Nassau Academy of Law DEAN S HOUR SHAREHOLDER CLASS ACTIONS Thursday, June 30, 2011 15th. & West Streets Mineola, New York 11501 516.747.4464
Riley MSJ Aff. Ex. 26 08/19/03 Credit Suisse Analyst Report SHAREHOLDER CLASS ACTIONS Dean s Hour Seminar Nassau Academy of Law June 30, 2011 1
Shareholder Class Actions: Class action cases brought by the shareholders of a corporation against the company s officers or directors. 2
Majority of Shareholder Class Actions are Prosecuted in Federal Court Securities Fraud Class Actions Shareholders sue officers and directors for false statements made in the company s SEC filings and press releases. Cases brought pursuant to the Private Securities Litigation Reform Act of 1995 ( PSLRA ). Plaintiffs allege violations of: Securities Act of 1933 Securities Exchange Act of 1934 Cases are typically prosecuted in Federal Court pursuant to Federal Question Jurisdiction 3
Majority of Shareholder Class Actions are Prosecuted in Federal Court State Law Fraud Claims by Shareholders Against Corporate Officers and Directors. Cases involving publicly traded securities are subject to the Securities Litigation Uniform Standards Act ( SLUSA ) SLUSA prohibits private class actions based on state statutory or common law alleging misrepresentations or omissions in connection with the purchase of a covered security. Covered securities include those listed on a national exchange. 4
Majority of Shareholder Class Actions are Prosecuted in Federal Court Class Action Fairness Act ( CAFA ) Displaces the requirement of complete diversity. Cases where the amount in controversy exceeds $5 million and any member of the class is a citizen of a different state than any defendant are removable to Federal Court. There is an exception where 2/3 of the class and the primary defendant reside in the state where the action is filed. With publicly traded companies, it is rare that the citizens of any state comprise more than 2/3 of the shareholders. 5
Shareholder Class Action Cases Prosecuted in State Court SLUSA exempts class actions based on the law of the state in which the issuer of the security is incorporated. CAFA carves out cases that concern a covered security that relate to the internal affairs or governance of a corporation... that arise under or by virtue of the law of the State in which such corporation... is incorporated or organized. 6
Shareholder Class Action Cases Prosecuted in State Court Shareholder Derivative Cases Not class actions but cases where a shareholder acting on behalf of a corporation brings a case that the corporation is not willing to bring. Fraud Cases Involving Securities that Do Not Fall Within the Definition of Covered Securities. Mortgage Backed Securities SIVs Shareholder Claims Involving Breaches of Fiduciary Duties 7
Class Actions Alleging Breaches of Fiduciary Duties For the Case to Remain in State Court Must allege breaches of fiduciary duty under the law of the state of incorporation. Case does not have to be brought in that state. The court in the state where the action is brought must apply the law of the state of incorporation. 8
Class Actions Alleging Breaches of Fiduciary Duties Going Private Transactions Publicly traded company Buyer seeks to purchase the outstanding shares If board approves the transaction, it goes to a shareholder vote If the majority of outstanding shares vote in favor of the transaction, all shareholders get cashed out. Transactions involve mergers and acquisitions of public companies 9
Going Private Transactions Going Private Transactions Are Particularly Vulnerable To Breaches Of Fiduciary Duty Insiders may the ones seeking to buy out the public stockholders. Insiders may have an ongoing relationship with the company following the buy out. Insiders may want to cash out of their positions in the company but cannot do so on the open market. Insiders interests may differ from those of the shareholders to whom they owe fiduciary duties. All lead to the insiders not pushing for maximum value for the shareholders. 10
Going Private Transactions Directors Owe Duties Of Care and Loyalty to the Shareholders. Violations can concern breaches of those duties by not employing a proper process to sell the company. Violations can concern unfair deal protection mechanisms. Breakup fees where the company will have to pay the buyer millions of dollars if the company does not go through with the deal. Results in an increase in the price to any other potential bidder. No shop provisions 11
Going Private Transactions Directors Owe Duties Of Care and Loyalty to the Shareholders. Violations can concern the duty of disclosure to the corporation s stockholders. The board must disclose all material information within its control that would have a significant effect on the stockholders decision to approve or reject the transaction. When the board chooses to speak on a subject, it must disclose sufficient information to ensure that its disclosures are not misleading. Literally true statements can still be actionable 12
