Opinion

Alison Frankel

Allergan investors (other than Ackman!) sue for say in takeover fight

Alison Frankel
May 21, 2014 21:56 UTC

Valeant Pharmaceutical’s soon-to-be sweetened $47 billion bid for Allergan has been called “a weird textbook for the Future of Mergers & Acquisitions”: It’s the first deal in which an activist hedge fund investor, William Ackman of Pershing Square Capital, has teamed up with an operating company on a bid; and the first in which hostile bidders have convened an unofficial shareholder meeting and proxy vote to scare their target into negotiations. Ackman and Valeant are adding new steps to the old M&A dance — and shareholder class action lawyers are trying to figure out how to keep up with their moves.

On Tuesday, Bernstein Litowitz Berger & Grossmann and Grant & Eisenhofer filed their second declaratory judgment complaint against the Allergan board in Delaware Chancery Court. Two weeks after suing directors for supposedly promulgating a misinterpretation of a proposed bylaw amendment that would serve to entrench the board, the shareholder firms are back with a new theory and a new client. This time around, the lead plaintiff is the Police Retirement System of St. Louis and the allegation is that the Allergan board intends to rely on a “constituency” clause in its certificate of incorporation to rebuff a takeover offer that benefits shareholders. (Hat tip to the great Chancery Court newsletter, Chancery Daily.)

Allergan’s constituency provision, according to the complaint, permits the board to consider the interests of groups other than shareholders — such as customers and employees — in evaluating a takeover offer. The suit claims that the provision is contrary to Delaware’s doctrine, which holds that the board’s primary obligation is to maximize shareholder value. The plaintiffs’ firms, including Robbins Arroyo, are asking Delaware Chancellor Andre Bouchard to declare that Allergan’s constituency provision is void and to enjoin the board from relying on it.

So far, the plaintiffs firms aren’t lining up directly with Valeant and Pershing; the new complaint specifically says that shareholders need the declaratory judgment in case a strategic white knight shows up to rescue Allergan from the hostile bidders. But the two suits, which will almost certainly be consolidated into one case, position shareholders for a breach-of-duty claim if the Allergan directors can’t find a way to deliver shareholders the premium that Valeant and Pershing are promising. That’s what happened in the Sotheby’s M&A litigation, when Bernstein Litowitz and Grant & Eisenhofer ended up suing the board and supporting activist investor Daniel Loeb of Third Point.

It’s a new development, as I’ve said before, for public pension funds and the shareholder class action bar to wade into activist investor spats and deal negotiations before there is an announced merger. Usually, they snap into action only after a deal is announced, claiming that directors have breached their duties by agreeing to an inadequate price. I’ve heard arguments, in fact, that the class action bar’s post-merger interests conflict with those of activist investors: Shareholder lawyers want to hold up deals and get paid for improving terms; activist investors want to push deals through on the terms that benefit them, which aren’t necessarily the best possible terms for other shareholders.

5th Circuit’s last word to BP leaves constitutional question-mark

Alison Frankel
May 20, 2014 22:28 UTC

The 5th U.S. Circuit Court of Appeals has had it with BP and its attempts to evade the consequences of the deal it struck to end litigation over the 2010 Deepwater Horizon oil spill.

On Monday, eight 5th Circuit judges refused to review the decision of a divided three-judge panel, which held in March that the class action settlement’s payout process complies with the U.S. Constitution. That’s the last word from this court, which has now heard BP’s protestations about the settlement in four different rounds of briefing before two different three-judge panels. But it may not be the last word in the dispute. A dissent by three 5th Circuit judges practically implores the U.S. Supreme Court to take the case and resolve tricky constitutional questions about standing in class action settlements.

Judge Leslie Southwick wrote an opinion explaining the 5th Circuit’s decision not to rehear BP’s appeal en banc. His explanation is heavy on specifics about whether a particular exhibit in the settlement agreement conflicts with a policy statement subsequently issued by the claims administrator and ratified by the judge overseeing the class action, U.S. District Judge Carl Barbier of New Orleans. But Southwick’s opinion boils down to a simple idea: BP made compromises when it bought global peace via a gigantic class action settlement, and now it’s stuck with the repercussions.

Lesson from the smartphone wars: Litigation is not a business plan

Alison Frankel
May 19, 2014 19:55 UTC

After almost five years of suing each other in courts in the United States and Europe over patents on mobile devices, Apple and Google abruptly announced Friday night that they’ve called a ceasefire: They’re dropping all of the litigation. They’re not even making a deal to cross-license one another’s IP, just declaring a truce and walking away.

