Opinion

Alison Frankel

Wachtell plays shareholder savior in weird National Interstate case

Alison Frankel
Mar 17, 2014 20:36 UTC

There is probably no law firm more closely associated with corporate charter and bylaw provisions requiring shareholders to litigate their claims in Delaware Chancery Court than Wachtell, Lipton, Rosen & Katz. Wachtell didn’t defend the Chevron and FedEx cases that led then Chancellor Leo Strine to uphold the validity of forum selection clauses, but Wachtell partners Theodore Mirvis and William Savitt (among others) have been ardent boosters of the tactic as a means of curbing the expensive and duplicative shareholder suits that almost inevitably now follow deal announcements.

That’s what makes Wachtell’s role in the litigation over American Financial’s tender offer for the 48 percent stake in National Interstate that it doesn’t already own so notable. In representing a shareholder seeking to squelch the deal – National Interstate founder Alan Spachman, who owns more than 9 percent of the outstanding shares – Wachtell engaged in the sort of forum selection gamesmanship we usually see from shareholder class action firms, leading to accusations of forum shopping that Wachtell is more accustomed to tossing than receiving. After two different state court judges in Ohio refused to enjoin American Financial’s $30 per share tender offer to National Interstate’s minority shareholders, despite widespread criticism of the sale process, Wachtell and Baker & Hostetler sued on Spachman’s behalf in federal court in Akron, adding federal securities claims to the breach of duty assertions in the two previous cases.

The third time turned out to be the charm for National Interstate’s minority shareholders. Despite American Financial’s arguments that Spachman and his lawyers were blatantly shopping for a friendly judge and that a single shareholder should not be permitted to block a $300 million deal, U.S. District Judge James Gwin was willing to grant what his state-court cohorts were not. At the end of a long hearing Friday, Gwin said he would enjoin the tender offer from closing Monday. On Sunday, American Financial announced that it was dropping the offer and returning shares already tendered.

So how did Wachtell and Baker & Hostetler manage to obtain what the shareholder class action bar could not? As I’ve previously reported, National Interstate’s minority shareholders were blessed (at least for litigation purposes) with unusually egregious facts. The board of the small trucking industry insurer is controlled by its majority owner, the insurance megalith American Financial. Yet when American Financial decided to make a surprise $28-per-share offer for the minority shares, the board didn’t even bother to establish a special committee to evaluate the offer. The company did bring in a financial advisor, Duff & Phelps, which concluded $28 per share was inadequate. Conflicted board members supposedly leaked the Duff analysis to American Financial, which then sweetened the offer to $30 per share – at the very low end of the Duff & Phelps valuation. Duff & Phelps then resigned from the assignment, and the National Interstate board, without any advisor to opine on the offer, voted not to make a recommendation to shareholders. Spachman, who sits on the National Interstate board, was so incensed by the tender offer process that he filed an extremely rare denunciation of the deal with the Securities and Exchange Commission.

Inevitably, the public messiness of the deal attracted shareholder lawyers. Wolf Popper struck first, alleging in a breach of duty class action in state court in Cincinnati that American Financial’s offer was both inadequate and coercive, since it included provisions to disadvantage stockholders who refused to tender their shares. A week later, Labaton Sucharow and Friedman Oster filed their class action in Akron state court, fleshing out the allegations from the first suit and adding National Interstate’s supposedly conflicted directors as defendants. The fight to retain control of the shareholder litigation was even more brutal than usual, but eventually the Akron judge concluded that she didn’t have jurisdiction because the Cincinnati case was filed first. The Cincinnati judge, meanwhile, refused to grant Wolf Popper’s motion for a preliminary injunction because she concluded there was no irreparable harm to shareholders if the deal went through: If they were indeed underpaid for their shares, they could be compensated by money damages after the tender offer closed. She set a trial schedule for the damages case but said the deal could proceed.

Google to 9th Circuit: Undo unworkable ‘Innocence’ copyright ruling

Alison Frankel
Mar 14, 2014 21:47 UTC

Does Chief Justice Alex Kozinski of the 9th Circuit Court of Appeals know more about the Copyright Act than the U.S. Copyright Office?

