does make it possible to avoid the city’s congested roads (reflected in the second picture below). The Metrô also makes it possible to easily visit many of the city’s other districts and neighborhoods, including in particular Centro Histórico de São Paulo (or “Centro” for short), which, as the name implies, is the city’s historic center.

 

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The city grew so quickly in the late 20th century that few vestiges of the city’s earlier history remain, and almost all of the city’s most historical buildings are located in the Centro. The photo at the top of the post depicts the Cathedral da Sé, an early 20th neo-Gothic revival structure that is in many ways the city’s heart. (However, given the general tenor of the crowd that inhabits the Praça de Sé in front of the Cathedral, I would suggest that most American tourists might want to allow pictures of the Cathedral to suffice). A warren of pedestrianized streets full of shops and cafes connects the Cathedral to the rest of the Centro.

 

The next pictures taken in the Centro, respectively, show the Teatro Municipal; the interior of the Mercado Municpal Paulistano; and the Estacão da Luz.

 

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Though densely populated and urban, São Paulo has some magnificent parks. Right near my hotel was the Parque Tenente Siqueira Campos, universally referred to as the Parque Trianon, a little jewel of a park located directly across the street from the MASP.  The Park, dense with native Brazilian plants and trees, some of which are said to be over 300 years old, is a reminder of the tropical rain forest that once covered much of the Brazilian coast.

 

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To the south (from my hotel) was another beautiful park, the Parque Ibirapuera , which has the same urban oasis feel as  Central Park. At 545 acres, Ibirapuera is one of the largest urban parks in South America, though it is smaller than New York’s 778 acre version.  The view across one of the park’s large lakes is shown below. The park is laced with paths and trails.

 

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In addition, there are several smaller (and a little bit more ragged) parks in the city center, including the Parque da Luz (which is pictured first below, and is just across from the Luz rail station pictured above), and the Parque da República, located adjacent to the Centro district.

 

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There are many great reasons to visit Sao Paulo, but possibly the best is the food, which is absolutely phenomenal. I had several great meals while I was there, including in particular a memorable lunch on the day of my arrival, with my São Paulo hosts, Glaucia Smithson (of Zurich) and Marcus Smithson (of Generali), at the Jardineira Grill, a Brazilian barbeque in the Vila Olimpia neighborhood. The restaurant is a churrascaria; waiters move around the restaurant with skewers, slicing various types of grilled meat directly onto each customer’s plate. In the picture below, I am seated at the table and awaiting the first round of grilled meat, with Marcus on the left in the picture and Celso Soares (of Zurich) to my right. (Glaucia, who snapped this shot for us with my camera is, alas, not in this picture. Sorry Glaucia!)

 

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I also had a great dinner with several industry colleagues at the Hotel Unique Skye Bar and Restaurant, the highlight of which was a wonderful dish of Filhote, an Amazon river fish. We toasted our gathering with a Caipirinha — the Brazilian drink made with cachaça  (distilled spirits made from sugar cane juice), sugar, and lime — which has to be the best cocktail on the planet.  But perhaps the most authentic and memorable meal I enjoyed in Sao Paulo was the bowl of feijoado, a traditional stew of black beans, beef and pork served with rice and cabbage, which I enjoyed for lunch Wednesday afternoon (the dish traditionally is served on Wednesdays and Saturdays for reasons no one could explain to me), as depicted in the picture below (the beans are in the bowl).  When I tell you this meal stayed with me, you will I understand I mean that in more than one sense. I didn’t require any dinner that evening.

 

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When I left Ohio to travel to São Paulo, the early summer sunset back home was well after 9 p.m. During my Sao Paulo visit, however, in the Southern Hemisphere early winter, the sun set was before 5:30 p.m. The abrupt shift in daylight hours was quite a shock to my system. My first evening in Sao Paulo, I found myself wandering in the unexpected early evening darkness in the streets near my hotel, feeling adrift and alone in the middle of a huge foreign (and now quite dark) city. Even though it was just after 6, I was about to call it quits and head back to my room when I came upon a street of lively cafes and bars, including one open air sports bar with outdoor seating and huge big screen TVs on the veranda. Purely coincidentally, as I walked up, the Copa America qualifying match between Brazil and Peru had just begun. I made my way into the crowded bar, ordered uma cerveja, and tried to blend into the crowd as they vocally registered every dribble, pass, shot, and goal in the game. (Only my closest family members would truly appreciate how, for me, stumbling upon the bar and the game was about as perfect of a development as could possibly have happened in the entire universe.)

