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Sixth Circuit case specifies additional language required in indemnification survival clauses in M&A agreements

A recent Sixth Circuit case, interpreting Ohio law, found that a merger agreement stating that the representations and warranties “shall survive…the Closing until… the second anniversary date of the Closing…,” without more, was not sufficient to modify the statute of limitations for breach of contract claims related to the merger agreement. Fortunately, this issue can be remedied in merger agreements with the addition of a provision expressly limiting when “actions,” “demands” or “claims” may be brought.

This article describes the Sixth Circuit case in greater detail and provides a sample contract provision that M&A parties can add to their M&A agreements to ensure that courts will respect the parties’ intent to modify the statute of limitations in the survival clause of the agreement.

Background of the Sixth Circuit case

Escue v. Sequent, Inc., 2014 FED App. 0412N (6th Cir. 2014), involved the acquisition of Better Business Solutions of Alabama, Inc. (“Better Business”) by Sequent, Inc. pursuant to a stock for stock merger that closed Jan. 1, 2007. On Dec. 18, 2008, the plaintiff, the sole shareholder of Better Business, sent a letter to the defendant corporation stating that he intended to sue the defendant corporation for breaching its representations and warranties. However, the lawsuit was not filed until September 2009.…

Citigroup’s $7 billion settlement allows them to “focus on the future”

U.S. Attorney General Eric Holder and Citigroup announced today that Citigroup will pay $7 billion to settle a U.S. Department of Justice (DOJ) investigation into allegations that it defrauded investors by selling shoddy mortgages ahead of the financial crisis. The civil settlement does not rule out future criminal charges again Citigroup or individual employees. Citigroup stock rose 1.49% Monday in early trading following the announcements.

Citigroup will pay a $4 billion civil penalty to the DOJ, $500 million to the Federal Deposit Insurance Corp. and will set aside $2.5 billion in “consumer relief” to assist struggling mortgage holders. The settlement covers not only residential mortgage-backed securities but also collateral debt obligations (CDOs) issued between 2003 and 2008. The relief to consumers will include Citigroup receiving credit for modifying mortgages for struggling borrowers. The settlement marks a reversal from mid-June when the DOJ had threatened filing suit unless Citigroup significantly raised its offer.…

DOJ Returns $44 Million From Former CEO Joseph Nacchio To Investors of Qwest

Prosecutors and the SEC work quite vigorously to recover ill-gotten gains from those who have committed securities fraud, with the ultimate goal of compensating investors. A conviction in a criminal case or judgment in civil case brought by the SEC may result in a large number, like the $53.8 million forfeiture judgment in the criminal case and the $92 million civil judgment against Raj Rajaratnam (discussed here), but that is only the first step. A May 3, 2012 Press Release from DOJ provides some insight into this process (and how long it may take) – following a 2007 conviction of Joseph Nacchio, the former CEO of Qwest Communications International Inc., based on events which took place between 1999 and 2002, DOJ announced that it "has returned approximately $44 million to victims of [that] securities fraud scheme."…

Federal Judge in Oregon Upholds Dismissal of “Say-on-Pay” Lawsuit Against Umpqua Board

In an Opinion and Order dated February 23, 2012, Judge Michael Mosman adopted the January 11, 2012 Findings and Recommendations of Magistrate Judge John Acosta to dismiss the derivative lawsuit against the Board of Directors of Umpqua Holdings Corporation ("Umpqua") for breach of fiduciary duty. Magistrate Judge Acosta recommendation to dismiss the say-on-pay" lawsuit was the first of its kind. Judge Mosman agreed that plaintiffs’ failure to make a presuit demand was not excused under the arguments they raised regarding the Board members’ exercise of the business judgment rule or their lack of independence or disinterest. Plaintiffs have until March 26, 2012 to amend their complaint.…

Federal Magistrate Judge in Oregon Recommends Dismissing “Say-on-Pay” Lawsuit Against Umpqua Board

On January 11, 2012, Magistrate Judge John Acosta recommended the dismissal of the derivative lawsuit against the Board of Directors of Umpqua Holdings Corporation ("Umpqua") for breach of fiduciary duty. The lawsuit was filed after the shareholders, in an advisory vote, rejected the Board-approved executive compensation program. The Magistrate Judge found that the plaintiffs failed to make a presuit demand as required for a derivative suit and were not excused from doing so under the arguments they raised regarding the Board members’ exercise of the business judgment rule or their lack of independence or disinterest. As Broc Romanek of theCorporateCounsel.Net Blog pointed out, "[t]his is the first federal court decision to dismiss such an action." Magistrate Judge Acosta has referred his Findings and Recommendations to District Judge Michael W. Mosman for review and final determination.…

The Top 10 Most Intriguing Federal Securities Litigation Stories in 2011 (Part 1 of 2)

Today and tomorrow, the Federal Securities Litigation Blog will take a break from discussing the most recent events and, with a larger-than-usual entry, examine the Top 10 securities litigation stories that were the most intriguing in 2011. Undoubtedly, others will be preparing similar lists and this is not intended to be a definitive or complete version. Instead, these are the stories that piqued my interest. Half of the list will be discussed today and the other half tomorrow.

