REMEDIES
Most companies prefer to settle. Also, settlement boosts share price. Failing settlement talks, the options are: PAP; Legal action; Private Mediation; or filing reports to: CMA; SHORTSELLERS; SARS; SFO; FSA; AIMS DC; FCA; BBA; MLA; INSTITUTE OF DIRECTORS, SRA etc
Possible redress to victims:
-Compensation (for victims’ losses);
-Restitution (for the unjust enrinchment of the perpetrator)
– contract avoidance/voidance/cancellation etc
DUTIES
–BANKS are subject to the following duties:
1– Quincare duty : not to follow clients’ instructions (eg advice or loan) when the bank has reasonable grounds that they could facilitate a fraud, to benefit a client. This is strict liability therefore evidence of facilitation is not required.
2-Duty of Vigilance: to assess risks and impacts, (for instance on the environment or human rights), and mitigate them.
3- Duty to detect and prevent financial crime and to protect people, families and businesses. Case: France v BNP: France filed criminal litigation. Judgment: BPN was complicit* (CEOs knew) in human rights violations committed by the sudanese government because BNP facilitated Sudan’s ability to commit these crimes. Besides, such complicity granted legitimacy to the Sudan government, allowing them to enter the international marketplace.
* To establish complicity, knowledge is needed, but not a shared intent with the perpetrator.
4- Managers/Directors of Banks could be liable of the criminal offence of reckless misconduct.
–COMPANIES are subject to the following duties:
1- To prevent fraud/crime.
Eg: declaring fake assets, fake valuations, fake clients, exaggerating oil finds, payments to shells, anonymous transactions, fake bank deposits, tax evasion, having inadequate prevention procedures, taking bribes, etc.
2- To be diligent and to act in the best interest of the company:
Eg: misleading news or accounts disclosures; flawed business models; questionable accounting practices, greenwashing .
Eg: failing a cap rep
Shareholders (derivative class action) can seek civil liability for negligence from the company.
Climate activist oil shareholders are claiming that climate change will in the long/medium term, reduce the value of the oil company.
–Company Directors, brokerage analysts, auditors and accountants, law firms (and partners) are subject to a duty:
1- not to compromise their ethics more money. They could be disqualified (by their regulatory bodies)
2- Diligence: they can be civily liable for negligence (eg for failing a cap rep), and/or criminally liable for reckless misconduct , or for indifference to, or deliberate disregard to the whole body of shareholders. Facilitating crime could be liable of the criminal offence of reckless misconduct in their management.
Regulatory Bodies
Can be liable for negligent or reckless failure to detect and prevent the commission of fraud/crime by their members. Such failure grants legitimacy to the perpetrators as they can show ‘compliance’ to clients and potential clients.
FINANCIAL JOURNALISTS
Must not promote financial services or products without authority from the regulatory body.
Must not use non-public information to trade in securities or pass that information onto others to trade. This is ‘insider trading’ and is a criminal offence.
FREEDOM OF CONTRACT V FIDUCIARY DUTIES
Can claims for breach of fiduciary duty can be waived ex ante in a corporate shareholder agreement?
usa case: New Enterprise Associates 14 LP v. Rich
sophisticated private fund investors issued claims for breach of fiduciary duties against directors and controlling shs of Fugue, Inc. (the “Company”). the directors and controlling shs issued a ‘motion to dismiss’ (mtd} based on the ground that the claimants (shs) had agreed to an express waiver of the right to bring such claims.
However, the court dismissed the mtd. the court found that fiduciary duties, if the parties are sophisticated, can be waived by the voting agreement, and in this case found the claimants were sophisticated and therefore the waive was valid. The court, however, held that public policy prohibits contracts from insulating directors or controlling stockholders from tort or fiduciary liability in intentional wrongdoing, which the court found in this case.
The principle of freedom of contract (focp): “sophisticated parties” can “make their own judgments about the risk they should bear,”. Sophisticated investors may agree among themselves, (whether in stockholders agreements or M&A agreements), to contractually modify, limit or waive certain statutory or common law rights, including the right to sell shares,the right to vote, and the right to seek appraisal.
Exceptions (to focp) :
-In Libeau, the court emphasized that will only interfere upon a strong showing that dishonoring the contract is required to vindicate a public policy interest that is even stronger than freedom of contract” (i.e., in the case of fraud).[3]
-The court does not permit sophisticated parties to wholly eliminate, the scope of fraud claims that may be brought against a seller in an M&A transaction. The New Associate Partners case extends a similar principle to waivers of fiduciary duty claims agreed in a stockholders agreement. In New Associate Partners, the plaintiffs, who were sophisticated investors, agreed to a drag-along provision(dap).