Preliminary Injunctions Are Requested For Breaches Of The Duty Of Disclosure. Plaintiffs Ask the Court to Enjoin the Transaction Until Such Time as the Disclosures are Made. Shareholders have an absolute right to cast a fully informed vote. Money damages are inadequate. Following the transaction, the company is no longer the same. In the case of a merger, the operations may be integrated. Employees may have left the company. Cannot Unscramble The Egg. 13
Proceedings are Expedited Typically, the vote is scheduled to occur less than one month after the proxy is released To enjoin the transaction, plaintiffs must: Review all of the relevant information, which usually consists of hundreds of thousands of pages of documents. Depose representatives from the seller, the buyer, other actual or potential bidders, and the financial advisors. Brief injunction motions. Prosecute a preliminary injunction hearing. Plaintiffs must seek to expedite the proceedings to get all of this done prior to the shareholder vote. 14
Fairness Opinions Common disclosure claim alleges that the company s proxy statement is misleading with respect to the fairness opinion. Fairness opinions Provided by an investment bank or a financial advisor at the request of the board. Banker issues an opinion about whether the consideration provided to the shareholders is fair from a financial standpoint. 15
Fairness Opinions are Designed to Protect the Board and Not the Shareholders. It has been noted that fairness opinions are like Lucy from Peanuts. A fairness opinion, you know -- it's the Lucy sitting in the box: "Fairness Opinions, 5 cents." Unlike Lucy, the fairness opinions do not cost 5 They cost tens of millions of dollars 16
Financial Advisors May Suffer From Conflicts of Interest In many cases, more than 90% of the fee is contingent on the closing of the deal. creates a conflict of interest. Investment bank issuing the fairness opinion or running the sales process may sway the process toward a favored bidder. creates a conflict of interest. Del Monte Foods Financial advisor manipulated the sales process to engineer a transaction with buyers who would use the financial advisor to finance the transaction. Court invalidated the deal protection measures and enjoined the transaction in order to give competing bidders an opportunity to make an offer. 17
Financial Advisors May Suffer From Conflicts of Interest Investment bank s prior relationship with the acquiring company should be disclosed. Art Technology Group Oracle was attempting to buy the company but the board did not disclose how much work the investment bank had done for Oracle in the past. Court ordered that defendants disclose (i) the aggregate compensation paid by Oracle over the past four years to the investment bank and (ii) a description of the services provided to Oracle over that time period. 18
Plaintiffs Should Insist That Disclosures Include: Management s projections. When a company has several sets of projections, all reliable Absent projections, shareholders projections have should no be disclosed. way of knowing whether remaining a shareholder is a better option than Projections created close to Cannot just disclose agreeing the most to relinquish their shares in a the time of the transaction are pessimistic projections in merger order or acquisition generally considered to be to get a deal done. reliable. Must disclose all fairness opinions. Cannot hide opinions that determine the deal is unfair. 19
Disclosures Also Should Include: Disclose a summary of the work performed in creating the fairness opinion. Disclose the valuation exercise. Disclose the key assumptions used. Disclose the range of values generated by the bankers. 20
Plaintiffs Should Retain Their Own Financial Advisor to Review the Transaction. Plaintiffs Financial Advisor should come up with of Range of Values under: 1. Asset Approach Based on the concept of replacement Typically used in distressed company valuations rather than public company valuations. 2. Market Approach Based on the concept of substitution Imputes pricing based on comparables. Questions arise over what is a comparable and what is a precedent transaction. Looks at price to earning ratios. 3. Income Approach Based on the concept of anticipation. Attempts to determine the present value of future economic benefits. Discounted cash flow analysis 21
Robert Rothman Rrothman@rgrdlaw.com (800) 449-4900 Copyright 2011 by Robbins Geller Rudman & Dowd LLP. Robbins Geller Rudman & Dowd LLP will vigorously defend all of their rights to this writing/publication. No copyright is claimed in governmental reports or news articles quoted within this work. All rights reserved including the right to reproduce in whole or in part in any form. Any reproduction in any form by anyone of the material contained herein without the permission of Robbins Geller Rudman & Dowd LLP is prohibited. 22