westlaw journal corporate officers & directors liability · chinese ipo registration omitted...

CORPORATE OFFICERS & DIRECTORS LIABILITY

Westlaw Journal

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WHAT’S INSIDE

Litigation News and Analysis • Legislation • Regulation • Expert Commentary VOLUME 30, ISSUE 24 / JUNE 1, 2015

ERISA12 Citigroup employees’

ERISA suit over 401(k) losses dismissed

In re Citigroup ERISA Litig. (S.D.N.Y.)

BREACH OF DUTY13 Alibaba shareholder says

Chinese IPO registration omitted illegal activity

Surrey v. Ma (S.D. Cal.)

FIDUCIARY DUTY14 Shareholder suit claims

REIT merger a bum deal for investors

Berkman v. Friedman (N.D. Ohio)

SECURITIES FRAUD15 Kansas federal judge grounds

shareholder suit against airplane parts maker

Anderson v. Spirit Aerosystems Holdings (D. Kan.)

16 Biopharma company misled investors about drug study, suit says

Napoli v. Ampio Pharms. (C.D. Cal.)

INDEPENDENT DIRECTOR LIABILITY17 Delaware justices say bylaws

can shield outside directors from merger suits

In re Cornerstone Therapeutics Stockholder Litig. (Del.)

BREACH OF DUTY18 Disloyal directors hijacked

communications company, left it a ‘shell’, suit says

Chammas v. AT&T Corp. (Del. Ch.)

SEE PAGE 7

CONTINUED ON PAGE 21

SEE PAGE 3

COMMENTARY

Lengthy and costly FCPA investigations disserve both business and justicePaul Pelletier of Mintz Levin analyzes the speed of enforcement actions under the Foreign Corrupt Practices Act and contends the prolonged and lengthy proceedings are unnecessary and contrary to the Justice Department’s mandate.

COMMENTARY

El Paso Corp. hit with $171 million in damages for defective related-party transactionTransactional specialists Gardner Davis and Danielle Whitley of Foley & Lardner examine a recent Delaware Chancery Court opinion and explain how the failures of El Paso Corp.’s special com-mittee and investment banker cost it $171 million in a cautionary tale for those considering related-party transactions.

MERGER CHALLENGE

Kraft investors don’t want to be sandwiched with HeinzDissident Kraft Foods Group shareholders have asked a federal judge in Richmond, Va., to enjoin an “unfair and inequitable” sale to H.J. Heinz Holding Corp. that would leave Kraft a minority stockholder in the combined food products sandwich.

Wietschner et al. v. Kraft Foods Group Inc. et al., No. 15-00292, complaint filed (E.D. Va. May 14, 2015).

In a shareholder suit filed in the U.S. District Court for the Eastern District of Virginia, Sam Wietschner and his family’s pension fund claim Kraft’s officers and directors violated federal securities laws by making false, misleading and incomplete disclosures that were designed to hoodwink investors into approving the sale.

REUTERS/Jim Young

© 2015 Thomson Reuters2 | WESTLAW JOURNAL n CORPORATE OFFICERS & DIRECTORS LIABILITY

TABLE OF CONTENTSWestlaw Journal Corporate Officers & Directors LiabilityPublished since November 1985

Publisher: Mary Ellen Fox

Executive Editor: Donna M. Higgins

Managing Editor: Phyllis Lipka Skupien, Esq.

Senior Editor: Frank [email protected]

Managing Desk Editor: Robert W. McSherry

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Desk Editor: Sydney Pendleton

Graphic Designers: Nancy A. Dubin Ramona Hunter

Westlaw Journal Corporate Officers & Directors Liability (ISSN 2155-5885) is published biweekly by Thomson Reuters.

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How to Find Documents on WestlawThe Westlaw number of any opinion or trial filing is listed at the bottom of each article available. The numbers are configured like this: 2015 WL 000000. Sign in to Westlaw and on the “Welcome to Westlaw” page, type the Westlaw number into the box at the top left that says “Find this document by citation” and click on “Go.”

Merger Challenge: Wietschner v. Kraft Foods GroupKraft investors don’t want to be sandwiched with Heinz (E.D. Va.) ..................................................................1

Commentary: By Gardner Davis, Esq., and Danielle Whitley, Esq., Foley & LardnerEl Paso Corp. hit with $171 million in damages for defective related-party transaction ................................. 3

Commentary: By Paul Pelletier, Esq., Mintz Levin Lengthy and costly FCPA investigations disserve both business and justice .................................................. 7

ERISA: In re Citigroup ERISA Litig.Citigroup employees’ ERISA suit over 401(k) losses dismissed (S.D.N.Y.) ......................................................12

Breach of Duty/Misrepresentation: Surrey v. MaAlibaba shareholder says Chinese IPO registration omitted illegal activity (S.D. Cal.) .................................13

Fiduciary Duty: Berkman v. FriedmanShareholder suit claims REIT merger a bum deal for investors (N.D. Ohio) ..................................................14

Securities Fraud: Anderson v. Spirit Aerosystems HoldingsKansas federal judge grounds shareholder suit against airplane parts maker (D. Kan.) ..............................15

Securities Fraud: Napoli v. Ampio Pharms.Biopharma company misled investors about drug study, suit says (C.D. Cal.) ..............................................16

Independent Director Liability: In re Cornerstone Therapeutics Stockholder Litig.Delaware justices say bylaws can shield outside directors from merger suits (Del.) ..................................... 17

Breach of Duty: Chammas v. AT&T Corp.Disloyal directors hijacked communications company, left it a ‘shell’, suit says (Del. Ch.) ............................18

Breach of Contract: Am. Apparel Inc. v. CharneyAmerican Apparel says ex-CEO’s ‘scorched earth’ campaign breaks truce (Del. Ch.)...................................19

News in Brief ....................................................................................................................................................20

Case and Document Index ..............................................................................................................................22

JUNE 1, 2015 n VOLUME 30 n ISSUE 24 | 3© 2015 Thomson Reuters

Gardner Davis (L) is a partner in the transactional and securities practice of Foley & Lardner in Jacksonville, Fla. He frequently represents buyers and sellers in M&A transactions and advises boards of directors and special committees in regard to fiduciary-duty issues. He can be reached at 904-359-8726 or [email protected]. Danielle Whitley (R) is a partner in the firm’s finance and financial institutions and transactional and securities practices. She focuses her practice in the areas of mergers and acquisitions, finance, and general corporate law. She can be reached at 904-359-8789 or [email protected].

COMMENTARY

El Paso Corp. hit with $171 million in damages for defective related-party transactionBy Gardner Davis, Esq., and Danielle Whitley, Esq. Foley & Lardner

The Delaware Chancery Court recently held El Paso Corp. liable for $171 million because of a defective related-party “dropdown” transaction with El Paso’s publicly held master limited partnership financing vehicle. El Paso didn’t really do anything wrong — other than drive too good a deal. The fault lies with the special transaction committee and the investment banker representing the MLP. But when the process breaks down, the controller ultimately pays the price.

INTRODUCTION

In In re El Paso Pipeline Partners LP, No. 7141, 2015 WL 1815846 (Del. Ch. Apr. 20, 2015), Vice Chancellor J. Travis Laster issued a stinging rebuke of the independent directors, whom he found to have acted in “subjective bad faith” by going against their better judgment and approving a transaction that they did not believe was in the MLP’s best interests. According to Vice Chancellor Laster, the independent directors chose to do what the parent wanted rather than what they believed would be best for the MLP.

The Chancery Court’s willingness to hold that the independent directors acted in bad faith — a drastic and unusual finding — probably results in part from the unusual procedural context of the case. Most cases involving directors’ alleged bad faith arise in the corporate context, in which directors

Pickering, Holt & Co., the committee’s financial adviser. Vice Chancellor Laster believed Tudor manipulated its valuation analysis to present the transaction in a light that would get the deal approved and enable it to collect its fee. This case, following in the wake of the Chancery Court’s Rural/Metro, El Paso, Atheros and Del Monte decisions, demonstrates heightened concern regarding investment bankers’ loyalty and objectivity.1 Frankly, it’s almost too much to expect that independent directors will diligently and

owe a fiduciary duty directly to the plaintiff shareholders. Under Delaware law, a finding of bad faith may expose the defendant directors to personal liability for monetary damages.

This case is different because the plaintiffs are limited partners in the publicly traded MLP. El Paso’s subsidiary is the corporate general partner of the MLP, and the independent directors approving the conflict transaction are directors of the corporate general partner.

Technically, the directors owe a direct fiduciary duty under corporate law only to El Paso, as the

sole shareholder of the corporate general partner.

Technically, the directors owe a direct fiduciary duty under corporate law only to El Paso, as the sole shareholder of the corporate general partner. Therefore, Vice Chancellor Laster could find that the directors acted in bad faith without exposing them to personal liability for monetary damages. El Paso’s subsidiary, the general partner of the partnership, will pay the damages in this case under a contract-based claim based on the partnership agreement.

Vice Chancellor Laster rightly placed much of the blame for the failed process on Tudor,

aggressively meet their responsibilities to get the best deal possible and simply say no when their banker works against them and distorts the facts to please the controlling parent and maintain an ongoing source of lucrative work.

BACKGROUND

El Paso Corp., an energy company focused on the exploration, production and transmission of natural gas, sponsored El Paso Pipeline Partners, LP, a publicly traded master limited partnership, to maximize the market value of its midstream assets and the amount of capital it could raise based on that valuation. El Paso’s midstream assets were governed by long-term capacity agreements that generated stable cash flows. Because the MLP is a pass-through entity for tax purposes, it could distribute the cash to investors in a tax-efficient manner.

This built-in tax advantage meant that investors valued the same cash flows more highly at the MLP level than at the El Paso corporate level. This enabled the MLP to issue equity at a lower cost of capital than El Paso could achieve.

