Discussion of Key Issues in Securities & Governance Litigation
It is time to re-think the one-size-fits-all model of securities litigation defense. Currently, securities cases against all companies – gigantic, tiny, and everything in between – are primarily defended by law firms with marquee names featuring sky-high billing rates and big budgets. That model is ill-fitting for many companies.
There are many reasons why companies…
I recently had occasion to review a number of motion-to-dismiss rulings, including some in which denial of the motion seemed to be an easy call. I’ve since been mulling over whether there are circumstances in which it would be strategically advantageous not to make a motion to dismiss in a Reform Act case, or a…
On October 24, Kevin LaCroix’s D&O Diary discussed a report called “The Trial Lawyers’ New Merger Tax,” published by the U.S. Chamber Institute for Legal Reform. The report proposes several legislative approaches that would funnel all shareholder lawsuits challenging mergers to the seller corporation’s state of incorporation. Kevin has been a leading commentator in the discussion of the M&A-case problem. I started to write a reply to his October 24 post but my reply became too involved for a simple comment. So, I decided to turn it into a post here.
I doubt I need to convince many people, including a great many plaintiffs’ lawyers, that the explosion of M&A cases is a problem. The problem, of course, is not that shareholders bring lawsuits challenging mergers. Challenges to transactions based on problematic processes, such as the one at issue in Smith v. Van Gorkom, have improved corporate decision-making. Rather, the problem is that virtually every acquisition of a public company draws a lawsuit, even though very few transactions are actually problematic, and most cases are filed very quickly, before plaintiffs’ lawyers could possibly have enough information to decide whether the case might have merit.
The result is spurious and wasteful litigation. But very few cases present significant risk, so the vast majority of cases present a simple nuisance that can be resolved through painless additions to the proxy statement and a relatively small payment to the plaintiffs’ lawyers. Although companies that are sued bemoan the macro M&A-case problem, each individual company understandably focuses on its own case, and the vast majority conclude that it’s best to settle it rather than defend it to the bitter end. Collectively, however, the M&A-case problem is significant and needs to be addressed.
Everyone suffers from the M&A-case problem. Public companies being acquired now expect to be sued, regardless how favorable the transaction and how pristine the process, and are paying higher D&O insurance premiums. D&O insurers collectively have suffered the full brunt of the problem through payment of defense costs and settlements. Plaintiffs’ securities lawyers who don’t bring M&A cases, or who bring them more thoughtfully than others, suffer from guilt by association. Defense lawyers’ law practices have benefited from the increase in M&A cases, but I for one – and I’d bet that the vast majority of my peers would agree with me – would prefer to defend more legitimate M&A cases or other types of matters than the type of M&A cases I’m addressing.
I believe there are two sets of related root causes of the M&A-case problem:
These sets of causes are intertwined. Companies are willing to settle because they want certainty that the deal will close on time. They need to settle to ensure certainty, even if the case lacks merit, because too few cases are dismissed. They are able to settle because they usually can do so quickly and cheaply. This is so because few of the plaintiffs’ M&A firms are set up to vigorously litigate even a small percentage of the cases they file; instead, these law firms take a low-intensity, high-volume approach. Such firms can survive in the M&A-case “market” because of the two root causes: (1) there is too little coordination of the cases – which means that firms often obtain some recovery just by filing a case – and (2) too few cases are weeded out at the dismissal stage – which means that companies must settle to obtain certainty that the deal will close on time.
All of the foregoing adds up to make the M&A litigation business an attractive one for certain plaintiffs’ lawyers. That attraction increases the number of plaintiffs’ lawyers trolling for cases, which in turn leads to more filings.Continue Reading M&A Litigation: A Potential Partial Solution to a Big Problem
The Supreme Court’s decision in the Amgen securities case will have a profound impact on the future of securities class action litigation. If the Court affirms the Ninth Circuit’s decision, it will eliminate an important event: a determination of whether the alleged false or misleading statements materially impacted the price of the company’s stock sufficient to invoke the “fraud-on-the-market” presumption of reliance. That would mean, absent settlement, that the vast majority of all securities class actions that survive a motion to dismiss will remain alive until at least summary judgment, even those that are doomed to fail because the challenged statements were not, in fact, material. If the Court reverses the Ninth Circuit, many future securities class actions will involve a meaningful class certification process. That would yield several important strategic and economic consequences. Argument is scheduled for November 5, 2012.
Before getting to my prediction and a discussion of the consequences of the Court’s ruling, following is a brief overview of the law and practice surrounding the issue the Court will decide.
Reliance is an essential element of a Section 10(b) claim. Absent some way to harmonize individual issues of reliance, however, class treatment of a securities class action is not possible; individual issues would overwhelm common ones, precluding certification under Federal Rule of Civil Procedure 23(b)(3). In Basic v. Levinson, the Supreme Court provided a solution: a rebuttable presumption of reliance based on the “fraud-on-the-market” theory, which provides that a security traded on an efficient market reflects all public material information. Purchasers (or sellers) rely on the integrity of the market price, and thus on a material misrepresentation. Decisions following Basic have established three conditions to its application: market efficiency, a public misrepresentation, and a purchase (or sale) between the misrepresentation and the disclosure of the “truth.” At issue in Amgen is whether the materiality of an alleged misrepresentation is also a condition to the presumption’s application.
Over the years, defendants have argued that, absent a showing by plaintiffs that the challenged statements were material, or upon a showing by defendants that they were not, the presumption is not applicable or has been rebutted. And, in a twist on such arguments, defendants sometimes argued that the absence of loss causation rebutted the presumption. This argument was accepted by the Fifth Circuit in Oscar Private Equity Investments v. Allegiance Telecom, Inc. But Oscar rested on shaky analytic grounds, and indeed the Supreme Court in Halliburton unanimously rejected loss causation as a condition of the presumption of reliance.Continue Reading “Materiality” of Class Certification Procedure in Securities Class Actions at Issue in Amgen
The appeal of Judge Rakoff’s rejection of the settlement between the SEC and Citigroup is spectacular theater. Behind the scenes, however, is a highly serious issue: does a federal district judge have the power, as a condition to approving a consent judgment, to require an admission of liability or to otherwise impose collateral estoppel effects.
The briefing is complete. I commend it to you (if you have a couple of hours to spare); it is excellent and entertaining. Oral argument has been requested but not scheduled.
Here’s some background. The SEC investigated Citigroup’s marketing of collateralized debt obligations. The SEC then filed a complaint alleging non-scienter violations of the Securities Act. The same day, the SEC also filed a proposed consent judgment, enjoining violations of the law, ordering business reforms, and requiring the company to pay $285 million. As part of the consent judgment, Citigroup did not admit or deny the complaint’s allegations. Judge Rakoff held a hearing to determine “whether the proposed judgment is fair, reasonable, adequate, and in the public interest.” In advance, the court posed nine questions, which the parties answered in detail. Judge Rakoff rejected the consent judgment.
The rejection order rested, in part, on the court’s determination that any consent judgment that is not supported by “proven or acknowledged facts” would not serve the public interest because:
The SEC and Citigroup appealed, and sought an order staying the rejection order pending appeal. A panel of the Second Circuit granted the motion, finding that the SEC and Citigroup have a strong likelihood of success on appeal, and rejecting the district court’s holding that a consent judgment may be approved only if “liability has been conceded or proved and is embodied in the judgment.”
The parties then filed appeal briefs. One of the briefs is from pro bono counsel appointed to represent Judge Rakoff.Continue Reading Judge Rakoff’s Rejection of SEC-Citigroup Settlement: Second Circuit to Decide Power of Court to Condition Consent Judgment on Admission of Liability