Shareholder Derivative

As has been widely reported in the media, the stock options backdating scandal suddenly engulfed hundreds of publicly traded companies throughout the country. Robbins Geller was at the forefront of investigating and prosecuting options backdating derivative and securities cases. The Firm's lawyers have recovered over $1 billion in damages on behalf of injured companies and shareholders. Robbins Geller attorneys have served as lead counsel in several large stock option backdating actions, including actions involving Finisar Corp., Halliburton Company, KLA-Tencor Corp., KB Home, Inc., Marvell Technology Group, Inc., McAfee, Inc. and UnitedHealth Group, Inc.

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  • In re KLA-Tencor Corp. S’holder Derivative Litig., Case No. C-06-03445 (N.D. Cal.). After successfully opposing the Special Litigation Committee of the Board of Directors’ motion to terminate the derivative claims, Robbins Geller recovered $43.6 million in direct financial benefits for KLA-Tencor, including $33.2 million in cash payments by certain former executives and their directors’ and officers’ insurance carriers.
  • In re Marvell Technology Group Ltd. Derivative Litig., Case No. C-06-03894 (N.D. Cal.). In this stock option backdating derivative action, Robbins Geller recovered $54.9 million in financial benefits, including $14.6 million in cash, for Marvell, in addition to extensive corporate governance reforms related to Marvell’s stock option granting practices, board of directors’ procedures and executive compensation. At the time, the recovery in Marvell represented one of the largest of its kind in shareholder derivative actions.
  • In re KB Home S’holder Derivative Litig., Case No. 06-CV-05148 (C.D. Cal.). Robbins Geller served as co-lead counsel for the plaintiffs and recovered more than $31 million in financial benefits, including $21.5 million in cash, for KB Home, plus substantial corporate governance enhancements relating to KB Home’s stock option granting practices, director elections and executive compensation practices.
  • In re F5 Networks, Inc. Derivative Litig., Case No. 81817-7 (Wash. Sup. Ct.). Robbins Geller represented the plaintiffs in this precedent setting stock option backdating derivative action. Adopting the plaintiffs’ arguments, the Washington Supreme Court unanimously held that shareholders of Washington corporations need not make a pre-suit litigation demand upon the board of directors where such a demand would be a futile act. The Washington Supreme Court also adopted Delaware’s less-stringent pleading standard for establishing backdating and futility of demand in a shareholder derivative action, as urged by the plaintiffs.

The Firm’s shareholder derivative practice is focused on preserving corporate assets, restoring accountability, improving transparency, strengthening the shareholder franchise and protecting long-term investor value. Often brought by large institutional investors, these actions typically address executive malfeasance that resulted in violations of the nation’s securities, environmental, labor, health & safety and wage & hour laws, coupled with self-dealing. Corporate governance therapeutics recently obtained in the following actions was valued by the market in the billions of dollars:

