Alison Frankel

Delaware justices: Do we need new vehicle for post-merger derivative suits?

Alison Frankel
Jul 3, 2013 22:04 UTC

You might not expect Dr. Seuss and Jekyll & Hyde to be invoked in oral arguments before the Delaware Supreme Court on the question of whether shareholder derivative breach-of-duty claims against corporate directors can survive a merger when that merger is allegedly the result of the directors’ misconduct. But indeed they were, amid discussion of slippery, transmogrified claims that left four Delaware justices (as well as lawyers on both sides) searching for analogies.

If I had to proffer a prediction, I’d guess that the Supreme Court will adopt the Jekyll & Hyde model – finding that shareholders have a surviving claim under the fraud exception Delaware justices already carved out in the court’s seminal 1984 decision in Lewis v. Anderson – rather than create a new, Seussian “quasi-derivative” cause of action. Either way, I think that oral arguments, which I was able to watch live courtesy of Courtroom View Network, boded well for shareholders trying to revive a derivative suit against Countrywide’s directors and officers, and not so well for Countrywide, despite the best efforts of its counsel Brian Pastuszenski of Goodwin Procter.

As it happens, the shareholder derivative suit came to the Delaware Supreme Court by way of the 9th Circuit Court of Appeals, which certified a question to the state justices in January: “Whether, under the ‘fraud exception’ to Delaware’s continuous ownership rule, shareholder plaintiffs may maintain a derivative suit after a merger that divests them of their ownership interest in the corporation on whose behalf they sue by alleging that the merger at issue was necessitated by, and is inseparable from, the alleged fraud that is the subject of their derivative claims.” The 9th Circuit said it needed an answer from Delaware in order to decide whether to reanimate a years-old shareholder suit against Countrywide’s board that had been dismissed by a district judge in Los Angeles after Bank of America acquired the mortgage lender.

Under Delaware precedent in Lewis v. Anderson, shareholders lose standing to pursue derivative claims on behalf of the corporation when a merger eliminates their ownership interest. The only exception noted in Anderson is when the entire merger is a fraud intended only to protect the board, which BofA’s acquisition of Countrywide was not. But in dicta in a 2011 ruling in a tangentially related case against Countrywide, the Delaware Supreme Court had mused about whether shareholders should still have a cause of action when the merger that deprived them of standing was actually the inevitable result of corporate malfeasance. That dicta led the 9th Circuit to seek additional instruction from the Delaware court.

In the 2011 decision, the Delaware justices didn’t specify any particular vehicle for hypothetically surviving shareholder derivative claims, but at oral arguments on Wednesday, Stuart Grant of Grant & Eisenhofer, arguing on behalf of the Arkansas Teacher Retirement System and other onetime Countrywide shareholders, said the form of the suit was a matter of mere labeling. He quoted the court’s strong language about Countrywide’s conduct back to the four justices sitting on the bench (Chief Justice Myron Steele, who wrote the 2011 opinion, was absent) and paraphrased Dr. Seuss: “I said what I said and I meant what I meant, Delaware is faithful 100 percent.” Grant urged the justices to abide by their dicta and permit shareholders with derivative claims to hold directors accountable for their breaches of duty.

The 2nd Circuit splits with 10th on tolling time bar in securities cases

Alison Frankel
Jul 2, 2013 21:36 UTC

Is the statute of repose – the once obscure cousin of the statute of limitations that burst into prominence as a defense in litigation over mortgage-backed securities – coming to the U.S. Supreme Court?

That’s the thrilling prospect now before us, thanks to a decision last week by the 2nd Circuit Court of Appeals in a case against the onetime mortgage securitizer IndyMac and underwriters of some of its MBS offerings. The 2nd Circuit panel – Judges Jose Cabranes, Reena Raggi and Susan Carney – ruled that the filing of a class action does not stop the clock for class members on the three-year statute of repose for federal securities claims. That holding is contrary to a ruling from the 10th Circuit, which found in Joseph v. Q.T. Wiles in 2000 that a pending class action tolls the statute of repose as well as the statute of limitations. The Roberts Court is known for granting review even of arcane issues that have split the federal circuits, and tolling of the statute of repose could impact the outcome of a lot more cases than, say, the intersection of appellate deadlines and awards for contractual legal fees, which the Supreme Court is already scheduled to hear next term.

