Shareholder Fighting Consent-to-Sue Bylaw Takes Battle to Federal Court

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By Michael Greene

April 22 — An Imperial Holding Inc.'s shareholder challenging a unique bylaw is now taking his case to federal court.

The bylaw in question requires plaintiffs to obtain written consent to sue from shareholders that beneficially own at least 3 percent of company's stock before bringing their class or derivative action.

In addition to his challenge to the bylaw, investor Harry Rothenberg has filed a class-action complaint in the U.S. District Court for the Southern District of Florida, alleging that Imperial's board caused the company to file a false and misleading proxy statement by failing to disclose material information in connection with an “advisory vote” on the bylaw, according to his filing.

Last January, Rothenberg filed a complaint in a Florida state court, claiming the “draconian bylaw” was adopted to insulate Imperial directors from “shareholder redress” for violations of state and federal law and breaches of fiduciary duties.

Controversial Bylaws

The challenge at issue adds to the growing controversy over whether it is proper for companies to unilaterally adopt bylaws that restrict the litigation rights of shareholders.

Other types of litigation reform bylaws include ones that contain fee-shifting, forum-selection and arbitration provisions. The written-consent-before-suing bylaw, however, appears to be unique to companies controlled by Imperial chairman Phillip Goldstein and GWG Holdings Inc.

Goldstein told Bloomberg BNA that he believes the bylaw that he has pioneered is a good way to balance the interest of deterring lawyer-driven lawsuits and still allowing meritorious lawsuits. If the lawsuit is meritorious lawsuit, it should have no problem getting the “modest support” of 3 percent of shareholders, he said.

In a November statement announcing Imperial directors' adoption of the bylaw, Goldstein remarked on the “disturbing trend” of shareholders with small holdings suing companies purportedly on behalf of other shareholders or on behalf of the company.

“It's kind of a cooling off period,” he said. “Lets make sure there really is some merit here. If you can convince 3 percent of the shareholders, it's probably a good [lawsuit].”

He added, “I don’t think you would have a problem getting 3 percent of the shareholders to sue Worldcom or Enron or somebody that has done something wrong.”

Challenged Bylaw

Like in the lawsuit originally filed in state court, the most recent complaint alleges that Imperial's directors unilaterally adopted the bylaw against a backdrop of ongoing government investigations and recent settlements. Most notably, the complaint states that the company is currently under investigation by the SEC and IRS, and it has made payments to the U.S. government and shareholders as part of the two settlement agreements.

Rothenberg claims that directors adopted the bylaw in bad faith and in breach of their fiduciary duties because they acted with the sole purpose of reducing their risk of being held liable to the company and shareholders.

“The Bylaw imposes a pre-filing requirement so onerous that it effectively guarantees that, notwithstanding the provisions of federal and state law, no class or derivative actions can be filed against Defendants or the Company, regardless of the extent of their misconduct,” the complaint states.

The plaintiff seeks a declaratory judgment pronouncing the bylaw an ultra vires act, as well as preliminary and permanent injunctions barring the bylaw's enforcement.

New Allegations

The new allegations in the complaint, include, among other things, that directors violated SEC rules §14a-9 and §20(a) by including false and misleading information in its April 8 proxy statement.

“The Proxy fails to disclose material information to the Company's shareholder with their ‘advisory vote' on the Bylaw,” the complaint states.

When asked about the new allegation against him and other directors, Goldstein called them “ludicrous.” Imperial tried to make its disclosures as fair as possible, including giving the plaintiff an opportunity to put in an opposition statement, he said.

Targeted Approach?

Goldstein said he doesn't believe Imperial's written consent bylaw will receive the same type of push-back that other ligation reform bylaws have gotten.

Fee-shifting bylaws have been particularly controversial following ATP Tour, Inc. v. Deutscher Tennis Bund, in which the Delaware Supreme Court concluded that such bylaws can be valid and enforceable.

Provoked in large part by the ATP decision, the Delaware State Bar's Corporation Law Council proposed legislation March 6 that seeks to restrict the ability of corporations to adopt “loser pays” bylaws and also validate Delaware exclusive forum selection provision. 

The bar's proposal which has received both strong praise and criticism were approved April 9 by the bar's corporation law section. The proposal, however, still must be approved by the section's executive committee; then after a legislative sponsor introduces them, the General Assembly would vote on them.

“I think ‘loser-pays bylaws are too onerous because they actually deter meritorious lawsuits.” Goldstein said. “I think this one really gets at what the problem is—lawyer-driven litigation,” he said.

Rothenberg's attorney Stuart Davidson, Robbins Geller Rudman & Dowd LLP of Boca Raton, Fla., did not immediately respond to a request for comment.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Kristyn Hyland at khyland@bna.com

The complaint is available at http://www.bloomberglaw.com/public/document/ROTHENBERG_v_GOLDSTEIN_et_al_Docket_No_915cv80505_SD_Fla_Apr_20_2