© 2012 Winston & Strawn LLP · • Dura Pharmaceuticals, Inc. 2005: inflated purchase price/stock drop alone are insufficient to establish loss causation • Tellabs 2007: inference

© 2012 Winston & Strawn LLP


Securities Litigation in 2012 and Beyond: New Targets, New Solutions

Brought to you by Winston & Strawn’s Securities Litigation Practice Group

© 2012 Winston & Strawn LLP 3

Today’s eLunch Presenters: Topic 1

Casey Berger

LitigationHouston

[email protected]

John Roesser

LitigationNew York

[email protected]

Getting Out in Front of Shareholder Challenges to Mergers & Acquisitions


Focus Has Shifted

Private Securities Litigation Reform Act of 1995 & recent Supreme Court decisions have made traditional stock drop cases much more difficult to allege

• Dura Pharmaceuticals, Inc. 2005: inflated purchase price/stock drop alone are insufficient to establish loss causation

• Tellabs 2007: inference of “scienter” (intent) must be more than merely “reasonable” or “permissible,” must be cogent & compelling

• Morrison 2010: limited extraterritorial application of securities laws

• Merck 2010: SOL begins running when plaintiffs actually or reasonably should have discovered facts forming claim

Financial Crisis Cases are on the decline

As a result, M&A cases are dramatically on the rise


The Anatomy of a Typical Shareholder Challenge to a Merger or Acquisition

Transaction is announced

Multiple complaints filed soon thereafter (< 2 weeks)

Plaintiffs assert claims for breach of fiduciary duty against the board of directors, often alleging, initially, that the offer significantly undervalues company

Company has incentive to close transaction and thus seeks to quickly dispense with lawsuits


The Overwhelming Majority of Deals Will Be Challenged

Chart taken from Cornerstone Research’s

“Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions”


M&A Cases Are No New Phenomenon


"Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions"


M&A Deals Are Often the Subject of Multiple Lawsuits




Shareholders Act Quickly . . .




. . . And Their Lawyers Get Paid . . .




. . . Even When the Shareholders Don’t

57 investor class actions settled or otherwise concluded in Delaware in 2010 and 2011

40—or 70 percent—made money for plaintiffs’ lawyers but not shareholders (disclosures only)

Judges are growing critical of disclosure – only settlements


The Other 30%




Plaintiffs Are Avoiding Federal Courts . . .




While Delaware Is The Most Prominent Non-Federal Venue . . .




Delaware Is No Walk in the Park

Complex law applied

Sophisticated, diligent, and thorough judges

Unwilling to sign off on standard & unearned fees

Little patience for meritless cases

• “I don’t think for a moment that 90 percent—or based on recent numbers, 95 percent of deals are the result of a breach of fiduciary duty. I think that there are market imbalances here and externalities that are being exploited. What this means is that this Court needs to think carefully about balancing.”

o Vice Chancellor, J. Travis Laster, Stourbridge Investments, LLC v. Bersoff, C.A. No. 7300-VCL (Del. Ch. Mar. 13, 2012) (emphasis added)


. . . Plaintiffs Are Forum Shopping to Avoid It




Post-Closing Litigation

Post-Closing litigation historically uncommon

Business Judgment Rule

Exculpation Provisions

Incentive for companies to settle prior to closing of transaction, particularly where plaintiffs seek to restrain closing

Plaintiffs instead pursue pre-closing settlements & disclosures

Judges are, however, growing increasingly critical of such cases and fear that they primarily result in attorneys’ fees

• 40 cases $32.4 million for lawyers & $0 for shareholders

• 17 M&A lawsuits only led to $350 million total for the shareholders

• Del Monte settled for $89.4 million $22.3 million in attorneys’ fees

Plaintiffs now willing to litigate given potential damages awards, especially if not in federal court or Delaware state courts


M&A Litigation: Recent Example

In re El Paso Corporation Shareholder Litigation, C.A. No. 6949-CS (Del. Ch. Feb. 29, 2012)


The Deal

El Paso Corporation (two main business lines: Pipeline and E&P) publically announced plan to spin-off the E&P business

Kinder Morgan submitted an offer to buy the entire company, but intended to spin-off E&P business to finance the deal

