Corporate Governance and Derivative Litigation
Kahn Swick & Foti prosecutes shareholder derivative suits in state and federal courts when corporate boards breach their fiduciary duties owed to the company. These actions encompass the business judgment rule, corporate waste, executive compensation, failing to disclose non-arm length transactions between insiders and the company, and other corporate governance matters.
Orrego v. Lefkofsky (Groupon, Inc. Derivative Litigation), No. 12 CH 12420 (Ill. Cir. Ct, Cook Cnty., Ch. Div.). KSF acted as Co-Lead Counsel in the consolidated shareholder derivative action filed in the Chancery Division of the Cook County Circuit Court in Illinois, which was brought derivatively on behalf of Groupon, Inc. against certain of its current and former directors and officers for allegedly breaching their fiduciary duties by, among other things, causing Groupon to issue or make materially false and misleading statements and failing to implement necessary controls over Groupon’s accounting function. KSF facilitated a settlement comprising of comprehensive corporate governance reforms with an estimated value of $159 million, including changes to the Compensation Committee Charter, implementation of director education requirements, enhanced Independent Director meeting obligations, augmentations to the Audit Committee and Disclosure Committee rules and procedures, creation of a new Director of Compliance position, and the retention of an independent auditing firm to conduct an assessment of the company’s internal audit department.
In re Bank of America Corp. Securities, Derivative, and Employment Retirement Income Security Act (ERISA) Litigation, 09 Civ.580 (DC) (S.D.N.Y.). KSF served as court appointed Co-Lead Counsel in the Southern District of New York, and sued current and former executive officers and directors of the company, on behalf of shareholders. The substance of this action focused on Bank of America’s January 1, 2009, acquisition of Merrill Lynch & Co., Inc. in a stock-for-stock transaction. This action alleged, among other things, that certain material information was omitted from the proxy statement filed with the Securities and Exchange Commission and mailed to stockholders on November 3, 2008. This proxy was critical in allowing defendants to obtain shareholder consent for the issuance of shares necessary to consummate the Merger. KSF was successful in resolving this action after defeating motions to dismiss by multiple defendants. In addition to major corporate governance reforms, KSF was also able to recover over $62.5 million for the company.
Bassett Family Trust v. Costolo, et al. (Twitter, Inc. Derivative Litigation), C.A. No. 2019-0806 (Del. Ch.). As counsel for the plaintiff in this demand wrongfully-refused shareholder derivative action, KSF brought breach of fiduciary claims derivatively on behalf of Twitter, Inc. (“Twitter”) against certain of its current and former directors and officers for breaches of duties involving false and misleading statements about Twitter’s user engagement and growth and for insider trading. Plaintiffs were able to secure a settlement providing that Twitter’s board of directors will pay $38 million in cash to Twitter. Twitter’s board will also adopt a series of corporate governance reforms, which include (among other things): (i) enhanced board independence and oversight reforms, including amendments to the charters for the Disclosure Committee and the Audit Committee; (ii) enhancements to oversight of corporate strategy and risk, internal controls, and disclosures, including the creation of the Independent Chief Compliance Officer; and (iii) enhancements to corporate policies regarding compliance training, compensation, insider trading, and recapture of cash-based incentive compensation.
In re Barnes & Noble Stockholder Derivative Litigation, C.A. No. 4813 (Del. Ch. Ct.). As Co-Lead Counsel in this shareholder derivative action filed in the Court of Chancery of the State of Delaware on behalf of Barnes & Noble, Inc. against certain of its officers and directors, including Chairman Leonard Riggio, related to the company’s 2009 acquisition of Mr. Riggio’s private company Barnes & Noble College Booksellers, Inc., alleging that the purchase price, and the process by which it was agreed to, was not entirely fair to Barnes & Noble, Inc. and harmed shareholders, KSF helped obtain a settlement resulting in the recovery of $29 million for Barnes & Noble, Inc. in the form of reductions to the principal and interest payable to Mr. Riggio.
Weil v. Baker, No. 08-CA-00787-SS (In re ArthroCare Corp. Securities Litigation, No. 08-cv-574) (W.D. Tex.). As Co-Lead Counsel in the consolidated federal derivative action on behalf of ArthroCare Corporation against certain of its officers and directors arising from alleged improprieties in the company’s marketing of spine wands, KSF helped obtain a cash settlement of $8 million, along with important corporate governance changes.
In re Fitbit, Inc. Stockholder Derivative Litigation, Consolidated C.A. No. 2017-0402 (Del. Ch.). As Co-Lead Counsel in this shareholder derivative action filed in the Court of Chancery of the State of Delaware on behalf of Fitbit, Inc. (“Fitbit”) against certain of its officers and directors, KSF alleged that certain insiders made stock sales in the company’s initial public offering and—after agreeing to release the insiders from lock-up agreements that barred them from trading for 180 days after the initial public offering—an early secondary offering, taking take advantage of an artificially positive market response to Fitbit’s flagship PurePulse heartrate monitoring technology. KSF was successful in resolving this action after defeating the defendants’ motion to dismiss, recovering $5 million for Fitbit.
