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Westlaw Journal Formerly Andrews Litigation ReporterCORPORATE OFFICERS & DIRECTORS LIABILITYLitigation News and Analysis • Legislation • Regulation • Expert Commentary VOLUME 26, ISSUE 5 / AUGUST 30, 2010COMMENTARYWHAT’S INSIDEPOISON PILLS Nine steps to optimization of the audit committee7 Barnes & Noble’s poison pill was reasonable response Officers and directors serving on corporate audit committees should be aware of to threat, court says their increased liability and step carefully in light of a 2010 report that the number YucaipaAm.AllianceFundIIv. of securities suits and the amounts paid to settle them are up sharply, say Barry Jay Riggio (Del. Ch.)Epstein and Elaine Vullmahn of Russell Novak & Co.SEE PAGE 3FIDUCIARY DUTY8 Shareholder says drug firms’ $168 million merger is ‘unfair’ Jacksonv.PenwestPharms.Co. (Wash. Super. Ct.)SUBPRIME8 Raymond James Financial wins dismissal of subprime fraud suit Woodwardv.RaymondJamesFin. (S.D.N.Y.)9 JPMorgan asks judge to boot subprime mortgage suit FortWorthEmployees’Ret.Fundv.JPMorganChase&C o.(S.D.N.Y.)BOOKS & RECORDS10 Delaware high court says ruling did not make it too tough to use records action CityofWestlandPolice&FireRet.Sys.v.AxcelisTechs. (Del.)11 Morgan Stanley shareholder REUTERS/Robert Galbraithseeks directors’ reason for dismissal move BREACH OF DUTY La.Mun.PoliceEmployeesRet.Sys.v.MorganStanley& McAfee sold its future ...

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Westlaw Journal Formerly Andrews Litigation Reporter
CORPORATE OFFICERS
& DIRECTORS LIABILITY
Litigation News and Analysis • Legislation • Regulation • Expert Commentary VOLUME 26, ISSUE 5 / AUGUST 30, 2010
COMMENTARY
WHAT’S INSIDE
POISON PILLS Nine steps to optimization of the audit committee
7 Barnes & Noble’s poison pill
was reasonable response Officers and directors serving on corporate audit committees should be aware of
to threat, court says their increased liability and step carefully in light of a 2010 report that the number
YucaipaAm.AllianceFundIIv. of securities suits and the amounts paid to settle them are up sharply, say Barry Jay
Riggio (Del. Ch.)
Epstein and Elaine Vullmahn of Russell Novak & Co.
SEE PAGE 3FIDUCIARY DUTY
8 Shareholder says drug firms’
$168 million merger is ‘unfair’
Jacksonv.PenwestPharms.
Co. (Wash. Super. Ct.)
SUBPRIME
8 Raymond James Financial
wins dismissal of subprime
fraud suit
Woodwardv.RaymondJames
Fin. (S.D.N.Y.)
9 JPMorgan asks judge to boot
subprime mortgage suit
FortWorthEmployees’Ret.
Fundv.JPMorganChase&C o.
(S.D.N.Y.)
BOOKS & RECORDS
10 Delaware high court says
ruling did not make it too
tough to use records action
CityofWestlandPolice&Fire
Ret.Sys.v.AxcelisTechs. (Del.)
11 Morgan Stanley shareholder REUTERS/Robert Galbraith
seeks directors’ reason
for dismissal move BREACH OF DUTY
La.Mun.PoliceEmployees
Ret.Sys.v.MorganStanley& McAfee sold its future too cheaply in $7.7 billion Co. (Del. Ch.)
Intel deal, suit says
REGULATION
14 Feds finalize ‘horizontal An unfair $7.7 billion merger with Intel Corp. will cut McAfee shareholders out of the
merger’ guidelines cyber security firm’s bright and profitable future as most electronic devices link to the
Internet, a disgruntled investor charges in state court in San Francisco. NEWS IN BRIEF
CONTINUED ON PAGE 6
40856731TABLE OF CONTENTS
Westlaw Journal Corporate Officers
& Directors Liability
Breach of Duty: Greenberg v. McAfee Inc.
Published since November 1985
McAfee sold its future too cheaply in $7.6 billion Intel deal, suit says (Cal. Super. Ct.) ...................................1
Publisher: Mary Ellen Fox
Commentary: By Barry Jay Epstein, Ph.D., CPA, and Elaine Vullmahn, MBA, CPA, CIA
Executive Editor: Jodine Mayberry
Nine steps to optimization of the audit committee .......................................................................................... 3
Production Coordinator: Tricia Gorman
Poison Pills: Yucaipa Am. Alliance Fund II v. RiggioManaging Editor: Donna M. Higgins
Barnes & Noble’s poison pill was reasonable response to threat, court says (Del. Ch.) ................................. 7
Editor: Frank Reynolds
Frank.Reynolds@thomsonreuters.com Fiduciary Duty: Jackson v. Penwest Pharms. Co.
