Move by Biotech Company Tees Up Court Consideration of Attorneys’-Fee Clause in Corporate Bylaws

DelawareThe Wall Street Journal Law Blog reported today that Philadelphia-based (but Delaware-incorporated) biotechnology company Hemispherx BioPharm Inc. has injected itself into the middle of a growing dispute over attorneys’ fees in shareholder class action lawsuits. (A hat-tip to the Institute for Legal Reform, whose must-read daily email referenced the WSJ Law Blog piece) Prompted by a May 14 Delaware Supreme Court decision, ATP Tour, Inc. v. Deutscher Tennis Bund, et al., Hemispherx earlier this month adopted a provision in its corporate bylaws that shareholder plaintiffs must pay the company’s legal fees if Hemispherx prevails in a shareholder-initiated lawsuit. The provision applies retroactively to pending suits, and lawyers for shareholders in a class action against Hemispherx have asked the Delaware Chancery Court to invalidate the bylaws.

A July 11 Washington Legal Foundation Legal Backgrounder, Is Delaware High Court Ruling an Ace for Merging Companies Served with Shareholder Suits?, discussed the ATP Tour decision and assessed how it could be applied to deter frivolous shareholder class actions. Authored by Snell & Wilmer LLP attorneys Greg Brower and Casey Perkins, the paper explains that ATP Tour involved not a public company, but a private membership corporation which included in its bylaws a fee-shifting provision. The Delaware Supreme Court, answering a question certified to it by the U.S. Court of Appeals for the Third Circuit, held that the fee-shifting provision was a matter of private contract, and nothing in the state’s corporate law prohibited its inclusion in ATP’s bylaws.

The authors went on to examine whether Delaware statutory or common law would permit public companies to include such a fee-shifting mechanism in their bylaws. They found that a recent Delaware Chancery Court case, Boilermakers Local 154 Retirement Fund, et al. v. Chevron Corporation, et al., strongly supported the legality of fee-shifting through bylaws.  Brower and Perkins concluded:

Chevron and ATP Tour together make it clear that Delaware law is intended to give broad leeway to corporations, private and public, to adopt bylaws not otherwise prohibited by law, and that duly adopted bylaws are presumed to be part of the contract between the company and the member or shareholder. This means that publicly-traded companies and their shareholders ought to be able to freely contract for the details of their relationship, including details such as where disputes between them will be litigated, and whether the losing party in such litigation should have to pay the legal fees of the prevailing party. Such contracts are part of the fundamental structure of the corporate law of Delaware—or, it seems, of any other state for that matter.

Given the financial implications for the securities fraud class action bar and the promise such provisions hold for public companies, the Hemispherx case is likely just the first skirmish in what will be a drawn-out, intense battle over fee-shifting through corporate bylaws.

Supreme Court Observations: Halliburton v. Erica P. John Fund

supreme courtGuest Commentary

by Lyle Roberts, Cooley LLP

*Editor’s note: We are cross-posting this commentary from Mr. Roberts’s blog, The 10b-5 Daily, where it originally appeared. Mr. Roberts authored Washington Legal Foundation’s amicus brief in Halliburton.

The U.S. Supreme Court has issued a decision in the Halliburton v. Erica P. John Fund case holding that defendants can rebut the fraud-on-the-market presumption of reliance at the class certification stage with evidence of a lack of stock price impact. It is a 9-0 decision authored by Chief Justice Roberts, although Justice Thomas (joined by Justices Alito and Scalia) concurred only in the judgment. As discussed in a February 2010 post on this blog, Halliburton has a long history that now includes two Supreme Court decisions on class certification issues. A summary of the earlier Supreme Court decision can be found here.

Under the fraud-on-the-market presumption, reliance by investors on a misrepresentation is presumed if the misrepresentation is material and the company’s shares were traded on an efficient market that would have incorporated the information into the stock price. The fraud-on-the-market presumption is crucial to pursuing a securities fraud case as a class action—without it, the proposed class of investors would have to provide actual proof of its common reliance on the alleged misrepresentation, a daunting task for classes that can include thousands of investors.

