Fee Shifting Provisions and How Public Pensions Are Fighting Back

Transcription

1 Fee Shifting Provisions and How Public Pensions Are Fighting Back NCPERS 2015 Legislative Conference Capitol Hilton Hotel, Washington, D.C. January 26, 2015 Lee D. Rudy, Esquire Kessler Topaz Meltzer & Check, LLP Darren J. Check, Esquire - Kessler Topaz Meltzer & Check, LLP Jay Chaudhuri, General Counsel & Senior Policy Advisor North Carolina Treasurer

2 ATP Tour Inc. v. Deutscher Tennis Bund May 2014 Delaware Supreme Court decision that held that a fee-shifting bylaw at a non-stock corporation was facially valid unless the shareholder could show that the bylaw was adopted for an improper purpose. intent to deter litigation is not invariably an improper purpose. ATP s reasoning would appear to apply equally to stock corporations 53 public stock companies have adopted fee-shifting bylaws since ATP. Many more waiting for additional court rulings or legislation Alibaba included a fee-shifting provision in their IPO docs 2

3 53 Companies Have Adopted Fee Shifting Bylaw or Charter Provision Air Industries Group, Inc. Alibaba Group Holdings Limited American Spectrum Realty, Inc. Antero Resources Midstream LLC (name changed to Antero Midstream Partners LP) ATD Corporation Barnwell Industries, Inc. Biolase, Inc. Cadista Holdings Inc. CIG Wireless Corp. Cogent Communications Holdings, Inc. Columbia Pipeline Partners, LP Cone Midstream Partners, LP Constellation Energy Partners, LLC (to become Sanchez Production Partners LP Cryo Cell International, Inc. Echo Therapeutics, Inc. FDO Holdings, Inc. First Aviation Services, Inc. Freshpet, Inc. GAMCO Investors, Inc. GWG Holdings, Inc. Hemispherx BioPharma, Inc. Highlands Bankshares, Inc. Imperial Holdings, Inc. Insys Therapuetics, Inc. Interactive Brokers Group, Inc. Iradimed Corporation KLX, Inc. Landmark Infrastructure Partners LP Lannett Company, Inc. LGL Group, Inc. Mammoth Energy Partners LP Mongolia Holdings, Inc. Nature's Sunshine Products, Inc. Portfolio Recovery Associates, Inc. (name changed to PRA Group, Inc.) Rice Midstream Partners LP Rocky Mountain Chocolate Factory, Inc. Rollins, Inc. Smart & Final Stores, Inc. Smart Sand Partners LP Sol-Wind Renewable Power, LP Special Opportunities Fund, Inc. Terryville Mineral & Royalty Partners LP The Mexico Equity and Income Fund, Inc. Tiger Media, Inc. Townsquare Media, LLC (name changed to Townsquare Media, Inc.) Viper Energy Partners LP Western Capital Resources Westlake Chemical Partners Winthrop Realty Trust 3

4 Example of Typical Fee Shifting Bylaw Insys Therapeutics (INSY) To the fullest extent permitted by law, in the event that (i) any current or prior stockholder or anyone on their behalf ( Claiming Party ) initiates or asserts any claim or counterclaim, including any derivative action brought by or in the right of the corporation ( Claim ) or joins, offers substantial assistance to, or has a direct financial interest in any Claim against the corporation and/or any director, officer, employee or Affiliate of the corporation, and (ii) the party bringing the Claim does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party that initiated or asserted the Claim or joined, offered substantial assistance to, or had a direct financial interest in the Claim shall be obligated jointly and severally to reimburse the corporation and any such director, officer, employee or Affiliate of the corporation, the greatest amount permitted by law of all fees, costs and expenses of every kind and description... that the corporation and/or any director, officer, employee or Affiliate of the corporation may incur in connection with such Claim. 4

5 Breadth of Bylaw s Language Shareholder who brings the claim is liable for fees, but also anyone who offers substantial assistance to such party Experts, lawyers All are jointly and severally liable Plaintiff needs to obtain a judgment on the merits Extremely rare Excludes settlements The judgment must substantially achieve, in substance and amount, the full remedy sought Eg., plaintiff seeks $100m and get $60m 60% recovery? How about $40m? Eg., sue CEO for $20m excessive comp, and litigation forces him to retire? Eg., In re Southern Peru sought $2 billion, only got $1.3 billion (before interest) after trial. independent directors were dismissed from the case. So plaintiff wins biggest judgment in DE history, owes defendants fees 5

6 Representative Shareholder Litigation Becomes Economically Irrational Shareholder only gets a pro rata share of any class recovery if successful Shareholder owes 100% of defendants fees if unsuccessful Defendants fees were $17 million in ATP 6