Shareholder says drug firms’ $168 million merger is ‘unfair’ (Wash. Super. Ct.) ............................................8
Westlaw Journal Corporate Officers &
Directors Liability (ISSN 2155-5885) is
Subprime: Woodward v. Raymond James Fin.published biweekly by Andrews Publications,
Raymond James Financial wins dismissal of subprime fraud suit (S.D.N.Y.) ..................................................8
a Thomson Reuters/West business.
Andrews Publications Subprime: Fort Worth Employees’ Ret. Fund v. JPMorgan Chase & Co.
175 Strafford Avenue JPMorgan asks judge to boot subprime mortgage suit (S.D.N.Y.) ...................................................................9
Building 4, Suite 140
Wayne, PA 19087 Books & Records: City of Westland Police & Fire Ret. Sys. v. Axcelis Techs.
877-595-0449 Delaware high court says ruling did not make it too tough to use records action (Del.).............................. 10
Fax: 800-220-1640
www.andrewsonline.com Books & Records: La. Mun. Police Employees Ret. Sys. v. Morgan Stanley & Co.
Morgan Stanley shareholder seeks directors’ reason for dismissal move (Del. Ch.) ......................................11Customer service: 800-328-4880
For more information, or to subscribe, D&O Insurance: Pendergest-Holt v. Certain Underwriters at Lloyd’s of London
Texas hearing focuses on whether Stanford scheme included money laundering (S.D. Tex.) ......................12please call 800-328-9352 or visit
west.thomsom.com.
D&O Insurance: Strategic Capital Bancorp v. St. Paul Mercury Ins. Co.
’Insured vs. insured’ exclusion includes company and subsidiaries (C.D. Ill.) ................................................13Reproduction Authorization
Authorization to photocopy items for internal
Regulationor personal use, or the internal or personal
Feds finalize ‘horizontal merger’ guidelines ....................................................................................................14use by specific clients, is granted by Andrews
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n © 2010 Thomson Reuters2 | WESTLAW JOURNAL CORPORATE OFFICERS & DIRECTORS LIABILITYCOMMENTARY
Nine steps to optimization of the audit committee
By Barry Jay Epstein, Ph.D., CPA, and Elaine Vullmahn, MBA, CPA, CIA
Shareholders are becoming increasingly and regulations. Rapid business expansion A key committee, like the AC, should include
intolerant of inadequate financial disclosures (oftentimes into international markets), a mix of continuing members and recent
and questionable accounting practices continuously changing accounting standards additions; it is wise always to retain a few
and increasingly are holding audit commit- and greater reliance on electronic information experienced members for needed stability
tees responsible. According to a second- systems have further complicated the ability and to serve as the “institutional memory”
quarter 2010 report by Advisen Ltd., which of many ACs to monitor corporate behavior. of actions taken in earlier periods, both
specializes in research and analytics, the successful and those that misfired. ACs can lessen shareholder dissatisfaction
number of securities suit filings “was up and the risk of litigation by learning to Even with the best of intentions, looking at the
sharply — nearly 30 percent higher than the function more efficiently and effectively. same criteria and making repetitive decisions
first quarter, and 19 percent above the very Prudent ACs can accomplish this, in part, by year after year can become mundane to even
active second quarter of 2009.” conducting regular self-evaluations to assess the most professional governance advisers.
Advisen also reported that “the average the extent to which they are meeting their Adding occasional “fresh blood” is a means
securities class action settlement [through responsibilities. The following nine areas are to overcome this tendency. Overall, the
the first half of 2010, compared to 2009] often ripe with possibilities for improvement. AC should strive to function with members
increased materially, from $10.4 million to
$49.6 million.”
Oversight failures can clearly contribute to severe Oversight failures can clearly contribute to
and even disastrous consequences for individual severe and even disastrous consequences for
individual directors and the companies they directors and the companies they serve.
serve.
Recently, there have been a number of
lapses in oversight that have resulted in COMPOSITION who possess an effective amalgam of fresh
poor financial performance for well-regarded perspective, knowledge and experience. The AC should regularly review its corporations. For example, Monsanto
composition to thwart stagnation and Co.’s financial statements are alleged to BUILDING AND MAINTAINING ensure the best-equipped people are serving have masked the agricultural products COMPETENCYas active members. Companies subject to distributor’s true financial condition.