4 | WESTLAW JOURNAL n CORPORATE OFFICERS & DIRECTORS LIABILITY © 2015 Thomson Reuters

El Paso owned the MLP’s general partner interest, representing a 2 percent economic interest, as well as approximately 52 percent of the publicly traded common units and all of the incentive distribution rights. El Paso exercised control over the MLP through the general partner. As a practical matter, the partnership had no employees of its own, and El Paso employees managed and operated the MLP’s business.

The corporate general partner’s board was loaded with present and former El Paso executives and Arthur Reichstetter, who retired after a long and distinguished investment banking career focused primarily in the energy industry.

From time to time, income-producing assets were sold by El Paso to the MLP. Similar related-party transactions proliferate in the oil and gas industry, where professionals call them dropdowns.

financial adviser. Tudor is a Houston-based investment banking boutique that specializes in the oil and gas industry. Its standard engagement letter called for a $500,000 fee plus expenses, with the entire fee contingent upon the issuance of a fairness opinion.

COMMITTEE FAULTED

Vice Chancellor Laster faulted the committee for repeatedly hiring the same advisers without considering other firms. He expressed a concern that the advisers became compromised by a desire to capture the continuing deal flow and resulting fees. He also implicitly criticized the contingent nature of Tudor’s fee. Reading between the lines, Vice Chancellor Laster would have preferred that Tudor receive a significant portion of its fee in the event that it advised against the transaction.

At the committee’s first meeting to consider the economics of the proposed deal, Tudor distributed a presentation to the committee that looked like the books from the prior dropdowns. There were subtle differences that seemingly were intended to improve the appearance of the current proposal. Tudor modified its presentation of precedent transactions to combine all transactions rather than separately break out minority acquisitions and control acquisitions, as it had done in the past. This approach enabled Tudor to raise the transaction multiple ranges for the proposed acquisition of a minority interest in Elba so that El Paso’s asking price fell within the range.

Tudor also played with its discounted cash flow methodology. For the prior dropdown of 51 percent of Elba, Tudor used a single DCF projection. For the proposed 49 percent dropdown, Tudor prepared three different DCF valuations. One had a five-year projection period, one had a 10-year projection period and one had a 15-year projection period.

Tudor calculated the terminal value using four exit multiples rather than three as it had done in the past. It also added a 6x multiple to the mix. Most significantly, Tudor reduced the upper bound of its discount from 14.5 percent to 12 percent. These changes widened the DCF range and moved El Paso’s price toward the center.

Finally, Tudor modified its valuation summary. On the page addressing the Southern asset, where El Paso was asking for the lowest multiple, Tudor provided bars for all three of its methodologies. Tudor did the same on the page addressing Elba and Southern together, where the lower multiple for Southern drove down the multiple El Paso was asking for the transaction as a whole. But on the page that addressed Elba by itself, Tudor only presented bars for its various DCF analyses and did not show its precedent transaction or comparable company analysis.

UNIFYING THEME FOUND

Vice Chancellor Laster found the unifying theme of these changes was to make El Paso’s asking price look better. Tudor did not identify any of these changes for the committee, and the committee members did not notice them. They did not learn of the changes until the lawsuit challenging the transaction approval process.

Vice Chancellor Travis Laster rightly placed much of the blame for the failed process on Tudor, Pickering, Holt & Co., the

committee’s financial adviser.

The limited partnership agreement governing the MLP permitted El Paso to engage in a transaction involving a conflict of interest, like a dropdown, if the transaction received “Special Approval.” The MLP’s limited partnership agreement defined special approval as approval from a conflicts committee comprised of qualified members of the board of directors of the MLP’s corporate general partner. The only contractual requirement for special approval was that the committee members believed in good faith that the transaction was in the best interest of the MLP.

Each time El Paso proposed a dropdown transaction to the MLP, the board of the MLP’s general partner would appoint an ad hoc committee to consider the specific transaction. The committee consisted of two retired El Paso executives and Reichstetter.

Reichstetter always served as chair and did all of the bargaining with the parent.

Each time, the committee obtained a marginal improvement in the El Paso’s opening offer and then granted special approval.

The committee always hired Akin Gump as its legal counsel and Tudor as its

In October of 2010, El Paso proposed that the MLP acquire El Paso’s 49 percent minority ownership interest in a liquefied natural gas terminal in Elba Island, Georgia, and a 190-mile pipeline connecting the terminal to four major interstate pipelines for $948 million in cash and debt. Earlier in 2010, the MLP purchased the controlling 51 percent ownership interest in Elba from El Paso. The proposal also included an option for the MLP to purchase an additional 13 percent of El Paso’s Southern Natural Gas subsidiary, in which the MLP already owned a 16 percent stake.

Upon receiving the proposal, Reichstetter asked Tudor to consider whether the weakening LNG market had undermined Elba’s attractiveness and to examine recent LNG transactions. He also followed up with an email asking Tudor to analyze each of the assets individually as well as on a combined basis. Reichstetter also asked Tudor to consider a new comparable acquisition category presenting just the three recent LNG asset deals and to look at the MLP’s public market performance since the March acquisition of the 51 percent controlling stake in Elba.


The following day, Ronald Kuehn, retired Chairman of El Paso and a member of the special committee, shared his thoughts about the proposal with his fellow committee members by email. The upshot was that he did not like having the MLP acquire the balance of Elba; he thought the price was too high and would result in an over-concentration of assets in a single class of assets. Kuehn provided several reasons for these conclusions.

At its next meeting, Tudor provided a presentation to the committee substantially identical in format to the prior presentation but with some additional modification. Most notably, Tudor changed the exit multiples it used in its DCF analysis to bring the proposed transaction price closer to the center of the DCF sensitivity. Tudor again did not identify the change to the committee, and the committee members did not notice the change.

When Reichstetter met with the chief financial officer of El Paso to discuss price, Reichstetter asked for a 3 percent reduction in the price. The El Paso CFO quickly agreed. There is no indication in the record that Reichstetter made the types of arguments that one would expect a motivated bargainer to make. He did not compare the asking price to the prior Elba dropdown or point out that Tudor had previously justified a higher price based on the acquisition of control. He did not cite the deterioration of the LNG market, and he did not mention Kuehn’s objections to the transaction.

After agreeing on price, the CFO of El Paso came back to Reichstetter to propose changing the deal to provide that the MLP acquire 15 percent of Southern.

The committee quickly met twice in three days to consider and approve the revised deal. Tudor’s presentation valued Elba and Southern as a package, while El Paso valued the assets separately. Tudor had previously valued the assets separately, and Reichstetter told Tudor to do so.

At the final meeting, Tudor opined that the combined transaction, but not its component parts, was fair from a financial point of view. The committee never learned what the breakdown in price was between Elba and Southern.

Members of the committee had no idea what the MLP paid for the additional 15 percent of Southern or how it compared to the prior purchase of Southern.

Though it did not present a separate analysis for the Southern and Elba assets to the committee, Tudor did the work internally. Tudor’s analysis indicated that at best, the MLP paid the same price on a percentage basis for 49 percent of Elba that it previously paid for control.

The plaintiff sought to prove at trial that the general partner breached the provision in the partnership agreement requiring that the committee members believe that the transaction is in the best interest of the MLP. The contractual standard did not require that the committee make a determination about the best interests of the common unit holders as a class or prioritize their interests over other constituencies. Nor did the contractual standard contemplate that a court would review the committee’s decision using an objective test, such as reasonableness.2

Unfortunately, Vice Chancellor Laster found that the members of the special committee, the investment bankers and the other defense witnesses had little to offer to support their decision. They had few specific recollections of the transaction, and they testified instead to what they typically did or generally would have done when responding to a proposed dropdown.6

THE TIPPING POINT

Vice Chancellor Laster found that the number of problems reached a tipping point. The composite picture that emerged, according to Vice Chancellor Laster, was one in which the committee members went through the motions.7 They did not subjectively believe that approving the dropdown was in the best interest of the MLP. They thought the dropdown would

“Tudor failed to perform the real work of an advisor to a committee,” the judge said.

For the purpose of trial, the contractual standard meant that the plaintiff bore the burden of proving by a preponderance of the evidence that the committee members did not hold the necessary subjective belief. Plaintiffs could prove this by showing either “subjective bad faith” or conduct “motivated by an actual intent to do harm,” which is the classic concept of “bad faith” addressed in In re Walt Disney World Co.3 Alternatively, the plaintiff could establish a lack of the necessary actual belief by evidence that the committee members intentionally failed to act in the face of a known duty to act, demonstrating a conscious disregard for their duties. This required the court to focus on the subjective beliefs of the specific directors accused of wrongful conduct.4

Vice Chancellor Laster found that the trial record revealed numerous problems with the transaction. None of these problems, standing alone, would have supported a finding that the committee members acted in subjective bad faith. Even a combination of the problems would not have been sufficient to overcome the presumption of good faith and the testimony of the committee members that they acted in good faith. Indeed, the transaction could have suffered from many flaws as long as the committee members reached a rational decision for comprehensible reasons.5

allow the MLP to increase distributions on its common units while achieving El Paso’s goal of raising inexpensive capital. However, neither factor meant that the transaction was in the best interest of the MLP. In this case, the vice chancellor found, notwithstanding the formal transaction documentation to the contrary, the committee did not decide that acquiring the balance of Elba at the price paid in the transaction was in the best interest of the MLP. In fact, the committee never learned enough about the price to make that determination.

Vice Chancellor Laster placed great emphasis on the committee members’ private emails. These emails included the opinion that the MLP already had an over-concentration of assets in the LNG trade and that the MLP should not acquire more of Elba, as well as substantial doubt regarding the value of the assets.8

Vice Chancellor Laster also placed weight on the fact that the special committee consciously disregarded what it had learned from the prior dropdown, involving 51 percent of Elba, after which the members of the committee acknowledged that the market thought the MLP had paid too much and decided they would do a better job the next time.9


Vice Chancellor Laster concluded, however, that rather than returning to their independent assessments of value, the committee allowed the price from the spring 51 percent control dropdown to anchor their counteroffer. Similarly, the committee members consciously ignored their own commitment to examine the transactions component separately and signed off on El Paso’s aggregate price.10

Moreover, when El Paso proposed to include 15 percent of Southern without providing a separate price for the two assets, it was impossible to determine how the deal priced either individually. Despite Reichstetter’s earlier instructions and the obvious reasons for valuing the components separately, Tudor did not analyze the two assets separately for the committee.

