EAST-WEST TRADE: LEGAL REQUIREMENTS FOR
FOREIGN BUSINESS AND INVESTMENT
Monday, June 4, 2012
Gansevoort Park Avenue NYC
Director’s and Officer’s Liability
By Perry S. Granof Esq.
Williams Kastner
&
Granof International Group LLC
The Corporation
Its Shareholders
Its Creditors
Its Employees
The Regulators/Law Enforcement Agencies
• The Duties a D&O Owes to the Corporation Itself
– The Duty of Care
– The Duty of Loyalty
– The Duty of Obedience
• The Business Judgment Rule
• Derivative Actions
– Recourse for Breaches of Duty
• Mega Derivative Settlements/Judgments:
–
–
–
–
–
Southern Peru Copper Corp: - US $1.26 billion judgment (Dec. 19, 2011)
United Health Group - US $900 million settlement (July 1, 2009)
Oracle - US $122 million settlement (Nov. 22, 2005)
Broadcom - US $118 million partial settlement (Aug. 28, 2009)
AIG/Greenberg - US $90 million settlement (Aug. 26, 2010)
– Sino-Forest – Derivative Demand served (Oct. 14, 2011) – Canadian
Corp.
• Special Litigation Committee formed
The D&O Diary, by Kevin LaCroix December
7, 2010, et al
• Select Fee Awards in Derivative Litigation
– Southern Peru Copper Corporation (Del. Ct. Chancery, Dec. 19,
2011) :
• $300 million fee award
– Del Monte Foods (Del Ct. Chancery, Oct. 2011):
• $22.3 million fee award
– El Paso Corporation (Morgan Kidde) (Del Ct. Chancery, Nov. 19,
2010):
• $50 million fee award
– Atlas Energy Resources (Del Ct. Chancery, May 14, 2012):
• $4,500,000 fee award
• Statutory Basis for Liability (US Code)
– The Securities Act of 1933:
-Section 11
-Section 12(2)
-Section 15
– The Securities Exchange Act of 1934:
-Section 10(b)
-Section 14(d) (7)
-Section 20(a)
– The Public Company Accounting and Investor
Protection Act of 2002 (Sarbanes-Oxley):
-Section 302
• 2011 U.S. Settlements in Subprime and Credit Crisis
– American International Group: $725 million partial settlement USDC
– Southern District New York (Approved in February 2012)
– Wachovia Bondholders: $627 million USDC- Southern District of New
York (Settled August 5, 2011)
– Lehman Brothers/Offering Underwriters: $417 million USDC –
Southern District of New York (Settled December 2, 2011)
– Washington Mutual: $208.5 million USDC- Western District of
Washington (Settled July 1, 2011)
– National City Corporation: $168 million USDC- Northern District of
Ohio (Settled Aug. 9, 2011),
Kevin La Croix ABA/CCIP Presentation,
Beijing China, April 19, 2012
• Trends
– Chinese Reverse Merger Cases Declining
(Number of Filings)
• 2010
• 2011
• 2012
11
39
2
– Merger and Acquisition Cases Increasing
(Number of Lawsuits per transaction)
•
•
•
•
•
•
2006
2007
2008
2009
2010
2011
2.6
3.0
2.8
4.6
4.7
4.8
Kevin La Croix ABA/CCIP Presentation,
Beijing China, April 19, 2012
• Litigation Outcomes (1996-2011)
– Before first ruling on Motion to Dismiss
• 9% voluntarily dismissed
• 16% settled
– After first ruling on Motion to Dismiss
• 32% dismissed
• 35% settled before ruling on Motion for Summary
Judgment (MSJ)
• 8% proceeded to ruling on MSJ
Cornerstone Research, Securities Class
Action Filings, 2011 Year in Review
• Statutory Remedies
• Title VII of the Civil Rights Act of 1964
• The Equal Pay Act
• The Age Discrimination in Employment Act
• The Family and Medical Leave Act
• The Americans with Disabilities Act
• Common Law Remedies
• Wrongful Interference with Contractual Relationships
• Breach of Fiduciary Duty
• Fraud and Negligent Misrepresentation
• Tortuous Inducement
• Unsecured Creditor Class Actions
• Derivative Claims Against Directors of Insolvent
Companies
• Fiduciary duties of directors of distressed companies:
– American Catholic Educational Programming Foundation Inc. v.
