Westlaw Journal Formerly Andrews Litigation Reporter CORPORATE OFFICERS & DIRECTORS LIABILITY Litigation News and Analysis • Legislation • Regulation • Expert Commentary VOLUME 26, ISSUE 21 / APRIL 11, 2011 SECURITIES FRAUD/PLEADING STANDARDS WHAT’S INSIDE BREACH OF DUTY 7 Case against Cadant Supreme Court rules on drug firm’s duty directors cut off too soon, 7th Circuit says to disclose ‘adverse events’ CDX Liquidating Trust v. Venrock Assocs. (7th Cir.) A pharmaceutical company should CAREMARK STANDARD disclose to investors so-called “adverse 9 Suit fails to meet tough event reports” linked to its product Caremark pleading standard when a “reasonable shareholder” would Oakland County Employees’ want to know the reported information, Ret. Sys. v. Massaro (N.D. Ill.) a unanimous Supreme Court has ruled. PRE-SUIT DEMAND Matrixx Initiatives Inc. et al. v. Siracusano et al., 10 Dillard’s directors weren’t puppets of controlling family, No. 09-1156, 2011 WL 977060 (U.S. Mar. 22, 2011). Arkansas court says Adverse event reports are user complaints of REUTERS/Molly Riley Berry v. Dillard (Ark. Ct. App.) harm caused by a pharmaceutical product. remedy marketed by defendant Matrixx Initiatives BREACH OF DUTY The ruling affirms a 2009 decision by the 9th Inc. Siracusano v. Matrixx Initiatives, 585 F.3d 1167 11 Walgreens merger is bad U.S. Circuit Court of Appeals in a securities fraud (9th Cir. 2009). medicine for Drugstore.com, lawsuit involving Zicam, an over-the-counter cold investors say CONTINUED ON PAGE XX Hurlin v. Drugstore.com (Wash. Super. Ct.) BOOKS & RECORDS COMMENTARY COMMENTARY 12 Ex-HP CEO asks court to stay order to unseal letter Delaware court uses minority High court’s Siracusano that led to his ouster Espinoza v. Hewlett-Packard freeze-out principles to decision reaffirms materiality Co. (Del. Ch.) analyze reverse stock split depends on context 13 Shareholder can access info on why Morgan Stanley Robert Reder, David Schwartz and of what defendant says board refused to sue Nehal Siddiqui of Milbank, Tweed, La. Mun. Police Employees Morrison & Foerster corporate law Ret. Sys. v. Morgan Stanley & Hadley & McCloy say a recent Delaware attorneys Erik J. Olson, Stephen Thau Co. (Del. Ch.) Chancery Court decision indicates that and Stefan J. Szpajda analyze the U.S. SUBPRIME/MORTGAGE- unless they see the use of procedural Supreme Court’s recent Siracusano de- BACKED SECURITIES safeguards to protect minority share- cision, advising companies to map out 15 Merrill Lynch, BofA win holders, state court judges will require a strategy for disclosing information on dismissal of investor suits controlling stockholders to show that In re Merrill Lynch & Co. Sec., adverse events before bad news lands Derivative & ERISA Litig. their reverse stock split was entirely fair on the doorstep. (S.D.N.Y.) to the minority that it froze out. SEE PAGE 3 SEE PAGE 5 41066555 TABLE OF CONTENTS Westlaw Journal Corporate Officers & Directors Liability Securities Fraud/Pleading Standards: Matrixx Initiatives v. Siracusano Published since November 1985 Supreme Court rules on drug firm’s duty to disclose ‘adverse events’ (U.S.) ...................................................1 Publisher: Mary Ellen Fox Commentary: By Robert Reder, Esq., David Schwartz, Esq., and Nehal M. Siddiqui, Esq. Executive Editor: Kevin M. McVeigh Delaware court uses minority freeze-out principles to analyze reverse stock split ........................................ 3 Production Coordinator: Tricia Gorman Commentary: By Erik J. Olson, Esq., Stephen Thau, Esq., and Stefan J. Szpajda, Esq., Morrison & Senior Editor: Frank Reynolds Foerster [email protected] High court’s Siracusano decision reaffirms materiality depends on context of what defendant says ...........5 Westlaw Journal Corporate Officers & Directors Liability (ISSN 2155-5885) is Breach of Duty: CDX Liquidating Trust v. Venrock Assocs. published biweekly by Andrews Publications, Case against Cadant directors cut off too soon, 7th Circuit says (7th Cir.) ...................................................... 7 a Thomson Reuters/West business. Caremark Standard: Oakland County Employees’ Ret. Sys. v. Massaro Andrews Publications Suit fails to meet tough Caremark pleading standard (N.D. Ill.) .....................................................................9 175 Strafford Avenue Building 4, Suite 140 Pre-suit Demand: Berry v. Dillard Wayne, PA 19087 Dillard’s directors weren’t puppets of controlling family, Arkansas court says (Ark. Ct. App.) .................... 