Here’s a quick headline look at the bottom half of the Top 10:

10. The D.C. Circuit Vacates SEC Exchange Rule 14a-11 Regarding Shareholders’ Rights to Include Board Nominee on Proxy Materials.

9. The Jenkins Litigation: Settlement Negotiations in Clawback Case Collapse, But Are Ultimately Resolved.

8. The SEC’s Director of the Division of Enforcement Now Has Authority To Issue Witness Immunity Orders.

7. Where is That File? The SEC Addresses Issues Related to the Destruction of Documents and Discovery Issues Relating to their Notes.

6. The FCPA Sting Case: One Hung Jury, One On-Going Trial, A Conspiracy Count Dismissed and More to Come.

These five stories are discussed in greater detail after the jump.…

Settlement in Chesapeake Energy Derivative Action: CEO Keeps $75 Million Bonus, But Agrees to Buys Back $12 Million Art Collection

On Wednesday November 2, 2011, several media outlets reported on the details of the settlement in the shareholders derivative action filed against executives of Chesapeake Energy Corporation. The case, which was filed in state court in Oklahoma in April 2009, was on appeal after the claims were dismissed in February 2010. Under the terms of the settlement, CEO Aubrey McClendon, whose compensation in 2008 included a $75 million bonus (following a six-month period where the company’s share price fell from $74 to $16.17 a share), will buy back an art collection which he sold to the company for approximately $12 million in 2008.…

Ohio Federal Judge Allows Say-on-Pay Lawsuit to Proceed

In a September 20, 2011 Opinion, Judge Timothy Black of the Southern District of Ohio ruled that a lawsuit brought against senior executives and directors of Cincinnati Bell, Inc. alleging a breach of fiduciary duty regarding compensation would be allowed to proceed. The lawsuit focuses on the "say-on-pay" provisions of the Dodd-Frank Act: specifically, attacking the Board’s decision to increase 2010 executive compensation in light of the nonbinding vote by 66% of the voting shareholders to reject that increase. Although the defendants argued that they are entitled to rely upon the business judgment rule in proceeding with the increase in compensation, the Court held that the issue of whether defendants properly exercised that judgment or, as plaintiff claimed, acted with deliberate intent to injure the company (or reckless disregard for the company) would be an issue based on the evidence (at trial or summary judgment) and not decided at the pleading stage.…

SEC Elects Not To Seek Rehearing of Opinion Vacating Exchange Act Rule 14a-11 Regarding Shareholders’ Rights to Nominees Be in Proxy Materials

On Tuesday, September 6, the SEC announced that it is not seeking rehearing of the decision by the D.C. Circuit Court of Appeals invalidating Exchange Act Rule 14a-11. That Rule, which was previously discussed here, allowed 3% shareholders (or larger) to use the company proxy statement to nominate directors. As discussed here, on Friday, July 22, 2011, the D.C. Circuit Court of Appeals issued an Opinion vacating the rule. Business Roundtable v. SEC, No. 10-1305, slip op. (D.C. Cir. Jul. 22, 2011).…

D.C. Circuit Vacates SEC Exchange Rule 14a-11 Regarding Shareholders’ Rights to Request Their Nominee for the Boards Be Included in the Company’s Proxy Materials

On Friday, July 22, 2011, the D.C. Circuit Court of Appeals issued an Opinion vacating Exchange Act Rule 14a-11. Business Roundtable v. SEC, No. 10-1305, slip op. (D.C. Cir. Jul. 22, 2011). The Rule, which was previously discussed here, allowed 3% shareholders (or larger) to use the company proxy statement to nominate directors.…

Wall Street Journal: Judges in Delaware Taking a Hard Look At Fee Awards in M & A Derivative Cases

On Tuesday, July 19, 2011, the Wall Street Journal ran an interesting article by Gina Chon entitled "Judges Making Lawyers Earn It," discussing trends in fee awards in lawsuits challenging mergers and acquisitions in the Delaware Court of Chancery, finding that:

In recent months … the court’s judges have been more discerning, according to plaintiffs and defense lawyers as well as court officials. In several cases, they have been less willing to sign off on standard fees for lawyers who have done relatively little and more willing to grant high payouts when they think lawyers have worked to earn them. 