Merger talks begin August/September 2011 between El Paso & Kinder Morgan

El Paso’s longtime advisor Goldman Sachs was initially advising on E&P spin-off; due to potential conflicts, Morgan Stanley also brought in to advise on the Kinder Morgan Merger

El Paso CEO “undertook sole responsibility for negotiating the sale” to Kinder Morgan

Merger Agreement signed – October 16, 2011


The Fallout

Multiple El Paso stockholders file class action suits challenging the Merger

22 putative class action lawsuits filed overall: 6 (DE) / 5 (TX) within 1 week

5 (DE) / 3 (TX) within 2 weeks

2 (DE) within 3 – 4 weeks

Cases consolidated in Delaware and lead counsel chosen


Shareholders Take Issue

Shareholders file breach of fiduciary duty claims against Board and seek to enjoin the Merger. Key allegations: El Paso accepted a lower final bid ($25.91/share) than what was

previously offered ($27.55/share) $534M shortfall

Deal protection provisions

“No-shop” provision

$650 million termination fee and matching rights in event of Superior Proposal

Conflicts of interest with financial advisors and management


The Conflicts

Conflicting motives of El Paso CEO: approached Kinder Morgan with proposal for management buy-out of E&Pbusiness late in process, which was not disclosed to Board

Goldman owned 19% of Kinder Morgan ($4 Billion)

Goldman controlled two Kinder Morgan Board seats

Goldman’s lead banker for El Paso had an undisclosed personal financial interest in Kinder Morgan worth $340,000

Morgan Stanley brought into immunize Goldman conflict; however, Morgan Stanley would only get paid if El Paso sold to Kinder Morgan (which would benefit original advisor Goldman)


Unhappy Judge

Judge highly critical of players and process: Extremely “disturbing behavior” Board acted “weakly” during negotiations Revised lower bid that was ultimately accepted:

“Instead of telling Kinder [Morgan] where to put its drilling equipment, [the CEO] backed down.”

“Goldman’s friends in El Paso management—and this is what they seem to have been—easily gave in to Goldman”

Board and CEO “can be seen by a rational mind as oddly timid” “Some backbone might well have resulted in a better result” CEO’s “velvet glove negotiating strategy” viewed as having been

influenced by improper motive


Business Judgment Protection May Be Compromised By Conflicts

Court reaffirms general Delaware notions that, under Revlon, so long as directors made reasonable decisions for a proper purpose, they met their duties and courts will not second-guess the board “Although a reasonable mind might debate the tactical choices

made by the El Paso Board, these choices would have little basis for enjoining a third-party merger approved by a board overwhelmingly comprised of independent directors”

Even so, the Court suggested that the customary deference to the Board in exercising its business judgment was undermined by the conflicts of the CEO and financial advisors upon which it relied


No Injunction

Court determined that the shareholders had a reasonable probability of success on a claim that the Merger was tainted by breaches of fiduciary duty, however…

Injunction still denied – El Paso stockholders were sufficiently prepared to vote on the Merger and “decide for themselves”

Reasoning: injunction would cause more harm than good No rival bids existed

Roughly 35-45% premium over pre-announcement share price

Injunction would likely last beyond June 30, 2012, which is the drop-dead date in the Merger Agreement

Kinder Morgan would be allowed to walk away on that date


Where Does the Deal Stand?

WSJ (Mar. 9, 2012): El Paso shareholders voted overwhelmingly to approve the sale to

Kinder Morgan (95% of the shares voted endorsed the deal; shareholders holding about 79% of outstanding shares voted)

Kinder Morgan has agreed to sell the E&P business to private-equity firm Apollo Global Management

Court mentions the likely prospect of a damages trial against the El Paso CEO, other El Paso managers who might be added as defendants, and financial advisors NYTimes (Mar. 7, 2012): California State Teachers’ Retirement

System said it would vote to block Kinder Morgan’s $21 billion takeover of El Paso, citing a lack of transparency and conflicts of interest related to the deal


Considerations after El Paso

Consider appointing a special committee of independent and disinterested directors; Board should be actively involved in the process

Legal team should include/consider litigation perspective

Vet financial advisors and assess the impact of their potential conflicts before and throughout retention; Board should be prepared to explain financial advisors’ capabilities and why they were retained

Clearly define the financial advisor’s role and actively police

Carefully consider the incentives created by fee arrangements with financial advisors

