Justia Corporate Compliance Opinion Summaries

Verfuerth, the founder and former CEO of Orion, had disputes with Orion’s board of directors, involving outside counsel's billing practices, potential patent infringement, potential conflicts of interests involving a board member, violations of internal company policy, such as consumption of alcohol at an informal meeting, the board’s handling of a defamation suit by a former employee, and the fact that the chairman of Orion’s audit committee allowed his CPA license to expire. The board ignored his advice to disclose those matters to stockholders. Orion removed Verfuerth as CEO, citing high rates of management turnover. The board conditionally offered Verfuerth emeritus status. Verfeurth declined. The parties were unable to negotiate his severance package. The board fired him for cause, citing misappropriation of company funds in connection with his divorce, disparagement of the new CEO, and attempts to form a dissident shareholder group. Verfuerth filed suit, claiming that his complaints to the board were “whistleblowing” and that, by firing him, Orion violated the Sarbanes‐Oxley Act, 18 U.S.C. 1514A(a), and the Dodd‐Frank Act, 15 U.S.C. 78u‐6.e. The Seventh Circuit affirmed summary judgment for Orion. An executive who advises board members to disclose a fact that the board already knows about has not “provide[d] information” about fraud.. Nothing in any federal statute prevents a company from firing its executives over differences of opinion. View "Verfuerth v. Orion Energy Systems, Inc." on Justia Law

In 2009, XTO Energy, Inc., filed an interpleader action, seeking to resolve competing claims to oil and gas proceeds held by XTO. XTO named several potential claimants as defendants in the interpleader action, including Seawatch Royalty Partners, LLC (managed by Chester Ellsworth) and several alleged heirs of the record owner of the relevant oil and gas interests. After a bench trial, the court concluded that a group of individuals (deemed the true heirs of the record owner) were entitled to the proceeds. Of relevance to this appeal, the trial court also ruled that Seawatch’s claims and defenses were frivolous; that Seawatch was an alter ego of Ellsworth; and that Seawatch and Ellsworth were jointly and severally liable for any future award of attorneys’ fees. Ellsworth was subsequently joined as a party under C.R.C.P. 21 and served via substituted service. The post-judgment sanctions proceedings continued for another several years. During that time, Ellsworth contested his individual liability, arguing that the court lacked personal jurisdiction over him; that he had been improperly served; and that Seawatch was not, in fact, his alter ego. The trial court rejected these arguments and entered judgment jointly and severally against Seawatch and Ellsworth for approximately $1 million in attorneys’ fees. Ellsworth appealed pro se. In an unpublished opinion, the court of appeals vacated the judgment against Ellsworth, holding that the district court lacked jurisdiction to hold him jointly and severally liable for the attorneys’ fee award because, as a nonparty, Ellsworth did not have notice and opportunity to contest his individual liability. The Colorado Supreme Court concluded Ellsworth had adequate notice and opportunity to challenge the alter ego findings that established his liability, and reversed the appellate court's judgment. View "Stockdale v. Ellsworth" on Justia Law

The remaining petitioners in this matter were former stockholders of Dell, Inc. who validly exercised their appraisal rights instead of voting for a buyout led by the Company’s founder and CEO, Michael Dell, and affiliates of a private equity firm, Silver Lake Partners (“Silver Lake”). In perfecting their appraisal rights, petitioners acted on their belief that Dell’s shares were worth more than the deal price of $13.75 per share, which was already a 37% premium to the Company’s ninety-day-average unaffected stock price. The Delaware appraisal statute allows stockholders who perfect their appraisal rights to receive “fair value” for their shares as of the merger date instead of the merger consideration. Furthermore, the statute requires the Court of Chancery to assess the “fair value” of such shares and, in doing so, “take into account all relevant factors.” The trial court took into account all the relevant factors presented by the parties in advocating for their view of fair value and arrived at its own determination of fair value. The Delaware Supreme Court found the problem with the trial court’s opinion was not that it failed to take into account the stock price and deal price; the court erred because its reasons for giving that data no weight (and for relying instead exclusively on its own discounted cash flow (“DCF”) analysis to reach a fair value calculation of $17.62) did not follow from the court’s key factual findings and from relevant, accepted financial principles. "[T]he evidence suggests that the market for Dell’s shares was actually efficient and, therefore, likely a possible proxy for fair value. Further, the trial court concluded that several features of management-led buyout (MBO) transactions render the deal prices resulting from such transactions unreliable. But the trial court’s own findings suggest that, even though this was an MBO transaction, these features were largely absent here. Moreover, even if it were not possible to determine the precise amount of that market data’s imperfection, as the Court of Chancery concluded, the trial court’s decision to rely 'exclusively' on its own DCF analysis is based on several assumptions that are not grounded in relevant, accepted financial principles." View "Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd, et al." on Justia Law