The fraud-on-the-market presumption, however, is not part of the federal securities laws. It was judicially created by the Supreme Court in a 1988 decision (Basic v. Levinson). In Halliburton, the Court agreed to revisit that decision, but ultimately decided that there was an insufficient “special justification” for overturning its own precedent. Continue reading

Second Circuit Mixes Clarity with Opacity in Ruling on Trial Courts’ Review of SEC Settlement

MatskoGuest Commentary

by Gary S. Matsko, Davis Malm & D’Agostine P.C.

It is curious how an appellate court can resolve cases before it in a manner and spirit that are vastly at odds with the driving philosophy behind the lower court’s decision. The U.S. Court of Appeals for the Second Circuit’s decision in United States Securities and Exchange Commission v. CitiGroup Global Markets, Inc.is such a case. Judge Jed Rakoff’s decision below, S.E.C. v. CitiGroup Global Markets, Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011), in which he declined to enter a consent decree that resulted from settlement negotiations, was driven by the judge’s intense displeasure that the settlement presented to him failed to include an admission of guilty. The decision emboldened advocates who believed that the SEC should require admissions, and likely played a role in the agency announcing that it would so require them in certain matters.

The counsel appointed to represent Judge Rakoff’s view in the Second Circuit did not forcefully argue that a trial court could require admission as a predicate to approving settlement. The Second Circuit thus curtly brushed that perspective aside. Instead, the appellate court clipped the wings of trial judges who embrace an expansive substantive role for courts in reviewing consent decrees, underscoring the deference owed to a prosecuting agency. Despite that distinct conclusion, CitiGroup Global Markets did not offer clear guidance on the trial court’s role in assessing facts, and, surprisingly, invited the SEC to turn to its administrative forum if it is unhappy with the remaining limited intervention reserved to the trial judge. Continue reading

COOL, Conflict Minerals, GMOs & Beyond: Much Hangs in the Balance of DC Circuit En Banc Rehearing in Commercial Speech Case

EnglishChip_lowGuest Commentary

by Chip English, Davis Wright Tremaine LLP

Americans are naturally curious and interested about the food we eat and the products we buy—e.g., non-GMO labeling, country of origin labeling (“COOL”) and “conflicts minerals.” The question I explore here is whether and how far the government may constitutionally compel commercial interests to disclose information about their products when such compelled speech goes beyond preventing consumer confusion or deception.

These First Amendment issues are now front and center before the United States Court of Appeals for the District of Columbia Circuit (often referred to as the second highest court in the United States).   While commercial speech is not as protected under the Supreme Court’s First Amendment jurisprudence, it is still subject to heightened scrutiny. But the question now before the D.C. Circuit is whether the general four part test formulated in Central Hudson Gas & Electric Corp. v. Public Ser. Comm’n, 447 U.S. 557, 566 (1980) applies to compelled speech, or whether the decision in Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626, 651 (1985) carves out a special rule for all compelled speech as opposed to compelled speech designed to prevent confusion or deception.

On Monday, May 19, the entire D.C. Circuit, sitting en banc, will hear arguments regarding the constitutionality of USDA’s COOL requirements for meat and poultry labels. COOL requires all USDA regulated food labels to disclose the country or countries where the product was grown or produced. A panel of three judges upheld the constitutionality of COOL on March 28, 2014, concluding that Zauderer establishes essentially an exception to the more rigorous (if amorphous) Central Hudson heightened scrutiny test when the government seeks to compel commercial speech. American Meat Institute v. USDA, 1:13-cv-01033 (Mar. 28, 2014). The American Meat Institute (“AMI”) panel concluded that in addition to preventing deception, there may be multiple government interests in mandating a disclosure such as COOL that “are reasonably related to the state’s interests.” Id. at 11. The panel strained to define COOL as being supported by more than consumer curiosity—e.g., consumers may conclude that food produced in a particular country is not as safe as food produced in the U.S. (even though FDA and USDA are charged with appropriate food safety). Continue reading

Conflict Minerals, COOL, and Compelled Commercial Speech at the D.C. Circuit

DC CircuitTwo decisions issued a little over two weeks apart by separate U.S. Court of Appeals for the D.C. Circuit three-judge panels have created significant uncertainty on a critically important First Amendment issue. The court’s forthcoming actions in these cases will have a major impact on government regulation and on regulated industries as diverse as livestock, food, tobacco, smartphones, and medical devices.