Apple has not yet settled with Samsung, the device manufacturer that most successfully employs Google’s Android operating system, so the two companies haven’t entirely resolved their dispute; evidence from the recently concluded patent infringement trial between Apple and Samsung in San Jose, Calif., revealed that Google is paying at least part of Samsung’s defense costs. (The Korea Times reported Monday that Apple and Samsung are in global settlement talks.) Until there’s a Samsung deal, two law professors, Brian Love of Santa Clara University and Michael Risch of Villanova told Bloomberg, the Google settlement is more important as a symbol than for any actual impact.

What is increasingly obvious is that the same can be said for the entire panoply of smart device patent cases. Apple and Samsung have now been through two long and expensive patent infringement trials before U.S. District Judge Lucy Koh in San Jose. Apple has won both, but the jury in the trial that concluded earlier this month awarded the company only $119.6 million in damages, less than a day’s sales for Samsung. Most importantly, Apple failed to win an injunction in the federal-court litigation. Samsung also tried and failed, in its case at the U.S. International Trade Commission, to win any prohibition on the importation of Apple products. Microsoft, meanwhile, established in separate litigation against Google that individual patents in high-tech devices are worth a pittance.

California finds ‘right to privacy’ for anonymous online commenters

Alison Frankel
May 16, 2014 21:29 UTC

The big headlines this week on privacy and the Internet were about a ruling from the European Union’s highest court, which, as you know, held that Internet search companies must respect a “right to be forgotten.” The EU decision is a money pit for Google and its ilk, which now have to figure out how to respond to people’s requests that search engines disable links to purportedly irrelevant information about them, even if the information is otherwise accurate and publicly accessible. First Amendment advocates in the United States lamented the EU’s decision as an incursion on the public’s access to perfectly legitimate information. I’m with them on that.

In California, by contrast, an intermediate appeals court has just found that privacy and free speech on the Internet actually operate in tandem, not in tension. And while the EU decision involved the privacy rights of those who are the subject of free speech, the California case flipped the inquiry to consider the rights of the speaker. On Wednesday, the Court of Appeal for the Second Appellate District, in Los Angeles, ruled that anonymous online comments are protected by the California state constitution’s right to privacy. The decision reversed a trial court order that the online news site Digital Music News must turn over computer records to the parent company of the digital music sharing site Grooveshark to enable Grooveshark to identify an anonymous commenter who claimed to be an employee.

The anonymous poster, wrote Judge Victoria Chaney for a panel that also included Judges Frances Rothschild and Jeffrey Johnson, “has done nothing more than provide commentary about an ongoing public dispute in a forum that could hardly be more obscure — the busy online comments section of a digital trade newspaper,” Chaney wrote. “Such commentary has become ubiquitous on the Internet and is widely perceived to carry no indicium of reliability and little weight. We will not lightly lend the subpoena power of the courts to prove, in essence, that Someone Is Wrong On The Internet.”

The downside of Ackman’s call for Allergan “meeting”? There is none!

Alison Frankel
May 14, 2014 20:45 UTC

Valeant Pharmaceuticals and its hostile takeover partner William Ackman of Pershing Square Capital have a phalanx of lawyers working on their $47 billion bid for Allergan – Kirkland & Ellis for Ackman; Sullivan & Cromwell and Skadden, Arps, Slate, Meagher & Flom for Valeant- so I don’t know who deserves credit for the tactic they announced yesterday. But whoever came up with the idea of holding an unofficial meeting and proxy vote to give Allergan shareholders an opportunity to urge the board to enter discussions with Valeant is quite a strategist. The Ackman/Valeant proxy is apparently the first time a hostile bidder has called for a non-binding straw poll of shareholders but I bet it won’t be the last. This is a win-win proposition for Ackman and Valeant, and here’s why.

To start, the unofficial meeting and proxy vote permit Allergan’s bidders to avoid two different sorts of obstacles: the company’s board-friendly corporate framework and its recently-adopted poison pill. Matt Levine at Bloomberg View did a great job Tuesday of explaining why Ackman — who holds about 9.7 percent of Allergan’s stock through Pershing — can’t talk directly to other shareholders for fear of crossing the 10 percent “beneficial ownership” threshold and triggering the poison pill. But the pill, Levine explained, has an exception for proxy solicitations like the one Ackman just launched. So the unofficial proxy vote permits Ackman and Valeant to show Allergan what major investors think without actually talking to shareholders.