Plaintiffs lawyer Joseph Tabacco of Berman DeValerio, who was on the wrong end of last week’s 2nd Circuit decision, told me his clients have not yet decided on their next step, which could be to ask the 2nd Circuit for en banc review or to ask the panel for a ruling that its holding applies only prospectively. The statute of repose isn’t as problematic in this particular case as it once seemed, Tabacco said, because some plaintiffs who had been excluded from the IndyMac MBS class action saw their claims revived after the 2nd Circuit remade the rules for MBS class standing in NECA-IBEW v. Goldman. Nevertheless, Tabacco told me, “this is too important an issue” to let the 2nd Circuit panel’s decision go unchallenged. “There are well-reasoned opinions on both sides,” he said. “Clearly, this is an open legal question.”

SCOTUS’s Prop 8 ruling will complicate ballot initiative process

Alison Frankel
Jul 1, 2013 20:28 UTC

On Friday, two days after the U.S. Supreme Court announced its ruling in Hollingsworth v. Perry, marriage equality came back to California. Governor Jerry Brown, who had refused to appeal U.S. District Judge Vaughn Walker’s beautiful 2010 decision that the state’s bar on same-sex marriage was unconstitutional, ordered county clerks to begin issuing licenses to gay and lesbian couples. California Attorney General Kamala Harris performed the first wedding under the new regime, the San Francisco marriage of Kristin Perry and Sandy Stier, whose challenge to California’s ballot-initiative ban on same-sex marriage led to the Supreme Court’s decision last Wednesday. In Los Angeles, Mayor Antonio Villaraigosa married the other plaintiffs in the original case, Paul Katami and Jeff Zarrillo. Opponents of same-sex marriage filed an emergency petition at the U.S. Supreme Court over the weekend, seeking a temporary halt to the weddings, but Justice Anthony Kennedy, who oversees the 9th Circuit, denied it on Sunday. Marriage equality is now officially the law in California.

The means to that end, as you’ve probably heard, were not the equal rights of same-sex couples, at least not as far as the Supreme Court majority was concerned. An unusual five-judge coalition of Chief Justice John Roberts and Justices Antonin Scalia, Ruth Bader Ginsburg, Stephen Breyer and Elena Kagan found that the private proponents of the ballot initiative barring gay marriage, known as Proposition 8, did not have standing to appeal Judge Walker’s 2010 ruling, even though the public officials originally named as defendants by Kristin Perry and her fellow plaintiffs declined to ask for review from the 9th Circuit Court of Appeals. You won’t find any soaring language on equal rights in the Perry opinion. (For that, you have to look to Justice Anthony Kennedy’s companion decision in United States v. Windsor, striking down the federal Defense of Marriage Act.) Hollingsworth v. Perry is instead a technical ruling on one of the Chief Justice’s favorite subjects, standing under Article III of the U.S. Constitution.

And for all the wedding hoopla right now in California, Hollingsworth v. Perry will live on in legal citations not for what it says about the marriage-equality rights of gays and lesbians but for its rejection of the rights of private ballot initiative proponents to appear in court in place of public officials who don’t support their law. I predicted after oral arguments in the case that the justices’ ruling could end up “better remembered for setting precedent on standing, stage agency and ballot initiatives than for civil rights.” I’m sticking with that prediction. Sooner than later, same-sex marriage will be the right of people across America, and for that we can count among those we thank the lawyers who took up the Proposition 8 challenge four years ago, David Boies of Boies, Schiller & Flexner and Theodore Olson of Gibson, Dunn & Crutcher. But this opinion’s holding that private citizens do not have standing to defend the constitutionality of ballot initiatives when state officials refuse to do so is also going to affect whether voters can override their elected officials.