The article is available on line here.…

ISS 2011 Policy Updates

Earlier this month ISS updated its 2011 corporate governance policies, which apply to shareholder meetings held in February or later. Key updates include:

  • Say on Pay Votes. ISS will recommend annual say on pay votes, but it is unclear what action ISS will take if shareholders approve biennial or triennial votes. Companies that support triennial votes often argue that approval every three years comports with a long-term approach to compensation.
  • Equity Burn Rate. The cap designed to limit the dilutive effect of compensating employees with equity cannot change more than 2% from the prior year’s cap.
  • Problem Pay. ISS could recommend against directors for pay practices that include repricing underwater stock options without shareholder approval, "excessive" (not defined) perks or gross-ups, and change-in-control payments that exceed three times base salary and average/target/most recent bonus or are paid without involuntary job loss.
  • Absent Directors. ISS will recommend against director nominees who attend less than 75% of board and committee meetings without an acceptable reason (medical issues, family emergencies).  


Amendment to Financial Reform Bill Preserves Regulation D for Accredited Investors

The Senate voted yesterday to approve an amendment to Senator Dodd’s financial reform bill that preserves the current mechanics of a securities offering under Rule 506 of Regulation D.  The original language of the bill would have required a 120 day period for the SEC to review the filings of companies seeking to raise money from “accredited investors.”  If the SEC failed to review the offering, the security would not have been considered a “covered security” exempt from additional requirements of state securities regulators.  This provision, coupled with other language in the original bill would have allowed state regulators to review smaller financings “not of sufficient size of scope.”  In short, the bill would have made it harder and more expensive for start-ups to raise money by subverting federal preemption of state law that has been in place for over a decade.

The original language of the bill had left a lot of commentators, including the Angel Capital Association, wondering why Congress had any interest in restricting how start-up companies raise money from angel investors.  Several circumstances may have contributed to the financial crisis, but few analysts are willing to blame angel investors.

SaveRegD.com, a website started to lobby against the offending language of the original bill, is understandably supportive of the recent amendment.  …

Geithner announces support for executive compensation reforms, but Congress might have its own agenda

On Wednesday, June 10, Secretary of the Treasury, Timothy Geithner outlined the Obama administration’s new proposals on executive compensation. The proposals focused on greater independence of corporate compensation committees and giving shareholders a nonbinding vote on executive compensation, commonly known as ‘say on pay’ provisions. Geithner outlined five guiding principals for executive compensation, namely:

  1. compensation plans should properly measure and reward performance;
  2. compensation should be structured to account for the time horizon of risks by aligning executive (and highly compensated individual) pay with long-term value creation;
  3. compensation should be aligned with sound risk management;
  4. golden parachutes and supplemental retirement packages should properly align the interests of executives with the interests of shareholders; and
  5. the compensation setting process should promote transparency and accountability.

Geithner promoted the administration’s support for legislation requiring greater compensation committee independence for companies listed on the national securities exchanges. The proposed legislation would require compensation committee members to meet the stringent independence standards required of audit committee members under the Sarbanes Oxley Act. In addition, the proposed legislation would provide compensation committees with the right to (i) hire compensation consultants, (ii) hire legal counsel, and (iii) require each company to “appropriately” fund the compensation committee to allow it to execute its independent compensation oversight responsibilities.

In addition, Geithner promoted the administration’s support for legislation requiring non-binding ‘say on pay’ votes by shareholders. The legislation would require all public companies to include a proposal to allow shareholders to approve or disapprove of the compensation arrangements listed in a company’s …

Electronic Shareholder Fora

While certainly not the first company to use some version of an electronic shareholder forum, Intel is apparently the first company to use Broadridge to help Intel host a virtual shareholder meeting and an electronic shareholder forum. Maybe third-party hosting of these e-forums is the next step in what has been a predicted trend for several years now.

Last year, the SEC issued new rules to encourage electronic forums, namely by providing a framework to ensure that (1) communications within the forums will not be considered proxy solicitations and (2) participants will be not liable for the fraudulent statements of other participants.