Sarbanes-Oxley requirements, of course, Finding and recruiting qualified AC members
The company and certain of its officers and must have “financially literate” AC members, is vital, but after being appointed, the
executives stand accused of failing to ade- of whom at least one need be a financial- members must be given the resources to
quately disclose to shareholders material reporting expert. perform continually at a high level. The rules
adverse facts about the company, including and concepts pertinent to quality financial Even entities not affected by this rule how demand for its products was declining reporting are constantly evolving, and would be well advised to seek highly substantially, that prices for herbicide pro- steps should be taken to keep AC members qualified individuals to serve on this key ducts were going to be cut significantly to actively engaged in continual learning.committee and on the full board as well. compete with a saturating market, and that
Financial reporting, and its related control For example, on the near-term horizon is its reported earnings, prospects and financial
considerations, plays such an important role the move to replace generally accepted condition were substantially misstated.
in the life of an enterprise — even absent the accounting principles with international
Separately, a class-action lawsuit was existence of any outside shareholders — that financial reporting standards, about which
recently filed against Anadarko Petroleum it is well worth the effort to recruit, and the almost all U.S.-based AC members (and
Corp. and certain of its officers and directors. cost to compensate, appropriately qualified even the accounting and auditing experts
The plaintiffs in that case allege, interalia, individuals. among their ranks) currently have little
that the defendants “issued materially understanding. Other changes, such as The AC should also consider rotating false and misleading statements” and that revised Securities and Exchange Commission members, especially if one or more persons the company “lacked adequate systems of reporting requirements, will also continue not on the current board desire to contribute internal, operational or financial controls.” apace.to the organization. New members can bring
Many audit committees struggle with fresh perspectives to evaluating business To address these inevitable changes in the
discharging their oversight responsibilities operations, assessing risk and recommending financial-reporting environment, the AC
in the face of a complicated web of laws stronger internal control measures. could schedule regular “lunch and learn”
n n© 2010 Thomson Reuters AUGUST 30, 2010 VOLUME 26 ISSUE 5 | 3events and presentations tailored to meet extent of the commitment, so those unable ADEQUACY OF TECHNICAL
members’ needs and interests. It is critical or unwilling to serve in a substantive manner RESOURCES
that AC members be made aware of changes can be screened out. Even when composed of highly qualified
in their company’s business environment, individuals, it is not realistic to expect that
extending to the wider business scope, OPTIMIZING FREQUENCY AND ACs can always be self-sufficient, particularly
which could alter risks and opportunities STRUCTURE OF MEETINGS regarding insights into practices among other
the company faces and affect its financial- ACs should periodically evaluate the ACs, and concerning impending changes to
reporting needs and strategies. productivity of their regular meetings to financial-reporting rules and securities laws.
consider possible changes to meeting Attendance at updating and training sessions This has been underscored by Sarbanes-
structure or frequency. Meetings that are could be either optional or compulsory Oxley, which empowered ACs to engage
too informal could result in invigorating depending on topic and company philosophy their own legal and accounting advisers as
discussions but inadequate follow-through deemed warranted. Evidence suggests that (although the authors favor the latter).
on the ideas and concerns raised. Meetings few ACs have done this to date, which may Emphasis should be placed on active
that are too formal may inhibit active be explained by the inertia that affects us all.participation, even for optional sessions, as
involvement by participants who may be meetings featuring active learning can make However, in the event of an incident that
reluctant to speak up; these meetings tend more effective the participants’ abilities raises the specter of audit committee
to become mere box-checking sessions. to discharge their fiduciary and oversight legal exposure (e.g., inadequate financial-
responsibilities. Use of modern teaching statement disclosure allegations), the fact Depending on the agenda items, the AC may
techniques, such as role playing, can prove that such expertise was sought out and find that the communication of opinions
remarkably effective, even with participants utilized will corroborate the AC’s assertion and comprehension of complex data can
who may otherwise resent being subjected to that it was diligent in its conduct. Indeed, be enhanced by having guest speakers,
typical lectures that encourage only passive having advisory talent available could well a trained facilitator, or by using videos,
(and often ineffective) listening. prevent many such problems.
Highly qualified board and AC members
typically will carry a cost, particularly if The committee should regularly review its composition
independent (non-management) members to ensure that stagnation does not occur and that
are recruited (required for publicly held
the right people are serving as active members. companies but recommended for others as
well). The usual cost/benefit considerations
will apply, and the supply of highly qualified AVAILABILITY FOR ADEQUATE TIME detailed PowerPoint presentations and other individuals is finite.COMMITMENT technology to distribute information relevant
Board membership and/or meeting fees
AC members should reflect on whether or to the issues to be discussed.
should be set at a competitive level to ensure
not they have adequate flexibility in their On the other hand, slickly packaged, even the company is able to access needed talent.
respective schedules to assume the duties animated, presentations, which have become The cost of qualified board and AC members,
and responsibilities entailed in serving on the de rigueur for even routine staff meetings, and even of outside consultants for the AC,
committee. can be counter-productive and unlikely to rarely will be material to the company’s
If any member finds herself overwhelmed and foster follow-through, easily devolving into overall revenues and profits and would
incapable of handling the added workload, entertaining but non-substantive sessions almost never be material compared with the
she should bring the issue to the attention of that encourage passivity. cost of defending a suit.