Plus, Ackman and Valeant don’t have to worry about satisfying requirements in Allergan’s corporate charter and bylaws for shareholder meetings. To convene a special meeting of shareholders – which they would have to do, since Allergan’s regular annual meeting took place on May 6 – they’d have to obtain written consent from 25 percent of the shareholders. (Ronald Barusch of The Wall Street Journal’s Dealpolitik detailed the special meeting process last week, after Valeant mentioned that it might go that route in a conference call with analysts.) Shareholders can bind the corporation through votes at special meetings, though there’s a chance Allergan would claim that a newly-adopted bylaw amendment bars shareholders from replacing directors through a meeting convened by written consent. (It’s complicated, but one pension fund shareholder explained why in a complaint filed last week against Allergan’s board in Delaware Chancery Court.)

The misguided attack on incentive awards in class actions

Alison Frankel
May 13, 2014 20:28 UTC

U.S. District Judge Colleen McMahon of Manhattan included a highly unusual warning in her recent opinion approving the $15 million settlement of a securities class action against the clothing retailer Aeropostale: She’s no longer following the standard operating procedure of awarding extra fees to plaintiffs who lead class actions. “This opinion should serve notice that this court, at least, will not routinely decide to ‘tip’ lead plaintiffs simply because their names appear in the caption,” she wrote, “and will view with some skepticism conclusory arguments that they actually made a meaningful substantive contribution to the lawsuit.”

The award of incentive fees is apparently something of a bugaboo for McMahon, who said she has “always been troubled by the practice,” though she’s previously approved the payments. Unprompted by Aeropostale or objectors to the settlement, the judge raised doubts at a hearing last week about a request by the City of Providence for $11,000 in reimbursement for the 150 hours its legal department expended on the case. McMahon reluctantly approved the request, but only “after much soul searching” and assurances from class counsel at Labaton Sucharow that it received legitimate help from the city’s legal staff. Going forward, McMahon said, she’s not going to be so amenable. Lead plaintiffs, she said, ought to know what is expected of them in class action litigation and shouldn’t sign up for the job if they expect to be paid for it.

“For the most part, I fail to see why a party who chooses to bring a lawsuit should be compensated for time expended in appearing at a deposition taken in order to insure that he is actually capable of fulfilling his statutory obligations, or responding to document requests, or performing what are essentially duplicative reviews of pleadings and motions that his lawyers are perfectly capable of reviewing for him,” McMahon wrote.

College application process violates antitrust law: new suit

Alison Frankel
May 12, 2014 21:19 UTC

Revenue at the Common Application is practically infinitesimal by the standards of big business: $13 million in 2011, the last year for which its tax returns are public. But if you’re the parent of a kid who has applied or will be applying to college, you know Common App’s importance bears little relationship to its revenue. The non-profit completely dominates the college application process. More than 550 institutions in the United States are members of Common App, whose online application services permit students to prepare a single application that can be distributed to multiple schools, along with transcripts and teacher recommendations that are also uploaded to Common App’s site. These days, just about every kid applying to a selective college — one that judges applicants on more than just grades and test scores — is doing it through Common App.

Is that a violation of the Sherman Act?

One of Common App’s for-profit competitors claims it is. In a new antitrust complaint, filed Thursday in federal court in Portland, Oregon, CollegeNET alleges that over the last 10 years, Common App has stealthily changed its agreements with member colleges to impede competition from other application processing companies. Selective colleges, according to the suit, are all desperate to increase the number of applicants for admission, not just for the application fee revenue they receive but more importantly, to boost their selectivity, a key metric in rankings by U.S. News & World Report. By pioneering online applications more than 15 years ago, Common App positioned itself to bestow colleges with hordes of applicants they need in order to slash admission rates. Since then, CollegeNET claims, Common App has used its leverage to impose ever-expanding rules to punish members for using other services.

Common App’s fee structure, for instance, gives members a discount if they agree to use only its services, according to the suit. The non-profit also supposedly requires members to use official Common App forms for teacher evaluations and transcripts, extra submissions from art students, early decision agreements and even processing of application fees. According to CollegeNet, the non-profit “aggressively enforces its policies to ensure compliance and, not coincidentally, exclude competitors.” The complaint offers one concrete example of such supposed ruthlessness: After Tulane tried to stanch a drop in applications after Hurricane Katrina by waiving application fees and allowing fast-track admission, Common App expelled Tulane from membership. When Tulane tried to re-join, Common App allegedly demanded that it sign a multi-year agreement to use the service exclusively.

A smoking gun in debate over consumer class actions?

Alison Frankel
May 9, 2014 22:12 UTC

The biggest obstacle in evaluating class actions involving inexpensive consumer products is the frustrating lack of empirical data. Sure, we can compile statistics on case filings, dismissals, settlements and attorneys’ fees, but publicly available evidence about whether these cases actually benefit the people who bought the supposedly flawed products is scant indeed.