 

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During my visit to São Paulo, I was very self-conscious of my poor command of the Portuguese language. I know only a few phrases, so out of sheer self-defense, I kept my most useful Portuguese phrase at the ready – that is, não falo Português (I don’t speak Portuguese). As I was watching the Copa America game, a young man standing nearby started to speak to me, and more out of instinct than anything else, I quickly said to him, não falo Português. He looked at me sideways and said “Why in the world are you telling me you don’t speak Portuguese? Dude, I just spoke to you in English. I know you are American, you are the most American-looking person who has ever been in this place.” I recovered myself quickly, and introduced myself. It turns out that my new friend Luis had lived in Tampa for many years. He spoke perfect English. I bought him uma cerveja and we had a great conversation during the rest of the game.

 

As great as it was to become acquainted with São Paulo, the primary purpose of my visit was to attend and to participate as a speaker in the 3rd Encontro Internacional de Linhas Financeiras (International Financial Lines Conference) of Federação Nacional de Seguros Gerais (FenSeg, the Brazilian national insurance association). It was my honor to participate in a panel with Marcus and Celso, to discuss the recent developments in the Brazilian D&O marketplace in the context of historical developments in the U.S. and U.K. D&O markets. It was a lively panel and a fascinating conference. The best part of all was to meet for the first time so many industry colleagues in Brazil and to find out how many of them read The D&O Diary. I have posted more pictures of the event below.

 

Here is a picture of Marcus, Celso, and me after our session.

 

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Christopher Kramer (Zurich), me, and Victor Trapp (AON)

 

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Christopher Kramer (Zurich), me, and  Flavio Sá (AIG):

 

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I wanted to be sure and include this picture (below) of Raquel Canossa da Silveira  and Marco Antonio Mendes Miranda, both of AON in São Paulo. They had approached me during the lunch break to tell me how, as relatively new participants in the financial lines insurance market, they have found my blog to be an invaluable training source. Every now and then my energy for blogging starts to flag, but then when I meet some younger people in our industry like Raquel and Marco and they tell me how much they value the blog, I am completely rejuvenated. Isn’t it great that I sit in suburban Cleveland and write my little blog posts, put them out on the Internet,  and then somehow my articles wind up getting read literally all over the world? It never ceases to amaze me.

 

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I would like to thank Celso for inviting me to participate in the conference, for Glaucia for helping to make my participation happen in the first place, and to Glaucia and Marcus for being such good hosts during my visit to São Paulo.

 

More Pictures of São Paulo:

 

Here is the view looking south from my hotel room. This gives you a sense of how massive and sprawling São Paulo is. But do you see what is wrong with this picture, which was taken around Noon on the day of my departure? It is the sun – it isn’t in the picture. In the Southern Hemisphere, the afternoon sun is in the Northern sky, not (as is the case in the Northern Hemisphere) in the Southern sky. I suffered from massive solar disorientation throughout the visit, or at least I did when the sun was shining.

 

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In a city as populous as São Paulo, even the pedestrianized streets are crowded.

 

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A street fair on Avienda Paulista, near the Parque Trianon, the day I arrived.

 

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Anhangabaú Square, in the Center City

 

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As a final note, I feel I should acknowledge that while this most recent trip did take me below the equator during the Southern Hemisphere winter, I did have get the chance this past February to enjoy late summer in the Southern Hemisphere, in Australia (here) and New Zealand (here).

skadden_logo_noLLP_bigOn June 11, 2015, in a closely watched case, the New York Court of Appeals, New York’s highest court, decided when the statute of limitations begins to run for claimants alleging breaches of the representations and warranties provisions in residential mortgage backed securities.

 

As Robert Fumerton and Alexander Drylewski of the Skadden, Arps, Slate Meagher & Flom law firm discussed in a prior guest post on this blog at the time of the oral argument in the case, the range of possible outcomes inthe case included an interpretation of the statute of limitations that could have led to a new wave of RMBS repurchase litigation that otherwise would be time-barred.