the full board or chairman and, if necessary, AC and other board committee meetings
resign. AC members should be assured DECISION PROCESSES AND are typically scheduled for the same days
that there is no dishonor in resigning for OPERATING PHILOSOPHYas full board meetings and may occur four
such reasons, but that continuing to serve to eight times per year. The adequacy of The AC should share a common risk-
in name only, unproductively, would be a the current schedule should be periodically tolerance philosophy with the board of
disservice to the company and the other reconsidered and adjusted as warranted. directors and entity management. Ideally,
members. Not all committees have the same workload this can be articulated and explicitly agreed
There are many benefits gained by accepting (the audit committee’s tasks are often the upon, although regrettably in practice this
a seat on the AC. Such an appointment most demanding), so uniformity of schedules often goes unstated.
can enhance a member’s reputation and is neither necessary nor wise. A divergence in ideology could jeopardize
place him or her in a position for career Ultimately, in order to be effective, ACs need internal operations and ultimately have
advancement. to conduct meetings that balance effectively external financial-reporting implications
ACs can best achieve their goals when their the needs to summarize the status and if some individuals incorrectly believe that
certain interpretations of regulations or specific members have sufficient time to devote to review the progress of outstanding issues,
aggressive actions, for example, are acceptable discussing and deciding key issues. Potential discuss current agenda items, and assign
when this has not been agreed upon.members should be candidly informed of the responsibility for new tasks.
n © 2010 Thomson Reuters4 | WESTLAW JOURNAL CORPORATE OFFICERS & DIRECTORS LIABILITYThe AC can limit misunderstandings and to re-examine its charter periodically, since to discuss with the external auditors the
confusion regarding how risk should be expectations from when it was written may performing of specific procedures during the
evaluated and handled by creating a dynamic well have become obsolete. The AC should planned quarterly and year-end audits.
model to facilitate the decision-making either recommit to those goals or seek to In similar fashion, the AC can establish
process. Such a model can, and should, modify its current structure and obligations, communications schedules with its other
be shared with other decision-makers, to as new circumstances warrant. counterparties. Risk mitigation and improved
promote uniform application of risk policies. operating practices can be best achieved It is critical that the AC operate within a
through frequent communication between This is not to imply that unanimity of opinion framework that enables it to carry out
is expected or even particularly desirable. governance responsibilities with efficiency groups and putting into use a formal
communications calendar. A healthy level of debate serves to surface and effectiveness in a manner responsive to
ideas and concerns, and with appropriate changing environmental circumstances. It
CONCLUSIONstructure for discussion (with the necessary should be capable of influencing changes
“tone at the top” provided by the board and within the business’s operations so that, The audit committee is key to the success of
committee chairs), optimal decisions are among other things, entity risk management the company’s business operations. If the AC
more likely to result. is integrated throughout the enterprise. falters in executing its duties, particularly in
There is a greater opportunity for successful the areas of financial reporting and controls Nonetheless, it is best if an overall philosophy
adoption and acceptance of operating over the integrity of the financial-reporting regarding the role and responsibility of the AC,
changes when management understands process, there could be grave consequences the entity’s approach to financial reporting,
the AC’s responsibilities and authority, and for the entity. and so forth, is shared by most or all of the AC
is confident that these have been updated to members. This will change as membership Without proper governance, monitoring and reflect current conditions. changes and environmental conditions risk-assessment systems in place, the entity’s
evolve, of course. When new members financial statements may include errors COMMUNICATIONare being recruited, candidates should be and misrepresentations, which could cause
informed of the current committee’s posture Effective communication between the AC reduced investor confidence, higher cost of
on these matters. and the full board of directors, the internal capital, litigation and reputation damage.
audit function, management and external
If attention is paid to the foregoing nine INFORMATION SUPPORTING auditors is critical to company function. In
key aspects of AC structure and conduct, DECISION-MAKING order to encourage and enforce the free flow
the committee will more likely optimize its
of information and continuous dialog among AC decisions need to be based on the performance and contribute substantively
these groups, the AC could establish a most relevant and reliable information. It to the successful operation of the business
schedule reflecting when it expects to receive is, therefore, wise for ACs to evaluate the enterprise it serves. Periodic reviews are useful
and communicate information.processes used for requesting and receiving in coping with dynamic business environments,
information. It is essential for members to be For example, the AC could require the bringing fresh ideas to the fore and stimulating
able to obtain the decision inputs they need internal audit function to report on the active participation by AC members. Whether
in a timely manner. findings of internal audit engagements it has the entity is public or private, a vibrant AC can
performed on a monthly or quarterly basis. function as a key determinant of organizational When the AC requests documents, data,
The AC can, in turn, utilize that information WJachievement. models, etc., the members should receive
this information well in advance of meetings
to provide members time for thoughtful
consideration. They should also receive
materials that are sufficiently detailed and
respond satisfactorily to AC member inquiries.
It is not unknown for some management
personnel to provide ACs (and other outside
members of the boards) with information within
a few days of scheduled meetings, sometimes
to limit the risk of informed challenges to
management members of the board.
Such situations should never be tolerated.