The issue in both cases before the court is when can government compel businesses to provide information about their products or themselves. The U.S. Supreme Court held in Zauderer v. Office of Disciplinary Counsel that government can constitutionally require disclosures of a “purely factual” nature which are “reasonably related to the State’s interest in preventing deception of consumers.” The Court has repeatedly reaffirmed Zauderer, most recently in the 2010 case Milavetz, Gallop & Milavetz, P.A. v. U.S., where Justice Sotomayor wrote for a unanimous Court that a low level of scrutiny applies only in cases where the compelled speech is “directed at misleading commercial speech” (italics in opinion).

COOLCountry of Origin Labeling Rule. On March 28, a three-judge panel of Senior Judge Williams, Chief Judge Garland, and Judge Srinivasan upheld the Department of Agriculture’s country-of-origin labeling (COOL) rule in American Meat Institute v. U.S. Dept. of Agriculture. AMI argued that the compelled origin disclosure impinged on its members’ First Amendment rights, and because the information was not meant to prevent deception, the court should review the rule under the heightened scrutiny of Central Hudson v. Public Service Commission, and not the “reasonableness” standard of Zauderer. In upholding the COOL rule, the panel concluded that Zauderer encompassed government interests beyond just preventing consumer confusion, and thus it applied the minimal scrutiny of Zauderer rather than Central Hudson.

That conclusion rejected years of D.C. Circuit precedent (including last year’s R.J. Reynolds Tobacco Co. v. FDA) and instead embraced rulings from the First and Second Circuits. The panel acknowledged in a footnote that “reasonable judges” may read Reynolds as limiting Zauderer review to deception, and suggested en banc review for American Meat Institute. On April 4, the D.C. Circuit sua sponte vacated the panel decision and ordered en banc review. Oral argument is set for May 19. Continue reading

WLF Brief Video Explains What’s at Stake as Supreme Court Hears Arguments in Halliburton v. Erica John Fund

Washington Legal Foundation filed an amicus brief supporting the petitioner in Halliburton v. Erica P. John Fund, on which we were represented by Lyle Roberts on a pro bono basis.  The brief is available here.

If you would like a copy of Mr. Robert’s comments, click here.

WLF Briefing Focuses on U.S. Supreme Court at its Mid-Term Point

One of our speakers, Troutman Sanders’ Peter Glaser, and his authoring of WLF’s amicus brief in Utility Air Group v. EPA, were referenced in a New York Times story on the case.

Attendees of the briefing received printouts of the following WLF Supreme Court-related resources:

Proxy Advisory Services: Making Glass (Lewis) Transparent—and ISS Too

nasdaqCross-posted at WLF’s Forbes.com contributor page

With 2014 and many corporations’ annual meetings just around the corner, more and more publicly-traded companies find themselves girding for costly proxy fights over corporate governance issues.  The small cadre of firms that provide proxy advisory services increasingly hamper management’s ability to prevent proxy battles, and to win those it can’t forestall.  Entities like Glass Lewis & Co. and Institutional Shareholder Services (ISS) provide advice to their institutional money manager and investment adviser clients that increase the percentage of shareholders voting against management’s recommendations.