 

However, as discussed below, the Court rejected these more expansive possibilities. In the following guest post, the two Skadden attorneys discuss the June 11 decision of the New York Court of Appeals and examine the ruling’s implications. A version of this article previously appeared on Law 360 (here, subscription required).

 

A copy of the New York Court of Appeals June 11 decision can be found here.

 

I would like to thank Robert and Alexander for their willingness to publish their article as a guest post on this site. I welcome guest posts from responsible authors on topics of interest to readers of this blog. Please contact me directly if you would like to submit a guest post. Here is Robert and Alexander’s guest post.

 

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On June 11, 2015, New York’s Court of Appeals unanimously affirmed the Appellate Division, First Department’s decision in ACE Securities Corp. v. DB Structured Products, Inc. and held that New York’s six-year statute of limitations for breach of contract claims begins to run on the date that the RMBS defendant’s contractual representations and warranties were first made, not on the date of its refusal to comply with the parties’ agreed-upon remedy provision.

 

“Finality, Certainty and Predictability”

 

In a highly-anticipated opinion, the Court reaffirmed New York’s emphasis on the “objectives of finality, certainty and predictability that New York’s contract law endorses.”  Among the key aspects of the decision was the Court’s conclusion that a defendant’s failure to comply with a contractual remedy provision is “not a separate and continuing promise of future performance” sufficient to defer accrual of the statute of limitations for breach of contract claims.

 

The Court stressed that “[a]lthough parties may contractually agree to undertake a separate obligation, the breach of which does not arise until some future date, the repurchase obligation undertaken by [defendant] does not fit this description.”  The Court recognized that the representations at issue involved “certain facts about the loans’ characteristics as of” the date of the contract – “not a promise of the loans’ future performance” – and that “loans may default 10 or 20 years after they have been issued for reasons entirely unrelated to the sponsor’s representations and warranties.”

 

The Court also concluded that “[t]he Trust suffered a legal wrong at the moment [defendant] allegedly breached the representations and warranties.”  Because the defendant’s obligation to repurchase was only a remedy for underlying breaches of representations, and not a substantive element of any breach claim, the Court reasoned that the remedial obligation was “a procedural prerequisite to suit” that did not delay accrual of the limitations period.

 

“Day 1 Breaches”

 

The Court’s decision was well reasoned.  Indeed, the defendant’s representations and warranties were either true or false on the first day of the transaction – i.e., the date that they were made.   As a result, any alleged breaches could only occur on Day 1 and the statute of limitations for breach of contract must expire six years from that date.  RMBS representations and warranties typically relate to the characteristics of the mortgage loans, including the loan-to-value ratios and occupancy status of the underlying properties, as well as whether the loans complied with the applicable originator underwriting guidelines.  These are static characteristics that cannot be altered or change in the future.  Significantly, at oral argument, the trustee had no answer to the most critical question raised by the Court – namely, whether it could provide any example of a breach of representation or warranty that could occur after the transaction closed.  The only specific example that the trustee offered was a situation where the borrower’s employment status was misstated on the loan application and later discovered to be false.  But this is precisely the type of representation that is either true or false on Day 1 – a borrower’s employment status at the time of closing cannot later become false through subsequent events.

 

Rather than provide concrete examples of breaches that could occur after closing, the trustee emphasized that RMBS investors had no duty to conduct due diligence on the loans at issue and thus could not have discovered the breaches on Day 1.  But this argument is, in essence, an attempt to import a “discovery rule” into New York’s statute of limitations.  As the Court’s decision makes clear, New York case law is well-settled that the limitations period for breach of contract claims begins to run on the date of breach regardless of whether or when the plaintiff may have discovered the breach.

 

This principle is also reflected in N.Y. CPLR 206(a), which states that where a demand is necessary in order to institute a breach of contract suit, “the time within which the action must be commenced shall be computed from the time when the right to make the demand is complete” – not the time when demand is actually made.  Indeed, in any breach of contract case, the parties understand that there is a risk that they will not discover any breach until more than six years after the date of contract.  By focusing on the investors’ inability to discover potentially breaching loans, the trustee framed its position before the Court as contrary to long-standing New York law regarding statute of limitations accrual.

