Author: Werner R. Kranenburg

Last month, District Judge Cote (SDNY) dismissed the derivative action brought against ABN Amro Holdings NV (Euronext, NYSE: ABN) of the Netherlands and members of its Managing and Supervisory Boards, which was brought by an American holder of its American Depository Receipts. The Court applied the New York internal affairs doctrine and concluded that the plaintiff lacked standing to bring such a suit on behalf of the bank. (opinion and order)

Plaintiff’s Counsel: Weiss & Lurie; Defendants’ Counsel: Milbank Tweed Hadley & McCloy LLP and NautaDutilh NV

Under New York law, the law of the state of incorporation adjudicates “a corporation’s internal affairs, including questions as to the relationship between the corporation’s shareholders and its directors.” “[O]nly one State should have the authority to regulate a corporation’s internal affairs.” (citing Galef v Alexander and Edgar v MITE Corp, respectively, p.15) And so, as agreed by the parties, Dutch law would apply to this action.

Dutch law however (see pp.8-11), “affords shareholders no right to bring a claim on behalf of a corporation against members of its Managing or Supervisory Boards for breach of duties owed to shareholders since, under Dutch law, members of these boards do not owe fiduciary duties directly to shareholders,” according to an expert declaration submitted by the defendants and plaintiff concedes so.

The Court, in holding that “Dutch law provides different avenues for shareholders to address malfeasance by members of corporate Managing and Supervisory Boards than does New York law,” (original emphasis, p.19) it rejects that in casu the public policy exception to the doctrine should apply and grants the motion to dismiss.

(See the first note here) Today, as announced at Wednesday’s press conference, Shell released a number of documents via the Investor Centre section of its website. They include, among others, the petition to the Amsterdam Court of Appeals (in Dutch), the Settlement Agreement and the current list of investors that have participated in the settlement.

See here for the audiocast of the press conference (via Cantos, no transcript available), worth the 45 minutes as Shell, the special purpose entity Shell Reserves Foundation and several representatives of the investors discuss not only this particular settlement but also comment on class actions in general. More to follow.

Yesterday, Royal Dutch Shell Plc‘s (Euronext, LSE, NYSE: RDSA, RDSB) announcement that it had reached a settlement with non-US investors in relation to its recent oil reserves overstatements had hit the wires and headlines. (press release) An extensive post on the settlement will follow, for now just a brief note.

The settlement reached is unlike that of a US class action; technically there is no such thing as a Dutch class action procedure, but one party or several parties collectively may sue, or enter into talks without a suit having been filed, on behalf of itself or themselves and once a settlement has been reached, the Court is asked to declare the settlement binding on a class.

That is the case here too: Shell, on behalf of its two predecessor entities, had not been sued by a class outside the US (as it has been within it) but had held talks with a group of investors and investor associations. On the day of the announcement, the parties filed an application with the Amsterdam Court of Appeals to request such declaration to bind the proposed class. As it currently stands, the settlement agreement’s validity is thus contingent upon the Dutch Court confirming the agreement and the US Court, before which the class action is pending, declining jurisdiction over these non-US claims.

The settlement amount as well deserves greater scrutiny: the most widely reported figure of $352.6 million is not the whole settlement amount and it itself consists of two separate amounts. Elements of the total recovery, including previously paid sums, may cover both non-US and US shareholders.

The above and more, including how to participate in this settlement, will be discussed in-depth in a follow-up post. (In order not to miss any future posts on cases such as this one, please subscribe.)

(See previous posts, here and here.) Wolverhampton didn’t get it, but it is another foreigner who was appointed to be sole lead plaintiff in the Dell Inc. securities action, namely Union Asset Management Holding AG of Germany, represented by Lead Counsel Motley Rice LLC (on its own and notably not with Sturman LLC). Liaison Counsel is Byrd Davis Furman LLP.