From Aspen: Justice Kagan calls surveillance cases ‘growth industry’

Alison Frankel
Jul 1, 2013 15:44 UTC

Speaking late Saturday afternoon at the Aspen Ideas Festival, U.S Supreme Court Justice Elena Kagan was every bit as diplomatic as you would expect a woman who has survived the Senate confirmation process to be. Chief Justice John Roberts? “A great chief justice,” who faces the “tall order (of) trying to forge agreement” on a court whose members traditionally treasure the right to go their own way. Justice Clarence Thomas? “I enjoy him enormously. He’s a justice with incredible integrity and a very principled one,” Kagan said. “We disagree on a lot of stuff and we’re going to disagree on a lot of stuff but I enjoy every moment I spend with him.”

And Justice Antonin Scalia, whose opinion in American Express v. Italian Colors was very emphatically disputed by Kagan? The justice told her interviewer, George Washington University law professor and New Republic legal affairs editor Jeffrey Rosen, that she and Scalia go hunting together a few times a year, a tradition that began when she promised one senator before the confirmation vote that even though she hadn’t held a gun – as a native of New York’s Upper West Side, she said, “that just wasn’t what we did” – she’d ask Scalia to take her out shooting. When she joined the court, she told Scalia that this was the single promise she had made in the confirmation process. “He thought it was hilarious,” she said. On their most recent trip, to Wyoming, Kagan shot a deer. (Kagan seemed quite proud of her prowess but the audience wasn’t as enthusiastic.)

When Rosen pressed the justice on how it feels to be in the minority on a court that so frequently divides along ideological lines, Kagan admitted that it’s sometimes hard to come to work the morning after realizing her side has lost the fight. “You’ll notice that at the moment we’re done, we all leave,” she said. “We need a little vacation from each other.” But she was quick to add, “We like each other very much…. We’re all grownups.”

From Aspen: America’s opportunity gap – and why it’s bad for lawyers

Alison Frankel
Jun 28, 2013 22:02 UTC

Near the end of a delightful interview at the Aspen Ideas Festival, CBS journalist Rita Braver asked Williams & Connolly superlawyer Robert Barnett – who also happens to be her husband of many decades – what advice he would offer to young attorneys. Could they, Braver asked, replicate his career path, which took him from a Supreme Court clerkship to the representation of publishing and political luminaries, and service as a sachem of the Democratic party? Barnett said no.

The competition to win a job at a firm like Williams & Connolly is fiercer than ever – Barnett said his firm received 6,000 resumes last year – and the prize at many firms is “drudgery.” (Barnett took care to except W&C’s work from the “drudgery” category.) “If I were a regular practicing lawyer at a megafirm, I would have been out of the law long ago,” he said.

It was a discouraging comment in an otherwise sparkling hour of conversation between Braver and Barnett, who met as undergraduates at the University of Wisconsin in the 1960s and have managed to balance their work and family life. Among Barnett’s specialties is preparing Democratic candidates for presidential and vice presidential debates, but Braver told the audience that he stepped aside in 1996, despite his long allegiance with Bill Clinton, so that she could serve as White House correspondent for CBS; Barnett joked that he won the Best Husband Award in his condominium that year.

Biggest idea at Aspen Ideas Fest: Don’t run from risk. Grab it.

Alison Frankel
Jun 27, 2013 23:14 UTC

It is a truth (almost) universally acknowledged that a law firm in possession of a strong client base must be in want of pretty much nothing. (Apologies to Jane Austen.) As a species, lawyers are risk-averse. The practice, after all, is paved in precedent and bad things can happen to you and your clients if you veer off-road.

Here at the Aspen Ideas Festival, however, risk is not a four-letter word. I attended four panels Thursday, on topics ranging from the future of the Republican Party to financing the energy projects of the future. The single theme that ran through all of them is that opportunity grows out of crisis, and the winners of the next decade will be the leaders who aren’t afraid of new ideas.