 

Preventing Open-Ended or Subjective Liability

 

The Court’s decision reinforces New York’s commitment to promoting certainty, predictability and finality in contractual matters by strictly applying the statute of limitations.  Indeed, a contrary ruling would have twisted an agreed-upon remedy clause into a liability-enhancing provision, exposing RMBS defendants to nearly open-ended liability predicated on the plaintiff’s unilateral decision regarding when to make demand for repurchase.  The Court’s application of a bright-line statute of limitations protects defendants’ reasonable expectations; at the same time, parties may bargain for additional contractual language giving rise to a separate and continuing obligation to repurchase.  Such language – if sufficiently explicit – could protect investors for the life of the loans.  As the Court recognized, “even though the result may at times be harsh and manifestly unfair, . . . a contrary rule would be entirely dependent on the subjective equitable variations of different Judges and courts instead of the objective, reliable, predictable and relatively definitive rules that have long governed this aspect of commercial repose.”  Definitive rules like those endorsed by the Court can only help future commercial actors to reliably and efficiently structure their private affairs.

 

*   *   *

 

— By Robert Fumerton and Alexander Drylewski, Skadden, Arps, Slate, Meagher & Flom LLP

 

Robert Fumerton is a partner and Alexander Drylewski is an associate at Skadden, Arps, Slate Meagher & Flom’s New York office.

victoria1Here’s the scenario: A former company CEO faces criminal charges for alleged bribery in which he was involved while he was at the company. The company’s D&O insurance provides funding for his defense, but the amount of the insurance available proves to be insufficient to take him through trial. The officer then seeks to have his former company indemnify him for his continuing defense expenses. The company refuses, saying that applicable law prohibits the company from indemnifying him for criminal matters until it is known whether or not the criminal proceedings will result in a guilty verdict against him. The former officer files an action against the company seeking a judgment declaring that the company must advance his defense expenses while the criminal action is pending. The trial court rules in his favor and the company appeals.

 

In an appellate ruling that may not be all that surprising but that nevertheless has some noteworthy implications, on May 20, 2015, the Supreme Court of Victoria (Australia) Court of Appeal held in the case of Note Printing Australia, Ltd. v. John Leckenby (here) that  Leckenby had a “present entitlement to be indemnified prior to verdict.”

 

The court’s ruling is discussed in an interesting June 8, 2015 post on The FCPA Blog (here), written by Alistair Craig, a London commercial barrister. Among other things, the case shows the importance of corporate indemnities and also demonstrates the problems that can arise when the applicable D&O limits are insufficient to needs when they arise, a consideration that has obvious limits selection implications.

 

Background

John Leckenby was CEO of Note Printing Australia, Ltd. (NPAL) from September 1998 to June 2004. Along with other NPAL officers and NPAL itself, Leckenby has been charged with conspiring to bribe foreign officials to secure bank note printing contracts for NPAL. The trial in the criminal matter is expected to take place in 2015.

 

Leckenby’s legal costs had been being paid by NPAL’s D&O insurer. However, the D&O insurance policy’s limits of liability will be insufficient to meet all of Leckenby’s legal costs in defending himself through trial. He sought to have NPAL pay his legal costs pursuant to a separate Deed of Indemnity into which Leckenby and NPAL entered in 2001. The company refused to indemnify him on the grounds that is not permitted under the Australian Corporations Act of 2001 to indemnify him until it has been determined whether or not he is found guilty in the criminal proceedings.

 

Leckenby filed an action in the Supreme Court of Victoria Trial Division seeking a judicial declaration that he is entitled to have NPAL indemnify his continuing legal costs, unless and until he is found guilty, under which circumstances he agreed he would have to refund the amounts that NPAL paid. The trial judge upheld his present entitlement to be indemnified for his ongoing legal costs, holding among other things that the statutory provision on which NPAL relied does not specifically or directly address the question of costs prior to verdict. NPAL appealed.

 

The appellate court, in an opinion by Judge Pamela Mary Tate, reviewed the provisions of the indemnity agreement as well as the statutory provisions on which NPAL relied. The appellate court found that the conclusion that Leckenby had a present entitlement to have his legal fees paid unless and until his is found guilty to be consistent with the statutory provisions on which NPAL relied. The court found that Leckenby was not required to provide security toward any repayment he might later be required to make.