  • BP plc Shareholder Litigation, Case No. 3AN-06-11929CI (Sup. Ct. Alaska). Successfully prosecuted a shareholder derivative action on behalf of the London-based BP plc. The action, filed in late 2006, arose out of the misconduct of certain of BP’s officers and directors whose gross dereliction of duty and failure to oversee BP’s U.S. operations exposed the company to significant criminal and civil liability in connection with the 2005 Texas City refinery explosion (where 15 workers were killed and 170 more were injured), the 2006 Prudhoe Bay oil spill (where 200,000 gallons of crude were spilled on the Alaska tundra) and the Federal Commodities Trade Commission energy trading manipulation charges (where BP and its traders were charged with intentionally inflating the price of propane, the primary heating source in the northeastern United States). BP ultimately pled guilty to several felony and misdemeanor criminal charges, paid over $373 million in criminal fines and penalties and agreed to serve five years felony corporate probation, and paid over $2 billion in civil damages for its failure to properly fund or oversee maintenance and operations at its U.S. facilities. As part of the settlement of the shareholder derivative action, BP agreed to:
    • Improved Operational Safety Oversight in the United States: BP adopted a six-point plan to enhance the operational integrity and safety oversight function; formed two new board-level operations committees to facilitate the flow of important safety and operations information; put in place a new management team in Alaska; and improved oversight responsibility over compliance, safety and operational integrity at BP’s U.S. operations.
    • Increased Shareholder Input: BP agreed to hold annual meetings with the company’s top 20 shareholders – including ADR holders – to engage in discussions concerning BP’s ongoing commitment to good corporate governance.
    • Site Inspections: BP agreed to facilitate regular visits for BP board members to the company’s operational sites around the globe.
    • Safety as an Executive Compensation Metric: BP agreed to include operational health, safety and environmental performance in the principles used to calculate performance pay for executives.
    • Strengthened the Shareholder Voting Franchise: BP agreed to take measures to improve shareholder access to the proxy, web cast the annual shareholder meeting and remove impediments that prevent ADR holders from putting up resolutions at the annual meeting.
  • Royal Dutch Shell Shareholder Litigation, Case No. 04-CV-3603 (D.N.J.). Successfully prosecuted and settled a shareholder derivative action on behalf of the London-based Royal Dutch Shell plc, achieving very unique and quite valuable transatlantic corporate governance reforms. The suit, filed June 25, 2004, charged that misconduct by executives and board members that resulted in four separate misstatements of Shell’s oil and gas reserves – which collectively erased billions of gallons of previously improperly reported “proven reserves” – was due in large part to inadequate internal controls. To settle the derivative litigation, the complicit executives agreed to:
    • Improved Governance Standards: The Dutch and English company committed to changes that extend well beyond the corporate governance requirements of the New York Stock Exchange listing requirements, while preserving the important characteristics of Dutch and English corporate law.
    • Shareholder Participation in the Nomination of Board Members: Important governance changes were made regarding solicitation of shareholder input on supervisory board nominees going forward, making Shell corporate directors more accountable to shareholders in the governing process and producing highly qualified candidates for election to the Shell board.
    • Board Independence Standards: Shell agreed to a significant strengthening of the company's board independence standards and a requirement that a majority of its board members qualify as independent under those rigorous standards.
    • Stock Ownership Requirements: The company implemented enhanced director stock ownership standards and adopted a requirement that Shell's officers or directors hold stock options for two years before exercising them.
    • Improved Compensation Practices: Cash incentive compensation plans for Shell’s senior management must now be designed to link pay to performance and prohibit the payment of bonuses based on reported levels of hydrocarbon reserves.
    • Full Compliance with U.S. GAAP: In addition to international accounting standards, Shell agreed to comply in all respects with the Generally Accepted Accounting Principles of the United States.
  • EDS Shareholder Derivative Litigation, Case No. 6:04-CV-77 (E.D. Tex.). Prosecuted shareholder derivative action on behalf of Electronic Data Systems alleging EDS’s senior executives breached their fiduciary duties by improperly using percentage-of-completion accounting to inflate EDS’s financial results, by improperly recognizing hundreds of millions of dollars in revenue and concealing millions of dollars in losses on its contract with the U.S. Navy Marine Corps, by failing in their oversight responsibilities, and by making and/or permitting material, false and misleading statements to be made concerning EDS’s business prospects, financial condition and expected financial results in connection with EDS’s contracts with the United States Navy Marine Corps and WorldCom. In settlement of the action, EDS agreed, among other provisions, to:
    • limits on the number of current EDS employees that may serve as board members and limits on the number of non-independent directors;
    • limits on the number of other boards on which independent directors may serve;
    • requirements for the Compensation and Benefits Committee to retain an independent expert consultant to review executive officer compensation;
    • formalize certain responsibilities of the Audit Committee in connection with its role of assisting the board of directors in its oversight of the integrity of the company’s financial statements;
    • a requirement for new directors to complete an orientation program, which shall include information about principles of corporate governance;
    • a prohibition on repricing stock options at a lower exercise price without shareholder approval;
    • change of director election standards from a plurality standard to a majority vote standard;
    • change from classified board to annual election of directors;
    • elimination of all supermajority voting requirements;
    • a termination of rights plan; and
    • adopt corporate governance guidelines, including: requirement that a substantial majority of directors be outside, independent directors with no significant financial or personal tie to EDS; that all board committees be composed entirely of independent directors; and other significant additional practices and policies to assist the board in the performance of its duties and the exercise of its responsibilities to shareholders.
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Robbins Geller lawyers are also currently prosecuting shareholder derivative actions against executives at several companies charged with violating the Foreign Corrupt Practices Act and have obtained an injunction preventing the recipient of the illegally paid bribe payments at one prominent international arms manufacturer from removing those funds from the United States while the action is pending. In another ongoing action, Robbins Geller lawyers are prosecuting Audit Committee members who knowingly authorized the payment of illegal “security payments” to a terrorist group though expressly prohibited by U.S. law. As artificial beings, corporations only behave – or misbehave – as their directors and senior executives let them. So they are only as valuable as their corporate governance. Shareholder derivative litigation enhances value by allowing shareholder-owners to replace chaos and self-dealing with accountability.