Justia Corporate Compliance Opinion Summaries

Plaintiff, a stockholder in DeVry, which operates for-profit colleges and universities, filed a shareholders’ derivative suit against DeVry’s board of directors. A 2005 incentive plan authorized awards of stock options to key employees, including the CEO. The plan limited awards to 150,000 shares per employee per year. Nonetheless, the company granted Hamburger, who became its CEO in 2006, options on 184,100 shares in 2010, 170,200 in 2011, and 255,425 in 2012. DeVry, discovering its mistake, reduced each grant under the 2005 plan to 150,000 shares, but allocated Hamburger 87,910 shares available under the company’s 2003 incentive plan, which held shares that had not been allocated. Only the company’s Plan Committee, not the Compensation Committee, was authorized to grant stock options under the 2003 plan; there was no Plan Committee in 2012. The grant of 87,910 stock options was approved by the Compensation Committee, and then by the independent directors as a whole. The Seventh Circuit affirmed dismissal. The directors who approved the Compensation Committee’s recommendation were disinterested: the recommendation was a valid exercise of business judgment. Administration of the 2003 plan by the Compensation Committee, given the nonexistence of the Plan Committee, was not “a clear or intentional violation of a compensation plan,” View "Donnawell v. Hamburger" on Justia Law

Plaintiff Jeffrey Weinman was the Chapter 7 Trustee for Adam Aircraft Industries (“AAI”). Defendant Joseph Walker was an officer of AAI and served as its president and as a member of its Board of Directors. Throughout his employment, Walker had neither a written employment contract nor a severance agreement with AAI. In February 2007, the Board decided it wanted to replace Walker as both president and as a board member. Since AAI did not want Walker’s termination to disrupt its ongoing negotiations for debt financing, AAI suggested that Walker could voluntarily “resign” in lieu of termination and could also continue to support the company publicly. Subsequently, Walker agreed, and the parties executed a Memorandum of Understanding (“MOU”) outlining the terms of Walker’s separation, and they also embodied these terms in two Separation Agreements and Releases. About a year after terminating Walker, AAI declared bankruptcy. It then sued in bankruptcy court to avoid further transfers to Walker, to recover some transfers previously made to Walker, and to disallow Walker’s claim on AAI’s bankruptcy. The bankruptcy court denied AAI’s claims. The Bankruptcy Appellate Panel (“BAP”) affirmed this ruling in its entirety. AAI appealed part of the ruling, arguing that its obligations and transfers to Walker were avoidable under the Code on two alternative bases. Finding no reversible error, the Tenth Circuit affirmed the BAP's decision. View "Weinman v. Walker" on Justia Law

This case involved an appeal from a complicated transaction between a private company whose equity was wholly owned by the family of A.R. Sanchez, Jr., Sanchez Resources, LLC (the “Private Sanchez Company”), and a public company in which the Sanchez family constituted the largest stockholder bloc with some 16% of the shares and that was dependent on the Private Sanchez Company for all of its management services, Sanchez Energy Corporation (the “Sanchez Public Company”). The transaction at issue required the Sanchez Public Company to pay $78 million to: (i) help the Private Sanchez Company buy out the interests of a private equity investor; (ii) acquire an interest in certain properties with energy-producing potential from the Private Sanchez Company; (iii) facilitate the joint production of 80,000 acres of property between the Sanchez Private and Public Companies; and (iv) fund a cash payment of $14.4 million to the Private Sanchez Company. In this derivative action, the plaintiffs alleged that this transaction involved a gross overpayment by the Sanchez Public Company, which unfairly benefited the Private Sanchez Company by allowing it to use the Sanchez Public Company‟s funds to buy out their private equity partner, obtain a large cash payment for itself, and obtain a contractual right to a lucrative royalty stream that was unduly favorable to the Private Sanchez Company and thus unfairly onerous to the Sanchez Public Company. As to the latter, the plaintiffs alleged that the royalty payment was not only unfair, but was undisclosed to the Sanchez Public Company stockholders, and that it was the Sanchez family's desire to conceal the royalty obligation that led to a convoluted transaction structure. The Court of Chancery dismissed the complaint, finding that the defendants were correct in their contention that plaintiffs had not pled demand excusal under "Aronson v. Lewis," (473 A.2d 805 (1984)). "Determining whether a plaintiff has pled facts supporting an inference that a director cannot act independently of an interested director for purposes of demand excusal under "Aronson" can be difficult. And this case illustrates that." Because of that, the Supreme Court found that plaintiffs pled facts supporting an inference that a majority of the board who approved the interested transaction they challenged could not consider a demand impartially. Therefore, the Court reversed and remanded so that plaintiffs could prosecute this derivative action. View "Delaware County Employees Retirement Fund, et al. v. Sanchez, et al." on Justia Law

