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Delaware Clamps Down On Parasitic Shareholder Litigation

Feeding FrenzyFCPA Professor has been highlighting for years the parasitic nature of many FCPA-related civil claims.

The actions are as predictable as the sun rising in the east and generally unfold as follows.

A company becomes the subject of Foreign Corrupt Practices Act scrutiny or resolves an FCPA enforcement action.

Then a feeding frenzy follows as plaintiffs lawyers representing (after recruiting) shareholders file civil suits alleging either breach of fiduciary claims under state law or securities fraud claims under federal law.

Like most shareholder litigation of this nature, success is often defined as passing the motion to dismiss stage, and in the FCPA context such FCPA-related civil claims rarely get past this most basic hurdle.

Yet some claims do indeed get past the motion to dismiss hurdle or even they do not are otherwise settled by companies because settlement represents the path of least resistance. In such situations, shareholders receive nothing of significance in the settlement, but the plaintiffs lawyers sure do make out nicely. (See this prior post “Nice Pay Day, But What Did You Accomplish?)

Yet, the actions, as well as the purported investigations by plaintiffs firm surrounding the issues, continue. As this 2010 Forbes column rightly observed:

“[The general increase in FCPA enforcement] has made corporate lawyers and accountants rich as big companies pay big law and accounting firms to investigate and defend potential violations. Plaintiff lawyers have noticed the enormous fees, which are often reaching into the hundreds of millions of dollars, enhanced FCPA enforcement is generating and are moving to extract their own cut.”

The latest company to find itself in the crosshairs of plaintiffs lawyers is Freeport-McMoRan Inc. concerning its business practices in Indonesia after an Indonesian politician resigned after allegedly asking for Freeport shares in exchange for assistance in securing a contract renewal for the company.

Within days, the usual cadre of plaintiffs firms filed lawsuits or otherwise announced investigations (see here, here, here, here, here, here) claiming that Freeport violated the FCPA and as a result various Freeport public statements were materially false and misleading.

Against the above backdrop and general dynamics was a recent notable decision by the Delaware Court of Chancery (the most high-profile trial court in the country when it comes to intra-corporate disputes).

The decision (here – in which Trulia, Inc. shareholders alleged that company directors breached their fiduciary duties in approving a proposed merger with Zillow at an unfair exchange ratio) did not involve FCPA-related civil claims, but did involve another vexatious form of shareholder litigation that typically follows corporate mergers. Perhaps you’ve heard the term “first the merger, then the lawsuit.”

While the decision is not a perfect parallel to FCPA-related civil claims, the language of the court in denying the proposed settlement between the parties is analogous to the FCPA context.

In denying the settlement, the court stated:

“The proposed settlement is of the type often referred to as a “disclosure settlement.” It has become the most common method for quickly resolving stockholder lawsuits that are filed routinely in response to the announcement of virtually every transaction involving the acquisition of a public corporation. In essence, Trulia agreed to supplement the proxy materials disseminated to its stockholders before they voted on the proposed transaction to include some additional information that theoretically would allow the stockholders to be better informed in exercising their franchise rights. In exchange, plaintiffs dropped their motion to preliminarily enjoin the transaction and agreed to provide a release of claims on behalf of a proposed class of Trulia’s stockholders. If approved, the settlement will not provide Trulia stockholders with any economic benefits. The only money that would change hands is the payment of a fee to plaintiffs’ counsel.”

[…]

Today, the public announcement of virtually every transaction involving the acquisition of a public corporation provokes a flurry of class action lawsuits alleging that the target’s directors breached their fiduciary duties by agreeing to sell the corporation for an unfair price. On occasion, although it is relatively infrequent, such litigation has generated meaningful economic benefits for stockholders when, for example, the integrity of a sales process has been corrupted by conflicts of interest on the part of corporate fiduciaries or their advisors. But far too often such litigation serves no useful purpose for stockholders. Instead, it serves only to generate fees for certain lawyers who are regular players in the enterprise of routinely filing hastily drafted complaints on behalf of stockholders on the heels of the public announcement of a deal and settling quickly on terms that yield no monetary compensation to the stockholders they represent.”

A Delicious Fact Pattern

The facts would make a delicious exam question.

A company subject to the FCPA engages foreign police officers to protect its local production facility.  The company spends millions to, among other things,  feed the police officers.  Analyze the company’s FCPA exposure.

The fact pattern is very much real world.

According to various media reports Freeport Indonesia, a subsidiary of Phoenix based mining company Freeport McMoRan Cooper & Gold,  has paid police officials in Papua New Guinea over $14 million in security related allowances, food and other in-kind necessities.

In this Jakarta Post article, the company claims that the  funds given to security personnel guarding project sites in Papua are allowed under a multi-national pact initiated in 2000 (the Voluntary Principles on Security and Human Rights – see here) by the U.S. and U.K. government which allows companies to contribute or reimburse the costs of protecting their facilities and personnel.  A Freeport spokesperson says that the company “uses the voluntary principles as guidelines to disburse the security funds” and that the money was “given voluntarily and without any intention of bribing state officials.”  The Jakarta Post article says Freeport’s spending on government-provided security measures has increased from $8 million in 2008 to $14 million in 2010.  A company spokesperson is quoted as saying that “about 80 percent of the funds were spent to support facilities and infrastructure, including meals for officers, and rest of the funds were transferred to the bank accounts of military units.”

As indicated by this 2006 New York Times article, the Freeport payments discussed above have been in the public domain for some time.

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