Internally, however, Tudor did analyze the components separately, and the plaintiffs’ expert used Tudor’s internal analysis to unpack the price.

Because of the experience with the prior 51 percent Elba dropdown, the committee knew better. They consciously disregarded their own independent and well-considered views about value when confronted by the El Paso CFO, even after the market had confirmed their views. They consciously disregarded their desire for separate analysis of the components of the proposed dropdown, even though it was obvious that separate pricing information was needed. “Their actions evidence[d] conscious indifference to their responsibilities to El Paso MLP.”11

SUBORDINATED WISHES

Vice Chancellor Laster found that the committee “subordinated their independently held views to the parent’s wishes.”12 Vice Chancellor Laster found that the committee members “did not want to acquire the balance of Elba in 2010 and believed subjectively that doing so was not in the best interest of MLP.”13

Vice Chancellor Laster found that Tudor’s work product further undermined any possible confidence in the committee. Vice Chancellor Laster found that “Tudor’s actions demonstrated that the firm sought to justify Parent’s asking price and collect its fee. Tudor’s approach made it all the more likely that the Committee practice appeasement as well.”14

Vice Chancellor Laster also found “Tudor manipulated the deal process through malfeasance. It is often said that valuation is more art than science, but this aphorism reflects the need for professionals to make case-specific judgments. For the dropdowns, Tudor practiced a different kind of art: the crafting of a visually pleasing presentation designed to make the dropdowns of the moment look as attractive as possible. This was a case in which ‘the financial adviser, eager for future business … compromises its professional valuation standards to achieve the controller’s unfair objective.’”15 “Tudor manipulated its presentations in unprincipled ways to justify the deal.”16

TUDOR SLAMMED

Vice Chancellor Laster slammed Tudor.

“Tudor failed to perform the real work of an adviser to a committee,” he said. “Instead of helping the committee develop alternatives, identify arguments, and negotiate with the controller, Tudor sought to make the price that the parent proposed look fair. Tudor’s real client was the deal, and the firm did what it could to justify the fall dropdown, get to closing, and collect its contingent fee. Rather than helping the committee bolster its claim to have acted in good faith, Tudor undercut it.”17

Under the terms of the partnership agreement, each committee member had an affirmative duty to conclude that the transaction was “in the best interest of the partnership.” Vice Chancellor Laster found that committee members did not do so.18

“They viewed El Paso MLP as a controlled company that existed to benefit Parent by providing a tax-advantaged source of inexpensive capital,” he said. “They knew that the fall dropdown was something the parent wanted, and they deemed it sufficient that the transaction was accretive for the holders of common units … everyone understood the routine and expected the transaction to go through with a tweak to the asking price. No one thought the committee might bargain vigorously or actually say ‘no.’”19

Vice Chancellor Laster found “the committee members and Tudor went through the motions, but the substance was lacking.”20 Because the committee members disregarded their known duty to determine that the proposed dropdown was in the best interest of El Paso MLP, they did not

act in good faith. Consequently, the general partner breached the LP agreement by engaging in the dropdown and was assessed $171 million in damages plus interest and costs.

CONCLUSION

The El Paso Pipeline decision represents another shot across the bow by the Delaware Chancery Court for special committees in the context of controlling shareholder transactions. The opinion highlights the risk that independent directors face where controlling shareholder management and the special committee’s professional advisers essentially lull the independent directors into complacency and acceptance. The case shows the need for both vigilance in the process and the dangers of just going through the motions and trying to get along with the controlling parent. WJ

NOTES1 In re Rural Metro Corp. S’holders Litig., 2014 WL 971718 (Del. Ch. Mar 7, 2014); In re El Paso Corp. S’holders Litig., 41 A.3d 432, 439 (Del. Ch. 2012); In re Atheros Commc’ns S’holder Litig., 25 A.3d 813, 830-31 (Del. Ch. 2011); In re Del Monte Foods Co. S’holder Litig., 25 A.3d 813, 830-31 (Del. Ch. 2011).

2 El Paso Pipeline Partners, 2015 WL 1815846 at *15 (Del. Ch. Apr. 20, 2015).

3 In re Walt Disney World Co. Derivative Litig., 906 A.2d 27, 64 (Del. 2006).

4 El Paso Pipeline Partners, 2015 WL 1815846 at *15.

5 Id. at *16.

6 Id.

7 Id. at *17.

8 Id.

9 Id. at *19.

10 Id. at *19.

11 Id. at *21.

12 Id. at *17.

13 Id.

14 Id. at *21.

15 Id. at *22 (quoting Gerber v. Enter. Prods. Holdings LLC, 67 A.3d 400, 420-21 (Del. 2013)).

16 Id.

17 Id. at *24.

18 Id. at *25.

19 Id.

20 Id.


COMMENTARY

Lengthy and costly FCPA investigations disserve both business and justiceBy Paul Pelletier, Esq. Mintz Levin

As each day seems to bring new headlines showing the depth and magnitude of overseas economic corruption, the importance and intrinsic value of a proactive and dynamic U.S. Foreign Corrupt Practices Act enforcement effort comes into sharper focus. In its 2014 report on foreign bribery, the Organization for Economic Cooperation and Development published some disturbing statistics that confirm the previously unquantified but widely held belief that anti-bribery investigations worldwide have become an excruciatingly arduous and costly process for all involved.

This pattern, if sustained, is anathema to the concepts of responsible stewardship and restorative justice, and must be rectified before vital global anti-corruption initiatives are significantly weakened.

To remain effective, U.S. prosecutors and regulators, as well as in-house and outside counsel, must responsibly and strategically use all appropriate investigatory and training tools at their disposal. They must also set and meet rational goals to achieve prompt and reasonable dispositions.

In its comprehensive 2014 report, the OECD noted that “the average time taken (in years) to conclude foreign bribery cases has steadily increased over time, [from approximately 2 years between 1999 and 2005] peaking at an average of 7.3 years taken to conclude the 42 [worldwide] cases in 2013.”1

To be clear, the OECD report covered more than U.S. enforcement of the FCPA and

Paul Pelletier, a member at the law firm Mintz Levin in Washington, specializes in representing public and private companies of all sizes and high-profile individuals in state and federal investigations. He previously served in the Department of Justice as a federal prosecutor for more than 25 years.

Source: OECD analysis of foreign bribery cases concluded between 02/15/1999 and 12/31/2013

This chart from the OECD Foreign Bribery Report shows that bribery cases are taking longer to conclude.

sought to aggregate the “number of years between the last criminal act and sanction” — time periods that do not necessarily reflect the actual duration of the government investigation prior to achieving a resolution. Nevertheless, an analysis of some of the most recent FCPA resolutions appears to lend continued credence to its findings.

Since late November 2013, the Department of Justice has concluded seven corporate FCPA resolutions with criminal penalties each exceeding $25 million against these companies: Weatherford, Bilfinger,

Maurebeni, Alcoa, Hewlett-Packard, Avon and Alstom. These investigations, most of which involved bribery schemes that began in the early part of this century, averaged 7 1/4 years.

Thus, the pattern of costly delay in FCPA investigations continues unabated. While every government investigation and resolution poses unique facts and circum-stances that may serve to delay the investigatory process, these recent long-developing FCPA resolutions, together with the findings of the OECD report, are convincingly problematic. The staggering investigative costs, ultimately borne by employees and shareholders alike, however, also can reach unconscionable levels.

Avon, for example, reported that since 2009 it has spent an astounding $344 million on “professional and related fees” associated with the FCPA investigation and compliance reviews. Those fees were in addition to the criminal fines and regulatory penalties of $135 million that Avon and Avon China paid along with costs associated with the imposition of an independent monitor.


Similarly, Weatherford has disclosed that it had incurred $125 million in legal fees, as a result of the FCPA investigation. Again, those fees were in addition to the $252 million in criminal and regulatory penalties, fines and independent monitor costs.

Perhaps the most stunning example of the punishing consequences of a lengthy FCPA investigation is the more than $500 million in professional fees and expenses that Wal-Mart publicly disclosed it has incurred since its investigation began in 2011.

The Department of Justice has recently articulated that at least part of the rationale or justification for these interminable investigations is that “[c]ompared to other white collar crime, the challenges

associated with FCPA investigations can be much greater.” The DOJ offered “overseas evidence” as one basis for this greater challenge.2

But this statement fails to explain the more than twofold increase in investigatory durations from historical norms. A dispas-sionate, experience-based analysis of this overly broad assertion exposes a faulty premise. Simply put, the DOJ can and must do better.

First, the international nature of FCPA crimes is unremarkable when compared with the investigation and prosecution of today’s transnational white collar crime schemes. Prosecutors investigating international financial crimes, with evidence, witnesses

and victims spread across the globe, often confront critical dual needs:

• To quickly secure evidence of a crimesufficient to support charges against the responsible individuals or entities, and

• Topreservetheabilityofanyvictimsofthe crime to be made whole — all of which typically must be accomplished within the five-year limitations period from the last criminal act.

While these challenges are usually daunting, they are not unique to FCPA investigations. Experienced, well-trained white collar prosecutors and investigators routinely bring complex charges and corral the criminal proceeds in short order.

