September 28, 2012
Idiot investment analysts
OK, so you've heard this from me before....and this is directed at all those juniors about to start. Don't do it. Sure, there are lots of academic debates about why insider trading is ok. I get that. But don't do it. Today's installment: idiot former investment analysts. Did you pick that up? Former. In any event, the SEC just charged Jason Lee and his friends from college, one of whom lived in the saame condo complex with him, with insider trading. The complaint itself is full of lots of cicumstantial evidence. It doesn't look like the giovernment had access to a wiretap or that any of the alleged co-conspirators has flipped, so the case is a series of internal investment emails lining up with times of cell phone calls and text messages, the kind of stuff you get from a pen register, and bank cash withdrawals and deposits.
In any event, this is where everything seems to go really south for Jason Lee:
OK, so a decision point for Lee. Come clean and say that you know Chen. Or ... well ...
Yeah ... this isn't going to turn out well. Don't do it. It's not a good career choice. Ok, off my soapbox.
September 26, 2012
Multi-forum litigation in other jurisdictions
Reuters observes that Delaware isn't the only state trying to deal with the problem of multi-forum litigation. New York joins the party.
Laster on the number three and the tools at hand
In an opinion in South v Baker, Vice Chancellor Laster ruminates on the number three:
[P]laintiffs‘ counsel was forced to retreat during oral argument to a more reductionist position: knowledge can be inferred because three safety incidents occurred within one year. ... And concededly the number three has a lot going for it. Three Graces. Three Fates. Three wishes from the djinni in Aladdin‘s lamp. It‘s the number of licks it takes to get to the center of a Tootsie Pop, and for fans of Schoolhouse Rock, it will always be a magic number. But three mining accidents in a year does not support a reasonable inference of board involvement, much less bad faith, conscious wrongdoing, or knowing indifference on the part of a board of directors, particularly where the incidents appear unrelated.
Visions of that wise owl chomping on that poor kid's lollipop appear. And ... is that how you spell genie of the lamp? I'll have to check that... In fairness, the issue for the court was a real one: to what extent can one impute knowledge or involvement to the board following the happening of corporate events, like mining accidents, when making a Caremark claim. Vice Chancellor Laster believes you can't. Better to file a Section 220 action first, do the investigation of the corporate books and records to find out what the board actually knew and then file a derivative claim. Absent the investigation it may be impossible to state the "particularized facts supporting a reasonable inference that a majority of the Board faces a substantial risk of liability". Without which, demand won't be excused.
So, again, the court returns to its mantra of using all the tools at hand before filing a derivative suit. This is now a familiar refrain and it's one way the court attempts to reduce the flow of placeholder litigation that in recent years has been flooding the court.
Although Laster dismisses the case with prejudice as to the named plaintiff, the board is not off the hook. Laster makes it clear that his dismissal is not an adjudication on the merits of any potential claims against the board, it's just a determination the instant plaintiff brought the case prematurely. Laster makes it clear that a subsequent, more diligent, plaintiff could file a 220 action and then bring a Caremark claim based on the same set of facts.
September 25, 2012
BigLaw-apalooza at the Times
It's BigLaw-apalooza over at the Times today. Check it out.
Merger review on the fly
OK, so you are about to start as a young, corporate associate at a fancy firm. For whatever reason, because it conflicted with Evidence, or because it was scheduled at the same time as the student associations's weekly softball game, whatever, it doesn't matter. You didn't take an M&A class. Truth be told, your Business Associations class covered mergers, but you weren't really paying attention. Doesn't matter. All that matters is that you are about to go into the belly of the beast and M&A will take up much of your time... No fear! MoFo just posted an 1.5 hour review of M&A basics for private company acquisitions -- here. It's like Khan Academy for laywers! If you are going to listen/watch make sure you get the CLE credit...
September 24, 2012
Grupo Mexico fires back after denial of reargument
The Delaware Supreme Court denied Grupo Mexico's motion for reargument following its ruling to uphold the Chancery Court's opinion - including a $300 million legal fee award. Now Grupo Mexico responds. Presumably they'll be sending a check soon.
"This ruling sets a dangerous precedent, if not a new high for court sanctioned legal fees in a derivative action. Excluding the defendants shares, it represents an award of 80 percent of the benefit obtained for their clients. On an hourly basis, it comes to$35,000 per hour. This is an unwarranted transfer of wealth from the shareholders of a publicly traded company to plaintiffs' attorneys. It turns the well established legal principle that 'those who profited from the litigation should share its costs' on its head, and sends a clear if disturbing message to plaintiffs' attorneys they can be made wealthy by an award out of proportion to the benefit they actually win for their clients." – Grupo Mexico General Counsel Mauricio Ibanez-bjmq
Constraints on private benefits of control
Profs. Ron Gilson and Alan Schwartz have a new paper, Constraints on Private Benefits of Control: Ex Ante Control Mechanisms Versus Ex Post Transaction Review. It's a contribution to the rules vs. standards debate. Gilson and Schwartz are a great writing pair. This paper is another add to their now lengthy collaboration.
Abstract: We consider how the state should regulate the consumption of pecuniary private benefits of control by controlling shareholders. These benefits have efficient aspects: they compensate the controlling shareholder for monitoring managers and for investing effort to create and implement projects. Controlling shareholders, however, have incentives to consume excessive benefits. We argue here that ex post judicial review of controlled transactions is superior to ex ante restrictions on the creation of controlled structures: the latter form of regulation eliminates the efficiencies as well as the abuses of the controlled company form. We also argue that controlling shareholders should be permitted to contract with minority investors over permissible private benefit consumption. Neither ex post regulation nor contract works well, however, when courts are inefficient and inexpert. Hence, our principal normative claim is that a European level corporate court should be created, whose jurisdiction parties can invoke in their charters or other contracts.