Of particular interest here is that part of the opinion and order (with thanks to Adam Savett of Securities Litigation Watch), in which the Court, after presuming and rebutting ABP being the most adequate plaintiff, presumes Union to be the most adequate (from p.13). (Union claims the next largest financial interest in the case, satisfies the typicality and adequacy requirements of FRCP 23 and had timely filed its motion to be appointed Lead Plaintiff.)

Referring to In re NPS Pharms Inc. Sec. Lit. and In re Molson Coors Brewing Co Sec. Lit., the Court states that “[t]here is neither a bar nor a presumption against appointing foreign entities to serve as lead plaintiff, particularly where, as here, the defendant is a U.S. company and the foreign entities bought their shares in the United States”, in effect dismissing the res judicata concerns raised by other movants in relation to the appointment of a foreign entity as lead plaintiff.

Perhaps as telling, the Court does not refer to In re Discovery Labs Sec. Lit. which was cited in a competing motion (as follows) as having established ‘a rule against appointing foreign investors as lead plaintiff’:

[I]n Discovery Labs, the court rejected another foreign asset manager represented by the same counsel for Union Asset management here – Motley Rice – reasoning that as “a foreign investor, OPAM ‘is subject to unique defenses that render [it] incapable of adequately representing the class.”

In addition, it does quote from Newman v Eagle Bldg Techs in relation to the relevance of a lead plaintiff’s location: “In light of today’s travel and communication methods, the geographical location of the [foreign lead plaintiff movants] is irrelevant.” (Original edit)

The Court, beyond nationality or geography, confirms its assessment of Union’s adequacy to represent the class thus:

It seems clear from the affidavit of Union’s in-house counsel that Union is firmly in the drivers’ seat with regard to this litigation. Appointing this institutional investor as Lead Plaintiff and approving its choice of Lead Counsel will serve the PSLRA’s goal of encouraging shareholders to protect their interests via securities class actions while discouraging “lawyer-driven” litigation.

What’s more: Union is another example for Adam Savett (see here at SLW and Kevin LaCroix at The D & O Diary) to add to his list of private institutional investor lead plaintiffs. Union itself is a fund manager and member of a cooperative of financial institutions, consisting almost entirely of banks (see here, in German) and two of its main shareholders are banks, namely DZ Bank AG and WGZ Bank AG.

Benn Steil, Senior Fellow and Director of International Economics with the Council of Foreign Relations, argues in an opinion piece in the Financial Times that “it was the earlier efforts of another congressman [and not of Paul S. Sarbanes and Michael G. Oxley] which in fact sparked the exodus [of foreign equity listings from New York], by deliberately mixing domestic market regulation with foreign policy.” The congressman in question is Rep. Christopher Cox (R-CA) as he then was, the current Chairman of the SEC. (See also Steil’s previous article on the same topic, here.)

Steil traces the current state of competitiveness back to two Commissions’ reports on US national security issues, in particular in relation to China and ‘weapons of mass destruction’, respectively. Both reports were presented to Congress in 1999; one of the Commissions was chaired by Cox, the other by former CIA Director Dr. John M. Deutch. The Deutch Commission, following findings of the Cox Commission, referred to the waging of ‘economic warfare’ in relation to US capital markets as being essential:

[J]ust as good intelligence is essential to successful military action, so too is good intelligence on key points of leverage in the government of a proliferating country essential for tailoring economic tools to achieve maximum influence. In addition, we should ensure that we have in place the legal mechanisms required to exercise this leverage. For example, the Commission is concerned that known proliferators [of weapons of mass destruction] may be raising funds in U.S. capital markets.

Subsequently, the SEC established the Office of Global Security Risk, under then-SEC Chairman William H. Donaldson. The Securities Industry Association, in a letter to Donaldson, had warned against ‘politicising US capital markets’:

America’s capital markets play a crucial role in fueling U.S. economic growth, creating new jobs, and providing the financing for innovative and new technologies that transform the U.S. economy. We believe that the prinicipal effect of politicizing the U.S. capital markets — however worthy the foreign policy goal — in order to try to influence the behavior of foreign countries would be to damage the U.S. capital markets.