Case & Docket Number Type of Resolution

Date of Last Criminal Act

Date of Resolution

Time to Resolve

U.S. v. Weatherford Services Ltd., No. 13-CR-734 (S.D. Tex.) DPA 9/2007 11/26/2013 6 years

U.S. v. Weatherford International Ltd., No. 13-CR-733 (S.D. Tex.) Plea 9/2006 11/26/2013 7 years

U.S. v. Bilfinger SE, No. 4-13-CR-745 (S.D. Tex.) DPA 6/2005 12/9/2013 8 1/2 years

U.S. v. Alcoa World Alumina LLC, No. 14-CR-007-DWA (W.D. Pa.) Plea 6/2005 1/19/2014 8 1/2 years

U.S. v. Marubeni Corp., No. 14-CR-052-JBA (D. Conn.) Plea 10/2009 3/19/2014 4 1/2 years

U.S. v. ZAO Hewlett-Packard A.O., No. CR-14-201-DLJ (N.D. Cal.) Plea 12/2003 4/9/2014 11 years

U.S. v. Hewlett-Packard Polska SP. Z O.O., No. CR-14-202-EJD (N.D. Cal.) DPA 6/2009 4/9/2014 5 years

U.S. v. Hewlett-Packard Mexico, S. de R.L. de C.V. (2014) NPA 3/2009 4/9/2014 5 years

U.S. v. Avon Products Inc., No. 14-CR-828-GBD (S.D.N.Y.) DPA 6/2008 12/17/2014 6 1/2 years

U.S. v. Avon Products (China) Co. Ltd., No. 14-CR-828-GBD (S.D.N.Y.) Plea 6/2008 12/17/2014 6 1/2 years

U.S. v. Alstom Network Schweiz AG, No. 14-CR-245-JBA (D. Conn.) Plea 5/2007 12/22/2014 7 1/2 years

U.S. v. Alstom S.A. et al., No. 14-CR-246-JBA (D. Conn.) Plea 5/2007 12/22/2014 7 1/2 years

U.S. v. Alstom Grid Inc., No. 14-CR-247-JBA (D. Conn.) DPA 3/2004 12/22/2014 10 1/2 years

U.S. v. Alstom Power Inc., No: 14-CR-248-JBA (D. Conn.) DPA 5/2007 12/22/2014 7 1/2 years

LENGTH OF LARGEST FCPA PROSECUTIONS


When issues involving the collection of foreign evidence are involved, prosecutors typically use legal assistance treaties or letters rogatory to secure evidence and testimony abroad. This can be a time-consuming process. While collecting foreign evidence is an issue of consequence in a multitude of white collar cases, FCPA investigations of public companies have at least one unique advantage: the capacity of corporate cooperation, which can shortcut and streamline the foreign evidence gathering process.

With a cooperating corporation, FCPA investigators routinely find themselves in the unique position of having prompt access to overseas evidence and witnesses without a need to resort to cumbersome inter-national treaty requests. Such cooperation is much like the prosecution having secured a cooperator with unfettered access to the critical evidence.

Moreover, many entities will have at least scoped out the problem and conducted a preliminary examination and remediation by the time of the self-report. While internal investigations can be tedious and time consuming, a high level of corporate cooperation is the sine qua non of a corporate FCPA investigation. The critical advantages it lends to the government’s investigation should neither be underestimated nor underutilized.

Second, the DOJ FCPA unit’s tilt toward the prosecution of culpable executives, initiated in 2007, may have caused a strain on then-available resources. Since that time, significant resource infusions to the FCPA unit, and the recruitment of multiple U.S. attorneys’ offices into the global anti-corruption enforcement effort, have served as force multipliers sufficient to ameliorate any resource drag. Regardless of the reason or reasons for these protracted investigations, both the continued vitality of the DOJ’s FCPA enforcement efforts and the prominence of the United States as the global leader of anti-corruption enforcement would seem to demand a renewed effort to dramatically reduce the time frame necessary to achieve resolution.

EXECUTIVE MANDATE

The president’s Corporate Fraud Task Force, formed in July 2002 in the wake of the corporate financial malfeasance epitomized

by Enron, tasked the DOJ with ensuring that corporate fraud investigations progress with “requisite promptness and thoroughness.”3

As such, the DOJ continuously reinforced the notion that “real time” enforcement4 is essential to properly effectuate both deterrence and restorative justice. In 2004, then-Deputy Attorney General James Comey confirmed that real-time enforcement is indeed critical so that the public and potential white collar criminals could see that misdeeds are “swiftly punished.”5 To drive home this message, Comey repeatedly reminded prosecutors that in conducting investigations of corporate malfeasance, justice does not demand perfection.

Encouragingly, laws were enacted, DOJ policies were enhanced, and prosecutors were trained to swiftly bring charges against criminally culpable organizations and executives. Prosecutors working under the aegis of the Corporate Fraud Task Force established that, when empowered to do so, they could bring comprehensive charges quickly and in real time against corporate and executive malfeasors, regardless of the complexity of the facts or the evidence-gathering process. The impact of this effort has been viewed as a game changer for criminal white collar enforcement.

Convincingly, in September 2002, less than six months after the last criminal act, prosecutors charged five executives of Adelphia Communications Corp. with “one of the most elaborate and extensive corporate frauds in United States history.”6 Also, in June 2003, less than 18 months after the last criminal act, a subsidiary of PNC Bank, PNC ICLC, through entry of a deferred prosecution agreement, resolved charges that they conspired to violate the securities laws by using highly complex and fraudulent special purpose vehicles to conceal hundreds of millions of dollars in non-performing assets on its balance sheets.

Similarly, by February 2006, within two years of the last criminal act, six executives of General Reinsurance and AIG were charged with engineering a complicated sham reinsurance scheme to fraudulently

inflate AIG’s insurance reserves by $500 million. Finally, in June 2009, about four months from the last criminal act, Allen Stanford and four accomplices were charged for their participation in an international $8 billion Ponzi scheme effectuated through concealment offered by offshore financial institutions.

Some of these referenced investigations involved little, if any, significant corporate “cooperation.” Not all of the cases were perfect. Nevertheless, in these cases and a multitude of others, prosecutors and agents were able to gather, distill and present evidence sufficient to promptly bring appropriate criminal charges involving

complex financial schemes. Experience dictates that FCPA cases, while not presenting radically different evidentiary hurdles than other complex international corporate prosecutions, can be resolved in real time.

There is an important ameliorative effect to the “real time” investigation and prosecution process encouraged by the Corporate Fraud Task Force: When resolutions are reached in real time, the deterrent effect heightens as businesses take note of ongoing fraud bribery schemes operating within their industry or region and ensure that their compliance programs adequately address those problematic practices.

Legitimate enterprises benefit from those kinds of real-time revelations, and criminal political regimes can be immediately identified and deterred. Moreover, when a criminal resolution discloses and punishes criminal conduct that occurred five or more years earlier, any deterrent effect of the resolution is significantly diminished. This is particularly true in industries where the overseas corrupt conduct flourishes with abandon.

At that late stage, the principal deterrent effect is relegated to the size of the monetary penalty — something the DOJ continues to emphasize with all too much frequency and relish. As recent cases have demonstrated, lengthy FCPA investigations also place untenably wasteful financial burdens on

The largest FCPA investigations, most of which involved bribery schemes that began in the early part

of this century, averaged 7 1/4 years.


corporations, their employees and their shareholders.

Given that the DOJ’s FCPA unit within the Fraud Section has more than doubled in size from 2009 to today and has been fortified by a dedicated squad of FBI agents, it is puzzling that many of these investigations seem to drag on interminably. The DOJ must strive to be more than just “FCPA Inc.,” churning out stale resolutions notable only for their record-breaking penalties.

The prosecutorial principles embodied in the Corporate Fraud Task Force and its successful “real time” strategies can easily be implemented in the FCPA arena to empower prosecutors and agents alike.

TRAINING

One hallmark of the Corporate Fraud Task Force was the effort undertaken to support the training of prosecutors and agents in the methods designed to swiftly identify, investigate and prosecute meritorious complex financial fraud cases. Recognizing that the ability to efficiently investigate and prosecute complex white collar schemes was not second nature to even the most senior agents and prosecutors, specific courses were designed and offered at the National Advocacy Center to continuously and proactively train them in the appropriate methods to effectuate real-time prosecutions. Complementing the NAC courses, the FBI offered regional training taught by prosecutors and agents.

COMMUNICATE EXPECTATIONS, SET REALISTIC DEADLINES

When an FCPA investigation of a public company is initiated, whether through a self-report or otherwise, the company invariably hires outside counsel to coordinate the internal investigation and meet with prosecutors and investigators. Because the U.S. attorneys’ manual and the U.S. sentencing guidelines provide significant benefits for corporate cooperation and public companies typically cannot risk indictment, significant synergies exist at this critical juncture to jointly chart a course for expeditious review.

The DOJ and outside counsel have a unified interest in efficiently determining the bona fides of the allegations, their potential breadth and steps needed to remediate any issue. This can best be accomplished through prompt joint review of critical expectations and the setting of aggressive timetables for the course of the internal/government investigation.

While the international operations of every business and the specific requirements of every internal investigation differ, most internal investigations follow a similar pattern: Investigate the issue; if extant, determine its scope; and, finally, undertake sufficient measures to remediate the problem. Although the complexities of these undertakings vary depending upon the scope of any discovered problem and the geographic reach of the company’s

affected business operations, investigative limits can be established for each stage of the process.

With firm deadlines and open lines of communication, there are no structural barriers to achieving resolution of most FCPA cases within two years. Indeed, the investigation of Siemens AG, one of the largest of all time, began with a search by the Munich Public Prosecutors Office in late 2006 and concluded with a resolution only two years later.

LIMIT ‘LOOK BACKS’

One issue that has vexed public companies in recent years — and routinely prolonged investigations — is the degree to which self-reporting companies must investigate their global business arrangements for the purpose of assuring the DOJ that even potentially corrupt activities have been identified and terminated. This is an endeavor that at times would unnecessarily stall a viable resolution.

At an FCPA conference in November 2014, and, more recently, at a New York University Law School corporate compliance program, Assistant Attorney General Leslie Caldwell assured the audience that prosecutors would be reasonable in their assessment of the breadth of the required “look back” and would not routinely require companies to “boil the ocean” prior to resolving the investigation.7

While companies should certainly expect, prior to resolution, to convincingly establish that the core criminal conduct had been identified and remediated, Caldwell’s remarks firmly evidence a recognition that the DOJ will assist in shaping a company’s internal inquiry and favorably consider a company’s sensible “look-back” policy.

Certainly, early discussions with prosecutors as to the proper scope of a required look-back would be prudent and could substantially reduce both the costs and duration of an investigation.