ACs must be assertive to control the risk of
making suboptimal decisions, which could Barry Jay Epstein, Ph.D., CPA, is partner in the Chicago firm Russell Novak & Co., where his practice is
spawn litigation and other costly, reputation- concentrated on technical consultations on GAAP and IFRS, and he is a consulting and testifying expert
on civil and white-collar criminal litigation matters. Epstein is the co-author of Wiley GAAP 2010, Wiley damaging consequences.
IFRS 2010, Wiley IFRS Policies and Procedures, the WG&L Handbook of Accounting and Auditing, and
other books. He can be reached at bepstein@RNCO.com. Elaine Vullmahn, MBA, CPA, CIA, is a senior
COMMITTEE STRUCTURE AND DUTIES litigation accountant with the firm, specializing in internal control matters and litigation consulting.
She is also a juris doctorate candidate at the John Marshall Law School, class of 2011.
Each AC should have a clearly defined role
within its organization. It is useful for the AC
n n© 2010 Thomson Reuters AUGUST 30, 2010 VOLUME 26 ISSUE 5 | 5McAfee
CONTINUED FROM PAGE 1
Greenberg v. McAfee Inc. et al., No. 10-180413, complaint filed (Cal.
Super. Ct., Santa Clara County Aug. 19, 2010).
The class-action lawsuit by shareholder Fred Greenberg asks the Santa
Clara County Superior Court to enjoin a $48-per-share offer from Intel
until the McAfee board fulfills its fiduciary duty to seek out the best
price for the company.
McAfee CEO David DeWalt and his overly
compliant board of directors agreed
to various deal-protection devices to
discourage other bidders, the suit says.
The suit claims that instead of pressing microprocessor maker Intel for
a better offer, the McAfee officers and directors thought more about
the lucrative change-of-control benefits and future positions they
would reap in the merger, which will create a hardware and software
giant.
Even worse, Greenberg complains, CEO David DeWalt and his overly
compliant board of directors agreed to various deal-protection devices
to discourage other bidders from coming forward. For example,
McAfee allegedly:
• Will not shop around for better bids or encourage superior offers
from other parties.
DeWalt commented on the deal in his own statement.• Will give Intel the right to match any offer that does come in.
“The cyber-threat landscape has changed dramatically over the past • Will require any successful competing bidder to pay a $230 million
few years, with millions of new threats appearing every month. We termination fee to compensate Intel for losing the deal.
believe this acquisition will result in our ability to deliver a safer, more
Although located in California, McAfee is chartered in Delaware, so secure and trusted Internet-enabled device experience,” he said.
its directors must fulfill the duty that state’s corporate law imposes
The suit asks the court to enjoin any shareholder vote on the deal at on them to maximize shareholder value in any sale of the company,
WJleast until the McAfee board is free to shop for the best price. Greenberg asserts.
Attorneys: In a press release announcing approval of the deal by both boards of
Plaintiffs: Marc Umeda, Stephen Oddo, Rebecca Peterson and Arshan Amiri,
directors, Intel CEO Paul Otellini said, “With the rapid expansion of Robbins Umeda LLP, San Diego; Mark Gardy and James Notis, Gardy &
growth across a vast array of Internet-connected devices, more and Notis, Englewood Cliffs, N.J.
more of the elements of our lives have moved online.”
n © 2010 Thomson Reuters6 | WESTLAW JOURNAL CORPORATE OFFICERS & DIRECTORS LIABILITYBurkle “repeatedly indicated in public filings POISON PILLS
and letters to the board that he intended to
effect changes in the company’s governance
and reserved the right to buy up to Barnes & Noble’s poison pill was reasonable
50 percent” of the company, the court response to threat, court says pointed out concerning Burkle’s intentions.
THE BACK DOOR TO CONTROL?Barnes & Noble Inc.’s directors were justified in using a poison-pill defense to
block a possible “creeping takeover” by activist investor Ron Burkle after he Moreover, the pill the Barnes & Noble directors
accumulated nearly 20 percent of the bookseller’s stock, a Delaware state adopted will not bar Burkle from mounting a
court judge has ruled. proxy contest that very well could let him in
the back door to control of the Barnes & Noble
Yucaipa American Alliance Fund II L.P. Burkle and Yucaipa argued at trial that boardroom, the court said.
et al. v. Riggio et al., No. 5465, 2010 WL feature of the pill will make it difficult to act “Indeed, the record indicates that even with the
3170806 (Del. Ch. Aug. 11, 2010). in concert with other dissidents to support pill in place, Yucaipa not only has a reasonable
a slate of director candidates at the next chance to, but is in fact likely to, prevail in a proxy Vice Chancellor Leo Strine rejected a request
annual shareholder meeting, scheduled to contest if it runs a credible slate of candidates,” by Burkle’s Yucaipa American Alliance Fund
take place sometime before Sept. 30.II to enjoin the directors from using that the judge wrote. “Thus the board’s decision to
The incumbent directors that Burkle hopes WJdefense. use the pill … was reasonable.”
to unseat support Board Chairman Leonard Attorneys:
HOW BIG A THREAT? Riggio, whose family owns a controlling Plaintiffs: David McBride, Martin Lessner,
Kristen DePalma, James Higgins, James Yoch Jr., share of the company.Burkle testified at a Chancery Court trial Kathaleen McCormick, Megan Haney, Richard
there was no threat to thwart because he had Thomas, Nicholas Rohrer, Melanie Sharp and WHO’S IN CONTROL HERE?