After discussing a few examples of affected companies – including AOA Lukoil (RTS: LKOH; LSE: LKOD; OTC: LUKOY) and PetroChina Company Limited (HKEX: 0857; NYSE: PTR) – Steil concludes:

[I]t was the relentless capital markets sanctions campaigns of the late 1990s that first signalled to the world that the US would use its regulatory power over foreigners for political purposes. Christopher Cox thus became the most important founding father of the capital markets sanctions movement, a movement earning pride of place in the pantheon of diplomatic dopiness.

For your convenience, a selected list of the sources and entities he cites:

• Cox Commission Report
• Deutch Commission Report (via FAS)
• SEC’s Office of Global Security Risk
• SIA’s Letter to Donaldson
• William J. Casey Institute of The Center for Security Policy

Heidi Crebo-Rediker and Douglas Rediker of International Capital Strategies, in their article on foreign policy and capital markets in the Wall Street Journal (entitled ‘Capital Warfare’, via YaleGlobal Online) just a few days earlier, come to the following conclusion:

[A]s long as politicians think the U.S. can afford to play protectionist politics with the CNOOC’s and Dubai Ports World’s of the world, then these proposed solutions [of reforms to Sarbanes-Oxley, shareholder litigation and regulatory fixes] are unlikely to stem the tide.

For more on reports on capital markets competition, see these two previous posts: on the Paulson Committee Report and on the Bloomberg/Schumer and Daley/Culvahouse Reports. (Subscribe to WV&Z here.)

Before Royal Ahold and Parmalat (both of 2003) and the likes, there was Lernout & Hauspie Speech Products NV (NASDAQ: LHSP, as it then was) of Belgium, which at one point was worth $10 billion. (Follow the assets: Dragon Systems Inc. merged with L&H in 2000; ScanSoft Inc. bought certain L&H assets from the post-merger entity in 2001, then took over Nuance Communications Inc. (NASDAQ: NUAN), which is the name of the company as it is today.) The company’s ‘allegedly fraudulent acts’ and subsequent bankruptcy in 2001 has caused, as the Court calls it, a “never ending series of lawsuits” (source), some of which have led to settlements.

See the Lernout & Hauspie Securities Litigation Website for the KPMG, Directors and FLV Settlements of 2004 and 2005; Lead Counsel: Berman DeValerio Pease Tabacco Burt & Pucillo, Cauley Bowman Carney & Williams PLLC and Shalov Stone & Bonner LLP.

The latest opinion and order are of 12 February 2007; the Court (D. Mass.) dismissed the proposed class action on behalf of those who purchased L&H securities on EASDAQ (later known as ‘Nasdaq Europe SA/NV’, as it then was) during the period 28 April 1998 through 8 November 2000. Plaintiffs have since filed a motion for reconsideration and a memorandum in support of that motion. Lead Counsel: Cohen Milstein Hausfeld & Toll LLP and Spector Roseman Kodroff PC, with Hagens Berman Sobol Shapiro LLP acting as Liaison Counsel. (With thanks to Eric J. Belfi of Labaton Sucharow & Rudoff LLP for his notification of the case and to Mark S. Willis and Matthew K. Handley of Cohen Milstein for their submission of the motion for reconsideration and other documents.)

The Court granted the defendants’ motion to dismiss on the ground of the forum non conveniens doctrine, holding that Belgium is an adequate alternative forum for the proposed class to pursue their claims. The previous action on behalf of the NASDAQ class was denied a motion to dismiss on the same ground:

Unlike the NASDAQ case, this Court finds that the balance of private factors strongly supports dismissal of the case. Although this case involves an alleged fraud that spans three continents, the bulk of the harm and activity rests in Europe. […] The fact that these securities were purchased in Europe and that most class members reside there suggests that Belgium would be a more proper forum. […] In addition, it is not clear that Europe [Belgium, your Honor] would enforce a class action judgment from this District.