In re Conduent Incorporated Shareholder Derivative Litigation, Lead Case No. 650903/2021 (N.Y. Sup. Ct., N.Y. Cnty., Ch. Div.). KSF acted as Co-Lead Counsel in the consolidated shareholder derivative action filed in the New York Supreme Court, New York County, which was brought derivatively on behalf of Conduent Incorporated against certain of its current and former directors and officers for allegedly breaching their fiduciary duties by (i) failing to oversee its electronic tolling line of business, resulting in fines, government complaints, and revenue withholding and (ii) causing the Company to make materially false and misleading statements in press releases and SEC filings about the known issues with it legacy information technology infrastructure that was impacting the Company’s financial guidance and growth. KSF facilitated a settlement comprising of robust and fulsome corporate governance reforms, including Board refreshment, formation of the Corporate Social Responsibility and Public Policy Committee, separation of the Chief Executive Officer and Chairperson positions, enhancements to the duties and responsibilities of the Audit Committee regarding financial reporting and internal controls, creation of a Board-level Risk Oversight Committee, addition of the Chief Risk Officer to the management-level Disclosure Committee, adoption of an enhanced Amended Compensation Recoupment Policy.
In re FAB Universal Corporation Shareholder Derivative Litigation, Lead Case, No. 14-cv-687 (S.D.N.Y.). As sole Lead Counsel in this consolidated action, KSF brought breach of fiduciary claims derivatively on behalf of FAB Universal Corporation against certain of its current and former directors and officers. Claims brought included breaches of duties of loyalty, due care, good faith, independence, candor and full disclosure to shareholders; misappropriation of material, non-public information of the Company by certain individual defendants; and violations of Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder. The action focused on defendants’ publication of false and misleading statements concerning the Company’s kiosk business in China, and the failure to disclose the issuance of $16.4 million worth of bonds to Chinese investors in April 2013. KSF obtained a settlement involving numerous corporate governance reforms, including the creation a new Disclosure Committee to put effective procedures and protocols in place and designed to ensure that all of the Company’s public statements are vetted for accuracy, integrity and completeness. KSF was also able to cause the Company to modify the Charter of the Audit Committee to provide that at least one non-executive member of the Audit Committee has general expertise in accounting or financial management. Modifications were also caused to be made to the Company’s Corporate Governance Committee and to the Company’s Code of Conduct.
In re Fifth Street Finance Corp. Stockholder Litigation, Consolidated C.A. No. 12157 (Del. Ch.). As Co-Lead Counsel in this shareholder derivative action filed in the Delaware Court of Chancery on behalf of Fifth Street Finance Corporation (“FSC”) against certain current and former directors of FSC, its investment advisor, Fifth Street Asset Management Inc. (“FSAM”), and current and former directors and officers of FSAM, KSF alleged that certain FSC and FSAM officers and directors caused FSC to pursue reckless asset growth strategies, to employ aggressive accounting and financial reporting practices, and to pay excessive fees under FSC’s investment advisory agreement with FSAM, in order to inflate the perceived value of FSAM in the lead up to FSAM’s initial public filing. KSF was instrumental in obtaining a settlement consisting of certain changes to FSC’s investment advisory agreement and governance enhancements. The changes to the investment advisory agreement include a waiver by FSAM of fees equal to $10 million and an acknowledgment that plaintiffs were a substantial and remedial factor in the reduction of base management fees from 2% to 1.75%. The governance enhancements include additional Board governance provisions, enhanced policies, practices and procedures regarding FSC’s valuation of its investments, increased disclosure of relevant issues, and increased consultation with outside advisors and independent third parties.
Lowry v. Basile (Violin Memory, Inc. Derivative Litigation), No. 4:13-cv-05768 (N.D. Cal.). As counsel for the plaintiff in this shareholder derivative action, KSF brought breach of fiduciary claims derivatively on behalf of Violin Memory, Inc. against certain of its current and former directors and officers for breaches of duties and waste of corporate assets. The action focused on defendants’ publication of false and misleading statements concerning the Company’s operating results and financial condition and alleged waste of corporate assets by granting outsized compensation to the CEO that was not in line with the performance of the Company. KSF obtained a settlement involving numerous corporate governance reforms, including the formalization of a Disclosure Committee to put effective procedures and protocols in place and designed to ensure that all of the Company’s public statements are vetted for accuracy, integrity and completeness. KSF was also able to cause the Company to modify the Charter of the Compensation Committee to provide that the committee will create annual and long-term performance goals for the CEO, whose compensation will be based on whether those performance goals are achieved. Modifications were also caused to be made to the Company’s Audit Committee and to the Company’s Corporate Governance Guidelines.
In re Moody’s Corporation Shareholder Derivative Litigation, No. 1:08-CV-9323 (S.D.N.Y.). As Lead Counsel for the demand-excused shareholder derivative actions filed on behalf of Moody’s Corporation against current and former executive officers and directors of the company, asserting various claims, including for breach of fiduciary duty, in connection with, inter alai, Moody’s credit ratings on various mortgage-backed securities, KSF helped obtain a settlement in which the settling defendants agreed that Moody’s had implemented or will adopt, enhance and/or maintain certain governance, internal control, risk management and compliance provisions, designed to identify, monitor and address legal, regulatory and internal compliance issues throughout the business and operations of Moody’s Investors Service, Inc., the credit rating agency operating subsidiary of the company.