ELIMINATE UNNECESSARY OR REDUNDANT REVIEW

Any outside counsel who recently has reached a corporate FCPA resolution with the DOJ has most likely endured seemingly endless layers of review. While no one would seriously argue that sensible supervisory review of FCPA resolutions is unwarranted, an examination of the Fraud Section’s

FCPA investigations of public companies have a unique advantage: the capacity of corporate

cooperation to actually shortcut and streamline the foreign evidence-gathering process.

Today, sponsored private-sector courses on FCPA practice seem to be ubiquitous. However, there remains a dearth of government-sponsored courses that are designed specifically to train prosecutors and agents in the methods of real-time prosecutions. With the inevitable turnover of prosecutors in the DOJ’s Criminal Division, there is a strong need for routine real-time enforcement training. The DOJ should undertake a concerted and sustained effort to meet this need.

The DOJ must strive to be more than just

“FCPA Inc.,” churning out stale resolutions notable only for their

record-breaking penalties.


organizational structure reveals no fewer than five supervisory layers between the FCPA unit’s trial attorney and the section chief.

Although each supervisor may not directly participate in the chain of review of such resolutions, the DOJ should take steps to ensure that each layer of review adds material value and is necessary to achieve programmatic goals and consistency.

CONCLUSION

The interests of justice are neither served nor advanced when FCPA investigations routinely drag on for five or more years. Rigorous and prompt FCPA enforcement with respect to current bribery schemes can have a dramatic impact on the insidious and corrosive effect of corruption overseas. Real-time enforcement is just one component of what must be a larger proactive strategy to root out overseas corruption, which includes

punishing the bribe takers as well as the bribe payers and dispossessing the government officials of access to ill-gotten gains.

Curing the deficiencies that lead to costly and wasteful delays will require a systemic and sustained effort, primarily by the DOJ. It will also require a more focused approach by outside counsel. Although the ameliorative benefits resulting from such change will not be achieved overnight, the long-term vitality and efficacy of the DOJ’s anti-corruption enforcement efforts ultimately rests on the government’s ability to sustainably alter the status quo. WJ

NOTES1 Org. for Econ. Cooperation and Dev., OECD Foreign Bribery Report: Analysis of the Crime of Bribery of Foreign Public Officials (Dec. 2, 2014) (emphasis added).

2 Nomination of Loretta E. Lynch to be Attorney General of the United States, Questions for the Record Submitted Feb. 9, 2015, S. Comm.

on the Judiciary, 114th Cong. 23 (2015), available at http://www.judiciary.senate.gov/imo/media/doc/Lynch%20QFR%202-9-15.pdf.

3 See First Year Report to the President, Corporate Fraud Task Force, at 1.3, available at http://www.justice.gov/archive/dag/cftf/first_year_report.pdf.

4 See id. at 2.9.

5 See Benno Groeneveld, Comey: Prosecute white collar criminals to keep people honest, Minneapolis/st. paul Bus. J., Apr. 20, 2004, http://www.bizjournals.com/twincities/stories/2004/04/19/daily19.html?page=all.

6 See Geraldine Fabrikant, Indictments For Founders of Adelphia And Two Sons, n.Y. tiMes, Sept. 24, 2002, http://www.nytimes.com/2002/09/24/business/indictments-for-founder-of-adelphia-and-two-sons.html.

7 See Leslie R. Caldwell, Assistant Attorney General, Address at the American Conference Institute’s 31st International Conference on the Foreign Corrupt Practices Act (Nov. 19, 2014), available at http://www.justice.gov/opa/speech/assistant-attorney-general-leslie-r-caldwell-speaks-american-conference-institute-s-31st.

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ERISA

Citigroup employees’ ERISA suit over 401(k) losses dismissedA federal judge has dismissed a class action brought by Citigroup employees who claimed the company’s directors mismanaged their 401(k) investments in the bank’s own stock during the subprime mortgage crisis, causing them to lose retirement benefits.

In re Citigroup ERISA Litigation, No. 11- 7672, 2015 WL 2226291 (S.D.N.Y. May 13, 2015).

U.S. District Judge John G. Koeltl of the Southern District of New York found the lawsuit untimely under the Employee Retirement Income Security Act’s three-year statute of limitations, and the plaintiffs failed to state a valid claim.

The six named plaintiffs were employee participants or beneficiaries of Citigroup’s 401(k) plan who had taken advantage of an option to invest in company common stock as part of their retirement portfolio.

They sued Citigroup’s directors and members of the administration and investment committees charged with managing the company’s 401(k) plans, alleging violations of ERISA, 29 U.S.C. § 1001.

The plaintiffs alleged the defendants breached their fiduciary duty of prudence for continuing to hold and purchase Citigroup stock throughout the class period from Jan. 16, 2008, to March 5, 2009, while the stock was crashing as a result of the subprime crisis.

Citigroup’s common shares fell from $55.70 a share Jan. 1, 2007, prior to public disclosure of the subprime crisis, to $.97 a share in March 2009, after a series of government bailouts, the plaintiffs said.

In October and November 2008 Citigroup received $45 billion from the government’s Troubled Assets Relief Program and $306 billion in loan guarantees from the Federal Reserve. In February 2009 the federal government announced it would purchase a 36 percent stake in Citigroup to save it from collapse, the complaint said.

According to the plaintiffs, the 401(k) fiduciaries should have fulfilled their duties by halting the purchase of additional Citigroup stock and divesting the plans of Citigroup stock but they took no action, causing a “devastating impact” on the 401(k) benefit plans.

This suit is the second ERISA suit to be filed against Citigroup’s directors. In August 2009

The three-year period that ran from Dec. 8, 2008, to Dec. 8, 2011 — the date the plaintiffs filed suit — is relevant here, Judge Koeltl said.

If the plaintiffs had actual knowledge of the alleged breaches more than three years prior to the date they filed suit, they could not rely on the six-year window ERISA provides, the judge explained. He noted that, according to the complaint, they did have actual knowledge from at least January 2008; therefore, the case was filed too late.

the same court dismissed the first lawsuit. In re Citigroup ERISA Litig., No. 07-9790, 2009 WL 2762708 (S.D.N.Y. 2009).

The court found that the director defendants had neither the discretion nor the duty to override the terms of the benefit plans, and therefore were not fiduciaries. The 2nd U.S. Circuit Court of Appeals affirmed the ruling two years later. In re Citigroup ERISA Litig. (Citi I), 662 F. 3d 128 (2d Cir. 2011).

The plaintiffs here filed the new suit Dec. 8, 2011, stating a slightly later class period than the original suit.

The defendants moved for dismissal on the basis that the claims are barred by the ERISA statute of limitations.

Judge Koeltl explained that ERISA features two limitations periods:

• A suit may not be filedmore than sixyears after the date of the last action that constituted a part of the breach or, in the case of an omission, the latest date on which the fiduciary could have acted to cure the breach.

• Asuitmaynotbefiledmorethanthreeyears after the earliest date on which the plaintiff had actual knowledge of the breach or violation.

REUTERS/Brendan McDermid

The Citigroup employees waited too long to file suit after they knew the company’s common stock in their

retirement portfolios had tanked because of its risky subprime mortgage investments.

“The vast majority of events that the plaintiffs described in their voluminous complaint occurred well before Dec. 8, 2008. Indeed, the plaintiffs alleged that Citigroup’s perilous condition was ‘abundantly clear’ at the beginning of the class period in January 2008,” Judge Koeltl said.

The plaintiffs argued that only the defendants would have been on notice at that time, but the judge said the plaintiffs’ own pleading contradicted them.

“[T]he plaintiffs use about seven single-spaced pages of their complaint to allege the very public ‘red flags’ that were specific to Citigroup and that demonstrated its dire financial situation prior to December 2008,” Judge Koeltl said.

He dismissed the plaintiffs’ claims as untimely and ruled they failed to state a meritorious claim for breach of fiduciary duty under ERISA for many of the same reasons that Citi I was dismissed.

As the courts ruled in Citi I, the Citigroup directors did not have veto power over the investment committee’s decisions and thus were not “de facto fiduciaries,” the judge said.

Moreover, the committee itself was between a “rock and a hard place” on the issue of


prudence because it was subject to suit, as happened here, if it did not divest the Citigroup common shares and the shares continued to decline, or if it did divest and the shares went back up, as they eventually did, the judge noted.

In Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014), the U.S. Supreme

BREACH OF DUTY/MISREPRESENTATION

Alibaba shareholder says Chinese IPO registration omitted illegal activityAlibaba, the self-described largest online and mobile commerce business, is facing allegations that executives hid illegal conduct from the Securities and Exchange Commission before the Chinese company’s initial public offering on U.S. markets last year.

Surrey v. Ma et al., No. 3:15-cv-01036, complaint filed (S.D. Cal. May 8, 2015).

Shareholder Steve Surrey claims Alibaba Group Holding Ltd. knew about the alleged wrongdoing two months before its American depositary shares began trading Sept. 19, 2014, according to the complaint filed in the U.S. District Court for the Southern District of California.

Alibaba, however, continued to mislead investors until China’s State Administration of Industry and Commerce revealed that information in January, the proposed class-action suit says.

Surrey is alleging claims for breach of fiduciary duty, waste of corporate assets and unjust enrichment. He is also alleging a derivative claim for violations of Section 14(a) of the Exchange Act for the purported omissions in the IPO registration form.

Alibaba Executive Chairman Jack Yun Ma, Executive Vice Chairman Joseph C. Tsai and CEO Jonathan Zhaoxi Lu are named defendants along with seven other board members. The company sold more than 368 million shares in its IPO at $68, making more than $25 billion.

