Robbins Geller files new challenge to minimum-stake-to-sue bylaw

April 21, 2015

Remember Imperial Holdings, the Florida life insurance settlement company that last fall adopted a bylaw requiring shareholders to amass written consent from a minimum percentage of their fellow investors in order to sue the board? Imperial was apparently the first public corporation to impose a minimum-stake-to-sue restriction on shareholders’ right to sue, but as the company’s chairman, activist investor Phillip Goldstein, predicted at the time, other companies he controls have since adopted similar provisions. Goldstein has told me many times that the bylaws are not intended to block all shareholder suits but to weed out frivolous cases by investors (and plaintiffs’ lawyers) acting in their own interests rather than the interests of the company.

In January, the class action firm Robbins Geller Rudman & Dowd sued Imperial and its board members in state court in Florida, where the company is incorporated, asserting that the real purpose of the bylaw is to insulate the board from accountability to shareholders. Imperial moved to dismiss the suit but the motion hasn’t been decided.

Now Robbins Geller wants to change venues and add new allegations. On Monday, the firm filed a new complaint against Imperial and its board members in federal court in West Palm Beach, Florida, on behalf of the same Imperial investor who brought the state case. Robbins Geller partner Stuart Davidson told me the firm intends to dismiss the state case and proceed just in federal court.

The new complaint adds federal claims based on Imperial’s April 8 proxy statement, which, among other things, provides shareholders with information about the minimum-stake-to-sue bylaw. Imperial’s board has called for an advisory shareholder vote on the bylaw at the company’s annual meeting next month; Goldstein has said the board will rescind the provision if shareholders vote it down.

Robbins Geller alleges that Imperial’s proxy leaves out so many material facts that it violates the Securities Exchange Act of 1934. The complaint seeks an injunction to bar Imperial from enforcing the bylaw, which, it alleges, would effectively bar shareholders from suing the board in the wake of ongoing investigations of Imperial by the Securities and Exchange Commission and the Internal Revenue Service. The filing also mentions a complaint against Imperial in federal court in Manhattan, claiming that the company is engaged in an illegal scheme to avoid excise taxes on structured settlement transactions. Robbins Geller said Imperial failed to disclose the suit in its proxy, even though the case raises allegations that could eventually give rise to a derivative suit.

Davidson told me it’s no surprise that only Goldstein’s companies have so far adopted minimum-stake-to-sue bylaws. “This is Phil Goldstein’s hubris come to bear,” he said.

Goldstein, on the other hand, said Robbins Geller is suing to invalidate Imperial’s bylaw because the firm is worried that similar minimum-stake-to-sue provisions will cut into its business. He also said it’s disingenuous for the firm and its Imperial investor client to allege the April 8 proxy is misleading when he and the Imperial board specifically invited Robbins Geller’s client to submit an opposition to the bylaw amendment proposal that would be included in the proxy statement. “They said they didn’t want to legitimize the vote,” Goldstein said.

The day after the proxy was issued, Robbins Geller’s client sent a response, which Goldstein and the board decided to distribute to shareholders in an additional SEC filing. “I said, ‘Let’s be as fair as possible.’ That way they can’t bitch that they didn’t have their say,” he told me. “So I find their federal claim – that we submitted a false and misleading proxy statement – pretty lame.”

Goldstein also said the Imperial shareholder doesn’t have standing to sue because he hasn’t tried and failed to amass the requisite shareholder support (3 percent) to bring a case against the board. “They have no particular claim against us other than that they don’t like this bylaw,” he said.

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