 

Discussion

The issues in this case turned on the particulars of a contract between Leckenby and NPAL and an interpretation of Australian law. It nevertheless presents a set of circumstances that would be familiar to the judicial officers of the Delaware Chancery Court – indeed, perhaps all too familiar, if the comments of the Chancellor in a recent case in the Delaware Court are representative.

 

As I noted here in a recent blog post discussing the rights of former Massey Energy CEO Donald Blankenship for the advancement of his defense fees in connection with the criminal proceedings pending against him, Chancellor Andre Bouchard began his opinion in the case (in which Bouchard ruled that Blankenship was entitled to have his fees advanced), by saying that the  case involves an “all too common scenario” – that is “the termination of mandatory advancement to a former director and officer when trial is approaching and it is needed the most.” In other words, though the setting was different and though the interpretation of a private contract and of Australian law were involved, the case nevertheless involved the all too familiar scenario of a company seeking to avoid or limit its obligations to provide a former officer’s defense expense, at the very moment when it is needed the most.

 

As Alistair Craig noted in his blog post about the Australian Court’s decision, the “result of the case may not be surprising.” But it nevertheless does underscore some important points.

 

The first is that the D&O insurance potentially can be critically important when a company’s directors or officers find themselves in legal difficulties. Here, Leckenby and other former officers of NPAL face criminal bribery charges. Even though the case involved criminal proceedings, the D&O insurance responded to the claim. Unfortunately for Leckenby – and presumably for the other officers facing the charges — the amount of D&O insurance will not be sufficient to pay for all of the costs to be incurred in the crisis. The problem of the insurance’s insufficiency may not have been a result of inadequate limits. I suspect that the limits proved insufficient because of the fact that it was a criminal proceeding, and therefore it is likely that each of the individual former officers involved in the case had their own counsel. With multiple counsel defending their clients in an unquestionably serious situation, the policy limits were quickly eroded and will soon be exhausted.

 

There is a lesson here for anyone considering or advising others with respect to the sufficiency of limits in a D&O insurance program. D&O insurance is what is referred to in the insurance industry as a low frequency, high severity line of business. That is, the claims are not common but when they arise they are serious. The insurance can, as this case arguably demonstrates, serve as a form of catastrophe protection. In assessing whether any given insurance buyer’s insurance program is sufficient to respond in a catastrophe, it is not enough to imagine that serious claims may arise. It must also be considered that when the claim arises, there could be multiple insureds seeking access to the limits of liability. Because the limits are shared, they can be eroded quickly, as this case also demonstrates. This potential for rapid erosion because the limits are shared is an obviously an important lesson to be considered in any limits selection analysis.

 

It is probably worth noting as well that though the D&O insurance policy here is responding to fund the defenses at least until the policy limits are entirely exhausted, if in the end the criminal proceedings result in guilty verdicts against Lackenby or any of the other criminal defendants, the insurer likely would have the right to seek recoupment of any fees or costs it paid on behalf of any individual against whom a guilty verdict is entered (assuming here that the applicable policy contains language giving the insurer the right to seek recoupment) – just as NPAL will have the right to seek recoupment of any amounts it has paid.

 

As Alistair Craig noted in his blog post, “While it may be tempting for exposed officers to retain expensive and high powered legal services on the back of such cover, there could be a nasty financial sting in the tail if guilt is eventually conceded or ultimately established.”

 

For a recent post in which I discussed the insurer’s rights to seek recoupment of amounts paid, please refer here.

globus2Historically, non-U.S. companies listed on U.S. exchanges were sued in securities class action lawsuits less frequently than were listed U.S. companies. For several years now, according to NERA, non-U.S. firms have represented about 16% of all companies listed on the U.S. exchanges, but according to Cornerstone, for the period 1997-2013, the average percentage of securities class action lawsuits involving foreign firms was only about 11%.

 

While the longer term average suggests that foreign firms have a lower likelihood of being involved in a securities suit than listed U.S. firms, in several recent years this relationship reversed, particularly in 2011. While the percentage of lawsuits involving non-U.S. companies was roughly proportionate to their percentage of U.S. listing in 2012 and 2013, in 2014 the percentage of foreign firms hit with securities suits again was above the percentage of foreign firms listed on U.S. exchanges.  This disproportionate involvement of non-U.S. companies in U.S. securities class action litigation has continued in 2015.

