Fighting for Changes in Corporate Governance

At G&E, we recognize the importance of recovering investors' financial losses. We also recognize the importance of securing corporate governance improvements, protecting investors from overreaching management conduct and safeguarding shareholder rights.

G&E Corporate Governance Track Record

Grant & Eisenhofer has been very successful in achieving significant changes in corporate governance. Some notable successes include: 

• News Corp. - forced to rescind the extension of its poison pill on the grounds that it was obtained without proper shareholder approval.
• Dollar General Corporation Securities Litigation - instituted sweeping changes in corporate governance relating to auditing functions; insider trading; and the election, compensation and oversight of directors
• Teachers' Retirement System of Louisiana v. Thomas M. Siebel, et al. - forced Siebel Systems to restructure its entire compensation system as well as cancel management stock options with a potential value of hundreds of millions of dollars
• Teachers' Retirement System of Louisiana v. HealthSouth -  ousted a majority of HealthSouth board members who were appointed by the indicted CEO Richard Scrushy
• Occidental Petroleum Corp. Litigation - achieved unprecedented governance reforms related to executive compensation and the board of directors' composition, committee structure, accountability and independence from management

 Sample Cases 

• UniSuper Ltd., et al. v. News Corporation, et al.
• In re:  Digex, Inc. Shareholders Litigation
• Carmody v. Toll Brothers
• State of Wisconsin Investment Board v. Bartlett, et al. (Medco Research)
• Teachers' Retirement System of Louisiana v. Thomas M. Siebel, et al
• Teachers' Retirement System of Louisiana v. HealthSouth Corp.

UniSuper Ltd., et al. v. News Corporation, et al.

CLIENTS: UniSuper Ltd., PSS/CSS, United Super Pty Ltd., MTAA, HESTA, CARE Super Pty Ltd., USS, Hermes, ABP, Connecticut Retirement Plans and Trust Funds, and Clinton Township Police and Fire Retirement System
TYPE OF CASE: Corporate Governance Litigation (Class Action)
SUMMARY:

G&E brought this action in the Delaware Court of Chancery in 2005, on behalf of a group of institutional investors from Australia, the United Kingdom, the Netherlands, and the United States, to enforce a promise made by News Corporation and its board of directors in connection with the company's reincorporation from Australia to Delaware in 2004.  Specifically, in order to persuade shareholders to vote in favor of the reincorporation, Rupert Murdoch and the rest of News Corporation"s board agreed to a number of corporate governance provisions, including that poison pills would be limited to one year in duration absent shareholder approval.  However, less than a year after the reincorporation was completed, the board announced that it was unilaterally extending the company's poison pill for 2 years, without giving the shareholders an opportunity to vote.  They claimed that they were entitled to disregard their earlier promise because it had been memorialized in a board policy rather than in the certificate of incorporation, and could therefore be revoked at the will of the board.

After expedited briefing and a hearing on the defendants' motion to dismiss, the Court upheld the plaintiffs' claims for breach of contract and promissory estoppel, and rejected the defendants' argument that enforcement of their promise would infringe upon the exercise of their fiduciary duties.  Recognizing that shareholders are the "ultimate holders of corporate power" and that directorial power derives from the shareholders, the Court held that "when shareholders exercise their right to vote in order to assert control over the business and affairs of the corporation the board must give way."  This decision represented a significant step forward for shareholder rights and empowerment under Delaware law. 

News Corporation requested an interlocutory appeal of the Court of Chancery's decision, but the Delaware Supreme Court declined to accept the appeal.  The case was subsequently settled on terms that required News Corporation to put its poison pill up for a shareholder vote at the next annual meeting, and imposed restrictions on the board's ability to adopt future poison pills for the next 20 years.  