In an ideal world, such forums could allow management to gain insight into shareholder opinion in a less formal, and perhaps more responsive, way than voting a proxy card. For example, one of the big criticisms of “say on pay” proposals is that there is no way to know what a “no” vote on a compensation package actually means. High participation in an electronic shareholder forum could provide the opportunity to expand on what such a vote means.

However, there are some hurdles: (1) shareholders don’t have one collective will that can be discerned from electronic comments; (2) shareholders are unlikely to participate in large numbers; (3) e-forums could just be way to gain access to more important closed-door meeting with management; and (4) the loudest participants will be looking for ways to takeover the forum.  …

Brokers Vote (For Now); Shareholders Don’t

RiskMetrics Group discusses here an NYSE rule change that will no longer allow brokers to vote uninstructed client shares in uncontested director elections. The new rule is scheduled to take effect for the 2010 proxy season, but groups such as Business Roundtable and the Society of Corporate Secretaries & Governance Professionals argue it will disenfranchise retail voters.

Corporations like broker votes on uncontested director elections because brokers tend to support management nominees. Institutional investors, on the other hand, presumably would have more power to influence director elections (and by extension, other corporate matters) if brokers cannot vote without instruction. This has become more important as more companies require nominees to obtain a majority of votes cast.

It is hard to argue that a rule against broker votes somehow disenfranchises retail investors who already have the ability to vote but choose not to. Whether or not brokers can vote on routine matters, individual holders can provide their own instructions for how to vote. “Notice and access” rules have resulted in even fewer individual shareholders voting, but the reality is small investors either vote with their feet or rely on larger shareholders to look out for their interests.  …

E-Proxy and Disclosures That Go Unread

As reported at The Corporate Counsel earlier this week, SEC Commissioner Luis Aguilar has recently lamented the fact that there was a sharp decrease last year in the number of retail investors who voted their proxies. The drop is attributed to the new e-proxy rules. Apparently, most retail shareholders are less likely to participate in the voting process if they get their materials via e-proxy as opposed to the mail. And, when they do vote using e-proxy, a substantial amount do not click on the proxy statements and annual reports posted online.

Electronic voting has allowed us to confirm that a large portion of shareholders do not read proxy materials, even when they vote. The SEC calls this troubling, but the reality is that retail shareholders rely on institutional investors to police the companies in which they invest.  …

2009 Board of Director Trends

As 2009 begins, perhaps the best indicator of board structure and corporate governance trends is the annual review of boards of directors recently completed by RiskMetrics Group. RiskMetrics has compiled data from last year’s proxy statements at S&P 1,500 companies, yielding the following trends:

  • 50% of companies continue to have classified boards, down 2% from last year.
  • 46% of companies have CEOs that do not serve as the leader of the board of directors, up 5% from last year. But, 8% fewer boards than two years ago have the position of some type of “lead” director. Perhaps companies that have different people serving as CEO and chairman of the board see no need to have a lead director; although, RiskMetrics reports only 48% of non-CEO board chairs were considered independent last year (a 10% increase from 2007).
  • 88% of companies have a board committee formally charged with CEO succession planning, up 8% from last year.
  • 17% of individual directors sit on two or more S&P 1,500 boards, up 5% from last year. It’s difficult to guess what this means, if anything, considering institutional shareholders tend to encourage not being on multiple boards. A closer look at the numbers reveals only the percentage of directors on two boards has increased, not the percentage on more than two boards. Could the up-tick reflect fewer qualified candidates? Fewer willing candidates?

Not surprisingly, most of the trends reflect policies and practices that are supported by the powerful institutional investor advisers.  …

Energy Company Agrees to Climate Change Disclosures

Xcel Energy has agreed to expand its disclosure of risks associated with climate change in its filings with the SEC. The announcement by Xcel comes in response to a subpoena issued by New York Attorney General Andrew Cuomo seeking information on the company’s plans to build an electric power plant in Pueblo, Colorado.

The most recent Form 10-K for Xcel includes disclosures under the following risk factors:

  • “We are subject to environmental laws and regulations, compliance with which could be difficult and costly.”
  • “We are subject to physical and financial risks associated with climate change.”
  • “We may be subject to legislative and regulatory responses to climate change, with which compliance could be difficult and costly.”

Mr. Cuomo is also negotiating with AES Corporation, Dominion Resources, Dynegy, and the Peabody Energy Corporation under a mantle of protecting investors’ right to know all associated risks of climate change.