That might sound intangible, but there are practical implications for lawyers and law firms. In a breakfast session, for instance, U.S. Trust President Keith Banks, whose firm manages about $200 billion in assets for ultrawealthy people, predicted an imminent boom in mergers and acquisitions. Companies are under pressure from shareholders and directors to expand their revenues, he told me after the session, and can’t grow fast enough organically. With almost $1.45 trillion sitting in corporate treasuries, he said, bottom lines are strong, but with growth in the United States stuck at about 3 percent, top lines are still anemic. So in Banks’s view, companies are going to turn to expansion through acquisition. (Banks is generally bullish on equities and on the private sector broadly; he told the audience that he’s not worried about quantitative easing because he thinks the Federal Reserve will slowly decelerate to a phase he called quantitative maintenance.) A significant uptick in M&A means more work for law firms. If you’ve already got an M&A practice, make sure clients know about it. If you don’t, perhaps this is the time to start thinking about laterals.

Election savant Nate Silver: Why punditocracy gets politics wrong

Alison Frankel
Jun 27, 2013 18:19 UTC

If Nate Silver, the data-driven New York Times FiveThirtyEight blogger who nailed state-by-state results in the 2012 presidential election, had been a better baseball player or a more satisfied KPMG numbers cruncher, our current political discourse would be a lot less analytically savvy than it is today.

I had a chance to hear Silver answer questions from Katie Couric Wednesday night at the Aspen Ideas Festival, where political, business and art bigwigs (including lawyers such as Robert Bennett of Williams & Connolly and Robert Gruendel of DLA Piper) gather in this mountain-ringed and flower-bedecked city to talk about the big ideas of the day. I’ll be blogging and tweeting from the festival through Saturday.

The Silver session followed the opening reception and was mobbed. He and Couric justified the crowd. Silver said that he was drawn to statistics through his love of the Detroit Tigers (and his sad realization that he was not cut out for the pros), then realized he only cared about certain kinds of data analysis when he suffered through what he calls the worst job of his life at KPMG, resorting to baseball data analysis to keep himself amused. The result was his blog about baseball analytics, which eventually led to his brilliant political data analysis at FiveThirtyEight.

Wake up, shareholders! Your right to sue corporations may be in danger

Alison Frankel
Jun 25, 2013 23:10 UTC

Do you believe that securities class actions and shareholder derivative suits have any salutary effect on corporate governance – that directors and officers are less likely to misbehave when they’re liable to shareholders (their nominal bosses) in court? If so, you ought to be very worried about a pair of developments in the last week that offer a theoretical framework to end shareholder class actions. If, on the other hand, you’re of the view that shareholder litigation is merely a transfer of wealth from corporations to plaintiffs’ lawyers, with little actual return to investors, you might want to start thinking about how to use the new rulings to stop that from happening.

Let’s look first at the U.S. Supreme Court’s 5-3 decision last week in American Express v. Italian Colors. That case, as you know, was brought by small businesses that believed American Express was abusing its monopoly in the charge card market by requiring them also to accept Amex credit cards carrying higher fees than competing credit cards. The Supreme Court said that even though the merchants had statutory antitrust rights under the Sherman Act, they had given up their right to sue Amex as a class when they signed arbitration agreements barring such suits. It was of no matter, the majority said, that the cost of arbitrating an individual antitrust claim would dwarf the recovery of any single small business: The merchants signed contracts that included arbitration clauses and those contracts bound them. (Or, as Justice Elena Kagan put it in a memorable dissent: “Here is the nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad.”)

The Amex ruling immediately drew the ire of consumer and employment rights advocates, who argued that it gives corporations the power effectively to insulate themselves against all sorts of legitimate claims by cutting off escape routes from class action waivers in mandatory arbitration clauses. But what about shareholders? In a very smart column on Monday, Kevin LaCroix of D&O Diary raised the question of Amex‘s potential impact on securities fraud and shareholder derivative class actions. Does the court’s ruling, he asked, mean that “the broad enforceability of arbitration agreements reaches far enough to include the enforceability of arbitration agreements and class action waivers in corporate articles of incorporation or by-laws?”

