Corporate Governance and Reform

We understand that corporate governance and reforms are of vital importance to informed institutional investors. “Corporate governance” is a term used interchangeably with the terms “corporate therapeutics” and “corporate reform.” These terms are commonly used to describe the reform of rules affecting the way a corporation’s board is structured and how it operates. The primary goal of “corporate governance” reform is to improve and ensure the integrity of public information provided by a corporation to its shareholders and to eliminate self-dealing by corporate insiders. When corporate governance reforms are adopted as a result of shareholder litigation, they reduce the likelihood that similar misconduct will occur in the corporation in the future.

Corporate governance reforms, such as increasing the number of independent directors on a company’s board (particularly on the all-important audit and compensation committees), are essential to the long-term health of a company. Of course, the bottom line recovery to the defrauded investor is always our litigation focus. We have found, however, that incorporating sound corporate governance reforms into a total settlement package often has an immediate and positive effect on the value of shares retained, while preventing fraud of a similar nature in the future. As long term investors, this is of particular interest to the institutions.

The following case studies illustrate the types of reforms that our firm has attained:

Cendant

As co-lead counsel, along with lead plaintiffs, the NYCRF, CalPERS and the New York City Pension Funds, we negotiated a strong corporate therapeutics package in addition to the $3.18 billion cash recovery. The Cendant governance reforms required:

• Independence of all members of the board’s audit, nominating and compensation committees;
• Independence of the majority of the board;
• Annual election of all directors; and
• Shareholder approval prior to “re-pricing” employee stock options.

Samsonite

As lead counsel to the class, and in consultation with our client, the Florida State Board of Administration, we negotiated a strong corporate therapeutics package in addition to a $28 million recovery for the investor class. Former FSBA Executive Director Tom Herndon observed: “The corporate governance reforms are significant and material to the future performance of the company. ... These corporate therapeutics are a substantial benefit to Samsonite shareholders and will advance the principles of good governance that the FSBA seeks to foster.” The Samsonite corporate therapeutics package required:

• Independence of 2/3 of the members of the company’s board of directors;
• Annual executive sessions without employee directors present;
• Independence of all members of the audit and compensation committees;
• Standing authorization of the board to retain independent legal advisers;
• Creation of a corporate governance committee composed entirely of independent directors; and
• Approval by an independent committee of the board (with authorization to obtain an independent fairness opinion) of any significant recapitalization or acquisition.

Derivative Actions

• In re AOL Time Warner Shareholder Derivative Litigation, Master File No. 02-cv-6302 (SWK) (S.D.N.Y.), we negotiated broad corporate governance and compliance changes, including the creation of new board and management-level positions to address the glaring deficiencies in internal controls and board oversight;
• In In re Quest Software, Inc. Derivative Litigation, Lead Case No. 06cv751 DOC (RNBx) (C.D. Cal.), defendants agreed to certain re-payments by recipients of backdated stock option grants, the re-pricing of certain options, and other corporate governance reforms; and
• In Hill v. Berdon, Index No. 06602839 (New York Cty. Sup. Ct.), a derivative case on behalf of shareholders of Barnes & Noble, we negotiated a settlement with defendants to implement wide-ranging corporate governance reforms.

Additionally, we have also provided advice to institutional investors on matters relating to proxy access, and shareholder rights and obligations pertaining to corporate governance matters involving a foreign corporation.