But it is not at all clear that this proxy voting trend serves shareholder interests.  The Securities and Exchange Commission (SEC) has been studying these firms (which together control some 97% of the proxy services market )and their grip over proxies.  As Edward Knight, General Counsel of NASDAQ OMX (the public company that owns NASDAQ) points out: “[T]here is evidence that the Firms not only increase the costs of being a public company, but also create disincentives for companies to become public in the first place.”  Perhaps, as an October petition filed with SEC by NASDAQ OMX urges, it’s time the SEC stopped studying and started acting to make the methodology behind such influential proxy voting advice more transparent.

A Creature of Regulation.  The current problem began when, in an effort to curtail potential conflicts of interest, SEC imposed a new rule in 2003—the “Proxy Voting by Investment Advisers” rule—that required entities such as institutional investors and investment advisers to disclose “the policies and procedures that [they use] to determine how to vote proxies.”  To satisfy this new requirement, investment advisers began turning to third-party firms that offer advice on proxy voting.  When a 2004 SEC no-action letter clarified that relying on such firms creates a veritable safe harbor, the reliance on these firms grew and their impact blossomed.

Thanks to a second 2004 no-action letter, SEC has also instructed proxy advisory firms that they can provide advice to public companies on corporate governance issues—including how to win proxy votes—at the same time that they make proxy voting recommendations to investment advisers.  As James Glassman and J.W. Verret wrote in a Mercatus Center analysis last April, “Instead of eliminating conflicts of interest, the rule simply shifted their source.  Instead of encouraging funds to assume more responsibility for their proxy votes, the rule pushes them to assume less.”  Such concerns, voiced both by public companies and SEC Commissioners, led SEC to publish a “Concept Release on the U.S. Proxy System” that elicited over 300 comments. Continue reading

Annual Meeting Holdup: Securities Class Action Lawyers’ Latest Scheme

Cross-posted at Forbes.com WLF contributor site

You’re a publicly traded company, and it’s a week before your annual meeting.  The SEC had no objections to your proxy statement, and it’s been sent to shareholders. Your focus should be on final meeting details, but instead, you are working with your lawyers to fend off a class action lawsuit which threatens to forestall the meeting.

This is not a bad dream, but an awake nightmare that an increasing number of public companies are facing. It’s the latest securities class action lawsuit “innovation” — just before an annual meeting, allege that a company’s proxy statements omit “material” information and thus violate general state-law duties to disclose; demand trivial changes to the proxy and high-six-figure fees; and stalk your next victim.

As leading securities defense litigator Bruce Vanyo noted at D&O Diary, at least 20 companies have faced such suits this year, with most claims involving advisory “say on pay” votes and votes on other compensation issues such as stock purchases. The suits are a mutation of disclosure-oriented class actions that are routinely filed against companies going through mergers or acquisitions. These new proxy challenges are of the cookie-cutter ilk common in securities class actions, with the same law firm and often the same investor acting as the lead plaintiff. Continue reading

SEC Conflict Minerals & Resource Extraction Rules Are Legally Suspect

Guest Commentary

by Steven A. Engel and Katherine M. Wyman, Dechert LLP*

Of the various U.S. departments and agencies responsible for policing U.S. activities abroad, the Securities and Exchange Commission (SEC) does not readily come to mind.  Nonetheless, the Commission recently stepped into those waters by issuing two rules implementing provisions buried deep within the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Those rules put the SEC’s “mission” to “maintain fair, orderly and efficient markets” in the United States in direct conflict with their supporters’ interests in policing the activities of U.S. corporations in international hotspots.  In all likelihood, litigation will soon follow.

Section 1502 of Dodd-Frank amended the Securities Exchange Act of 1934 (“Exchange Act”) by adding Section 13(p), which directs the Commission to issue rules requiring certain issuers to disclose their use of so-called “conflict minerals” (tantalum, tin, gold, and tungsten) that originated in the Democratic Republic of the Congo or in adjoining countries.  Section 1504 similarly adds Section 13(q) and directs the Commission to put out rules requiring “resource extraction” issuers (namely oil, gas, and mining companies) to disclose certain payments made to U.S. and foreign governments.  Continue reading