Emily Burton, Young Conaway Stargatt & Taylor, no interest in controlling Barnes & Noble, but
Wilmington, Del.; Stephen Alexander, Beth Although the suit claims the board is the judge noted Burkle’s Barnes & Noble
Boland, J. Warren Rissier, Matthew Lawson dominated by Riggio, Yucaipa does not say holdings rapidly rose in proportion to his
and Karen Pazzani, Bingham McCutchen LLP, a majority of the directors lack independence dissatisfaction with the firm’s management Los Angeles
because it knows it cannot prove that charge, decisions.
Defendants (Barnes & Noble): Peter Walsh Jr.,
the defendants said in their pretrial brief. Michael Pittenger, Dawn Jones, William Green Jr. The reasonableness of the Barnes & Noble
and Ryan Browning, Potter Anderson & Corroon, The fact that the majority of the board board’s adoption of the pill was a key issue in
Wilmington; Sandra Goldstein and Kevin Orsini, members are independent means the court the case — one of the most closely watched Cravath, Swaine & Moore, New York
must give their decisions a higher level of merger battles since the 2008 meltdown of
Defendants (Riggio): Gregory Williams, Lisa deference, the defendants say.the financial industry. Schmidt and Blake Rohrbacher, Richards,
Vice Chancellor Strine’s exhaustive 89-page Layton & Finger, Wilmington; Eric Rieder and Vice Chancellor Strine found that “in
John Kircher, Bryan Cave LLP, New Yorkopinion details a long history of conflict response to this threat that the corporation’s
in business relations between Burkle and Defendants (other individual defendants): Kenneth stockholders would relinquish control
Nachbar, Susan Waesco and Shannon German, Riggio that escalated when Burkle learned through a creeping acquisition without the
Morris, Nichols, Arsht & Tunnell, WilmingtonRiggio had sold a college book company he benefit of receiving a control premium, the
Related Court Document: controlled to Barnes & Noble in what Burkle board adopted a measured pill” that did not
Opinion: 2010 WL 3170806called a “self-dealing transaction.”bar Burkle’s proxy contest plans.
AN EXTRA-POISONOUS PILL?
A poison pill, also known as a shareholder-
rights plan, triggers when an uninvited
investor buys more than a set percentage
of the company’s stock (20 percent in this
case) and creates thousands of new shares
at a discount to all shareholders except the
hostile suitor.
However, the Barnes & Noble pill also
explodes if a group of investors who
collectively own 20 percent or more of the
company’s stock act in concert to elect
directors or change the corporate charter,
the breach-of-duty suit filed by Yucaipa and
a related entity alleges.
REUTERS/Lily Bowers
n n© 2010 Thomson Reuters AUGUST 30, 2010 VOLUME 26 ISSUE 5 | 7FIDUCIARY DUTY SUBPRIME
Shareholder says drug firms’ $168 million Raymond James
merger is ‘unfair’ Financial wins
dismissal of A drug development company that specializes in treating nervous system
disorders is selling itself too cheaply through an unfair sales process, a subprime fraud suit
shareholder claims in Washington state court.
A New York federal judge has tossed
Jackson v. Penwest Pharmaceuticals Co. et al., a shareholder suit alleging Ray-
No. 10-2-29162-8 SEA, complaint filed The lawsuit accuses mond James Financial fraudulently
(Wash. Super. Ct., King County Aug. 11, 2010). Penwest’s largest share- failed to set aside enough cash to
Steve Jackson sued Penwest Pharmaceuticals holders of pushing the cover its subprime mortgage losses.
Co., its board of directors and the company’s company into a sales
largest shareholders for self-dealing and Woodward v. Raymond James Financial Inc. transaction so that they unjust enrichment in the company’s proposed et al., No. 09-CV-5347, 2010 WL 3239411 can “monetize their illiquid $168 million sale to Endo Pharmaceuticals (S.D.N.Y. Aug. 16, 2010).
Holdings Inc. holdings in the company
The 2009 class-action suit said Florida-
Earlier this month Penwest announced as quickly as possible.” based RJF and top executives understated
that it entered into a merger agreement the subprime loan-loss reserves of a
in which Endo, its long-time partner in the subsidiary, Raymond James Bank, in order able to share in the future success of the development and commercialization of the to inflate RJF’s revenue during a 12-month company,” Jackson charges in the complaint.drug Opana ER, agreed to buy all its common period ending in April 2009.