You may remember the tit-for-tat “studies” on consumer class action outcomes issued last December by Mayer Brown (at the behest of the U.S. Chamber of Commerce) and the Consumer Financial Protection Bureau. Not surprisingly, given that Mayer Brown undertook its research to counter, pre-emptively, the CFPB’s preliminary report on mandatory arbitration clauses, the two studies reached opposite conclusions about whether class actions deliver real value to class members.

Both analyses, however, had to extrapolate aggressively to reach their predictable outcomes. There have been thousands of consumer class action settlements, but Mayer Brown based its conclusions about class members’ claim rates on data from a whopping six cases. The CFPB looked at eight. I’m not blaming either of them. They looked hard for data, but it’s just not available in public records.

How ‘Company Doe’ – now revealed as ErgoBaby – triggered 1st Amendment case

Alison Frankel
May 8, 2014 21:33 UTC

In September 2011, ErgoBaby — a small California-based maker of baby products – received potentially ruinous news. The Consumer Product Safety Commission intended to post a report on its public database of an incident in which a month-old baby in Maryland died while he was in an ErgoBaby carrier. The baby’s mom had been strawberry picking in hot weather with her infant strapped to the front of her body. The carrier’s coverlet was up, and, according to the initial autopsy report, “rebreathing in a hot environmental condition could have contributed to death.”

ErgoBaby brought in lawyers from Gibson, Dunn & Crutcher, who quickly protested that the CPSC’s proposed report contained materially inaccurate information. There was simply no link, ErgoBaby argued, between its carrier and the baby’s death because the autopsy’s note about rebreathing was sheer speculation. The CPSC revised the incident report twice, eventually removing a reference to the possibility that the baby’s death was related to recirculated hot air and stating that the cause of death was undetermined.

ErgoBaby believed that even the revised report would have a devastating impact on its business — and, moreover, according to CEO Margaret Hardin, that the CPSC public database was not intended to include such vague and unsubstantiated reports. In October 2011, the company’s lawyers filed a suit in federal court in Greenbelt, Maryland, to block the CPSC from publishing the stripped-down incident report. But ErgoBaby didn’t sue in its own name. That would have defeated the whole purpose of the litigation by exposing ErgoBaby’s fight with the CPSC over the incident report — exactly what the company was trying to avoid. So, in what Gibson partner Baruch Fellner called “an historic first,” ErgoBaby was identified in the complaint only as “Company Doe.” It asked the court to allow it to proceed under that pseudonym and to seal the entire docket of the case.

Bully tactics aside – is it finally time to exonerate Chevron?

Alison Frankel
May 7, 2014 22:40 UTC

Chevron is a litigation bully that has employed relentless tactics in 20 years of litigation against villagers in the Ecuadorean rainforest, where the oil giant’s predecessor Texaco once drilled for oil. The Ecuadoreans deserve to live in better conditions, without fear that oil waste continues to pollute their soil and water. I believe both of these assertions to be truth. I do not believe they are causally connected. Chevron’s pattern of exploiting the weaknesses of its adversaries — especially in its recent and overwhelmingly successful campaign in U.S. courts to discredit the villagers’ $9 billion Ecuadorean judgment against the oil company — does not necessarily mean Chevron is responsible for cleaning up the Lago Agrio oil field.

As recently as last year, I didn’t think the fundamental question in the Ecuadoreans’ case would ever be answered. No one would ever know for sure, I thought, whether Chevron had contaminated the land and injured the people of the Lago Agrio. Chevron’s bulldog lawyers at Gibson, Dunn & Crutcher had amassed copious evidence that the verdict in Ecuador was hopelessly tainted by fraud. U.S. District Judge Lewis Kaplan of Manhattan recounted that evidence in a 497-page ruling in March that concluded the Ecuadorean verdict was “obtained by corrupt means.” But even Kaplan acknowledged the tragedy that misconduct by the villagers’ lawyers would forever obscure the truth or falsity of their claims. We’ll never know, Kaplan said, whether the villagers might have been able to prosecute a legitimate case against Chevron.

I am increasingly convinced that they could not have.

On Wednesday, their lawyers at the Washington, D.C., firm Patton Boggs surrendered to Chevron in abject fashion. Patton Boggs, which entered the Lago Agrio case in 2010 and was quickly ensnared in its own litigation with Chevron, agreed to pay the oil company $15 million and to assign its interest in the Ecuadorean judgment to Chevron. The firm said that its two lead partners in the Lago Agrio case, James Tyrrell and Eric Westenberger, would submit to depositions by Chevron lawyers at Gibson Dunn, and that it would turn over discovery materials to Chevron, under the supervision of Judge Kaplan.

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