We though we’d give a mini-progress report on a set of filings against a series of European corporate governance train wrecks, including Bayer, Volkswagen, UBS and Credit Suisse via the latest filing, that of a New York state court appeal in Ezrasons on behalf of Barclays, PLC v. Rudd, et al, embedded at the end of this post. These suits aim to haul the top brass of these companies into New York court to ‘splain themselves. The deep pockets are their D&O policies. Triggering large payouts would provide some solace to much-abused shareholders, and potentially more important, lead policy issuers to become more stringent, say by setting higher minimum conduct standards, which if violated would void the coverage.
These filings have been moving very slowly through the New York courts thanks to Covid. They are also complex, which works to the advantage of defendants, at least in lower courts. As we saw in the foreclosure crisis, judges don’t like cases that make them feel stupid. These filings are all “derivative” lawsuits, where the plaintiff, usually a shareholder is not suing in his own name, but is petitioning the court to asset rights of the corporation that its board and executives have refused to use on behalf of shareholders. As we explained in an earlier post:
Each suit targets an epic level of value destruction, but they are not shareholder suits. They are derivative lawsuits, in which a shareholder steps in to act on behalf of a company that has been done wrong, typically by key members of its management and board. Important advisers may also be targets.
Shareholders in European companies often assume they have no recourse in the case of executive misconduct because their shareholder agreements often restrict the grounds on which shareholders can sue to pretty trivial items, like not getting dividend payments, and the courts are often unsympathetic to non-native plaintiffs.
The filing below describes the legal foundation of these cases (and also notes, despite the very clear statutory and case law basis for them, New York state lower courts appear regularly to reject derivative suits, only to get slapped down on appeal). If a company does business in New York, as a so-called “foreign corporation” (and “foreign corporation” is any non-New York business entity), it agrees to be bound by the laws of New York.
Companies like Barclays argue that home county law, for them English law, governs all shareholder-related matters. Here is the argument against that position:
Erroneously invoking the so-called “internal-affairs doctrine,” the lower court chose to apply English law, which confers standing to bring derivative actions only to “members”— shareholders whose names are entered in the company’s register of members. The lower court held that Plaintiff-Appellant Ezrasons, Inc. (“Plaintiff”), a New York based holder of Barclays common stock, lacked standing to sue under English law because Plaintiff—like virtually all U.S.-based investors—owns Barclays shares in “street name.”
In so holding, the lower court failed to apply §1319 of New York’s Business Corporation Law (“BCL”), which imposes New York’s gatekeeping rules governing shareholder derivative actions, including BCL §626, on all derivative actions—whether they involve domestic or foreign corporations.
And the lower court took away the protection for investors grafted into BCL §626 by the New York Legislature: conferring standing to bring derivative actions to all “holder[s] of shares … or of a beneficial interest in such shares.” N.Y. BUS. CORP. LAW §626(a).
The lower court’s disregard of §1319 is an error. Indeed, §1319, together with other provisions in the BCL and the New York Banking Law (“BL”), constitute a statutory scheme (collectively, the “Foreign Corporation Statutes”) to apply select provisions of New York substantive law to foreign corporations (including foreign banks)—as if they are incorporated in New York.
On the books since 1963, this statutory scheme regulates certain discreet aspects of the “internal affairs” of foreign corporations that choose to conduct business in New York by mandating the application of certain BCL provisions to those “foreign corporation[s] …, [their] directors, officers and shareholders.” N.Y. BUS. CORP. LAW §1319(a). And one such provision is BCL §626—New York’s procedure for shareholder “derivative action[s] brought in the right of the corporation to procure a judgment in its favor.” BUS. CORP. LAW §1319(a)(2) (quoting §626’s title).
This legislative intent—to regulate foreign corporations doing business in New York—is clearly manifested in §1319’s text and its “bill jacket” materials. The Foreign Corporation Statutes reflect the New York Legislature’s judgment in balancing “the interests of shareholders, management, employees, and the overriding public interest.” Robert S. Stevens, New York Business Corporation Law of 1961, CORNELL L. REV., Vol. 47, Issue 2, 141, at 172 (Winter 1962).
This statutory scheme operates as a window to the legal world—providing a convenient and sophisticated legal system for the adjudication of disputes involving actors in modern world commerce, including foreign corporations, large and small. The courts are dutybound to enforce these statutory provisions and to effectuate the intent of the Legislature. See Irvine v. N.Y. Edison Co., 207 N.Y. 425, 434 (1913). Here, the Legislature’s imposition of New York’s laws on foreign corporations doing business here is particularly important in light of New York’s status—recognized by the courts—as the legal, commercial, and financial center of the world. See Carlyle CIM Agent, L.L.C. v. Trey Res. I, LLC, 148 A.D.3d 562, 564 (1st Dep’t 2017).
In fact, for over a century, our appellate courts have faithfully implemented the Legislature’s scheme to regulate foreign corporations…Under this consent regime, this Court in Culligan Soft Water Co. v. Clayton Dubilier & Rice LLC issued two on-point holdings that control the outcome of this appeal:
– New York’s Foreign Corporation Statutes trump the internal-affairs doctrine—a common-law rule selecting as governing law the law of the place of incorporation on “‘matters peculiar to the relationships’” between the corporation and its officers, directors, and shareholders; and
– as mandated by §1319, §626 governs derivative actions brought on behalf of foreign corporations in New York courts.