Not according to Google. In a new brief to the 9th Circuit, Google has asked the entire court to review a controversial Feb. 26 opinion in which Kozinski and Judge Ronald Gould concluded that Google and YouTube must take down video from the explosive film “Innocence of Muslims” because the movie likely infringes the right of an actress, Cindy Lee Garcia, to control her own five-second performance in the film. Google’s new brief argues that Kozinski and Gould misinterpreted the Copyright Act when they found, in an issue of first impression, that Garcia likely has an independent interest in her performance. And the company’s lawyers at Hogan Lovells gave the 9th Circuit a good reason why all of the judges on the court should reconsider Kozinski’s take on Garcia’s rights: A week after his opinion came out, the U.S. Copyright Office rejected Garcia’s application to register a copyright on her performance in “Innocence of Muslims.” In a March 6 letter to Garcia’s lawyer, Cris Armenta of The Armenta Law Firm, the Copyright Office said that its “longstanding practices” do not allow actors to copyright individual performances within a movie.

Google is not alone in hoping that the 9th Circuit will reconsider the Kozinski opinion. As the brief points out, the possibility that actors with bit parts may have a right to control the distribution of entire movies has struck fear in film producers and documentarians. Meanwhile, a group of news organizations, including The New York Times and the Los Angeles Times, has filed an amicus brief arguing that the 9th Circuit’s takedown order contradicts important First Amendment principles and ought to be reconsidered. (Technically, the publishers’ brief addressed en banc review of the 9th Circuit’s decision not to stay the takedown order while Google pursues appeals, but the same arguments also apply more broadly.)

Cranky Posner opinion mocks brief, suggests sending lawyer to jail

Alison Frankel
Mar 13, 2014 19:13 UTC

In an interview last November with The Daily Beast, Judge Richard Posner of the 7th Circuit Court of Appeals explained why he wouldn’t want to sit on the U.S. Supreme Court. “I don’t think it’s a real court,” Posner said. “It’s a quasi-political party. President, House of Representatives, Supreme Court. It’s very political. And they decide which cases to hear, which doesn’t strike me as something judges should do. You should take what comes.”

That idea – that judges should not shape the law by cherry-picking cases but by deciding the cases that come their way – stuck with me. Posner’s not completely ingenuous, because, as he goes on to say in the interview, he does pick which opinions he wants to write and assigns out the rest. Nevertheless, it says something profound about American justice that Posner applies his incisive intellect to a semi-random gamut of cases, matters large and small, legally interesting and run-of-the-mill.

The acerbic judge was at his worst – or best, depending on your perspective – in an opinion Wednesday that’s already become an instant classic. Posner mocked the brief filed by a car crash victim and her lawyer, who were found in civil contempt for failing to deposit $180,000 in a trust account while they fight over the money with a union healthcare fund, as “a gaunt, pathetic document” with a grand total of 118 words of argument (including citations). He said the conduct of the crash victim and her lawyer was “egregious” and “outrageous,” and directed the trial judge presiding over their dispute with the union fund to consider throwing them in jail for contempt until they’ve come up with the $180,000. Posner suggested that the Justice Department might also be interested in the case, and then, to boot, scolded the trial judge, U.S. District Judge Joan Lefkow of Chicago, for permitting the case to drag on as “the stench rose.” Would Posner get to write such a masterpiece if he were on the Supreme Court? I think not.

Scant attorney-client protection for GM

Alison Frankel
Mar 12, 2014 20:00 UTC

On Tuesday, Reuters found out that General Motors is facing a criminal investigation by federal prosecutors in Manhattan into allegations that the auto company failed to alert consumers and regulators about long-running ignition-switch problems. Word of a possible criminal case followed GM’s revelation Monday that it has hired Jenner & Block and King & Spalding to assist its general counsel in an internal investigation of the company’s response to the ignition defect, which has been blamed for 13 deaths. The confluence of the two investigations raises an intriguing question: How much will GM’s own lawyers have to tell the Justice Department about their findings?

