Shareholder Class Action Lawsuits under the New Companies Act, 2013: Lessons Learned from the U.S. Experience Presented at Threading the Needle in U.S. India Deals February 14, 2014 Deborah R. Meshulam, Esq. Daniel C. Girard, Esq. Adam J. van Alstyne, Esq. GIRARD GIBBS LLP DLA Piper LLP (US) 1
Overview Plaintiff Perspective from US Experience Defense Perspective from US Experience Risk Management Principles Observations and Comments: Section 245 vs. FRCP 23 Questions and Reactions 2
Plaintiff Perspective US Class Actions Contingent Fees permitted Successful Plaintiffs Recover Attorneys Fees Federal Law and Most State Laws Allow Class Actions Class Action Rule is Trans-Substantive Applies Equally to Securities, Antitrust, Consumer, Employment Actions Specialized and Competitive Legal Area Settlements and Fee Payments Approved After Notice to Class Members and Public Hearing 3
Plaintiff Perspective Class Actions Perform a Public Function Limited Regulatory Infrastructure Preference for Private Enforcement Class Actions Serve Goals of Deterrence, Compensation of Victims Day in Court Resolve Controversies/Bring Closure Class Actions Remain Controversial U.S. Chamber of Commerce seeks to restrict Recent U.S. Supreme Court favor business Rapidly Evolving Landscape 4
Defense Perspective Class actions are a complex and evolving form of litigation Sophisticated defense bar practicing against well engaged plaintiff s bar In addition to fee shifting provisions, litigation financed by funding of defense costs through D&O insurance and indemnification 5
Defense Perspective Procedural Defenses Rule 23: Numerosity, Commonality, Typicality, and Adequate Representation Preemption & Removal Statute of Limitations Heightened Pleading Requirements (Rule 9(b) & PSLRA) Merits Defenses in Securities Context Materiality, Causation, Reliance, and Scienter Due Diligence & Reasonable Investigation Defense Good Faith Reliance on Experts No Duty to Disclose Bespeaks Caution Doctrine 6
Shareholder Class Action Principles Claims on Behalf of the Company/Corporate Governance Claims Demand Requirement: Demand on directors required to allow company to vindicate its own rights; futility may excuse requirement. Special Board Committees to investigate demands Business Judgment Rule Zapata Corp. v. Maldonado (Del. Supreme Court) Presumption that acts of independent directors have been made in good faith and with appropriate care. In order for a director to bear liability for injury to the corporation resulting from a transaction undertaken by the board, these presumptions must be rebutted 7
Shareholder Class Action Principles Claims Against Third-Parties Underwriter Liability Permitted by statute, limited Standard of due diligence Underwriter is obligated to look behind the financial statements Reasonable independent investigation of the issuer & offering Auditor/Expert Liability Standard of due diligence Hard to establish under US law no aiding and abetting Did not cause or participate directly Registration Statements Courts have not set a bright line standard of care 8
Minimizing Class Action Risk: Culture / Tone at Top / Written Policies Culture of Compliance: Reinforces ethical behavior. Separate compliance function and Chief Compliance Officer. Prioritization of compliance throughout the business Tone at the Top: Management & Board set tone for the organization. Board of Directors/Director Committees/Officers have oversight of Financial, Audit and Risk Management Processes Written Policies Code of Conduct: Sets standards for proper business conduct. Corporate Procedures & Guidelines: Details responsibilities & reporting chains 9
Minimizing Class Action Risk: Human Resources Approach Communication: Regularly communicate ethic/compliance policies and items of interest. Training: New hire and refresher training on ethics and compliance Incentives & Rewards: Performance management systems and compensation should acknowledge contributions. Discipline: Graduated disciplinary measures for improper conduct. Monitoring & Reporting: Encourage employees to report/seek guidance and protect those who do so. Cautionary Note: Consider Data Privacy/Employment Law Investigations: Ensure that proper procedures are followed for investigating the complaint. Cautionary Note: Consider Data Privacy/Employment Law Remediation: Correct any issues promptly and document steps taken 10
Minimizing Class Action Risk: Evolving Process of Improvement Evolution: Program must adjust to changing standards and best practices. Risk Assessment: Periodic review how the company conducts business, company procedures, policies, training, and internal controls. Benchmarking: Test effectiveness of controls and compliance program; evaluate against best practices. 11
Minimizing Class Action Risk: Practical Considerations Company Articles/Memorandum: Are they broad enough to encompass acts the Company may wish to undertake? Should the Company add provisions? Amendments to Articles/Memorandum: Is basis for amendments documented? Indemnification: If allowed, do Company Articles/Memorandum provide for indemnification? Insurance: Does the Company have D&O Insurance? Is it sufficient to encompass claims under Section 245? 12
Observations and Comments: Section 245 vs. FRCP 23 Similarities Prerequisites: Section 245(4) vs. FRCP 23(a): Threshold considerations Notice Process: Section 245(5) vs. FRCP 23(c): Certification and Notice Finality: Section 245(6) vs. FRCP 23(e): Finality and binding nature 13
Observations and Comments: Section 245 vs. FRCP 23 Differences Substantive Law: Section 245 covers certain substantive areas of law while FRCP 23 is trans-substantive and applicable to all types of law. Section 245 imposes broad liability for accountants & experts Class Size: Section 245(3) provides explicit minimum class size requirement vs. FRCP 23(a) numerosity requirement Appeals: Section 245 does not have a 23(f) equivalent Class Counsel: Section 245 does not have a 23(g) equivalent Attorneys Fees: Section 245 does not have a 23(h) equivalent 14
Open Questions Good Faith: How will applicant s good faith be determined? Notice Procedures: Are these procedures adequate? Class Cert. Discovery: Do the parties who are to be bound by the judgment have the right to take discovery of the applicant? Class Counsel: Is the expertise of the applicant s counsel an element of the good faith showing? Do the rules of ethics require that any relationships between the applicant and/or his counsel and the adverse parties be made known to the court? Declining Class Action Status: Under what circumstances can a judge decline to approve an application for class action status? What is the judge required to find to support a determination that relief can be obtained without proceeding on a class basis? Associations: How is someone supposed to bring together 100 shareholders? Presumably they will be available through the associations? Is there any mechanism to monitor the associations? What are associations anyway? Are they regulated? Are there restrictions on the formation of associations? Are lawyers likely to become involved in forming associations? 15
Open Questions Economics of Class Action: How will class actions operate in India without contingency fees and developed plaintiffs bar? Are there insurance systems in India that can finance class action litigation defense? Must companies indemnify directors and officers? Substantive rights: Does the statute confer new governance rights against oppression? Or are these rights already well-established and the statute simply allows for their assertion on a class basis? Damages: Would a recovery obtained for the corporation necessarily be paid to the corporation? Members vs. Shareholders: Does Section 245 contemplate the possibility that shareholders who are not members benefit? Finality of Settlements: What standards will the judge apply in determining whether to approve a compromise of claims? Lead Applicant: How will the lead applicant be selected if there are competing applicants? Level of Culpability: Will company officials/third parties be held liable based on mere negligence or some higher standard? 16
Open Questions Early Resolution: Are those sued able to seek early dismissal? Discovery: Is it allowed? If so, when and on what basis? Materiality: What standards will apply? Frivolous/Vexatious Applications: What standards will apply? 17