7 Not Just Fee Shifting Hemispherx bylaw also includes a bond provision that allows the company to demand that a shareholder post a bond for defendants expenses while litigation is ongoing LGL Group s bylaw eliminates shareholder s ability to recover fees even if the litigation creates a common fund or common benefit Four companies passed bylaws decreeing that only stockholders owning or controlling more than 3% of the company s stock are allowed to sue. More and more aggressive provisions are likely, since many of the bylaws have severability provisions, which state that even if one provision is struck down, the remaining terms still survive. 7

8 Chamber of Commerce s view [T]he controversy hinges on whether a company can adopt bylaws allowing it to claw back some of its legal costs if plaintiffs lawyers bring an abusive shareholder lawsuit and lose in court. - Lisa Rickard, U.S. Chamber of Commerce, WSJ, Nov. 15, 2014 One sentence; misleading in at least six ways [B]ylaws allowing it to claw back [1] some of [all of] [2] its legal costs if [plus all directors, officers and affiliates ] [3] plaintiffs lawyers bring [shareholders bring] [4] an abusive shareholder lawsuit and [or meritorious lawsuit] [5] lose [or don t entirely succeed] [6] in court. [or through a settlement] 8

9 Delaware Response to ATP and Fee Shifting In June 2014, the Corporate Law Section of the Delaware Bar Association proposed legislation that would prohibit corporations from imposing monetary liability on a shareholder, through fee-shifting or otherwise. Heavy lobbying by US Chamber of Commerce and other interests legislation was delayed Corp Law Section working on new bill now. Delaware legislature expected to consider legislation in early 2015 Even if legislation passes, may create a race to the bottom Other states may allow fee shifting even if DE outlaws it. 9

10 Oklahoma Is Currently Winning The Race To The Bottom Oklahoma legislature recently adopted fee shifting legislation Effective November 1, 2014 Non-prevailing party is required to pay prevailing party s fees Seems equal? shareholder can already get fees for creating a common fund now irrational to bring a case Kessler Topaz forced to dismiss its meritorious derivative litigation against Continental Resources directors after new legislation 10

11 Enforceability of Bylaws Under Federal Law ATP initially brought in federal district court, ruled that the bylaw was pre-empted. Third Circuit certified question of validity under DE law to DE Supreme Court. Pre-emption question still open Federal Courts generally refuse to enforce state law penalties designed to deter frivolous litigation. Conflict between Fed. R. Civ. Pro. Rule 11 for frivolous lawsuits and fee shifting provisions. Presumption of fee shifting under PSLRA if Rule 11 is not complied with, but requires judicial oversight and is equally applicable to defendants and plaintiffs. 11

12 SEC Response SEC not taking much action at the moment Missed the opportunity in Alibaba IPO to require statements on the impact or scope of the charter provision What can the SEC do? Assert that automatic fee shifting violates the Securities and Exchange Act Refuse to accelerate registration statements where fee shifting provisions exist (as it has done with mandatory arbitration provisions) Could require companies to include provisions that acknowledge that the SEC believes the bylaws are likely inconsistent with Federal Law Focus on disclosure of the provisions in order to raise the embarrassment factor Could gather data on typical defense of shareholder litigation and study whether there is a market for insurance 12

13 Investors need to understand: Investor Response Nobody is going to bring cases. Nobody. DE Corporate Law Section working on new bill recommending legislative fix Legislators (Fed and State) have begun to hear from investors And they need to. Institutional Investor effort underway. In support of a legislative prohibition of these bylaws, the Council of Institutional Investors (CII) and a number of public pension funds and other institutional investors have sent letters to: Governor of DE, DE Legislature and Bar Association, Glass Lewis and ISS. 13

14 Institutional Investor Letter to DE Legislature APG NYC Police CalPERS CalSTRS COPERA Connecticut State Treasurer Florida SBA HMEPS ING Inv. Mgmt. Int l Mass PRIM Middlesex County MN Services NYCERS NYC Board of Education NYC Teachers NYC Fire The Teachers Retirement Systems Variable A North Carolina Treasurer Oregon State Treasurer PGGM Investments SDCERS To be clear, the kind of fee-shifting bylaw approved in ATP Tour does not further stockholders interests by protecting corporations from frivolous litigation. Instead, such provisions bar all judicial oversight by making it economically unfeasible for stockholders to seek redress in Delaware courts to protect their rights. 14

15 Lee D. Rudy, Esquire Kessler Topaz Meltzer & Check, LLP 280 King of Prussia Road Radnor, PA Direct Dial: (610) Darren J. Check, Esquire Kessler Topaz Meltzer & Check, LLP 280 King of Prussia Road Radnor, PA Direct Dial: (610) Jay Chaudhuri, Esquire General Counsel & Senior Policy Advisor North Carolina Dept. of State Treasurer 325 N. Salisbury St Raleigh, NC Direct Dial: (919)