Be prepared to defend the process and demonstrate that it was not compromised by conflicts


Today’s eLunch Presenters: Topic 2

Robb Adkins

LitigationSan Francisco

[email protected]

Jack Knight

LitigationCharlotte

[email protected]

Dodd-Frank, Whistleblower Rules, FCPA, and What To Do When the Feds Come Knocking


Dodd-Frank (2010)

Comprehensive financial regulation and restructuring

CFTC and SEC have rule-making authority and power to regulate derivatives

Tightened regulation of credit-rating agencies – SEC Office of Credit Ratings

New whistleblower rules from SEC and CFTC – SEC Office of the Whistleblower

SEC Office of Market Intelligence


Overlapping Regulation Today

Example: Whistleblowers

SOX – strict compliance with procedures for receiving and investigating allegations

Dodd-Frank – bounties for whistleblowers Any action, any agency, not confined to shareholder

protection

Need not report internally first to receive monetary award

Compliance personnel eligible in certain circumstances

Good corporate citizens: What is a public company to do?


What is on the Horizon in Federal Regulation and Enforcement?

Greater parallel enforcement

Increased focus on predictive modeling and triage –impact of Dodd-Frank whistleblower rules

Greater emphasis on matters with potentially large monetary penalties or recoveries


How the SEC and DOJ Come Knocking

A “visit” or request for interview by Special Agents or investigators

Written Notice of Investigation

Target Letter (DOJ)

Notice of informal investigation (SEC)

Notice of formal investigation (SEC)

Wells Notice (SEC)

Grand Jury Subpoena (DOJ)

Subpoena Duces Tecum

Testimony

Search Warrant (DOJ)


The Parallel Players

Department of Justice (DOJ)

Antitrust (ATR), Civil (CIV), Civil Rights (CRT), Criminal (CRM), U.S. Attorney’s Office (USAO), FBI, Bureau of Alcohol Tobacco & Firearms (BATF), Drug Enforcement Administration (DEA), Bankruptcy Trustees

Securities and Exchange Commission (SEC) – Enforcement Division

Other federal investigators/regulators

CFTC, FTC, IRS-CI, USSS, USPIS, ICE, DOL, FDA, OCC, FDIC, FRB, NCUA, SIGTARP, FinCEN

Offices of the Inspector General

State Attorneys General/local District Attorneys

State Regulators


Financial Fraud Enforcement Task Force

Executive Order signed by President Obama establishing the FFETF on 11/17/2009

More than 25 Federal Agencies

Local and State Partners

Criminal, Civil, and Administrative Remedies

Broad scope of FFETF

Equally broad mandate


ENFORCEMENT COMMITTEE

FINANCIAL FRAUD ENFORCEMENT TASK FORCE

TRAINING AND

INFORMATION

SHARING

COMMITTEE

STEERING COMMITTEE

VICTIMS’ RIGHTS

COMMITTEE

MORTGAGE

FRAUD

SECURITIES

AND

COMMODITIES

FRAUD

RECOVERY

ACT

FRAUD

TARP

FRAUDDISCRIM.RMBS

“Financial

Crisis”


DOJ Criminal Division

Eric Holder,AG

U.S. Attorney’s Offices

(94 districts)

Lanny Breuer,AAG, Criminal

Division

Greg Andres,DAAG, Criminal

Division

Denis McInerney,Chief, Fraud

Section


SEC Division of Enforcement

Robert Khuzami,Director

Lorin Reisner,Deputy Director

Asset Management Unit

Foreign Corrupt Practices Unit

Market Abuse Unit

Municipal Securities and Public Pensions Unit

Structured and New Products Unit

Office of Market Intelligence

Office of the Whistleblower

Regional Offices


New SEC Formal Investigations Fiscal Years 1997 – 2011

Source: SEC

265 275 282

345324

300

254 261 272255

229 233

496

531

0

100

200

300

400

500

600

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

578

2011


SEC Enforcement Actions Filed Fiscal Years 2005 – 2011

Source: SEC

630

574

656

671664

681

520

540

560

580

600

620

640

660

680

700

2005 2006 2007 2008 2009 2010

735

2011


The SEC Reorganization

Specialized Units:

Asset Management (investment advisers and hedge funds)

Market Abuse (insider trading and market manipulation)

Structured and New Products (derivative products)

Foreign Corrupt Practices Violations*

Municipal Securities and Public Pensions

New offices with focus on predictive modeling:

Office of Market Intelligence

Office of the Whistleblower

*New, unique SEC unit in San Francisco focused on FCPA.