The plaintiffs filed a challenge in the Court of Chancery to a stock-for-stock merger between KKR & Co. L.P. ("KKR") and KKR Financial Holdings LLC ("Financial Holdings") in which KKR acquired each share of Financial Holdings's stock for 0.51 of a share of KKR stock, a 35% premium to the unaffected market price. The plaintiffs' primary argument was that the transaction was presumptively subject to the entire fairness standard of review because Financial Holdings's primary business was financing KKR's leveraged buyout activities, and instead of having employees manage the company's day-to-day operations, Financial Holdings was managed by KKR Financial Advisors, an affiliate of KKR, under a contractual management agreement that could only be terminated by Financial Holdings if it paid a termination fee. As a result, the plaintiffs alleged that KKR was a controlling stockholder of Financial Holdings, which was an LLC, not a corporation. The Court of Chancery held that the business judgment rule was invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders. For that and other reasons, the Court of Chancery dismissed plaintiffs' complaint. In this decision, the Delaware Supreme Court found that the Chancellor was correct in finding that the voluntary judgment of the disinterested stockholders to approve the merger invoked the business judgment rule standard of review and that the plaintiffs' complaint should have been dismissed. "Delaware corporate law has long been reluctant to second-guess the judgment of a disinterested stockholder majority that determines that a transaction with a party other than a controlling stockholder is in their best interests." View "Corwin, et al. v. KKR Financial Holdings LLC., et al." on Justia Law

In 2005, plaintiffs, former Beeland minority shareholders, hired the McGuireWoods law firm to sue Beeland’s managers and majority shareholder, alleging misappropriation of Beeland’s intellectual property. Plaintiffs brought these claims in their individual capacities and derivatively on behalf of Beeland. In 2008, the court dismissed several claims without prejudice all claims. Plaintiffs’ new counsel obtained leave to amend and added counts against Beeland’s corporate counsel, Sidley Austin. The court dismissed all claims against Sidley as untimely and dismissed all individual claims against Sidley on the grounds plaintiffs lacked standing in their individual capacities. In 2011, plaintiffs settled with Rogers; relinquished their ownership interests in Beeland, and, in their individual capacities, sued McGuireWoods for breach of fiduciary duty for failing to timely assert obvious claims against Sidley. The court granted McGuireWoods summary judgment. The appellate court noted that in the underlying action the court never ruled on the merits of derivative claims against Sidley and remanded for a determination as to whether plaintiffs would have been successful in a derivative but for failure to add Sidley in a timely manner. The Illinois Supreme Court held that plaintiffs are bound by the trial court’s determination in the underlying case that they had no standing to bring individual claims against Sidley; even assuming they were successful, plaintiffs could not have collected personally on any judgment against Sidley on the derivative claims. McGuireWoods’s failure to assert claims against Sidley in a timely manner caused no injury to plaintiffs in their individual capacities, which is the only capacity in which they are proceeding. View "Stevens v. McGuireWoods L.L.P." on Justia Law

The jeopardy element of the tort for wrongful discharge against public policy and whether the administrative remedies available under the Surface Transportation Assistance Act of 1982 (STAA) were at issue in this case. This was one of three concomitant cases before the Washington Supreme Court concerning the "adequacy of alternative remedies" component of the jeopardy element that some of Washington cases seemingly embrace. The complaint here alleged that Anderson Hay & Grain Company terminated petitioner Charles Rose from his position as a semi-truck driver when he refused to falsify his drivetime records and drove in excess of the federally mandated drive-time limits. Rose had worked as a truck driver for over 30 years, the last 3 of which he worked as an employee for Anderson Hay. In March 2010, Rose sued under the STAA in federal court but his suit was dismissed for lack of jurisdiction because he failed to first file with the secretary of labor. Rose then filed a complaint in Kittitas County Superior Court, seeking remedy under the common law tort for wrongful discharge against public policy. The trial court dismissed his claim on summary judgment, holding that the existence of the federal administrative remedy under the STAA prevented Rose from establishing the jeopardy element of the tort. The Court of Appeals affirmed. The Supreme Court remanded the case back to the appellate court for reconsideration in light of "Piel v. City of Federal Way," (306 P.3d 879 (2013)). Like the statute at issue in Piel, the STAA contained a nonpreemption clause. On remand, the Court of Appeals distinguished Rose's case from Piel, and again affirmed the trial court's decision. Upon review, the Supreme Court addressed the cases the Court of Appeals used as basis for its decision, and held that adequacy of alternative remedies component misapprehended the role of the common law and the purpose of this tort and had to be stricken from the jeopardy analysis. The Court "re-embraced" the formulation of the tort as initially articulated in those cases, and reversed the Court of Appeals. View "Rose v. Anderson Hay & Grain Co." on Justia Law

Plaintiff Erika Rickman brought this suit against her former employer, Premera Blue Cross, for wrongful discharge in violation of public policy. Rickman alleged she was terminated in retaliation for raising concerns about potential violations of the federal Health Insurance Portability and Accountability Act of 1996, and its Washington counterpart, the Uniform Health Care Information Act (UHCIA). The trial court dismissed Rickman's suit on Premera's motion for summary judgment, concluding Rickman could not satisfy the jeopardy element of the tort because Premera's internal reporting system provided an adequate alternative means to promote the public policy. The Court of Appeals affirmed. The Washington Supreme Court granted review of this case and two others in order to resolve confusion with respect to the jeopardy element of the tort of wrongful discharge in violation of public policy. Consistent with its decisions in the other two cases, the Court held that nothing in Premera' s internal reporting system, nor in HIPAA or UHCIA, precluded Rickman's claim of wrongful discharge. The Court reversed the Court of Appeals but remanded for that court to address Premera's alternate argument for upholding the trial court's order of dismissal. View "Rickman v. Premera Blue Cross" on Justia Law