In re:  Digex, Inc. Shareholders Litigation

CLIENT: Trust Company of the West
TYPE OF CASE: Corporate Governance Litigation (Class and Derivative Action)
SUMMARY:

G&E filed this class and derivative action in the Delaware Court of Chancery on behalf of a fund managed by Trust Company of the West, alleging that Digex, Inc.'s directors and majority stockholder (Intermedia, Inc.) breached their fiduciary duties in connection with WorldCom's proposed $6 billion acquisition of Intermedia, including the approval by an interested majority of the board of directors of Digex of a waiver of the protections that would otherwise be afforded to Digex's minority stockholders under 8 Del. C. § 203 with respect to transactions between WorldCom and Digex following the Merger. The Digex directors who approved the waiver of Section 203 were also directors and/or executive officers of Intermedia, and the plaintiffs alleged that these directors granted the waiver in order to satisfy a condition precedent to the merger for the benefit of Intermedia, despite the absence of any consideration to Digex or its stockholders. The plaintiffs further alleged that the Merger itself was the result of breaches of fiduciary duty by Intermedia and the individual defendants, since they had led Digex and a special committee of Digex directors to believe that Intermedia and its financial advisors were soliciting bids for the sale of all outstanding shares of Digex, and had negotiated several transactions in which the Digex shareholders would have received a premium for their shares, only to enter into a last-minute deal between WorldCom and Intermedia in which the Digex shareholders would receive no consideration. In connection with plaintiffs' motion for a preliminary injunction to enjoin the merger, the Court issued an opinion acknowledging plaintiffs' likelihood of success on the merits of their Section 203 claims. Following the injunction hearing, the case was resolved by way of a settlement valued at $420 million, the largest reported settlement in the history of the Delaware Chancery Court.

Carmody v. Toll Brothers

CLIENT: James Carmody
TYPE OF CASE: Corporate Governance Litigation (Class Action)
SUMMARY:

In this landmark and often-cited case, G&E successfully invalidated an onerous and controversial form of a poison pill referred to as a "dead-hand" poison pill. The question presented, which was one of first impression in Delaware, was whether the directors of Toll Brothers had breached their fiduciary duties to the company's stockholders by voting to approve a shareholder rights plan which effectively disenfranchised public shareholders of the company by restricting the ability of future-elected Toll Brothers directors to make decisions regarding corporate control. Under the plan, only so-called "continuing directors" chosen by the incumbent directors or by their chosen successors, would be permitted to participate in such decisions. The intent behind the plan was to deter unsolicited acquisition offers by creating severe economic penalties for any person attempting to effect a business combination with Toll Brothers without the approval of the incumbent directors. The Defendants' actions had the effect of fundamentally limiting the ability of the company's public shareholders to receive unsolicited takeover proposals, to oppose incumbent management, or to affect corporate policy through the proxy process or other exercise of the shareholder franchise. In its opinion denying the defendants' motion to dismiss the complaint, the Court held that, absent a provision in the company's certificate of incorporation, vesting the poison pill redemption power exclusively in the continuing directors would impermissibly interfere with subsequent directors' statutory power to manage the business and affairs of the corporation, and would transgress the statutorily-protected rights of shareholders to elect the directors who would have the power to redeem the poison pill. The Court's decision protects the fundamental rights of stockholders to use the ballot box as their "ultimate recourse" if they are dissatisfied with a board's decision-making, and recognizes that the shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests.

SWIB v. Bartlett, et al. (Medco Research)

 CLIENT: State of Wisconsin Investment Board
TYPE OF CASE: Shareholder Derivative Action
SUMMARY:

In January 2000, G&E filed a shareholder derivative action on behalf of the State of Wisconsin Investment Board (SWIB) against the directors of Medco Research, Inc. in Delaware Chancery Court. The suit alleged breaches of fiduciary duty in connection with the directors' approval of a proposed merger between Medco and King Pharmaceuticals, Inc. In particular, the complaint alleged that Medco's board allowed its Chairman to single handedly negotiate the terms of the transaction, and gave him an economic incentive to reach an agreement regardless of whether it was in the stockholders' best interests; that the Chairman negotiated and agreed to the transaction without any meaningful financial due diligence and without appropriate valuations as to the true value of Medco's stock; and that the resulting terms of the proposed merger did not fairly compensate Medco's stockholders for the value of their shares. In addition, the complaint alleged that the proxy materials in which Medco solicited shareholder approval of the merger failed to disclose material information. During expedited discovery, G&E uncovered proof that the defendants had omitted or misrepresented information in Medco's proxy statement that would have been important to stockholders in deciding whether to approve the merger. As a result of G&E's efforts, Medco issued a supplemental proxy statement at the close of the discovery period, and the stockholders' meeting to vote on the transaction was enjoined in order to give the stockholders sufficient opportunity to consider the supplemental disclosures. The injunction resulted in an improvement in the exchange ratio for the merger, which increased the merger consideration to Medco's stockholders by $4.08 per share, or $48,061,755 on a class-wide basis.