Surrey says shares continued to trade at ever-increasing, artificially inflated prices to reach a high of $120 per share Nov. 13. Alibaba executives meanwhile allegedly made bullish statements on growth potential, touting

Court held that the presumption of prudence was too broad in such a situation, “rendering suits implausible when they allege that the fiduciaries should have been able to beat the market,” Judge Koeltl said. WJ

Attorneys: Plaintiffs: Brad N. Friedman, Milberg LLP, New York; Kent A. Bronson, Bernstein Litowitz Berger & Grossmann, New York; Curtis V. Trinko, New York;

Edgar Pauk, Brooklyn, N.Y.; Amy C. Williams-Derry, Keller Rohrback LLP, Seattle; Edward W. Ciolko and Joseph H. Meltzer, Kessler Topaz Meltzer & Check, Radnor, Pa.

Defendant: Myron D. Rumeld and Russell L. Hirschhorn, Proskauer Rose LLP, New York

Related Court Document: Opinion: 2015 WL 2226291

an explosion of online Chinese consumer activity, the company’s willingness to deter counterfeit sales, its dedication to protect intellectual property rights and its focus on consumers as the top priority.

The complaint says numerous financial media outlets reported Jan. 28 that the State Administration of Industry and Commerce, China’s main corporate regulator, had released a white paper identifying unscrupulous and illegal activity that the agency had brought to Alibaba’s attention in July 2014.

The administration’s allegations included:

• The rampant sale of counterfeit goods, restricted weapons and other forbidden items on Alibaba’s third-party marketplace platform.

• Company staffers’ acceptance of bribes from merchants seeking to help boost their search rankings and advertising space.

• Alibaba’s blind eye toward vendors faking transactions in order to artificially inflate sales volume.

Surrey says Alibaba was required under SEC rules to disclose this information in its

registration statement but failed to do so. Share prices dropped 4 percent on unusually high trading volume following the Chinese agency’s disclosure, or $4.49 per ADS, to close at $102.94 on Jan. 28.

The following day, Alibaba released its fourth-quarter 2014 results, which indicated it missed the mark on a $4.45 billion projection with revenues of $4.22 billion. The results represented a 28 percent decline in profits from the fourth quarter of 2013, down to $964 million, according to the complaint.

The price of the company’s ADS plummeted $8.64 per share Jan. 29 to close at $89.91, the complaint says. Surrey says this two-day drop represents a 25 percent decline from a high of $120 per share, erasing $11 billion in market capitalization.

Surrey has demanded a jury trial and is seeking class certification for anyone who bought Alibaba securities since Oct. 21. He is also seeking unspecified damages and the costs of bringing suit, as well as an order directing the board to implement stronger accountability measures, allow shareholders to appoint two new board members and modify Alibaba’s share repurchase program. WJ

Attorney:Plaintiff: Jeffrey R. Krinsk, Finkelstein & Krinsk, San Diego

Related Court Document: Complaint: 2015 WL 2155456

REUTERS/China Daily


FIDUCIARY DUTY

Shareholder suit claims REIT merger a bum deal for investorsA shareholder in an Ohio real estate investment trust has filed a derivative suit in Cleveland federal court, alleging the directors breached their fiduciary duty when they kowtowed to an activist investor and sold the company too cheaply.

Berkman v. Friedman et al., No. 1:15-cv-00928, complaint filed (N.D. Ohio, E. Div. May 12, 2015).

Lead plaintiff Brent Berkman is seeking class certification and has demanded a jury trial on three claims arising from a merger agreement between Associated Estates Realty Corp. and co-defendant Brookfield Asset Management. The complaint, filed in the U.S. District Court for the Northern District of Ohio, also names seven Associates Estates board members as defendants, including Chairman and CEO Jeffrey Friedman.

The $2.5 billion deal announced April 22 represents a sale price of $28.75 per share for Associates Estates shareholders, but Berkman claims the proposed transaction fails to account for the REIT’s strong growth potential and is the product of a hopelessly flawed process.

Real estate investment firm Land & Buildings acquired a 1 percent stake in the company in June 2014 and almost immediately began advocating a sale, according to the complaint. Berkman says L&B increased its holdings to nearly 3 percent by November and issued a release questioning the “entrenched, intertwined and stale” leadership of the board. L&B also allegedly indicated it planned to initiate a proxy war by running a slate of seven new board candidates at an upcoming shareholder meeting.

The suit says the board is kowtowing to an activist

investor to avoid an embarrassing proxy war and ouster of longtime directors.

Berkman says Associates Estates has delivered a 195 percent return to shareholders over the past decade and saw a total return of 52.6 percent in 2014 alone, the highest among public multifamily REITs, which are trusts made up of apartment complexes and mobile home parks.

this year that Associated Estates should be trading at $37 per share and will unfairly rob stockholders of at least $11 million in dividend payments.

Each nonexecutive board member meanwhile will be able to cash in on $100,000 in annual restricted stock awards, according to the complaint, and Friedman alone is expected to reap nearly $8 million in accelerated equity awards.

Berkman also claims the proposed transaction includes unfair deal-protection devices, including a “no shop” provision barring Associated Estates from seeking a better price and allowing Brookfield to match any unsolicited offer that might come in. It also includes a $60 million termination fee should the company decide to accept a superior offer.

Berkman is seeking to halt the merger until a better price can be secured, and he proposes setting up a constructive trust for any benefits board members might have received for their allegedly wrongful conduct.

If the sale is completed, he wants the court to rescind it and to award actual and punitive damages and legal costs to shareholders. WJ

Attorney:Plaintiff: Andrew S. Goldwasser, Ciano & Goldwasser, West Cleveland, Ohio

Related Court Document:Complaint: 2015 WL 2203584

The board nonetheless began caving to L&B’s demands by replacing two long-standing board members with L&B appointees and even proposed adding two new slots to the board to be filled with two L&B appointees, according to the complaint.

But L&B announced in March that it still planned to nominate candidates to replace three of Associates Estates’ longest-tenured directors. Rather than face the possibility of a public and embarrassing ouster, Berkman says, the board agreed to the Brookfield acquisition, which L&B had been orchestrating.

The complaint alleges the proposed deal, expected to close in the second half of 2015, falls well below L&B’s own estimates earlier


SECURITIES FRAUD

Kansas federal judge grounds shareholder suit against airplane parts maker A lawsuit accusing aircraft part manufacturer Spirit Aerosystems of violating federal securities laws by misleading investors about its contracts with several airplane manufacturers will not move forward.

Anderson v. Spirit Aerosystems Holdings Inc. et al., No. 13-CV-2261, 2015 WL 2340379 (D. Kan. May 14, 2015).

U.S. District Judge Eric F. Melgren of the District of Kansas tossed Wayne Anderson’s proposed class-action, saying the allegations were not material and the suit failed to establish statements the company and its executives made were knowingly false.

Spirit builds commercial aircraft aero-structures such as fuselages and wing components through performance contracts with airplane manufacturers, according to the company’s website and Judge Melgren’s memorandum and order.

The company announced a $590 million forward-loss charge Oct. 25, 2012, the order says.

A forward-loss charge occurs when the estimate of a contract’s total revenue is lower than the contract’s actual total cost. The loss is recorded in the financial quarter it is discovered.

Court records say six manufacturing contracts contributed to Spirit’s losses: its Boeing 787 and 747, Gulfstream G650 and G280, Rolls-Royce BR725, and Airbus A350 programs,.

Spirit attributed the contract losses to performance issues, higher costs estimates and a delay in moving work to lower-cost facilities. It claimed the losses were an unforeseen business reversal of a cost-reduction effort, the order says.

The company’s stock dropped 30 percent on the news, the order says.

Anderson filed suit in June 2013, alleging Spirit and its executives violated federal securities laws by reporting success with its cost-reduction efforts while its major contracts experienced cost overruns.

Spirit and its officers and directors moved to dismiss the suit.

Judge Melgren granted the motion, holding that the company’s alleged misstatements were too vague to require the disclosure of production problems.

Court records say six of Spirit Aerosystems’ manufacturing contracts, including its Boeing 787 program, contributed to the company’s losses. In this photo, Boeing workers construct a 787 Dreamliner.

REUTERS/Randall Hill

Spirit Aerosystems announced a $590 million

forward-loss charge Oct. 25, 2012. It claimed the

losses were an unforeseen business reversal of a cost-reduction effort.

“Statements that Spirit made ‘good progress on 787 cost-reduction initiatives’ and that Spirit is ‘making substantial improvements in our cost curves’ seem to acknowledge that costs were an issue but are too vague and indefinite to trigger a duty to disclose contrary information,” the order says.

Moreover, the complaint failed to show the defendants knew the cost-reduction statements were false when made, the order says.

The company and its executives even hedged their optimism and placed investors on notice of a possible forward-loss charge, undercutting “any inference of recklessness,” Judge Melgren held. WJ

Related Court Document:Memorandum and order: 2015 WL 2340379


SECURITIES FRAUD

Biopharma company misled investors about drug study, suit saysAmpio Pharmaceuticals and its officers and directors concealed its drug investigator’s relationship with its “independent” clinical research organization, as well as problems with a new drug, a shareholder suit claims.

Napoli v. Ampio Pharmaceuticals Inc. et al., No. 15-CV-03474, complaint filed (C.D. Cal. May 8, 2015).

The complaint, filed by Guidano Napoli in the U.S. District Court for the Central District of California, says Ampio and its executives violated federal securities laws by failing to disclose clinical research organization Dream Team Clinical Research’s relationships with a knee injection drug’s investigator and a data analysis delay for the same drug.

An Ampio representative declined to comment on the suit.

According to the suit, Colorado-based Ampio announced trial study of Ampion, a biological intra-articular injection for knee osteoarthritis, on Jan. 13, 2014. The company also announced that the treatment received approval from the Institutional Review

Board for Health Science Research and investigational new drug clearance from the Food and Drug Administration.

Ampio issued a press release Aug. 21 saying a delay occurred with the study’s data analysis. Ampion and its placebo’s shipment exposed the drugs to temperatures below their permitted specifications, the suit says.

Temperature changes could alter the drug’s potency, so the company delayed its data analysis and contacted the FDA for guidance, the complaint says.

On this news, Ampio’s stock price dropped 24 percent.

The blog Buyerstrike on Aug. 22 reported “a number of red flags” regarding the study. Ampio conducted the trial study with only one supervising doctor at one location, and Dream Team’s office is located next door

to the principal investigator of the trial, the complaint says.