For a discussion of when companies are required to make disclosures regarding climate change and its associated risks, see the attached law alert prepared by Porterwright.  …

RiskMetrics 2008 Proxy Report

RiskMetrics Group—a significant source of proxy voting guidance for institutional investors—has published its Preliminary U.S. Postseason Report for the 2008 proxy season. The report indicates that before the most recent proxy season, analysts were predicting increases in “shareholder discontent.” Shareholders were expected to increasingly withhold votes for incumbent directors; however, this did not happen, and RiskMetrics blames the bear market.

It seems in times of capital market downturns, shareholders prefer to support management. RiskMetrics reports that most directors were elected with strong support in 2008, and there was only slightly increased support for say on pay proposals.

Certain “activist investors” as labeled by RiskMetrics, also chose not to pursue “vote no” campaigns against boards of struggling financial firms, and most boards received strong support in 2008 (based on voting percentages). These results could mean shareholders do not blame directors for the current market (with the exception of Washington Mutual where 9 directors received over 29% opposition).

If the current market is responsible for increased support for the company’s slate of directors, it could suggest that shareholders collectively understand there is some economic “cost” associated with installing new directors, even when the current directors are thought to be under-performing. One theory is that the costs of replacing poor-performing directors with new directors are higher in a struggling market. …

Say on Pay Update

Earlier this week Aflac became the first large US company to offer shareholders the opportunity to approve compensation for top executives. Faced with an up or down vote, the shareholders resoundingly approved the $12 million pay package by a vote of 93 percent.

Institutional investors and shareholder services have pushed proposals to give shareholders the opportunity to approve pay packages for the past three years. Some companies have asked shareholders to reject such measures. Last year, 43 percent of proposals received shareholder support. This year, the approval rate is at about 42% according to Risk Metrics.

A shareholder vote against a specific compensation package is troublesome because there is no way to know what it means. Different shareholders vote no and yes for different reasons so it is difficult to know which aspect of the compensation is being rejected, or more importantly, what type of compensation package a majority of shareholders would support.  …

Investors Want Disclosure about Carbon Footprint

As the Green Movement continues, more institutional investors are becoming concerned with the potential costs and risks of investing in projects that produce high amounts of carbon. This was the topic of a recent meeting of investors in New York organized by the United Nations Foundation and Ceres, a coalition of investors and environmental groups.

Investors have asked the SEC in the past to require carbon footprint disclosures, but the SEC has declined, and many companies are against such disclosures. The investors are not being altruistic; they are reacting to potential costs that could affect their investments, including 12 bills currently in Congress that would raise costs for companies that emit too much carbon. Investors what to know what is a company’s “climate risk,” which includes risks associated with the costs of carbon production, diminished reputation for not being green, and costs associated with environmental forces such as hurricanes that tend to disrupt energy-based investments.

The investors, including investment banks and pension and retirement funds, have a lot of power if they can agree on strategies for obtaining carbon footprint disclosures. The organizers of the meeting claimed those that attended collectively control trillions of dollars in capital. …

Supreme Court Rejects Third-Party Securities Liability

Earlier this week the U.S. Supreme Court ruled in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. that stockholders cannot sue third parties that participate in a securities fraud scheme because the stockholders have not directly relied on the advice of the third parties. Such third parties potentially include banks, accountants, and law firms. The law that allows stockholders to sue for fraud requires that they actually rely on the misinformation they receive. The Court determined that even if a third party such as an investment bank contributes to fraudulent activity in connection with the sale of securities, the third party does not directly communicate misinformation to stockholders, and therefore the stockholders have no fraud claim against the third party.

The case will have direct implications for Enron stockholders who have been waiting for the Stoneridge decision to determine whether they can sue Enron’s former bankers. Unless Congress creates a private right of action against third parties, the Supreme Court has determined that stockholders only have claims against the fraudulent issuer.

Not surprisingly, investor-advocate groups have criticized the decision as anti-investor. The ruling eliminates one theory of third party liability; however, the SEC continues to have authority to pursue claims against any party that participates in securities fraud. …

Say-On-Pay Update

RiskMetrics Group, an international company that advises institutional investors on the corporate governance policies of publicly traded companies, has announced its 2008 proxy voting policies updates. The updates will apply to all companies with shareholder meeting dates after February 1, 2008. The updates explain how RiskMetrics Group’s ISS Governance Services unit determines whether to support various shareholder and management proposals.

As more U.S. companies move toward having shareholders approve an annual advisory vote on executive compensation (Say-On-Pay), ISS offers more information on how it will evaluate compensation programs. Currently, ISS evaluates executive compensation programs on a case-by-case basis but offers “five global principles” for appropriate compensation. High on the list is no “pay for failure,” meaning no excessive severance packages. …