At issue in this appeal are the limits of the stockholder ratification defense when directors make equity awards to themselves under the general parameters of an equity incentive plan. In the absence of stockholder approval, if a stockholder properly challenges equity incentive plan awards the directors grant to themselves, the directors must prove that the awards are entirely fair to the corporation. But, when the stockholders have approved an equity incentive plan, the affirmative defense of stockholder ratification comes into play. The Court of Chancery has recognized a ratification defense for discretionary plans as long as the plan has “meaningful limits” on the awards directors can make to themselves. Here, the Equity Incentive Plan (“EIP”) approved by the stockholders left it to the discretion of the directors to allocate up to 30% of all option or restricted stock shares available as awards to themselves. Plaintiffs have alleged facts leading to a pleading stage reasonable inference that the directors breached their fiduciary duties by awarding excessive equity awards to themselves under the EIP. The Delaware Supreme Court determined a stockholder ratification defense was not available to dismiss the case, and the directors had to demonstrate the fairness of the awards to the Company. The Court reversed the Court of Chancery’s decision dismissing the complaint and remanded this matter for further proceedings. View "In Re Investors Bancorp, Inc. Stockholder Litigation" on Justia Law

Community, the nation’s largest for-profit hospital system, obtained about 30 percent of its revenue from Medicare reimbursement. Instead of using one of the systems commonly in use for determining whether Medicare patients need in-patient care, Community used its own system, Blue Book, which directed doctors to provide inpatient services for many conditions that other hospitals would treat as outpatient cases. Community paid higher bonuses to doctors who admitted more inpatients and fired doctors who did not meet quotas. Community’s internal audits found that its hospitals were improperly classifying many patients; its Medicare consultant told management that the Blue Book put the company at risk of a fraud suit. Community attempted a hostile takeover of a competitor, Tenet. Tenet publicly disclosed to the SEC, expert analyses and other information suggesting that Community’s profits depended largely on Medicare fraud. Community issued press releases, denying Tenet’s allegations, but ultimately corroborated many of Tenet’s claims. Community’s shareholders sued Community and its CFO and CEO, alleging that the disclosure caused a decline in stock prices. The district court rejected the claim. The Sixth Circuit reversed. The Tenet complaint at least plausibly presents an exception to the general rule that a disclosure in the form of a complaint would be regarded, by the market, as comprising mere allegations rather than truth. The plaintiffs plausibly alleged that the value of Community’s shares fell because of revelations about practices that Community had previously concealed. View "Norfolk County Retirement System v. Community Health Systems, Inc." on Justia Law

Apple shareholders filed a consolidated derivative action concerning Apple’s alleged pursuit and enforcement of anticompetitive agreements with other Silicon Valley companies to prohibit the recruitment of each other’s employees. Plaintiffs alleged that certain current and former members of Apple’s board of directors were aware of or tacitly approved of Apple’s practices and breached their fiduciary duties by permitting the illegal agreements over many years. Plaintiffs alleged that the Apple board never disclosed settlements of an earlier action filed by the Department of Justice based on violations of the federal antitrust laws and several federal class action lawsuits brought by employees of Apple and other technology companies. Given each board member’s alleged role in participating in or allowing the illegal agreements, plaintiffs claimed that any demand on Apple's board to institute the derivative action against the individual defendants should be excused as a futile and useless act. The superior court found that an amended complaint adequately alleged demand futility as to the board in place when the original action was filed. The composition of the board of directors had changed in the interim. The court of appeal disagreed. The court was required to assess demand futility as to the board in place when the amended complaint was filed. View "Apple, Inc. v. Superior Court" on Justia Law

Intel acquired McAfee, in a cash sale at $48 per share. Plaintiff, a pension fund, on behalf of itself and a class, alleged that McAfee, Intel, and former members of McAfee’s board of directors, consisting of nine outside directors and the former president and CEO, DeWalt (defendants), engaged in an unfair merger process contaminated by conflicts; that DeWalt withheld material information about negotiations from McAfee’s directors, who failed to safeguard the process and approved an undervalued price; and that defendants omitted material information from the merger proxy statement on which McAfee’s shareholders relied in voting for the merger. The trial court, applying Delaware law, granted the defendants summary judgment, finding no triable issue of material fact regarding the individual defendants’ alleged breaches of fiduciary duty, and concomitantly no liability on behalf of the corporation for aiding and abetting. The court of appeal affirmed as to the nine directors and reversed as to DeWalt and the corporations. Plaintiff raised triable issues of material fact related to DeWalt’s apparent nondisclosure of arguably material information about a $50-per-share overture. DeWalt bears the burden under the enhanced scrutiny standard to show that he exercised his fiduciary duties in furtherance of the obligation “to secure the transaction offering the best value reasonably available.” View "Central Laborers' Pension Fund v. McAfee, Inc." on Justia Law