Ampio shares subsequently fell 14 percent.

Napoli says Ampio and its executives violated federal securities laws by misrepresenting Dream Team’s relationships and concealing Ampion’s transportation problems, artificially inflating Ampio’s stock.

The complaint seeks class-action status, damages, attorney fees and litigation costs.

Ampio CEO Michael Macaluso, Chief Financial Officer Gregory Gould and former CFO Mark McGregor also are named as defendants. WJ

Attorney: Plaintiff: Laurence M. Rosen, Rosen Law Firm, Los Angeles


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INDEPENDENT DIRECTOR LIABILITY

Delaware justices say bylaws can shield outside directors from merger suitsIn a milestone ruling, the Delaware Supreme Court has held that independent directors whose company bylaws shield them from ordinary breach-of-duty charges cannot be automatically required to defend against shareholder claims that they disloyally accepted bargain-priced buyouts.

In re Cornerstone Therapeutics Inc. Stockholder Litigation, No. 564, 2014; Leal et al. v. Meeks et al., No. 706, 2014, 2015 WL 2394045 (Del. May 14, 2015).

Reversing two rulings in separate but similar Chancery Court cases, the high court said May 14 that those judges had misread its seminal decision in Emerald Partners v. Berlin, 840 A.2d 641 (Del. 2003), to mean that full trials are necessary to decide whether independent directors could be liable for accepting unfair buyout offers.

In his opinion for the court, Chief Justice Leo E. Strine used the occasion to clarify the much-debated Emerald Partners decision.

He said that, absent proof the outside directors were guilty of more serious breaches of fiduciary duty of loyalty, bad faith or gross negligence, they should not be pulled into the trials.

He sent both cases back to their respective Chancery Court judges to determine at the outset whether the charges the directors faced sufficiently alleged conduct that was so egregious that their normal protections could not shield them.

CLARIFICATION APPRECIATED

Attorney and Delaware law blogger Francis G.X. Pileggi, who heads the Wilmington office of Eckert Seamans, called the decision “a welcome clarification of the law that provides guidance for lawyers who now will know which types of claims will allow independent directors to file a motion to dismiss.”

”One refreshing part of the opinion,” he said, “is its candor in acknowledging that, like other areas of corporate law, the right answer is not always easy to figure out — as in this case when two expert members of the Court of Chancery were reversed.”

In the Cornerstone case, the company attempted to use a special committee to negotiate a better offer from its controlling shareholder, Italian drug manufacturer Chiesi Farmaceutici S.p.A., but Chiesi adamantly talked about walking away or pushing to change the committee’s composition, court records show.

Meanwhile, Cornerstone suffered ill-timed financial downturns and pressure from

Legal blogger Francis G.X. Pileggi praised the opinion’s “candor in acknowledging that, like other areas of corporate

law, the right answer is not always easy to figure out.”

Instead of faulting the trial judges’ analysis, Pileggi said, “Delaware’s high court acknowledged the lack of clarity in the law.”

The two appeals addressed in the May 14 high court ruling involved the buyout of specialty product pharmaceutical company Cornerstone Therapeutics Inc. by its controlling shareholder and the CEO-led going-private buyout of China-based food processor Zhongpin Inc.

In each case, independent directors — non-employee board members without business ties to the company or its controlling shareholders — were accused of failing to press for the best price in a change-of-control transaction and, instead, blessing a controlling shareholder’s deal that short-changed investors.

HOW WIDE IS THE SHIELD?

Those disinterested directors are normally sheltered even when a majority shareholder is accused of using its influence to railroad an unfair deal and the burden of proof shifts to the defendants to show that both the negotiations and the price were entirely fair to the shareholders.

This is especially true where, as here, the companies’ charters also put the independent directors under an “exculpation” umbrella that shields them from money damages liability for all but the most grossly negligent conduct.

But in both cases, the Chancery Court judges refused to dismiss the independent directors, saying it would take a trial to decide what level of charges were going to stick to them for allegedly rubber-stamping an unfair deal.

a market competitor, influencing the committee to recommend a lower offer than it said it would accept from Chiesi, according to plaintiff shareholders.

The independent directors moved to be dismissed from the suit, but Vice Chancellor Sam Glasscock III denied the motion on the grounds that only a trial would determine what level of charges they faced. In re Cornerstone Therapeutics Inc. Stockholder Litig., No. 8922, 2014 WL 4418169 (Del. Ch. Sept. 10, 2014).

DIFFERENT CASE, SIMILAR ISSUE

In the case of Zhongpin, Vice Chancellor John W. Noble said even though the independent directors had no financial interest in the CEO-led buyout they accepted and would normally be shielded from ordinary liability, they could face graver charges. In re Zhongpin Inc. Stockholders Litig., No. 7393, 2014 WL 6778537 (Del. Ch. Nov. 26, 2014).

The judge said that, to win dismissal, Zhongpin’s disinterested directors would have to show at trial that they face only the less serious variety of charges, so the business-judgment rule and the company’s exculpation bylaw would exempt them from liability.


The business-judgment rule gives directors’ decisions the benefit of the doubt, unless there is evidence of collusion or control.

In their appeals, the independent directors in both cases argued that they should not have been dragged into the litigation because every one of the charges was exempted under the business-judgment rule and their company’s bylaws.

The plaintiffs in both suits maintained that because the challenged transactions would be examined under the “entire fairness” standard because of the presence of self-dealing, there was a distinct possibility discovery would produce evidence to support more serious bad-faith charges. Therefore, those directors must remain defendants until the end of the litigation.

“The Court of Chancery was reluctant to embrace that result but felt that it was the reading most faithful to our precedent,” Chief Justice Strine said. “In this decision, we hold that even if a plaintiff has pled facts that, if true, would require the transaction to be subject to the entire fairness standard of review ... the independent directors do not automatically have to remain defendants.”

When independent directors who are protected by exculpatory bylaws and a merger challenge suit does not plead the more serious level of charges against them, “they are entitled to have the claims against them dismissed,” the opinion says. WJ

Attorneys: Cornerstone plaintiffs-appellees: J. Brandon Walker and Melissa A. Fortunato, Kirby McInerney LLP, New York; Shane Rowley, Levi & Korsinsky, New York; Chet B. Waldman and Joshua H. Saltzman, Wolf Popper LLP, New York; Seth D. Rigrodsky, Brian D. Long, Gina M. Serra and Jeremy J. Riley, Rigrodsky & Long, Wilmington, Del.

Cornerstone defendants-appellants: Anthony M. Candido, Robert C. Myers and John P. Alexander, Clifford Chance US LLP, New York; Donald J. Wolfe Jr., Kevin R. Shannon and Christopher N. Kelly, Potter Anderson & Corroon, Wilmington

Zhongpin plaintiffs-appellees: Seth D. Rigrodsky, Rigrodsky & Long, Wilmington

Zhongpin defendants-appellants: S. Mark Hurd, Morris, Nichols, Arsht & Tunnell, Wilmington

Related Court Document:Opinion: 2015 WL 2394045

BREACH OF DUTY

Disloyal directors hijacked communications company, left it a ‘shell’, suit saysDirectors designated by AT&T Corp. and a Qatar-based telecom misused their controlling interest in NavLink Inc. to oust its founders then usurp and “carve up” the communications technology company for themselves, according to a shareholder suit in the Delaware Chancery Court.

Chammas et al. v. AT&T Corp. et al., No. 11015, complaint filed (Del. Ch. May 12, 2015).

The complaint, filed by Maroun Chammas and Seraphin Delifer on behalf of NavLink’s minority shareholders, alleges those directors breached their duty to put NavLink’s interests first. The suit asks the court to force the directors to disgorge any money that they and the designating companies improperly made.

The plaintiffs, who are relatives of NavLink founders George Chammas and Laurent Delifer, claim that the two men had built the company into “the premier information and communications technology managed services provider in the Middle East” with revenue of $50 million in 2014.

positions at the end of 2009 and effectively take over NavLink’s two main business segments, the complaint says.

“The director designees allowed AT&T to steal a corporate opportunity that arose out of a three-way agreement among NavLink, AT&T and Emirates Integrated Telecommunications Co. … but AT&T senior executives convinced [EITC] to cut NavLink out of the deal, costing NavLink millions of dollars,” the suit says.

In addition, “those directors collaborated to block an independent investigation” of their misuse of power and misappropriation of NavLink’s corporate opportunities with the result that “NavLink is now a shell of what it recently was and what it stood to become,” the complaint says.

The plaintiffs say NavLink is a Delaware-chartered company, as is AT&T Inc., the parent of AT&T Corp., giving the shareholders standing to sue in the Chancery Court.

The suit asks the court to find the seven defendant directors breached their duties to the minority shareholders. The plaintiffs say the directors should be held individually liable for any ill-gotten gains they and the companies that designated them reaped, as well as for any economic losses the shareholders have suffered.

No one at NavLink was immediately available to comment on the suit. WJ

Attorneys:Plaintiffs: Joel Friedlander, Jeffrey M. Gorris and Benjamin P. Chapple, Friedlander & Gorris, Wilmington, Del.

Related Court Document: Complaint: 2015 WL 2254837

“NavLink is now a shell of what it recently was and

what it stood to become,” the complaint says.

Along the way, however, the founders did “significant business” in Saudi Arabia, Qatar and the United Arab Emirates with AT&T and Ooredoo Q.S.C., a Qatar-based telecommunications multinational, the complaint says. Those two companies each bought a 38 percent stake in NavLink and gained the right to collectively designate a majority of the company’s directors, according to the suit.

The director designees AT&T and Ooredoo used their combined majority interest to remove the founders from their officer


BREACH OF CONTRACT

American Apparel says ex-CEO’s ‘scorched earth’ campaign breaks truceClothing and accessories retailer American Apparel has asked a Delaware judge to force ex-CEO Dov Charney to abide by a peace treaty in which he promised to end a purported campaign of retribution against the company for firing him over employee sexual harassment claims.