The answer: a lot. GM lawyers will almost certainly have to inform the government of all the facts they uncover, despite Justice Department guidelines that prohibit prosecutors from conditioning leniency for corporate defendants on their waiver of attorney-client privilege. Prosecutors are not supposed to ask corporations outright to surrender the traditional protections shielding legal advice, attorney work product and communications between clients and their counsel. But the Justice Department guidelines allow government lawyers to demand an account of the facts corporate investigators have obtained. If a corporation wants to receive credit for cooperating with the government, the guidelines state, then it “must disclose the relevant facts of which it has knowledge,” including facts uncovered through an internal investigation.

That policy, which the Justice Department promulgated in August 2008, came in response to widespread criticism of the government’s previous requirement that corporations waive their attorney-client privileges in order to receive a deferred prosecution or non-prosecution deal. Theoretically, the revised guidelines permit cooperating corporate defendants to assert attorney-client privilege over materials such as the notes their law firm investigators make during interviews of corporate witnesses, so long as inside investigators are careful to disclose all relevant facts to prosecutors. “Lawyers have to conduct internal investigations in a way that the facts can be gathered and then communicated to the government while still preserving the privilege,” said former Justice Department prosecutor Nathaniel Edmonds, now at Paul Hastings.

Has Supreme Court lost its zeal to curb consumer class actions?

Alison Frankel
Mar 11, 2014 19:35 UTC

On Monday, the U.S. Supreme Court declined to grant review to two small Nebraska banks facing class action allegations that they failed to post stickers on ATM machines to alert users about add-on fees. That might not seem like a surprise, except that the certiorari petition by the banks’ counsel at Mayer Brown raised a question that the Supreme Court has previously struggled with: whether class action plaintiffs asserting federal laws that provide statutory damages have constitutional standing to sue even if they haven’t suffered any actual injury. The justices heard a different case posing the exact same question in 2011 in First American Financial v. Edwards, but didn’t resolve the issue because they dismissed the appeal on the last day of the term in June 2012. Class action opponents like the U.S. Chamber of Commerce, the Washington Legal Foundation and the Association of Credit and Collection Professionals were hoping that the Nebraska banks’ case was a new chance to end litigation by uninjured plaintiffs whose small, individual statutory damages claims turn into a big nuisance when they’re accumulated in class actions.

Monday’s cert denial is the second time in two weeks that the justices have decided to sidestep thorny consumer class action issues. On Feb. 24, as you probably know, the court refused to grant certiorari to Sears and Whirlpool, which had argued that the 6th and 7th Circuit Courts of Appeal erroneously certified classes of washing machine owners whose appliances have an alleged tendency to develop a moldy smell. The moldy washer cert petitions were the subject of a vigorous public relations campaign by business groups that contended the vast classes, consisting mostly of owners whose machines never developed a moldy smell, perfectly exemplified the perniciousness of class actions. The justices were clearly interested in the cases, since they discussed the Sears and Whirlpool appeals at least three conferences. But even though the 6th and 7th Circuit certifications came on remand from the Supreme Court, the justices ultimately decided not to accept the invitation from Sears, Whirlpool and their influential amici to remake the rules of consumer class actions.

So: two big opportunities to curb classwide consumer cases and two big punts by a Supreme Court that has in recent years shown no hesitation to limit the litigation rights of ordinary people. (A few prime examples from a long list: American Express v. Italian Colors, AT&T Mobility v. Concepcion, Wal-Mart v. Dukes.) Are we witnessing the dawn of a new era at the Supreme Court?

Delaware ‘abetting’ ruling v. RBC should scare M&A advisors

Alison Frankel
Mar 10, 2014 21:19 UTC

If there were any remaining shreds of doubt that Delaware Chancery Court has come to regard financial advisors in M&A deals with considerable mistrust, they ought to be erased by Vice-Chancellor Travis Laster‘s 92-page decision Friday in a shareholder class action stemming from Warburg Pincus’s $17.25-per-share acquisition of the ambulance company Rural/Metro.