Teachers' Retirement System of Louisiana v. Thomas M. Siebel, et al

CLIENT: Teachers Retirement System of Louisiana
TYPE OF CASE: Shareholder Derivative Action
SUMMARY:

The issue of excessive executive compensation has been of significant concern for investors, yet their concerns have remained largely unaddressed due to the wide discretion afforded corporate boards in establishing management's compensation. In this case, G&E affected a sea change in the compensation policies of Siebel Systems, Inc., a leading Silicon Valley-based software developer long considered to be an egregious example of executive compensation run amok. This action caused Siebel Systems to cancel 26 million options issued to Thomas Siebel, the company's founder and CEO, with a potential value of $54 million. Since the company's founding in 1996, Siebel Systems, Inc. had paid Mr. Siebel nearly $1 billion in compensation, largely in the form of lavish stock options that violated the shareholder-approved stock option plan. In addition, the company paid its directors millions of dollars for their service on the board, also in the form of stock options, at levels exponentially higher than that paid to directors on the boards of similar companies. In September 2002, G&E commenced a derivative action on behalf of Teachers' Retirement System of Louisiana (TRSL) in California state court to challenge the company's compensation practices, even though a prior similar lawsuit had been dismissed. Following hard-fought litigation, G&E successfully negotiated a settlement that, in addition to the options cancellation, included numerous corporate governance reforms. The company agreed, among other things, to restructure its compensation committee, disclose more information regarding its compensation policies and decisions, cause its outside auditor to audit its option plans as part of the company's annual audit, and limit the compensation that can be paid to directors. This settlement generated considerable favorable press in the industry, as investors and compensation experts anticipated that the reforms adopted by Siebel Systems could affect how other companies deal with compensation issues as well.

Teachers' Retirement System of Louisiana v. HealthSouth Corp.

CLIENT: Teachers' Retirement System of Louisiana
TYPE OF CASE: Shareholder Derivative Action
SUMMARY:

In November 2002, G&E filed a complaint against HealthSouth Corporation on behalf of the Teachers' Retirement System of Louisiana ("TRSL") in the Delaware Court of Chancery, seeking to enforce TRSL's right under § 220 of the Delaware General Corporation Law to inspect certain books and records of HealthSouth which relate to self-dealing transactions involving several members of HealthSouth's Board and certain of its executive officers. At the conclusion of the trial on the § 220 action, the Court ordered HealthSouth to produce virtually all of the documents sought by TRSL. Based upon those documents, G&E drafted a derivative and class action complaint alleging that current and former HealthSouth officers and directors breached their fiduciary duties by approving the self-dealing transactions, and seeking the invalidation of those transactions and the return to the company of the proceeds from the individual defendants' sales of HealthSouth stock at artificially inflated prices. Among other claims, the complaint also included a claim under § 211 of the Delaware Corporation Law for an order compelling the company to hold an annual shareholder meeting and a new election of directors, because no such election had been held (as required by Delaware law) for sixteen months. Following a November 2003 trial on the § 211 claim, the parties negotiated a settlement of that claim which requires the directors who were responsible for oversight at the time of the self-interested transactions to leave the Board. HealthSouth also agreed to hold an annual shareholders meeting within 60 days after the company's audited financials are available. During the period of transition to a new board, any significant action by the company requires an 80% supermajority vote, thereby ensuring that all major decisions will have the support of the new directors. The search for new directors is being led by a search committee that includes a representative of TRSL and representatives of other institutional shareholders of HealthSouth.

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