His suit also names Penwest’s largest stock for $5 per share.
The plaintiff shareholders, led by the shareholders, Tang Capital Partners L.P. and Penwest’s board of directors unanimously Louisiana School Employees’ Retirement Perceptive Life Sciences Master Fund Ltd., as approved the deal, and the offer represents a System, say they paid an artificially inflated defendants.premium of 19 percent over the closing price price for RJF stock during that time.
of the company’s stock Aug. 6, according to It alleges that both Tang and PLS are pushing
In an Aug. 16 decision U.S. District Judge the complaint in the King County Superior the company into a sales transaction so that
Robert Patterson of the Southern District Court. they can “monetize their illiquid holdings in
of New York dismissed the suit, finding it the company as quickly as possible.”But Jackson says the sales price “does not did not meet federal pleading standards for
adequately reflect the company’s prospects Jackson seeks a court order enjoining the securities fraud.
going forward.” transaction “unless and until the company
RJF’s allegedly false statements about loss adopts and implements a fair sales procedure He notes that the company’s stock price reserves “are without exception general WJor process.” has been steadily rising since it bottomed statements of optimism,” the judge
Attorneys:out with the rest of the public markets in said. “This in and of itself renders these Plaintiff: Karl P. Barth and Steve W. Berman,
November 2008. Hagens Berman Sobol Shapiro, Seattle; Darren J. statements inactionable.”
Robbins, Randall J. Baron, A. Rick Atwood Jr., The company also has a number of pipeline According to the complaint, RJF announced David T. Wissbroecker, David A. Knotts and drugs in development that it anticipates April 14, 2009, that its second-quarter Eun Jin Lee, Robbins Geller Rudman & Dowd,
putting out over the near term, according to San Diego; Richard A. Maniskas, Ryan & Maniskas, financial results for that year would be well
Jackson. Wayne, Pa. below the consensus estimates of stock
Related Court Document: “If the defendants are able to consummate market analysts.
Complaint: 2010 WL 3281076the proposed acquisition, however, the The company also announced that both its
See Document Section A (P. 17) for the complaint.company’s public shareholders will not be commercial and residential loan portfolios
would require higher loss reserves, tripling
from the first quarter, the suit said.
n © 2010 Thomson Reuters8 | WESTLAW JOURNAL CORPORATE OFFICERS & DIRECTORS LIABILITYIn response to the unexpected sharp increase The plaintiff retirement system says The complaint alleged the defendants
in loan-loss provisions, RJF’s common shares shareholders lost hundreds of millions of violated the anti-fraud provisions of the
fell more than 13 percent overnight to close dollars because of the alleged fraud. Securities Exchange Act of 1934, 15 U.S.C.
at about $16.50 each April 15, it said. §§ 78j(b) and 78t(a). WJThe executives named in the suit were RJF
Related Court Document: During the class period RJF shares traded as CEO Thomas A. James and CFO Jeffrey Julien
Opinion: 2010 WL 3239411high as $38 each. and RJ Bank CEO Steven Raney and Senior
See Document Section B (P. 27) for the opinion.Vice President Mark Moody.They are currently trading around $25 each.
The offering documents
allegedly failed to
disclose that mortgage
lenders ignored their
underwriting and property-
appraisal standards.
by borrowers whose loans have been bundled
into a trust.
In a recent motion to dismiss the suit,
JPMorgan says the plaintiff is a “sophisticated
investor” that bought the securities knowing
a subprime mortgage meltdown was
underway.
REUTERS/Lucas Jackson “Plaintiff has no grounds for a lawsuit
where it was fully informed of the risks of its SUBPRIME investment but, in hindsight, would prefer
not to have made the investment,” JPMorgan
says in a memo supporting dismissal.JPMorgan asks judge to boot subprime
Eleven separate trusts sold investors mortgage suit hundreds of millions of dollars worth of
certificates that fell in value as the subprime
JPMorgan Chase is urging a federal judge to dismiss an amended investor suit mortgage crisis unfolded in 2007, according
to the complaint.alleging it fraudulently sold purported investment-grade mortgage-backed
securities in 2008 that were “junk bonds.” The plaintiff fund seeks compensation on
behalf of investors who relied on the offering
Fort Worth Employees’ Retirement Fund v. The court-appointed lead plaintiff, an documents in buying the certificates.
JPMorgan Chase & Co. et al., No. 09-CV- employee pension fund based in the Virgin
The suit also names as defendants six 3701, memo supporting dismissal filed Islands, filed an amended complaint in July.
JPMorgan executives who allegedly signed (S.D.N.Y. Aug. 9, 2010). According to the suit, the offering documents WJthe documents.