 

The more recent trend involving more frequent suits against foreign firms gained significant momentum in 2011, driven by a wave of lawsuits against U.S.-listed Chinese companies. Many of these Chinese companies had gained their U.S.-listing by way of a reverse merger, in which the Chinese company merged with a U.S. domiciled shell company that had a U.S. listing. According to my analysis, there were 55 securities class action lawsuits filed against non-U.S. companies in 2011, representing about 25% of all securities suits filed that year. Of those 55 suits involving foreign firms, 39 were directed against Chinese-based or Chinese-domiciled firms. Those 39 suits involving Chinese firms by themselves represented about 18% of all securities class action lawsuit filed in 2011.

 

The percentage of annual lawsuit filings involving non-U.S. companies has declined since 2011. In 2012 and 2013, respectively, 16.6% and 16.3% of securities lawsuit filings involved non-U.S. companies, a figure much closer to even with the percentage of non-U.S. companies listed on U.S. exchanges but still above longer term annual average of the percentage of securities suits involving foreign firms.  In 2014, the percentage increased to 20%. This trend toward a disproportionate securities litigation involvement of foreign firms has continued again in 2015, at least so far.

 

According to my unofficial running tally of year-to-date securities lawsuit filings, there have been 82 securities class action lawsuit filed so far in 2015. Of those 82 lawsuits, 18 involve companies based or organized outside of the U.S., representing about 22% of year-to-date securities suit filings. Of those 18, nine involve companies based or organized in China, and additional suit involved a Hong Kong company. In other words, 12.2% of 2015 year-to-date securities suit filings involve companies based or organized in China or Hong Kong.

 

Four lawsuits filed just since May 19, 2015 are representative of these 2015 lawsuits involving foreign companies and involving Chinese companies.

 

First, on May 19, 2015, a securities class action lawsuit was filed in the Southern District of New York against Vipshop Holdings Limited, a Chinese online retailer, and certain of its directors and officers. The complaint, a copy of which can be found here, alleges that the defendants “made allegedly false and/or misleading statements and/or allegedly failed to disclose that Vipshop Holdings Ltd manipulated and overstated sales, receivables, profit, cash flows, and asset accounts including inventory and investments, that Vipshop Holdings Ltd’s financial statements contain GAAP violations by reporting revenue on a ‘gross’ basis, despite the fact that the vast majority of the company’s sales are under a consignment arrangement, that Vipshop Holdings Ltd’s internal controls over financial reporting were ineffective, and that as a result of the foregoing, Vipshop Holdings Ltd’s public statements were materially false and misleading at all relevant times.” A copy of the plaintiffs’ lawyers’ May 19, 2015 press release about the lawsuit can be found here.

 

Second, on May 28, 2015, a securities class action lawsuit was filed in the Central District of California against Yingli Green Energy Hold. Co. Limited and certain of its directors and officers. The complaint, a copy of which can be found here, alleges that the defendants “made allegedly false and/or misleading statements and/or allegedly failed to disclose that the Company was inappropriately recognizing revenue, that Yingli Green Energy Hold. Co. Ltd.had no reasonable prospects to collect on certain accounts receivable based on historical customer conduct, that Yingli Green Energy Hold. Co. Ltd. was no longer able to borrow from commercial banks to fund its operations, that the Company’s inability to raise additional capital or borrow funds from commercial banks threatened the Company’s ability to continue as a going concern, and that, as a result of the foregoing, Defendants’ statements about Yingli Green Energy’s business, operations, and prospects were false and misleading and/or lacked a reasonable basis.” A copy of the plaintiffs’ lawyers’ May 29, 2015 press release about the lawsuit can be found here.

 

The third of the four lawsuits is a securities class action lawsuit that was filed in the Central District of California on June 5, 2015 against China Finance Online Co. Limited and certain of its directors and officers. The complaint, a copy of which can be found here, alleges that on June 3, 2015, a report was published asserted among other things, that the most current SAIC records in China show that Chairman and CEO Zhiwei Zhao suddenly resigned from his positions at three key Chinese subsidiaries of China Finance Online Co. over the past few months; that Chinese media reports exposing the detention of China Finance Online Co. independent director Rongquan Leng prompted China Finance Online Co. to announce his resignation, without addressing his alleged detention; and that Ling Wang, a former long-time China Finance Online Co. director and associate of Zhao, fled China in 2014, leaving his company indebted to China Finance Online Co. for $25 million. The plaintiffs allege that following these reports, the company’s share price declined. The plaintiffs’ lawyers June 5, 2015 press release about the lawsuit can be found here.

