Heat Wave Quick Hits

With the temperatures reaching mind-bending levels, we considered it advisable to stay inside, drink plenty of fluids, and limit our exertions. So in lieu of a more elaborate post, we have simply noted some mid-summer quick hits below.

Action against U.S.-Listed Chinese Companies Auditors Allowed to Proceed: A recurring question during the current wave of lawsuit filings involving U.S.-listed Chinese companies has been how the plaintiffs will pursue their claims and enforce any judgments against the Chinese defendants. One likely counter to these problems has been for plaintiffs to pursue the claims against the Chinese defendant company's more accessible outside professionals. A number of recent suits have named outside auditors and other professionals as defendants (refer for example here). Given recent U.S. Supreme Court case law, making these claims against the outside professionals stick could be tough.

But in a July 18, 2011 decision in a case filed prior to the current wave of lawsuit filings against Chinese companies, a judge had held that the plaintiffs' allegations were sufficient for the claims against the auditor to proceed. As reflected here, the plaintiff first filed its lawsuit against China Expert Technology in 2007. The original complaint included among the defendants the company's outside auditors including affiliates of BDO Seidman and affiliates of PKF.

The case had been through several rounds of pleading. The defendants' motions to dismiss were initially granted, but the dismissal as to the PKF parties was without prejudice. The plaintiff twice attempted to amend his complaint in an attempt to overcome the pleading concerns, but each time the motion as to the PKF parties was granted, without prejudice.

In the July 18 order, which is handwritten, Southern District of New York Judge Alvin Hellerstein concluded with respect to the plaintiff's fourth amended complaint that "enough has been alleged to make out a plausible claim for relief." Unfortunately for other litigants who might want to try and rely on or cite Judge Hellerstein's ruling, his brief order does not provide any elaboration.

But despite the brevity of the ruling and the fact that it took four amended complaints for the China Expert technology plaintiff to overcome the pleading hurdle, the fact is that the plaintiff was ultimately able to present allegations sufficient to meet the pleading hurdles. That fact alone may provide comfort for the plaintiffs in pursuing claims against the Chinese companies' outside professionals in other cases.

Success in overcoming the hurdles in pleading claims against the auditor in this particular case is for this plaintiff critical. As Nate Raymond pointed out in his July 20, 2011 Am Law Litigation Daily article about the case (here), China Expert Technology has never appeared in the case and a default was previously entered against the company. Plaintiffs in other cases may face similar challenges, and so the ability to pursue claims against the outside professionals may prove to be critical in other cases as well. Whether or not those claimants will be able to make their claims stick remains to be seen. But in at least one case, the plaintiff's claims against a Chinese firm's outside auditor are going forward.

A July 21, 2011 Reuters article about the decision can be found here.

Who's Paying for News Corp.'s Legal Costs?: The media frenzy over News Corp.'s phone hacking scandal has led to a host of actual and potential legal proceedings involving News Corp. and its senior managers. The legal bills no doubt are starting to mount, which inevitable leads to the question of who will be paying the lawyers. A July 20, 2011 Reuters article (here) speculates that the company's D&O insurance may be paying for the the legal expenses.

The article appropriately notes some of the questions surrounding the availability of D&O insurance coverage for the legal fees. Among other things, depending on its terms and conditions, the D&O policy may not cover substantial amounts of the expense, even if there is coverage under the policy for some of the company's expense. The fees the company and its senior officials incur in defending the various civil suits are likely to be most likely to be covered. The various investigations and criminal proceedings may or may not be covered depending on the nature of the proceedings and the specific wordings of the company's policy.

And Speaking of D&O Insurance: As suggested in the prior item, the specific wording in a D&O insurance policy is critically important. Subtle wording differences can make a significant difference in whether or to what extent insurance is available for claims related expenses, settlements and judgments. In a competitive insurance marketplace , the more advantageous wordings often are available and are often available at little or no additional cost.

A July 2011 memo from the Lowenstein Sandler law firm describes the availability of more favorable coverage terms as "D&O Coverage at Little or No Additional Cost." The memo explores some of the policy alternations that can increase the scope of coverage available under the D&O insurance policy.

They're Getting Litigation Weary North of the Border, Too: In changes that went into effect in 2005, Ontario modified its securities laws to provide a different liability regime for holding corporate officials accountable to shareholders for material misrepresentations and omissions. One of the new law's features was the inclusion of a procedural requirement that prospective litigants obtain judicial leave to proceed. The leave requirement was introduced at companies' insistence as a way to try to ensure that only meritorious cases proceed.

But as discussed in a July 20, 2011 Reuters article (here), the leave requirement itself is proving to be burdensome, as the process of determining whether or not the case should be allowed to go forward is proving to be protracted and expensive. The article also reports that there are concerns in some circles that the courts have set the bar for granting leave too low.

It was perhaps inevitable that there would be grumbling in the wake of claims under the new regime. From that perspective, the complaints are hardly surprising. But it does seem as if the actual process under the new rules is turning out differently than at least some had envisioned.

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

For more information about LexisNexis products and solutions connect with us through our corporate site.