Tactical Considerations in Defending Parallel

Proceedings

Questions to Consider Cooperate and assist or prepare to defend?

If you cooperate, are you creating a roadmap for plaintiffs?

If you do not cooperate and assist, do you risk charges of obstruction?

By cooperating, do you risk waiving the attorney-client privilege?

Document Production

Witness Summaries

Written Report


FCPA Trend No. 1: More and More FCPA

Dramatic increase in FCPA enforcement, with large surge in the past five years

Reportedly there are approximately 150 ongoing FCPA investigations by DOJ alone


FCPA Trend No. 2: Continued Large Monetary Resolutions – Why?

A few examples of FCPA fines and disgorgement:

BAE Systems plc: $400 million criminal fine

Snamprogetti Netherlands B.V./ENI S.p.A.: $365 million ($240 million criminal penalty and, with former parent ENI, $125 million in disgorgement)

Technip S.A.: $338 million ($240 million criminal penalty and $98 million in disgorgement)

Daimler AG (along with two subsidiaries): $185 million ($93.6 million criminal penalty and $91.4 million in disgorgement)

Alcatel-Lucent S.A. (along with three subsidiaries): $137.4 million ($92 million criminal penalty and $45.4 million in disgorgement and interest)

Panalpina World Transport (Holding) Ltd. and Panalpina Inc.: $81.9 million ($70.6 million in criminal fines and $11.3 million in disgorgement)

JGC Corporation of Japan: $218.8 million in criminal fines

IBM: $10 million ($2 million civil penalty, disgorgement of $5.3 million and $2.7 million in prejudgment interest)

Maxwell Technologies: $14.4 million ($8 million in criminal penalties, as well as $6.4 million to settle SEC civil charges)

Comverse: $2.8 million ($1.6 million disgorgement to SEC and $1.2 million criminal fine)


Other FCPA Perils

Shareholder Lawsuits

Faro Technologies: $444,492 in alleged bribes led to $3 million in penalties and resulted in over $7 million settlement with shareholders

Immucor: $19,000 in alleged bribes led to $30,000 in penalties and resulted in $2.5 million settlement with shareholders

Syncor: $113,007 in admitted bribes led to $2 million in penalties and resulted in $15 million settlement with shareholders 7 years later

Internal Investigation Costs

Avon: Spent over $150 million in legal fees on an FCPA investigation, and a shareholder lawsuit is underway

Claims by Foreign Governments

Royal Dutch Shell: after settling with U.S. authorities, required to pay $10 million by the Nigerian government

Alcatel-Lucent: after settling with U.S. authorities, required to pay $10 million by the Costa Rican government


FCPA Trend No. 3: Prosecuting Individuals

As a primary means of deterring bribery, the DOJ has begun to emphasize prosecution of individuals

Numerous individuals settled FCPA-related charges in 2011, including one settlement in which the individual forfeited nearly $149 million, the largest FCPA-related forfeiture imposed on an individual to date (Jeffrey Tesler)

4

5


FCPA Trend No. 4: Widespread Compliance Retooling

Expanding FCPA enforcement, internationalization of business, and Dodd-Frank whistleblower rules have led to massive revision of compliance policies and procedures, including: (i) devising and updating written policies and procedures;

(ii) providing employees and third parties with documented training and certifications;

(iii) performing due diligence on third parties, including distributors, partners, joint ventures, and purported charities;

(iv) vetting the provision of gifts, meals, and other hospitalities to officials in both the public and private sector; and

(v) effectively evaluating and investigating red flags and whistleblower reports.


Questions?


Contact Information

Robb AdkinsLitigation

San Francisco(415) 591-1411

[email protected]

Jack KnightLitigationCharlotte

(704) [email protected]

Neal MarderLitigation

Los Angeles(213) 615-1728

[email protected] Roesser

LitigationNew York


Casey BergerLitigationHouston



Thank You.

© 2012 Winston & Strawn LLP · • Dura Pharmaceuticals, Inc. 2005: inflated purchase price/stock drop alone are insufficient to establish loss causation • Tellabs 2007: inference

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