Shareholder challenges minimum-stake-to-sue bylaw

January 21, 2015

Last fall, directors of the life insurance settlement company Imperial Holdings adopted an apparently unique tactic to rein in suits by shareholders. As I reported at the time, the board amended Imperial’s bylaws to require shareholders to deliver written consent from the owners of at least 3 percent of the company’s outstanding shares in order to bring a class action or derivative suit.

Imperial’s chairman, Phillip Goldstein of Bulldog Investors, told me in November that the idea wasn’t to shut down all shareholder litigation or to discriminate against small investors. He said Imperial’s minimum-stake-to-sue bylaw was intended to stop shareholders without a real financial interest in the outcome of their own case from hijacking deals and forcing the company to defend meritless litigation.

“The bylaws are like a cooling-off period,” Goldstein said. “We’re saying, ‘Slow down, get support from other shareholders.'”

At least one Imperial shareholder suspects a more sinister motive for the bylaw, though. On Tuesday, Robbins Geller Rudman & Dowd filed a complaint against Imperial, Goldstein and the rest of the company’s directors in state court in Florida, where Imperial is incorporated. The suit, brought by shareholder Harry Rothenberg on behalf of a class of Imperial investors, contends that the minimum-stake-to-sue requirement illegally insulates the board from accountability.

“The bylaw’s sole purpose is to allow Imperial Holdings’ executives and directors to get away with fraud, breach their fiduciary duties or even commit criminal acts without having to answer to the company’s own shareholders,” said Stuart Davidson of Robbins Geller in an email statement. The complaint argues that amassing consents from 3 percent of shareholders is so onerous a requirement that the bylaw “places all-but-insurmountable hurdles before the courthouse doors.”

The named plaintiff in the new suit was previously one of the lead shareholders in a derivative case that Imperial settled in 2013. (The settlement was for $13.6 million, but most of that was to resolve a parallel securities fraud class action.) Tuesday’s suit seeks a declaration that Imperial’s minimum-stake-to-sue bylaw was adopted illegally under Florida law, as well as an injunction against enforcement of the provision.

In an interview Wednesday, Imperial chairman Goldstein said Rothenberg’s new suit “is exactly what the bylaw is supposed to prevent.” He said the bylaw isn’t illegal: Foley & Lardner advised the company on the bylaw, he said, and Goldstein consulted with Institutional Shareholder Services before the board agreed to adopt the measure. And Imperial shareholders will have an opportunity to vote on the minimum-stake-to-sue provision at the company’s annual meeting this spring. If investors don’t back the requirement, Goldstein told me, he will ask the board to rescind it. (In December, shareholders at two other companies on whose boards Goldstein serves, the Mexico Equity and Income Fund and the Special Opportunities Fund, voted to adopt minimum-stake-to-sue bylaws.)

Robbins Geller partner Davidson said in an email that Imperial should have put the bylaw to a vote before enacting it (Goldstein said the annual meeting was too far off to wait). Davidson also said, however, that even if a majority of Imperial shareholders approve the bylaw, the vote is “irrelevant.”

“The federal and state securities and derivative laws do not permit the tyranny of the majority when it comes to shareholder rights,” Davidson said.

Davidson’s client “wants to prevent a vote,” Goldstein responded. “Who is really for shareholder rights here?”

Goldstein said the company has not been formally served with the complaint, so it’s too soon to predict its defenses. Among the possibilities, he said, is an argument that the complaint itself proves the bylaw doesn’t preclude a minority shareholder from filing a suit. Goldstein also said he’d be happy to provide Rothenberg and Robbins Geller with shareholder information so they can try to rope in enough other investors to comply with the 3 percent bylaw. “He hasn’t even attempted to do it,” Goldstein said. “If we did something wrong, you would think shareholders would be champing at the bit.”

As an alternative, Goldstein said, he intends to offer Rothenberg an opportunity to present shareholders with a statement in opposition to the bylaw before the vote at the annual meeting. “Go ahead, put the whole complaint in,” he told me.

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