 

The fourth is a securities class action lawsuit that was filed on June 8, 2015 in the Central District of California against Xunlei Limited and certain of its directors and offices, as well as the underwriters who managed the company’s June 24, 2014 IPO. The complaint, a copy of which can be found here, alleges the defendants “made false and/or misleading statements and failed to disclose the material risk that Xunlei’s strategic focus on Project Crystal and its mobility initiative would have a detrimental impact on the Company’s financial condition.” The complaint alleges that “when the truth emerged,” the company’s share price declined. A copy of the plaintiffs’ lawyers’ June 8, 2015 press release about the lawsuit can be found here.

 

It is significant that these four lawsuits involving Chinese companies have been filed just in the last few weeks. These filings represent something of a surge of suits against U.S.-listed Chinese companies in a short space of time, although at least so far nothing on the scale of the wave of suits filed against Chinese companies in 2011.

 

I selected these four lawsuits representative in that they involve Chinese companies. Just the same, however, it is a little difficult to generalize about the non-U.S. companies that have been sued so far this year and the reasons why these companies have been sued. For example, two of the companies sued – Petrobras (Brazil) and Sociedad Quimica y Minera de Chile, S.A. (SQM, of Chile) – were hit with securities suits after bribery allegations involving the companies surfaced. Others, like the suits against  Xunlei (mentioned above) and CHC Group Limited (Cayman Islands) involve IPO companies.

 

But while it may be difficult to generalize, the point is that at least so far the 2015 securities lawsuits disproportionately have involved non-U.S. companies. This obviously is an important consideration for foreign companies that have or are considering a U.S. listing.  It is also an important consideration for D&O underwriters outside of the U.S. that are underwriting non-U.S. companies that have U.S. listings. These underwriters are well aware of the heightened risk that these companies have as a result of their U.S. listings. The fact is, however, that these U.S.-listed non-U.S. companies not only have a heightened risk, but their U.S. securities litigation exposure may be even greater than that of publicly traded U.S.-domiciled companies.

delsealIn a late night session on June 11, 2015, the Delaware House of Representatives 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. The bill, which previously passed the state’s Senate, now goes to Delaware Governor Jack Markel for his signature. The bill provides that the changes will be effective August 1, 2015. A copy of the bill can be found here.

 

The dust-up in Delaware over fee-shifting bylaws got started in May 2014, when the Delaware Supreme Court in the ATP Tours, Inc. v. Deutscher Tennis Bund case upheld the facial validity of a bylaw provision shifting attorneys’ fees and costs to unsuccessful plaintiffs in intra-corporate litigation. This development quickly caught the eye of litigation reform advocates, as the adoption of fee-shifting bylaws seemed to offer a way for companies to reduce the costs of and possibly curb burdensome litigation. At the same time, however, shareholder advocates became concerned that these types of bylaws could deter even meritorious litigation.

 

The controversy that followed over fee-shifting bylaws seemed headed for a swift resolution when the Delaware General Assembly quickly moved to enact on a measure that would have limited the Supreme Court’s ruling to non-stock corporations (meaning that it wouldn’t apply to Delaware stock corporations). However, as discussed here, the legislature tabled the measure until the 2015 session.

 

While the proposed legislation was pending, institutional investors mounted a concerted effort in support of legislative action in Delaware “to curtail the spread of so-called ‘fee-shifting’ bylaws,” while business groups conducted a campaign opposing the legislation.

 

During the period while the legislation remained pending, a number of companies went ahead and adopted some version of a fee-shifting bylaw. Alibaba, one of 2014’s highest profile IPOs, was among several companies that completed offerings during the year and that adopted fee-shifting bylaws.

 

When the legislation recently was taken up again by the Delaware legislature, it quickly sailed through both houses – there was only one vote in opposition to the legislation when submitted to the Delaware House of Representatives.

 

The legislation itself does a number of things, but it does two basic things with respect to corporate bylaws.