Journalists and the Espionage Act: Prosecution risk is remote but real

Alison Frankel
Jun 24, 2013 20:51 UTC

Meet the Press host David Gregory brought down the wrath of fellow journalists on Sunday when he asked a provocative question of Glenn Greenwald, the Guardian reporter who broke revelations from Booz Allen contractor Edward Snowden about the U.S. government’s monitoring of citizens’ phone and Internet data. After Gregory and Greenwald discussed the Justice Department’s new Espionage Act charges against Snowden, Gregory asked, “To the extent that you have aided and abetted Snowden, even in his current movements, why shouldn’t you, Mr. Greenwald, be charged with a crime?”

Gregory’s prosecutorial tone didn’t go over well with journalists trained to believe that the U.S. Supreme Court’s landmark 1971 ruling in The New York Times v. United States (better known as the Pentagon Papers case) gives them carte blanche to publish materials they’ve received lawfully from their sources, even if their sources broke the law to obtain the information. The court’s subsequent 2001 ruling in Bartnicki v. Vopper confirmed that the media cannot be punished for publishing information that sources obtained illegally, so long as the information is of public importance. But there’s actually a distinction in the law between the media’s right to publish sensitive national security information and the government’s right, at least in theory, to bring charges against reporters and publishers for possessing and disclosing classified information.

Gregory’s question, in other words, may have been inaptly posed but it addressed a legitimate, albeit remote, risk for reporters with hot national security stories. No journalist has so far been prosecuted under the Espionage Act for a story that reveals sensitive information (nor, for that matter, under other federal laws addressing classified information), and Attorney General Eric Holder has said publicly that he doesn’t intend to start charging reporters for doing their job. Nevertheless, there’s enough uncertainty about criminal liability that the government has used the threat of prosecution to try to squelch reporting, according to a fascinating 2008 paper, “National Security and the Press: The Government’s Ability to Prosecute Journalists for the Possession or Publication of National Security Information,” from the Communication Law & Policy journal.

The inherent conflict for lawyers who oppose Supreme Court review

Alison Frankel
Jun 21, 2013 19:52 UTC

As usual, the U.S. Supreme Court has saved the big stuff for the last week of its term. Among the 11 cases the justices have yet to decide are the four that garnered the most public attention this year: Fisher v. University of Texas, which addresses affirmative action; the voting rights case Shelby County v. Holder; and the two gay marriage cases, Hollingsworth v. Perry, which stems from California’s ballot-proposition ban on gay marriage, and U.S. v. Windsor, which challenges the federal Defense of Marriage Act. You can reliably expect frenzied coverage at the court until rulings come down in all four of these hot-button cases.

With all eyes on the Supreme Court, I wanted to revisit an issue I mentioned glancingly in a post earlier this week: Do lawyers who write briefs opposing Supreme Court view have an ethical conflict if they’re secretly hoping for a chance to argue before the justices? I posed the question as an afterthought in a story about experienced Supreme Court litigators taking over certiorari briefing in a $350,000 dispute between a union pension fund and a landscaping company when it became clear that the otherwise undistinguished case had a shot at Supreme Court review. (And, indeed, the court granted certiorari on Monday.) A Twitter reader very thoughtfully directed me to a 2012 article in the Harvard Journal of Law & Public Policy that attempts to answer the question with some hard data.

In “The Ethics of Opposing Certiorari Before the SupremeCourt,” then Stanford Law student Aaron Tang posited the theory that as the Supreme Court’s docket shrinks and oral arguments become increasingly restricted to an elite appellate bar, “the value associated with each rare opportunity to argue before the court continues to rise.” One way to get before the justices is to prevail with a cert petition for clients seeking review of adverse rulings, Tang said, but the other, of course, is to write an unsuccessful cert opposition brief. “Attorneys who lose at the opposition stage might nevertheless enjoy a personal ‘win’ in the form of an opportunity to argue at the Supreme Court,” he wrote. “As a result, there is an ex ante ethical dilemma for attorneys tasked with opposing certiorari. This dilemma, in turn, might well have important downstream effects on clients who prevailed below and who, unlike their attorneys, would therefore prefer not to be in the Supreme Court at all.”