Hopefully you are persuaded! But there is much more on the legal argument front, for those who like that sort of thing.
Even though this filing is not designed to argue facts, it includes them for sake of completeness. The allegations are not pretty. Starting on page 19:
The verified FAC [First Amended Compliant] details how certain current and former directors and officers of Barclays (collectively, “Defendants”) permitted, or engaged in, a decade of wrongdoing emanating from Barclays’ Manhattan headquarters. E.g., R899–890 (¶¶294–313). The FAC alleges Defendants violated their duties as officers and directors of Barclays under §§174 and 178 of the ECA, which require them to “exercise reasonable skill and diligence” and make them liable to Barclays for “any act or omission involving negligence, default, breach of duty or breach of trust.” R777 (¶91); see also R953–964. Defendants’ misconduct led to severe punishment by the New York Attorney General (“NYAG”) and the NYDFS, as well as federal regulators, costing Barclays $18 billion in fines and penalties. R899 (¶311). The resulting carnage left Barclays’ stock selling for less than the price of a pack of cigarettes….
The enormity of the damages to Barclays and the egregiousness of the underlying decade-long corporate miscreant require that Defendants—Barclays’ wayward fiduciaries—be called to account. Controlled by Defendants, however, Barclays is powerless to bring suit against them. These circumstances present a classic case for a shareholder derivative action—a form of action that has been endorsed by New York courts since the 1800s. See, e.g., Attorney-General v. Utica Ins. Co., 2 Johns. Ch. 371, 389 (N.Y. Ch. 1817) (recognizing the jurisdiction over corporations and “persons who … exercise the corporate powers” to hold them “accountable to this court for a fraudulent breach of trust”)….
Barclays suffered a criminal conviction, more nonprosecution agreements, censures and the ouster of two Board Chairs and CEOs at the insistence of regulators. R741–742 (¶¶18–20); R744–746 (¶¶22–26). In addition, Defendants’ years of misconduct emanating from Barclays’ New York operations resulted in massive penalties imposed by the NYAG and NYDFS, as well
as federal authorities:– August 2010: $300 million, NYAG and U.S. Department of Justice (“DOJ”). Money laundering. R817–819 (¶¶162–163).
– June 2012: $452.5 million, DOJ. LIBOR manipulation. R823 (¶174).
– Mid-2013: $453 million, Federal Energy Regulatory Commission. Manipulation of U.S. power market. R833 (¶192).
– September 2014: $15 million, SEC. “Systemic [c]ompliance [f]ailures.” R834–835 (¶194).
– May 2015: $2.4 billion, NYDFS. Conspiring to manipulate Forex trading. R836–837 (¶197).
– May 2015: $710 million, DOJ. Guilty plea for Forex manipulation in New York. R837–838 (¶198).
– May 2015: $242 million, U.S./New York Federal Reserve. Unsafe and unsound practices, deficient policies and procedures. R838–839 (¶200).
– November 2015: $150 million, NYDFS. Forex misconduct in New York. R840 (¶202).
– July 2016: $105 million, SEC and NYAG. Dark-pool violations. R840–841 (¶203).
– August 2016: $100 million, NYAG. Interest-rate manipulations. R841 (¶204).
– May 2018: $97 million, SEC. Overcharging clients. R843 (¶207).
– March 2018: $2 billion, DOJ. Fraud in sales of toxic securities. R844 (¶209).
– September 2019: $6 million, SEC. Violations of the Foreign Corrupt Practices Act. R848 (¶218).
– December 2018: $15 million, NYDFS. Unsafe banking practices. R876 (¶261).This litany of wrongdoing at Barclays is the result of Defendants’ “negligence and breach of duty” in New York.
The worst is that this sort of rap sheet, and attendant fines, are not unusual for large international banks. And the legal and regulatory actions have virtually no effect. The fines are paid by the companies, so in the end the shareholders. The only sort of actions that shake these miscreants a bit are restrictions on acquisitions and dividends, since they have a more lasting effect on share price and therefore executive pay.
So we’ll keep an eye on these actions and wish for their success.
00 (2023-01-03) Appellant's Opening Brief (Barclays)
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So, in essence the the last thirty years shareholder value focus is a failure. ‘Nuff said.
Something that used to be known, as i seem to recall hearing that shareholders are at the back of the line during bankruptcies. But somehow the Chicago boys managed to convince the world that shareholders were core to the economy, effectively placing the cart before the horse.
Sure would be nice to read that quite a few of these “miscreants'” butts end up in a genuine prison.
Post Trump and Covid the American courts have became increasingly lazy — my good friend recently resigned a prestigious judgeship over what he saw as his colleagues’ extreme behavior in finding new reasons to limit the public’s access to the courts. That’s a judge who doesn’t want to put in work unless the “grownups” make her/him.
The New York State long-arm statutes have always extended jurisdiction over this sort of litigation. Barclay’s derives nearly 40 percent of its profit in the U.S. and the punitive measures imposed on it by the New York State authorities were significant and deserved. There is absolutely no reason for the New York courts to reject this litigation — other than the mediocrity and laziness of the latest generation of American judges.