It then states the factors on the other side of dismissal, namely the lack of the class action mechanism in Belgium and lack of ability to use a “fraud on the market theory” and the long delay in the Belgian government’s conclusion of the criminal investigation which in turn delays the pursuit of civil relief.

The Court has self-admittedly ‘waffled’ on the issue of timeliness and actual and constructive notice in this case, but unfortunately does not reach on it as it ‘ships’ the case to the Continent.

The stated aim of the motion for reconsideration is to “request the Court to reconsider and amend its order and stay entry of the judgment therein until the availability of the Belgium forum has been confirmed.” (WV&Z’s emphasis) If, however, Belgium is confirmed to be an available forum, the lead plaintiffs state they will consent to entry of the order.

The main arguments of the motion turn on defendant KPMG LLP of the US: If Belgium lacks jurisdiction over this part of KPMG (as opposed to fellow defendant KPMG of Belgium) and, because in Belgium civil litigation can only commence after the criminal proceedings have been concluded and KPMG US is not a party to these criminal proceedings, it is therefore unlikely all parties to the current action will also be subject to the action once referred (original emphasis), then Belgium is “neither an adequate nor available forum and dismissal for forum non conveniens erroneous” (Mercier v Sheraton Int’l Inc. cited). Another argument for reconsideration relates to human rights under EU law.

The motion is currently pending before the Court.

Two defendants in the case In re Parmalat Securities Litigation, namely Banca Nazionale del Lavoro SpA (BNL, now part of the BNP Paribas Group (Euronext: BNP; OTC: BNPQY)) and Credit Suisse Group (SWX: CSGN; NYSE: CS) and other Credit Suisse entities, have agreed to settle the case against them. This settlement, for $50 million in cash and non-financial consideration relating to corporate governance, is a partial settlement, as the action against Parmalat SpA (the successor to Parmalat Finanziaria SpA (Borsa Italiana: PLT)) and other financial institutions among others proceeds. (Also see The 10b-5 Daily on scheme liability.)

See the partial settlement website, in seven European languages, for the detailed notice, the settlement stipulation of 15 February 2007 and more. The Court will consider whether to approve the settlement at a hearing in New York on 19 July 2007; the deadline to object or opt out is 19 June 2007.

It is worth pointing out two things here, concerning the class and the defendants and lead plaintiffs in particular. The class to which this settlement applies includes “all people and entities who bought Parmalat common stock and/or bonds from January 5, 1999 through and including December 18, 2003, and were damaged thereby, regardless of where such people live or where they purchased their Parmalat securities.” (WV&Z’s emphasis)

Both defendants are non-US entities and all five co-lead plaintiffs hail from outside the US, including Hermes Focus Asset Management Europe Limited of the UK, Cattolica Partecipazioni SpA of Italy and Société Moderne des Terrassements Parisiens of France. Lead Counsel for the plaintiffs are Cohen Milstein Hausfeld & Toll PLLC, Grant & Eisenhofer PA and, acting as Of Counsel, Spector Roseman & Kodroff PC; Counsel for the defendants are Davis Polk Wardwell (BNL) and Allen & Overy LLP (Credit Suisse).

A note to Association of British Insurer‘s Peter Montagnon regarding the plaintiffs’ counsel’s fees and expenses (see here): the fee counsel will seek at the hearing is not to exceed 12% of the settlement fund and so, at least in this case, it is not close to the ‘almost a third of the proceeds’ as claimed is the norm.

In latest news regarding Parmalat’s legal proceedings, the Wall Street Journal (subscription required) reports that some counterclaims brought by Bank of America Corp. (NYSE: BAC) against the company have been dismissed and that the securities fraud claims against its Dutch subsidiary also have been dismissed. A Bank of America spokesperson however said that it is “looking forward to prosecuting [the remaining counterclaims including for securities fraud against Parmalat SpA] vigorously.”