The class-action suit, originally filed in New failed to disclose that loan originators,
Attorneys:York state court, alleges JPMorgan violated including now-bankrupt lender American
Plaintiff: Samuel H. Rudman, David A. Rosenfeld,
the federal Securities Act of 1933, 15 U.S.C. Home Mortgage Corp., ignored their under- Carolina C. Torres and Jarrett S. Charo, Robbins
§  77a, by making misleading statements in writing and property-appraisal standards. Geller Rudman & Dowd, Melville, N.Y.; Arthur C.
Leahy, Thomas E. Egler, Susan G. Taylor, Scott H. securities offering documents concerning the JPMorgan likewise ignored its loan- Saham, Nathan R. Lindell and Matthew I. Alpert, quality of underlying mortgages. purchasing guidelines in acquiring the risky Robbins Geller Rudman & Dowd, San Diego
JPMorgan removed the suit to the U.S. loans for securitization, the suit says. Defendants: A. Robert Pietrzak, Dorothy J.
Spenner and Owen H. Smith, Sidley Austin LLP, District Court for the Southern District of The securities, called mortgage pass-
New YorkNew York, where the case is pending before through certificates, pay dividends drawn
Related Court Document: U.S. District Judge John G. Koeltl. from principal and interest payments made
Memo supporting dismissal: 2010 WL 3253993
n n© 2010 Thomson Reuters AUGUST 30, 2010 VOLUME 26 ISSUE 5 | 9BOOKS & RECORDS
Delaware high court says ruling did not
make it too tough to use records action
A recent Delaware state court decision did not set the bar too high for
dissident shareholders to show a “credible basis” to suspect wrongdoing by
corporate officials and demand an inspection of company records, the full
Delaware Supreme Court has ruled.
City of Westland Police & Fire Retirement However, on appeal, Westland said that rule UNPOPULAR DECISIONS
System v. Axcelis Technologies Inc., No. 594- does not apply to the challenged decisions in
This case arose after the majority of the
2009, 2010 WL 3157143 (Del. Aug. 11, 2010). this case.
Axcelis board spurned a 2008 merger bid
The high court rejected an appeal from Writing for Chief Justice Myron Steele and by Sumitomo Heavy Industries and allegedly
Axcelis Technologies stockholders who Justices Carolyn Berger, Randy Holland and prevented shareholders from accepting the
claimed that if the Chancery Court decision Henry duPont Ridgely, Justice Jack Jacobs offer.
that dismissed their suit stood, the right of said the board’s refusal of the merger offer Dissident shareholders successfully organ-ized
all investors to inspect corporate records for and resignations was well within the powers a proxy vote to withhold support from three
evidence of misconduct will be “worthless.” granted the directors under the company of the directors on the board and, under the
charter and Delaware law. company charter, those directors should have REASON FOR SUSPICION The plaintiff urged the high court to adopt a been required to step down after that vote of no
Delaware, where Axcelis and the majority standard that “improperly attempts to shift confidence, according the dissidents.
of the nation’s large companies are incorp- to Axcelis Westland’s burden to establish a The board refused to accept the directors’
orated, allows shareholders to access proper purpose” for the inspection, Justice resignations and thereby allowed them to
company records to communicate with Jacobs wrote.stay on, the shareholders said.
other investors or to find evidence to support However, the high court noted that in other
a suspicion of wrongdoing. circumstances with a different fact pattern, a THE BENEFIT OF THE DOUBT
However, the shareholders must be able board’s rejection of a shareholder mandate, One of the dissident shareholders, the City of
to show they have a “credible basis,” that such as the vote of no confidence in this case, Westland Police & Fire Retirement System,
is, something to back up that suspicion. could be sufficient justification for a records filed a books-and-records action, seeking
Several recent books-and-records cases in inspection. WJevidence that the incumbent directors had
the Delaware state courts have focused on Attorneys:mismanaged the company by thwarting
what that standard for suspicion should be. Plaintiff: Jay Eisenhofer, Michael Barry the investors’ will, but the Chancery Court
and Christian Keeney, Grant & Eisenhofer,
This case has been closely watched by granted the company’s motion to dismiss. Wilmington, Del.
corporate law specialists because it springs Vice Chancellor John Noble said the business Defendant: John Reed, Paul Brown, K. Tyler
from a dispute over shareholder proxy O’Connell and Aleine Porterfield, Edwards Angell judgment rule gives the decisions of officers
voting, a controversial area where state law, Palmer & Dodge, Wilmington.and directors of Delaware corporations the
corporate governance rules and federal Related Court Document: benefit of the doubt unless there is evidence
securities laws intersect. Opinion: 2010 WL 3157143of self-interest or irresponsibility.
Shareholder activist groups have urged
the Obama administration to instruct the
Securities and Exchange Commission to Justice Jack Jacobs said the board’s refusal of the merger
more tightly regulate proxy voting to offset
offer and resignations was well within the powers granted the what they see as the Delaware courts’
tendency to give corporate management too directors under the company charter and Delaware law.
much latitude in that area.
n © 2010 Thomson Reuters10 | WESTLAW JOURNAL CORPORATE OFFICERS & DIRECTORS LIABILITY