Gheewalla, et al. 2007 WL 1453705 (Del. May 18, 2007).
• Individual creditors of an insolvent corporation have no right to assert direct
claims for breach of fiduciary duty against corporate directors when a company
is in the zone of insolvency. However, a creditor may step into the shoes of the
shareholders, in the event of corporate insolvency.
– Shandler v. DLJ Merchant Banking, Inc., C.A. No. 4797-VCS (Del. Ch. July
26, 2010)
• Where the board was fully informed and fulfilled its duty of loyalty when making its
decision, they enjoy the protection of the business judgment rule and the Court will
not second-guess a decision to attempt to keep the company alive with additional
financing instead of filing for bankruptcy sooner.
• The Equal Employment Opportunity Commission (Enforces the above
statutory remedies, available to employees)
• The Securities Exchange Commission
– Securities Fraud
– Foreign Corrupt Practices Act
• The Federal Trade Commission
• The US Department of Justice and State Attorney General Offices
• SEC Enforcement Actions
– 735 enforcement actions commenced
(8% increase over 2010)
– 933 investigations opened
(2% decrease from 2010)
– $2.8 billion in penalties and disgorgement
– 22 settlements of $10M or more
(16% increase over 2010)
($71.4 million average)
SEC Market Data Fiscal 2011; PwCs 2011
Securities Litigation Study
• The Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Expanded SEC Powers)
– Section 922 (Whistleblower - remedies and prohibitions against
retaliation as respects disclosures to the SEC)
• 10% - 20% Recovery Rewards
– Section 929O (SEC can apply Aiding and Abetting standard of
knowledge satisfied by - Recklessness)
– Section 929P(b) (SEC granted authority to bring actions based on
“conduct/effect” standard – Extraterritorial Jurisdiction)
– Section 954 (Recovery of erroneously awarded compensation – ClawBack)
The Dodd-Frank Act’s Impact on Securities Litigation and Enforcement, Anthony M. Alexis, Hector
Gonzalez. Marcia E. Goodman
Mayer, Brown
• Enforcement Action Against Wall Street Firms for Conduct
Related to the Credit Crisis
–
–
Goldman Sachs agreed to pay US $550 million
Citigroup agreed to pay US $285 million*
– UBS agreed to pay US $160 million
– Bank of America agreed to pay US $150 million
– Wachovia Capital Markets ( Wells Fargo Securities), agreed to pay
a US $4.45 million penalty and to give up US $6.75 million of
allegedly ill-gotten gains
*Judge Rakoff rejected the SEC’s proposed settlement and, the 2nd Circuit said "the
SEC and Citigroup have made a strong showing of likelihood of success.” The
federal appeals court stopped just short of throwing out the judge’s decision.
• Law Enforcement and Regulatory Actions Against D&O’s
– Foreign Corrupt Practices Act (FCPA)
• Siemens agreed to pay the SEC US $800 million to settle FCPA – related charges
(Dec 15, 2008), the largest settlement ever
• Johnson & Johnson agreed to pay the SEC more than US $70 million to settle
FCPA - related allegations (April 8, 2011)
• Walmart ?
(FCPA Professor’s Blog)
– Insider Trading
• “In the past 18 months alone, the U.S. has criminally charged 47 hedge-fund
managers and others with insider trading; Galleon Group's Mr. Rajaratnam is
the 35th defendant to be convicted or to plead guilty.” Currently, Rajat Guptaa a
former director of Goldman Sachs is on trial facing charges that he leaked
secret information about the company to Raj Rajaratnam.
(“Trial Win Adds to Momentum in Crackdown”. Wall Street Journal, may 12, 2011)
The Conviction of Raj Rajaratnam
“Fund Titan Fond Guilty” The Wall Street Journal, May 12, 2011
The Convection of Raj Rajaratnam
“Trial Win Adds to Momentum” The Wall Street
Journal, May 12, 2011
The Decline in US Listings
U.S China Hong Kong
London
Brazil Canada
2001
2005
2011
“U.S. Falls Behind in Stock Listings”,
Wall Street Journal, May 26, 2011,