Friday, May 11, 2012
In the recently decided Forsythe v ESC Fund Management, Vice Chancellor Laster approved an innovative settlement. The innovation entails the way in which he managed the 57 objectors to the settlement. By his own reckoning the settlement offered was fair, though low. Rather than approve the settlement straight up, VC Laster gave the objectors the option to post a bond, buy the settlement, and try their own hand at improving it:
Passing on the current settlement to seek more at trial carries substantial risk. The defendants have offered real money to settle the claims, and any future recovery could be substantially less favorable to the Fund, even nonexistent. Because the consideration falls within the range of fairness, I will approve the settlement unless the objectors make the equivalent of a topping bid. If they post a secured bond or letter of credit for the benefit of the Fund for the full settlement consideration of $13.25 million, then they may take over the case. If they later lose or obtain less than the full settlement amount, the Fund will be able to draw on the security and be made whole. If the objectors achieve a greater recovery, then both they and the Fund will benefit.
In approving this topping bid approach, VC Laster took some inspiration from a version of claim buying previously proposed by Jonathan Macey and Geoff Miller's. As VC Laster noted:
This approach draws on proposals to address agency cost problems in representative actions by auctioning claims. In one such proposal, the class or derivative claims would be sold at the outset of the case to the highest bidder (including potentially the defendants), and the net proceeds of the auction would be distributed to the class. The winning bidder would take over the rights of the plaintiffs, could pursue the action, and would keep any recovery for itself. If the defendants were to win the auction, they would simply dismiss the claims. ...
By settling, the defendants effectively are purchasing the claims for $13.25 million. If the objectors believe the claims are worth more, they can act on their belief, put real money on the table, and outbid the defendants. Compared to an auction conducted at the outset of a case, the objectors are well-positioned to make an informed decision. At the start of a case, participants have only limited additional information. Here, the parties have access to a thoroughly developed discovery record and multiple decisions from the Court.
For observers of the court who are interested in shareholder litigation and other kinds of representative litigation, this kind of approach to settlements is an innovative way to beat agency costs out of the system. It will be worth following whether the objectors in this case ultimately post a bond and take over this case and what result they get in the end.
Thursday, May 10, 2012
Wednesday, May 9, 2012
What?! You think only lawyers can be idiots? The first two paragraphs of the SEC's complaint tells you more than you need to know:
This case involves insider trading in the securities of Semitool, Inc., a semiconductor manufacturer based in Kalispell, Montana that was acquired in a tender offer by Applied Materials, Inc. in December 2009. Beginning in at least October 2009, defendant Angela Milliard, a legal assistant at Semitool, learned confidential information regarding the terms and timing of the acquisition. Basedon this information, Angela Milliard secretly wired $38,000 to her boyfriend's account and purchased 5,400 Semitool shares in the account, as well as 300 Semitool shares in her own brokerage account. Angela also tipped her father, defendant Kenneth Milliard, about the then-secret acquisition, and he purchased 10,800 Semitool shares and helped other family members purchase another 4,000 Semitool shares.
When the acquisition was publicly announced on November 17, 2009, the company's stock price jumped over 30 percent, and defendants immediately profited that day, selling all of their Semitool shares for total realized profits of $68,160.
This being the end of exams and the start of graduation season, I suppose it's as good a time as any to give some good advice to recent law grads. This year, I'll give it in the form of a link to a memo written seven years ago to employees of public corporations, titled Your Future (or Lack Thereof).