The dap included a covenant not to sue for breach of fiduciary duties in the event the drag-along provision was validly employed. The dap allowed the Company’s board of directors and a majority of its preferred stockholders to drag other stockholders in a sale of the Company (subject to certain specified criteria for the sale). The plaintiffs acknowledged that the covenant was invalid, as a matter of public policy. The court disagreed concluding that the “covenant operates permissibly in an agreement that only addresses stockholder-level rights.”
–Manti and Altor Bioscience:
when is a waiver (covenant) not to sue, valid?:
1. must be narrowly tailored to address a specific transaction that otherwise would constitute a breach of fiduciary duty
2.must survive close scrutiny for reasonableness. Here, the plaintiff stockholders were sophisticated, received legal advice and understood the impact of the covenant not to sue, they had the opportunity to reject the provision, and the provision itself would only be triggered upon a specific set of circumstances (invocation of the drag-along in accordance with the voting agreement). On this basis, the court concluded that the covenant not to sue was valid.
Nevertheless, the court found that the covenant’s scope “cannot insulate the defendants from tort liability based on intentional wrongdoing.” Analogous to the reasoning in Abry and Online HealthNow, where the court disallowed complete elimination of fraud claims to the extent the contract itself was an “instrument of fraud,” the court in New Enterprise Associates reasoned that the covenant not to sue was ineffective to bestow immunity on a fiduciary who engaged in intentional wrongdoing (as opposed to a merely grossly negligent or reckless breach of fiduciary duty).
*A drag-along provision or clause in an agreement, enables a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller.
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- Drag-along rights may be included and instituted with the terms of a share class offering or in a merger or acquisition agreement.
- Drag-along rights eliminate the current minority shareholders through the sale of 100% of a company’s securities to a potential buyer.
- Tag-along rights differ from drag-along rights since tag-along rights offer the minority shareholders the option to sell but do not mandate an obligation.
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The dap is important to the sale of many companies because buyers are often looking for complete control of a company. Drag-along rights help to eliminate the current minority owners and sell 100% of a company’s securities to a potential buyer. While drag-along rights themselves may be clearly detailed in an agreement, differentiation between majority and minority may be something to watch out for. Companies can have different types of share classes. A company’s bylaws will denote the ownership and voting rights that shareholders have, which may have implications on majority vs. minority.
Daps can be instituted through capital fundraising or during merger and acquisition negotiations. If, for example, a technology startup opens a Series A investment round, it does so to sell ownership of the company to a venture capital firm in return for capital infusion. In this specific example, majority ownership resides with the chief executive officer (CEO) of the company who owns 51% of the firm’s shares. The CEO wants to maintain majority control and also wants to protect himself in the case of an eventual sale. To do so, he negotiates a drag-along right with the share offering to a venture capital firm, giving him the right to force the venture capital firm to sell its interest in the company if a buyer ever presents itself.
This provision prevents any future situation in which a minority shareholder may in any way be able to undermine the sale of a company that was already approved by the majority shareholder or a collective majority of existing shareholders. It also leaves no shares of the acquired company behind in the hands of previous shareholders.
In some cases, daps may be more popular in agreements involving private companies. Drag-along rights from privately held shares may also end when a company goes public with a new share offering agreement. An initial public offering of share classes will usually nullify previous ownership agreements and institute new drag-along rights if applicable for future shareholders.
While daps are meant to mitigate minority shareholder effects, they can be beneficial for minority shareholders. This type of provision requires that the price, terms, and conditions of a share sale be homogeneous across the board, meaning small equity holders can realize favorable sales terms that may be otherwise unattainable.
daps mandate an orderly chain of communication to the minority shareholders. This provides advance notice of the corporate action mandated for the minority shareholder. It also provides communication on the price, terms, and conditions that will apply to the shares held by the minority shareholders. Drag-along rights can be nullified if the proper procedures surrounding their enaction are not followed.
Tag-along rights (taps) differ from dap. taps offer minority shareholders the option to sell but do not mandate an obligation. If tag-along rights exist, it can have different implications for the terms of a merger or acquisition than would be discussed with drag-along rights.
Example:
In 2019, Bristol-Myers Squibb Company and Celgene Corporation entered into a merger agreement under which Bristol-Myers Squibb acquired Celgene in a cash and stock transaction valued at approximately $74 billion. Post-acquisition, Bristol-Myers Squibb accounted for 69% of shares for the combined entity and converted Celgene shareholders accounted for the remaining 31%. Celgene’s minority shareholders were not allowed any special options and were required to comply with the receipt of one Bristol-Myers share and $50 for each Celgene share owned. the Celgene shares were delisted. The minority shareholders were required to comply with the terms of the deal and were not eligible for special considerations. Had Celgene’s shares not been delisted, drag-along and tag-along rights could have become more of a factor. In some situations such as this, majority shareholders may negotiate special share rights under an alternative class structure that may not be available to minority shareholders due to the implications of drag-along rights.