10 877-595-0449 Fax: 800-220-1640 Breach of Duty: Hurlin v. Drugstore.com www.andrewsonline.com Walgreens merger is bad medicine for Drugstore.com, investors say (Wash. Super. Ct.) ..............................11 Customer service: 800-328-4880 Books & Records: Espinoza v. Hewlett-Packard Co. For more information, or to subscribe, Ex-HP CEO asks court to stay order to unseal letter that led to his ouster (Del. Ch.) ...................................12 please call 800-328-9352 or visit west.thomsom.com. Books & Records: La. Mun. Police Employees Ret. Sys. v. Morgan Stanley & Co. Shareholder can access info on why Morgan Stanley board refused to sue (Del. Ch.) ..................................13 Reproduction Authorization Authorization to photocopy items for internal News in Brief .....................................................................................................................................................14 or personal use, or the internal or personal use by specific clients, is granted by Thomson Subprime/Mortgage-Backed Securities: In re Merrill Lynch & Co. Sec., Derivative & ERISA Litig. Reuters for libraries or other users regis- Merrill Lynch, BofA win dismissal of investor suits (S.D.N.Y.) ..........................................................................15 tered with the Copyright Clearance Center (CCC) for a fee to be paid directly to the Subprime/Negligence: FDIC v. Killinger Copyright Clearance Center, 222 Rosewood WaMu execs’ risky loan strategy led to billions in losses, FDIC says (W.D. 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News briefs, agency reports, coverage of new and proposed legislation and regulations, verdict roundups, photos and graphics, and visual aids like lists and charts to highlight key information all come to you with each issue of your subscription. Call us at 800-328-4880 or find us on the store at west.thomson.com by searching “Westlaw Journals” to begin your subscription today. 2 | WESTLAW JOURNAL n CORPORATE OFFICERS & DIRECTORS LIABILITY © 2011 Thomson Reuters COMMENTARY Delaware court uses minority freeze-out principles to analyze reverse stock split By Robert Reder, Esq., David Schwartz, Esq., and Nehal M. Siddiqui, Esq. Milbank, Tweed, Hadley & McCloy In Reis v. Hazelett Strip-Casting Corp., that time.” If the company failed to make the THE COURT’S ANALYSIS the Delaware Chancery Court was asked second payment, the beneficiaries of Dick’s Reverse stock splits are authorized by to review a reverse stock split used by a estate would be entitled to retain all their Sections 242 and 155 of the DGCL, with control stockholder to freeze out minority shares as well as the initial $1,500-per-share Section 155(2) providing that a corporation stockholders.1 The court, in selecting payment. engaging in a reverse stock split may, in lieu the “entire fairness” standard of review, When the executors continued to resist, the of issuing fractions, “pay in cash the fair value emphasized that the burden of proving the estate’s attorney suggested to Bill that “a of fractions of a share as of the time when entire fairness of such a transaction remains reverse stock split could be used to bypass those entitled to receive such fractions are with the control stockholder and board of the … [executors] and achieve the same determined.” directors unless they either form a special result as a purchase.” The Hazelett board Although the term “fair value” also appears board committee or permit a majority-of- acted on this suggestion by unanimously in DGCL Section 262 (the appraisal statute the-minority stockholder vote to approve the approving a reverse split in which “every governing the treatment of dissenting transaction. outstanding share would become a 1/400 shares in mergers), the court did not find this The court also indicated that a business fractional interest,” leaving the estate with statute to be analogous from a procedural judgment rule analysis would have been only a fraction of a share. This fraction perspective because Section 155(2) “does applicable if both of these mechanisms had would be redeemed “promptly following not contain anything remotely similar to the been employed. the corporation’s receipt of a stock valuation mechanisms” found in the appraisal statute. study.”