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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 25 posts in Securities.
Delaware law permits a Delaware corporation to include a forum-selection provision in its certificate of incorporation governing all “internal affairs” claims by its stockholders. There is much national debate on the topic of forum-selection provisions in charters governing securities claims, such as whether a corporation can require arbitration. This decision wades into that debate by addressing a charter provision mandating a federal forum for securities claims. In it, the Court of Chancery holds that the Delaware General Corporation Law (the DGCL) does not authorize a Delaware corporation to include a forum-selection provision in its charter governing claims under the 1933 Act. The Court reasons that claims under the Act are external to the corporation—they do not “turn on the rights, powers, or preferences of the shares, language in the corporation’s charter or bylaws, a provision in the DGCL, or the equitable relationships that flow from the internal structure of the corporation.” Because the claim exists outside of the contract between the corporation and its stockholders and does not relate to the corporation’s internal affairs, it is beyond the power of state corporate law to regulate.
This is an excellent review of how the District Court will analyze the requirements of the PSLRA in selecting the lead plaintiff and lead counsel in a securities litigation. Briefly, the plaintiff with the most at stake should take the lead with its chosen counsel so long as it is qualified by past experience to do so. That such a plaintiff may have acted in 5 or more other securities cases is not disqualifying.
When stock is issued in violation of a stockholder agreement, the issuance is “void.” This has great significance because the issuance than cannot be ratified.
In what might be one of the most important decisions this year, the Court held that the tender of their shares by a majority of the stockholders invokes an “irrebuttable” presumption that the business judgment rule applies and, as a result, the complaint generally must be dismissed. This extends the Delaware Supreme Court’s Corwin decision to the tender offer context. While the tender offer aspect of this case will get the most notice, the concept of an “irrebuttable” business judgment rule may prove to be more important. For when that form of the business judgment rule applies, only facts demonstrating waste will let a complaint survive a motion to dismiss. Of course, waste is almost impossible to successfully allege under Delaware law.
In a case of first impression, the Court holds that Section 205 of the DGCL can only be used to validate defective corporate actions, not to declare an action invalid. While a similar claim might be made in a Section 225 case, there are limits to who may bring such a claim, so this decision does make a real difference.
This decision is an excellent primer for what must be plead to state a claim under various sections of the federal securities laws. The pleadings rules to establish a claim well enough to avoid a motion to dismiss are complicated and are well explored here. The opinion also has a good section on establishing jurisdiction over foreign defendants.
What must be pled to state a claim under the federal securities acts is often a difficult question. For example, what facts sufficiently allege scienter to state a claim under the heightened rules governing such complaints? This decision explains the applicable pleading rules very clearly.
When a preferred stockholder has the right to approve the issuance of any new securities by its company, the question arises whether that right extends to the issuance of notes. In the second decision in this case, the Court again determines whether such notes should be considered securities subject to approval by a preferred stockholder. In keeping with the brevity expected of a blog, the short answer is that the longer the term of the note, the closer it is to being classified as a security. Of course, that is too short an answer, but you will need to read this detailed opinion to really understand the test.
Stock splits have often been a problem, especially for non-Delaware lawyers who somehow think that all they need to do is have the Board decide to split the company's stock. Not so. This decision sets out the 3 essential steps to follow. Moreover, pleas to the Court's equitable powers to uphold what parties intended to do, even if they messed up the formalities, are not going to work. For as the Court held, in the area of a Delaware corporation's capital structure, formalities must be followed to achieve certainty. Hence, in this area at least, "law trumps equity".
Collins & Aikman Corp. v. Stockman, C.A. No. 07-265-SLR/LPS (D. Del. Sept. 30, 2009).
Upon review of the Report and Recommendation issued by Magistrate Judge Leonard P. Stark, and the objections thereto, the district court rejected Judge Stark's recommendation that the complaint did not contain adequately specific allegations that the defendants knew or should have known that the company's financial statements were false in connection with a Rule 10b-5 claim. The complaint is a rare example of a pleading that sufficiently raised red flags which should have alerted the defendants to accounting irregularities from the fraudulent schemes asserted against the director and officer defendants.
City of Roseville Employees’ Ret. Sys., v. Horizon Lines Inc., C.A. No. 08-969 (D. Del. June 18, 2009)
In this putative class action, the plaintiffs allege that Horizon, a container shipping and logistics company, fraudulently inflated the value of its securities by entering into illegal price-fixing agreements with its competitors in order to manipulate prices in certain markets. In an unopposed motion for appointment of lead plaintiff and counsel, the district court applied In re Cendant Corp. Litig., 264 F.3d 201 (3d Cir. 2001) and the terms of the PSLRA to appoint the Police and Fire Retirement System of the City of Detroit as lead plaintiff and their choice for lead and liaison counsel.
Chief District Judge Gregory M. Sleet rejected the defendants' motion for summary judgment, finding remaining issues of material fact concerning disclosures of gray marketing (marketing that legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer). The Court found factual disputes as to: (1) whether the defendants had a duty to disclose the risk of gray marketing and (2) whether the gray marketing risk was material. The defendants argued that gray marketing was not a “known trend or uncertainty” that must be disclosed under Item 303(a)(3)(ii) of Regulation S-K. The court concluded, however, that a jury could reasonably conclude that the risk of gray marketing was a known trend or uncertainty likely to have a material impact on future revenue or that such knowledge rendered the statements false and misleading. The Court also could not find as a matter of law that gray marketing risks were obviously unimportant to an investor.
In this decision, the Court of Chancery again affirms it disinclination to stay proceedings in Delaware just because a federal securities case was filed first elsewhere. Some doubt about that issue may have existed after the Court did stay a Delaware case involving Bear Sterns in favor of federal litigation in New York. But as this opinion notes, the Bear Sterns case was unique.
This decision addresses the question of whether an expert can testify as to materiality under the securities laws. The moving party argued that materiality was an ultimate issue in this breach of contract action and thus could not be the subject of expert testimony, citing Hill v. Equitable Banks, 1987 WL 8953 (D. Del. 1987), a case in which the ultimate issue was whether certain alleged misrepresentations and omissions were material.
The court, however, distinguished this case from Hill, finding that materiality was not the core question before the jury. The critical issue was whether the plaintiff, a warrant holder, was prevented from exercising his purchase rights—a fact the company denied completely. More ›
Cannon v. MBNA Corp., 2007 WL 2009672 (D. Del. July 6, 2007)
In this class action lawsuit brought by former MBNA employees, Plaintiffs asserted various breaches of fiduciary duty arising under ERISA in connection with administration of their 401(k) plan. Plaintiffs’ claims arose out of MBNA’s 2005 announcement of expected 10% annual growth for several years. Plaintiffs’ 401(k) plan contained MBNA stock. Several months later MBNA announced lower-than-expected earnings and MBNA stock fell nearly 35%. Plaintiffs alleged that the Defendants breached various fiduciary duties that resulted in this loss. Defendants were MBNA, the former CEO of MBNA, the committee responsible for the administration of the 401(k), and the individual committee members. Defendants moved to dismiss the various claims under F.R.C.P. 12(b)(6). The District Court found that dismissal as to all counts in the complaint was inappropriate at the pleading stage, and denied the motion. More ›