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Quote of the Day - Iím a man without a corporation. - Paddy Chayefsky, on being fired
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How-to Guide For Handling Derivative And Class-action Corporate Suits

If you're involved in either a shareholder class action suit or a derivative suit, there's a good primer available on how to handle them if you're on the corporate side, and how not to, if you're on the plaintiff's side.  In the just-decided case of Grosset v. Weenas, a plaintiff made the mistake of selling his stock and trying to maintain a derivative action, which the Court disallowed based on the continuous-ownership doctrine. 

It's the old "if you want to play, you have to pay" rule.  At least in Delaware, where this company was incorporated, that's the rule.  If you want to maintain a derivative action against the corporation, then you better own stock in the corporation during the entire time that you're suing the corporation.  In California, where the suit was brought, that rule will now be accorded the same respect.  This case, along with the related cases, gives both sides a pretty good idea of how tactics in these actions work out.

Our case, Grosset, was actually a piggy-back case, riding the coattails of the separate, but original, class-action lawsuit filed in New York that challenged the corporation's directors because the stock dropped from $126/share to $10/share, and alleged the directors sold their shares for a preferential profit.  The piggy-back aspect of the case occurred when one of the shareholders, independent of the class-action suit against the corporation, brought a separate derivative suit against the directors of the corporation.

The whole mess initially attracted a lot of attention.  Even so, the class-action case was dismissed, but is now on appeal in the Ninth Circuit.  After that dismissal, the corporation merged with another corporation, and purchased the shares of the derivative shareholder.  The derivative shareholder was dismissed from the suit, but the court allowed a substitute shareholder to maintain the derivative action.  The merger would prove to be the undoing of the derivative action.

That's when the corporation got smart.  It formed a special litigation committee (see page 18) and hired a retired judge and a retired admiral to investigate the claims  With the assistance of a separate attorney and after reviewing thousands of pages of documents and interviewing hundreds of witnesses, the SLC issued a sixty-four page report finding that there had been no misdeeds relating to the directors' sale of stock, the sharp price fall of the value of the stock or representations in the corporation's securities filings. 

The independence of the two members of the SLC, along with their independent counsel, gave the Grosset Court the "business judgment rule" confidence to dismiss the derivative action, although the Court hung its "opinion hat" on the hook labeled "standing."  Once the derivative shareholder's stock was repurchased in the merger, he lost his continuous ownership of stock, and along with it, his standing to sue the corporation.

In legal terms, that's "point, set, match."

Printer friendly page Permalink Email to a friend Posted by J. Craig Williams on Saturday, October 22, 2005 at 08:09 Comments Closed (1) |
 
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