Rural/Metro’s directors settled the case last year for $6.5 million, which meant that when shareholder lawyers from Robbins Geller Rudman & Dowd and Bouchard, Margules & Friedlander went to trial against Royal Bank of Canada for aiding and abetting the board’s breach of duty, they had to show that RBC induced directors to make unreasonable decisions about selling the company. That made the case tougher for shareholders, but they nevertheless convinced Laster that RBC was conflicted by its hope of earning big financing fees from Warburg in this deal and from other banks in a related transaction. The judge concluded that RBC is indeed liable for aiding and abetting the board’s breach – a precedent-setting opinion that means the litigation risk to financial advisors in M&A deals just got very real.

Laster’s RBC decision is the logical extension of a couple of recent Chancery Court rulings involving conflicted financial advisors. In 2011, Laster enjoined the acquisition of Del Monte by a private equity consortium, finding that Del Monte’s advisor, Barclays, was secretly receiving financing fees from the consortium. Barclays later settled with Del Monte shareholders for $90 million. A year after the Del Monte ruling, Chancellor Leo Strine (now Delaware’s chief justice) issued a scathing opinion describing Goldman Sachs’s “furtive” and “troubling” decision to advise El Paso Corporation in its sale to Kinder Morgan, even though Goldman held a big equity stake in Kinder. Goldman eventually agreed to waive more than $20 million in fees and legal costs as part of Kinder Morgan’s $110 million settlement.

How Texas oil company won $319 million ‘common law’ partnership verdict

Alison Frankel
Mar 7, 2014 22:42 UTC

The oil and gas industry was stunned this week a $319 million verdict for Energy Transfer Partners, courtesy of a state court jury in Dallas, Texas. Jurors agreed with ETP’s lawyers at Lynn Tillotson Pinker & Cox that ETP and Enterprise Products had a binding agreement to develop a pipeline to carry crude oil from Oklahoma to refineries on the Gulf of Mexico, and that Enterprise breached the agreement when it decided instead to hook up with a Canadian pipeline company called Enbridge.

That might seem like a straightforward determination – except that the letter of intent between ETP and Enterprise included language that specifically said their deal wasn’t binding unless there was a formal term sheet and their respective boards approved the agreement. Neither of those things happened.

So how did Enterprise and its lawyers at Beck Redden and Sayles Werbner wind up on the wrong side of a $319 million verdict? Because the judge in the case, Emily Tobolowsky, rejected their summary judgment argument that as a matter of Texas contract law, preconditions must be satisfied to create binding partnership obligations. Judge Tobolowsky’s denial of Enterprise’s summary judgment motion, which was not accompanied by an opinion, meant that ETP and lead trial counsel Michael Lynn could ask jurors to judge the relationship between ETP and Enterprise just as they’d judge a common law marriage. ETP told jurors that it didn’t matter what the formal paperwork said if Enterprise acted as though it were partnered with ETP. To emphasize his client’s “if it walks like a duck” theme, Lynn even showed the jury a poster of a duck holding a sign that said, “I am not a partner.”

Unprecedented Dewey charges put law firms on notice

Alison Frankel
Mar 6, 2014 23:50 UTC

Steven Davis, the onetime LeBoeuf Lamb chairman who engineered his firm’s 2007 merger with Dewey Ballantine, then presided over the titanic collapse of Dewey & LeBoeuf in 2012, is now an accused felon, along with Davis’s longtime deputy, Stephen DiCarmine, and Dewey’s former CFO Joel Sanders. The three criminal defendants and two other former Dewey financial professionals have also been named in an enforcement action by the Securities and Exchange Commission.

The New York state court indictment and the SEC complaint outline roughly the same allegations: When Dewey’s revenue came up short in 2008, the firm embarked on a disastrous course of accounting fraud that continued through its $150 million private placement in 2010 and, ultimately, its demise in 2012.

These are truly ruinous allegations. According to the New York District Attorney’s office and the SEC, Davis, DiCarmine and Dewey’s non-lawyer finance employees defrauded their bank lenders and the insurance companies that invested in the law firm’s private placement by various stratagems to “cook the books,” as CFO Sanders described Dewey’s accounting in an email to the COO in December 2008.