Respondent Gregg Becker began working for Rockwood Clinic PS, an acquired subsidiary of Community Health Systems (CHS) 1 as its chief financial officer (CFO) in February 2011. As a publicly traded company, CJ-IS is required to file reports with the United States Securities and Exchange Commission (SEC). As Rockwood's CFO, Becker was required by state and federal law to ensure that Rockwood's reports did not mislead the public, which also required his personal verification that the reports did not contain any inaccurate material facts or material omissions. In October 2011, Becker submitted to CHS' financial department an "EBIDTA," calculation. Becker was not told that when CHS acquired Rockwood, it represented to creditors that the acquisition would incur a $4 million operating loss. To cover the discrepancy, CHS' financial supervisors allegedly directed Becker to correct his EBIDTA to reflect the targeted $4 million loss. CHS did not provide a basis for its low calculation. Becker refused, fearing that the projection would mislead creditors and investors in violation of the Sarbanes-Oxley Act. The CEO made clear that Becker's refusal to do so put his position in jeopardy; Becker felt compelled to resign unless CHS responded to his concerns. CHS and Rockwood accepted Becker's resignation. CHS filed a CR 12(b)(6) motion to dismiss Becker's complaint for wrongful termination, contending that the jeopardy element of the tort had not been met because there were adequate alternative means to protect the public policy of honesty in corporate financial reporting. The Court of Appeals accepted review and determined that the jeopardy element had been satisfied because the alternative administrative enforcement mechanisms of SOX were inadequate and therefore did not foreclose common law tort remedies for employees. The Supreme Court's holding in "Rose v. Anderson Hay" instructed that alternative statutory remedies were to be analyzed for exclusivity, rather than adequacy. Under that formulation, neither SOX nor Dodd-Frank precluded Becker from recovery. The Court affirmed the trial court's denial of Community CHS' CR 12(b)(6) motion, and affirmed the Court of Appeals in upholding that decision upon certified interlocutory review. View "Becker v. Comm'y Health Sys., Inc.." on Justia Law

The United States Court of Appeals for the Second Circuit certified a question of Delaware law to the Delaware Supreme Court: "If a shareholder demands that a board of directors investigate both an underlying wrongdoing and subsequent misstatements by corporate officers about that wrongdoing, what factors should a court consider in deciding whether the board acted in a grossly negligent fashion by focusing its investigation solely on the underlying wrongdoing?" The plaintiffs in this case made a demand that the board of JPMorgan Chase & Co. investigate two related issues regarding a high-profile situation, what the Second Circuit has called the "London Whale debacle." According to the Second Circuit, these issues were: (1) the failure of JPMorgan‘s risk management policies to prevent the trading that resulted in corporate losses; and (2) supposed false and misleading statements made by JPMorgan management in the wake of the emergence of the problem. According to the plaintiffs, the board investigative committee only made findings as to the former issue by arguing that what management knew when it made disclosures was the subject of several pages of the report. In the Delaware Supreme Court's view, Delaware law on the relevant topic required that the decision of an independent committee to refuse a demand should only be set aside if particularized facts were pled supporting an inference that the committee, despite being comprised solely of independent directors, breached its duty of loyalty, or breached its duty of care, in the sense of having committed gross negligence. The Court concluded that the determination of what constituted gross negligence in the circumstances by definition required a review of the relevant circumstances facing the directors charged with acting. The Court requested more information from the Second Circuit prior to answering the certified question. View "Espinoza v. Dimon, et al." on Justia Law

From 2004-2007, CUNA purchased residential mortgage-backed securities from RBS. The housing market crashed and the securities declined in value. CUNA commissioned a forensic study of the loan pools underlying the securities and found that 40.8 percent of the loans were materially defective: “they violated applicable underwriting guidelines in a manner that materially increased the credit risk of the loan and that was not justified by sufficient compensating factors.” CUNA alleged that RBS induced it to purchase the securities by materially misrepresenting that the underlying loans complied with underwriting guidelines by repeatedly assuring CUNA that extensive due diligence was conducted on the loan pools and that the relevant prospectuses represented that the loans complied with guidelines related to borrower ability to pay and sufficiency of collateral. The court granted summary judgment in RBS’s favor on all but one of CUNA’s rescission claims, finding claims with regard to nine of the securities time-barred. The Seventh Circuit affirmed in part, finding that rescission claims were not time-barred. A reasonable factfinder could find that CUNA actually relied on the prospectuses' representations and that the representations were material. CUNA was entitled to a trial on the claims and with respect to the claims of due diligence. View "CMFG Life Ins. Co. v. RBS Sec., Inc." on Justia Law