 

First, the legislation invalidates a provision of either a certificate of incorporation or of a bylaw of a Delaware stock corporation that purports to impose liability upon a stockholder for the attorneys’ fees or expenses of the corporation or any other party for an “intracorporate claim” (These new restrictions do not apply to nonstock corporations.)

 

Second, the legislation confirms that the certificate of incorporation and bylaws of the corporation may specify that intracorporate claims must be brought only in the Delaware courts (including the federal court in Delaware). The provision also invalidates a provision that “may prohibit bringing such claims in the courts of this State”

 

For purposes of both of these provisions, the term “intracorporate claims” is defined to mean claims arising under Delaware’s statutory laws, including claims of breach of fiduciary duty by current or former directors or officers or controlling shareholders of the corporation, or persons who aid or abet such a breach.

 

While the legislation addresses the question of whether or not Delaware stock corporations validly may adopt fee shifting bylaws, other questions remain.

 

First, as detailed by Professor John C. Coffee, Jr. in a recent post on the CLS Blue Sky Blog, the Delaware legislation prohibits bylaws only to the extent they apply to “intracorporate disputes.” According to Coffee, as the term “intracorporate disputes” is defined in the legislation, it “does not clearly cover securities class actions (which need not and generally do not allege any fiduciary breach).” The result, according to Coffee, is “an unnecessary ambiguity and likely underinclusion, as federal antitrust, securities and related fraud actions (e.g., RICO) are not seemingly reached. Thus, fee-shifting bylaws could apply to these types of actions, unimpeded by the new statute.” So, at least according to Coffee, “this story has another chapter or two to go, and eventually the SEC will need to take a stand.”

 

Second, the legislation does not expressly address other types of litigation reform bylaws. For example, the legislation does not appear to address so-called minimum-stake-to-sue bylaws. As discussed here, these types of provisions require, for example, 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. Others may also try to argue that the legislation does not address mandatory arbitration bylaws, requiring shareholders to arbitrate intracorporate disputes – however, those opposing the adoption or imposition of an arbitration bylaw may cite to the forum selection bylaw portions of the new statute, which invalidate bylaws that prohibit bringing intracorporate claims in Delaware’s courts. The argument would be that an arbitration bylaw runs afoul of this provision because it prohibits bringing claims in the Delaware courts.

 

 

Third, the Delaware legislation obviously applies only to corporations organized under the laws of Delaware. It has no effect upon corporations domiciled elsewhere. Alibaba, mentioned above, is organized under the laws of the Cayman Islands, and so the new Delaware legislation has no effect on Alibaba’s fee-shifting bylaw. The laws of other jurisdictions may vary from those of Delaware. Indeed, the Oklahoma legislature has adopted a provision mandating the shifting of fees in derivative suits. The Oklahoma provision specifically applies to derivative suits “instituted by a shareholder” where there is a “final judgment.” In those circumstances, the court “shall require the non-prevailing party or parties to pay the prevailing party or parties the reasonable expenses, including attorney fees . . . incurred as a result of such action.”

 

Finally, at least one commentator has asked whether Delaware’s adoption of this legislation, which eliminates the availability of fee-shifting bylaws as a way for the state’s corporations to deter expensive intracorporate litigation, will cost Delaware in its competition with other states as the preferred location for company incorporation. In a June 11, 2015 post on the Real Clear Markets blog (here) former SEC Commissioner Paul Atkins suggests that Delaware’s adoption of the legislation, together with aggressive moves by other states to attract incorporations, “could be the straw that breaks Delaware’s position as the destination of choice.”

 

The Delaware legislation clearly takes much of the wind out of the sails for the effort in support of fee-shifting bylaws. But there still may be more of the story about litigation reform bylaws to be told. The question of whether or not fee-shifting bylaws can be applied to litigation other than Delaware “intracorporate litigation” will have to be sorted out, and there undoubtedly will be efforts to advance other types of litigation reform bylaws, such as the minimum-stake-to-sue bylaws. And there could be contrary development in other states. I strongly suspect we will all be hearing more about litigation reform bylaws, including perhaps even more about fee-shifting bylaws.

 

Break in the Action: Due to my travel schedule over the next several days, there will be interruptions in The D&O Diary’s publication schedule through next week. The D&O Diary’s regular publication schedule should resume by the end of next week.