American Apparel Inc. v. Charney, No. 11033, complaint filed (Del. Ch. May 15, 2015).

In violation of a standstill agreement he signed in July, Charney has trespassed on company property, harassed employees, threatened workers who refused to support his campaign to recoup control, and used proxies to file legal actions that seek to remove incumbent directors, American Apparel says in a Chancery Court complaint.

The company says the agreement bars Charney from directly or indirectly seeking the removal of any member of the board of directors, seeking election to the board, participating in any extraordinary stock transaction, or publicly disparaging the company and its personnel.

allegedly gave him the option of buying a much larger interest, American Apparel’s complaint says.

The company says Charney is now “attempting to manipulate the company’s labor force as part of his effort to take back control” and foment employee discontent while his attorney has filed at least a dozen unfair-labor-practice charges with the National Labor Relations Board.

According to the retailer’s complaint, Charney was fired because his conduct while CEO “led to countless allegations of sexual harassment brought by former workers,” he described certain employees as “sluts” and “pigs,” and he threatened others while “punching holes in tables and throwing things.”

American Apparel says ex-CEO Dov Charney signed a “standstill” agreement that bars him from

publicly disparaging the company and its personnel.

American Apparel’s breach-of-contract lawsuit says that after Charney was suspended in June 2014 and fired from his positions as CEO and board chairman in December, he waged a “scorched earth” campaign against the company.

Charney aborted an attempt to retake control of the company in June 2014 after using a hedge fund to acquire 23 million shares and then signing a pact with the hedge fund that

Charney also mistreated female employees, misused company property and funds, attempted to sabotage American Apparel’s relationships with its suppliers and financing sources, and tried to order employees to change normal, day-to-day operating procedures after his termination, the complaint says.

Because Charney has continued to make disparaging comments about American Apparel and its personnel to the press, the company has no choice but to ask the court

to require him to honor the wording and spirit of the standstill agreement, the suit says.

Reuters reported May 15 that Charney sued American Apparel and chair Colleen Brown, alleging defamation and mental and emotional distress, three days before the company filed its complaint. Charney v. Am. Apparel Inc. et al., No. BC581602, complaint filed (Cal. Super. Ct., L.A. Cnty. May 12, 2015).

American Apparel seeks a court judgment that Charney has breached the standstill agreement and the duty of good faith and fair dealing.

Charney could not be reached for comment on the company’s suit. WJ

Attorneys:Plaintiffs: Edward B. Micheletti, Jenness E. Parker, Matthew P. Majarian and Bonnie W. David, Skadden, Arps, Slate, Meagher & Flom, Wilmington, Del.

Related Court Documents:American Apparel complaint: 2015 WL 2399305 Charney complaint: 2015 WL 2254829

American Apparel says former CEO Dov Charney, shown here at a 2009 immigrants rights rally, has continued to make disparaging comments about the company despite agreeing to stop.

REUTERS/Mario Anzuoni


NEWS IN BRIEF

HELICOPTER SERVICES FIRM LIED ABOUT CONTRACT SITUATION BEFORE IPO, SUIT SAYS

A Canada-based helicopter services provider and its top executives failed to disclose that one of its largest customers stopped payments on its contracts months before the company’s initial public offering, a federal lawsuit says. The proposed class-action complaint filed against CHC Group by shareholder Errol Rudman in the U.S. District Court for the Southern District of New York says the company violated federal securities laws by misrepresenting the contract situation to its investors. CHC — one of the world’s largest commercial helicopter operators — mainly runs flights to offshore oil rigs and flies search-and-rescue and emergency medical missions. Prior to its IPO on July 9, 2014, CHC said its contract with Brazilian state-run oil company Petrobras accounted for 14 percent of its revenues, the suit says. The company announced the next day, however, that Petrobras had not made payments on its contract since April 2013. CHC’s share price subsequently fell 12 percent on the news to $7.63 per share.

Rudman et al. v. CHC Group Ltd. et al., No. 15-CV-3773, complaint filed (S.D.N.Y. May 15, 2015).


FOR-PROFIT EDUCATION COMPANY URGES DISMISSAL OF SHAREHOLDER SUIT

Education Management Corp. and its officers and directors say a lawsuit accusing the company of inflating its stock price in violation of federal securities laws by misrepresenting its financial outlook should be thrown out. In a memorandum in support of their motion to dismiss Brian Robb’s lawsuit, filed in the U.S. District Court for the Western District of Pennsylvania, EMC and its executives argue the suit fails to allege facts showing their statements were materially false or misleading. The for-profit company operates post-secondary education providers under the names The Art Institutes, Argosy University, Brown Mackie Colleges and South University. According to Robb’s complaint, EMC misrepresented to investors its revenue, job placement numbers, admission statistics, and loan and grant programs. The company says the suit should be dismissed because the allegedly false statements are too vague to be actionable.

Robb v. Education Management Corp. et al., No. 14-CV-01287, memorandum in support of motion to dismiss filed (W.D. Pa. May 18, 2015).

Related Court Document:Memorandum in support of motion to dismiss: 2015 WL 2373433

SEC HIRES NEW DEPUTY DIRECTOR OF MUNICIPAL SECURITIES OFFICE

The Securities and Exchange Commission announced May 20 that it has hired Rebecca J. Olsen as deputy director for the agency’s Office of Municipal Securities. Olsen had been serving as chief counsel for the office since April 2014. The Office of Municipal Securities is tasked with administering SEC rules involving broker-dealers, investors, municipal advisers and municipal securities issuers. It also advises the SEC on municipal securities policy matters, enforcement issues, rulemaking and the agency’s municipal adviser registration program. Olsen joined the SEC in 2013. She spent the previous 10 years as a private attorney practicing municipal securities law at Ballard Spahr LLP.

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Kraft, an Illinois-based conglomerate chartered in Virginia, jointly announced a stock-swap merger March 25 with Heinz, a Pittsburgh-based corporation incorporated in Delaware. The merger would create the nation’s third-largest food products company.

Heinz is known for its iconic ketchup and beans along with Ore-Ida, Classico and Weight Watchers products, while Kraft owns the Planters, Jell-O, Kool-Aid and Oscar Mayer brands.

A March 25 post on the Heinz company website quotes Chairman Alex Behring as saying, “By bringing together these two iconic companies through this transaction, we are creating a strong platform for both U.S. and international growth.”

• A no-solicitation provision that barsother prospective bidders from accessing vital confidential information.

• Ano-shopclausepreventingKraftfromactively soliciting other bidders.

• A promise to notify Heinz within 24 hours of any takeover proposal by a third party.

The suit says the director and officer defendants issued materially false statements concerning the negotiations with Heinz, the method by which Kraft was valued and the procedure by which the companies arrived at a price.

By distorting and hiding information that shareholders need to cast an informed vote on the merger, the officers and directors violated Section 14 (a) of the Securities Exchange Act of 1934, the complaint says. The defendants issued proxies that were materially false and deficient, it adds.

KraftCONTINUED FROM PAGE 1

The suit says Kraft’s directors disloyally rubber-stamped a deal that overvalues Heinz

and underestimates Kraft’s future growth.

Kraft shareholders will receive stock in the new combined corporation totaling a 49 percent interest along with a $10 billion dividend worth $16.50 per share, according to the suit.

Wietschner says Kraft’s directors disloyally rubber-stamped a deal that overvalues Heinz and underestimates Kraft’s future growth.

In addition, the suit says, the board members “exacerbated their breaches of fiduciary duty” of loyalty, good faith and due care by agreeing to deal protection terms designed to discourage competing bidders, such as:

• A$1.2billionterminationfeethatKraftor its buyer would have to pay Heinz if Kraft cancels the merger.

In addition, the officers and directors violated Section 20(a) of the act when they failed to either correct misleading statements or prevent them from being issued, the suit says.

It asks the court to hold the defendants individually liable for whatever money judgment is justified by the wrongs alleged. WJ

Attorneys:Plaintiffs: Eric G. Reeves, Moran Reeves & Conn, Richmond, Va.; Joshua Lifshitz, Lifshitz & Miller, Garden City, N.Y.


See Document Section A (P. 23) for the complaint.

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CASE AND DOCUMENT INDEX

American Apparel Inc. v. Charney, No. 11033, complaint filed (Del. Ch. May 15, 2015) ..................................................................................................... 19

Anderson v. Spirit Aerosystems Holdings Inc. et al., No. 13-CV-2261, 2015 WL 2340379 (D. Kan. May 14, 2015)........................................................... 15

Berkman v. Friedman et al., No. 1:15-cv-00928, complaint filed (N.D. Ohio, E. Div. May 12, 2015) ................................................................................. 14

Chammas et al. v. AT&T Corp. et al., No. 11015, complaint filed (Del. Ch. May 12, 2015) .................................................................................................. 18

In re Citigroup ERISA Litigation, No. 11-7672, 2015 WL 2226291 (S.D.N.Y. May 13, 2015) ............................................................................................... 12

In re Cornerstone Therapeutics Inc. Stockholder Litigation, No. 564, 2014; Leal et al. v. Meeks et al., No. 706, 2014, 2015 WL 2394045 (Del. May 14, 2015) ...............................................................................................................................................................................17

Napoli v. Ampio Pharmaceuticals Inc. et al., No. 15-CV-03474, complaint filed (C.D. Cal. May 8, 2015) ........................................................................ 16

Robb v. Education Management Corp. et al., No. 14-CV-01287, memorandum in support of motion to dismiss filed (W.D. Pa. May 18, 2015) ..................................................................................................................................................................................................... 20

Rudman et al. v. CHC Group Ltd. et al., No. 15-CV-3773, complaint filed (S.D.N.Y. May 15, 2015) .................................................................................. 20

Surrey v. Ma et al., No. 3:15-cv-01036, complaint filed (S.D. Cal. May 8, 2015) .................................................................................................................13

Wietschner et al. v. Kraft Foods Group Inc. et al., No. 15-00292, complaint filed (E.D. Va. May 14, 2015) ..........................................................................1 Document Section A.....................................................................................................................................................................................................23