Plaintiffs alleged insider-trading side deals in connection with the sale of a small aerospace manufacturing company, Kreisler, and insufficient disclosure to stockholders regarding the sales process. Before the sale, Kreisler was offered to dozens of potential acquirers. Several bidders emerged. A fairness opinion was rendered and a special committee ultimately recommended the sale. The transaction was approved by written consent of a majority of the shares outstanding. A block of shares of just over 50 percent executed a stockholder support agreement providing for approval of the transaction, so there was no stockholder vote. An Information Statement was provided to stockholders to permit them to decide whether to seek appraisal. A majority of Kreisler’s board of directors are independent and disinterested, and its charter contains an exculpation provision. The Delaware Court of Chancery dismissed the complaint, finding that even accepting the well-pled allegations as true and drawing all reasonable inferences in the Plaintiff’s favor, the Complaint fails to state a claim on which relief may be granted. View "Kahn v. Stern" on Justia Law

Globus, a publicly-traded medical device company, terminated its relationship with one of its distributors, Vortex, in keeping with a policy of moving toward in-house sales. Several months later, in August 2014, Globus executives alerted shareholders that sales growth had slowed, attributed the decline in part to the decision to terminate its contract with Vortex, and revised Globus’s revenue guidance downward for fiscal year 2014. The price of Globus shares fell by approximately 18% the following day. Globus shareholders contend the company and its executives violated the Securities Exchange Act, 15 U.S.C. 78j(b) and Rule 10b-5 and defrauded investors by failing to disclose the company’s decision to terminate the distributor contract and by issuing revenue projections that failed to account for this decision. The Third Circuit affirmed dismissal of the case. Globus had no duty to disclose either its decision to terminate its relationship with Vortex or the completed termination of that relationship. Plaintiffs did not sufficiently plead that a drop in sales was inevitable; that the revenue projections were false when made; nor that that Globus incorporated anticipated revenue from Vortex in its projections. View "Williams v. Globus Medical, Inc." on Justia Law

In 1998, in order to pursue a real estate investment and development project, Lynn and Connie Hanaway, T.R. White, Inc. (“T.R. White”), and several others formed a limited partnership, Sadsbury Associates, L.P. (“Sadsbury”). The Hanaways were among several limited partners of Sadsbury, while T.R. White served as the general partner. In 2002, acting independently from Sadsbury, T.R. White contracted for options to purchase two separate tracts of land. In 2005, prompted by the success of Sadsbury, the partners of Sadsbury formed The Parkesburg Group, LP (“Parkesburg”) in order to implement a new residential development project involving two tracts of land. T.R. White served as Parkesburg’s general partner, and the Hanaways were among several limited partners. Parkesburg’s limited partnership agreement gave T.R. White broad discretion to carry out its duties. Pursuant to the express terms of the agreement, T.R. White, as the general partner, controlled “the business and affairs of the Partnership.” The crux of this dispute concerned Parkesburg’s sale of the land to a newly formed limited partnership, Parke Mansion Partners (“PMP”). The Hanaways filed a six-count complaint against T.R. White, PMP, Parkesburg, and Sadsbury, alleging T.R. White, as general partner, breached Parkesburg’s limited partnership agreement. They viewed the sale of the Parkesburg tracts to PMP as a sham, executed to freeze them out of Parkesburg. The issue presented for the Pennsylvania Supreme Court’s review centered on the applicability of the implied covenant of good faith and fair dealing to a limited partnership agreement formed pursuant to Pennsylvania’s Revised Uniform Limited Partnership Act (“PRULPA”). The Superior Court reversed the trial court’s order, which had granted partial summary judgment in favor of Parkesburg’s general partner and against two of its limited partners. The Supreme Court reversed the Superior Court’s order in relevant part, holding that the implied covenant of good faith and fair dealing was inapplicable to the Pennsylvania limited partnership agreement at issue, which was formed well before the enactment of amendments that codified such a covenant. View "Hanaway v. Parkesburg Group" on Justia Law