At Halliburton argument, justices show little appetite for killing Basic

Alison Frankel
Mar 5, 2014 20:25 UTC

After oral arguments Wednesday morning at the U.S. Supreme Court in Halliburton v. Erica P. John Fund, I ran into a few securities class action plaintiffs lawyers in the court’s lobby, at the statue of Chief Justice John Marshall. They were looking jaunty indeed. The consensus in their little group was that the justices showed little inclination to toss out the 1988 precedent that has been the foundation of the megabillion-dollar securities class action industry. They regarded Wednesday’s argument as a hopeful portent that classwide securities fraud litigation is likely to survive the Supreme Court’s re-examination of Basic v. Levinson.

I have to agree. From the questions posed to Halliburton counsel Aaron Streett of Baker Botts and EPJ Fund lawyer David Boies of Boies, Schiller & Flexner, the Supreme Court seems to be searching for a way to require investors to demonstrate the price impact of alleged corporate misrepresentations in order to win class certification. That would be a new and different burden for the securities class action bar, which, under Basic’s fraud-on-the-market theory, simply had to show that shares traded in an efficient market in order to invoke the presumption that investors relied on corporate misstatements. To establish price impact, plaintiffs would have to hire experts to conduct event studies analyzing the market effect of particular misrepresentations. But such event studies are already common in securities class action litigation, as both sides acknowledged to the justices. So a new price impact requirement would leave the securities class action industry more or less intact. “We can live with that,” one plaintiffs lawyer told me.

If oral argument is a reliable predictor of the Supreme Court’s ultimate direction – a dicey proposition, of course – all of the lawyers and economic experts who worried they’d be scrabbling for work if the court overruled Basic can relax a bit. In fact, if the justices figure out some way to make price impact part of the class certification process, economics consultants could actually emerge from the Supreme Court’s scrutiny of Basic with more securities fraud business than ever.

As Basic hangs in the balance, next SCOTUS securities case looms

Alison Frankel
Mar 4, 2014 19:28 UTC

On Wednesday, the U.S. Supreme Court will hear oral arguments in Halliburton v. Erica P. John Fund, the most momentous securities case of the last quarter century. When this term ends in June, we’ll know whether the fraud-on-the-market theory that the Supreme Court codified in the 1988 case Basic v. Levinson will remain intact as the foundation of the securities class action industry or whether shareholders will lose the leverage of classwide damages claims for supposed fraud under the Exchange Act of 1934. I’ve been saying it for months: Untold billions of dollars hang on the justices’ determination in the Halliburton case.

The stakes are admittedly not quite as high in Omnicare v. Laborers District Council Construction Industry Pension, which the justices have just agreed to hear next term. Omnicare presents the question of whether plaintiffs asserting claims under Section 11 of the Securities Act of 1933 must only show that defendants made objectively false statements in offering documents – as the 6th Circuit Court of Appeals held in the Omnicare case – or must also show that defendants didn’t believe the supposedly false statements at the time they were made, as at least two other federal circuits have concluded. Section 11 class actions, as you know, aren’t historically as prevalent as Exchange Act fraud class actions. But if the Supreme Court overturns Basic v. Levinson, Securities Act claims will be one of the few remaining avenues for shareholders who want to sue through class actions. The justices’ reasoning on the standard of proof will go a long way toward determining how big a threat these cases present to issuers – and to their underwriters, auditors and lawyers.

To set that standard, the Supreme Court will have to resolve apparent tension between two of its own precedents. In the court’s 1991 ruling in Virginia Bancshares v. Sandberg, the majority considered “the actionability per se of statements of reasons, opinions or belief” under Section 14 of the Exchange Act. Because that sort of statement “purports to express what is consciously on the speaker’s mind,” the Supreme Court said, it made sense to limit any discussion of liability to misstatements that did not reflect the speakers’ true beliefs and opinions. According to Omnicare’s petition for certiorari, the 2nd, 3rd and 9th Circuits have all relied on that holding in Virginia Bancshares to conclude that even under Section 11 of the Securities Act – which calls for a more expansive view of liability than the Exchange Act provision at issue in the Virginia Bancshares case – defendants can only be sued for statements that depart from their actual opinions.

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