Multiple federal circuit courts have previously ruled that they did not have jurisdiction to hear a collateral challenge to the constitutionality of the SEC’s administrative proceedings before an Administrative Law Judge (“ALJ”) and that the respondents must raise challenges to the forum’s constitutionality as an appeal after the administrative proceeding concludes. In Raymond J. Lucia Companies, Inc. v. SEC, however, the D.C. Circuit became the first federal appellate court to consider the merits of the issue and concluded that the SEC’s administrative forum’s use of ALJs—who are not appointed by the President—does not violate the Appointments Clause, which requires the President to appoint all “Officers of the United States.”

The SEC instituted an administrative action against Raymond J. Lucia and Raymond J. Lucia Companies, Inc. (“petitioners”) alleging violations of the Investment Advisers Act of 1940. An ALJ heard the case, concluded that the petitioners were liable based on one of the four charged misrepresentations, and imposed sanctions. The SEC granted a petition for review, found that the petitioners committed anti-fraud violations, imposed the same sanctions as the ALJ, and concluded that its ALJs are employees, not Officers, and that their appointment did not violate the Appointments Clause. Petitioners then sought review with the D.C. Court of Appeals, which agreed with the SEC’s determination.

The D.C. Circuit explained that the Appointments Clause applies to judicial Officers but not employees or other “lesser functionaries,” and that an appointee is only an Officer if he or she exercises “significant authority pursuant to the laws of the United States.” The criteria for determining whether an appointee is an Officer are: “(1) the significance of the matters resolved by the officials, (2) the discretion they exercise in reaching their decisions, and (3) the finality of those decisions.” The D.C. Circuit determined that the SEC’s ALJs do not issue final decisions and thus cannot be Officers within the meaning of the Appointments Clause.

The D.C. Circuit agreed with the SEC that an ALJ’s initial decision only becomes a final decision when the SEC issues a finality order, and that the SEC must issue a finality order (either through issuing a new decision after a de novo review of the ALJ’s initial decision or by issuing an order advising that it has declined to grant review) in every case. The D.C. Circuit relied heavily on its 2000 decision in Landry v. FDIC, which held that ALJs of the FDIC were not Officers because they could only issue “recommending decisions” that are then forwarded to the FDIC Board of Directors for a final decision. After determining that the SEC’s use of ALJs passed constitutional muster, the D.C. Circuit also affirmed the finding of liability and lifetime industry bar sanction against the petitioners.


Cornerstone Research recently released its “Securities Class Action Filings: 2016 Midyear Assessment,” which tracks the number and type of securities class action lawsuits filed nationwide each semiannual period. In the first half of 2016, plaintiffs filed 119 new federal securities class actions nationwide, which is a 17% increase from the 102 new federal securities class actions filed in the second half of 2015 and a 38% increase from the 87 new federal securities class actions filed in the first half of 2015. The number of filings in the first half of 2016 is also above the historical average of 94 new federal securities class actions filed each semiannual period between 1997 and 2015.

Of those 119 new federal securities class actions filed in 2016, only four were filed in district courts located within the Fifth Circuit, which is down from the 10 that were filed in the Fifth Circuit in the second half of 2015. The Fifth Circuit filings accounted for approximately 3% of the nationwide federal securities class actions, down from the 6% historical trend, between 1997 and 2015. The Ninth Circuit continued to lead the way with 38 new federal securities class actions filed within its district courts, 9 more than were filed in the second half of 2015. Filings in the Second Circuit were also up significantly as compared to the two previous semiannual periods.

In the first half of 2016, new federal securities class actions filed against companies in the financial, consumer, and industrial sectors increased as compared to second half of 2015. In contrast, there were fewer new federal securities class actions filed against technology, communications, energy, and utilities firms than in the previous semiannual period. Click to view the full Cornerstone Research report.


Decisively resolving a split among Texas courts, the Texas Supreme Court held that arbitration awards under the Texas Arbitration Act can be set aside only on the grounds identified in section 171.088 of the Texas Civil Practice and Remedies Code. Common law grounds, including “manifest disregard of the law,” do not justify vacating an arbitration award.

Hoskins v. Hoskins
Supreme Court of Texas (May 20, 2016)
Opinion by Justice Lehrmann; Concurrence by Justice Willett

The case arose from a family feud, with one son accusing his mother, his brother, and a family company of a host of wrongs, including fraudulent conveyance of real property. A previous settlement agreement and a bankruptcy court order required arbitration of the dispute. After the arbitrator entered a take-nothing award, the complaining son asked a trial court to vacate the award on multiple grounds. The court confirmed the award, and the court of appeals affirmed.

The Supreme Court granted the petition “to resolve a split in the courts of appeals on whether the TAA permits vacatur of an arbitration award on common-law grounds not enumerated in the statute.” The answer, according to the Court, was easy: “The statutory text could not be plainer: the trial court ‘shall confirm’ an award unless vacatur is required under one of the enumerated grounds in section 171.088.” Consequently, “the TAA leaves no room for courts to expand on those grounds, which do not include an arbitrator’s manifest disregard of the law.”

Justice Willett agreed fully with Justice Lehrmann’s analysis, and filed a concurring opinion to highlight the decision’s significance. In particular, he noted a similar split of authority (a “quagmire”) continued to plague courts applying the Federal Arbitration Act, following the United States Supreme Court’s 2008 opinion in Hall Street Assocs. v. Mattel, Inc., which left some doubt about the role of “manifest disregard” in reviewing arbitration awards. In 2009, the Fifth Circuit construed Hall Street as precluding vacatur on common-law grounds not listed in the FAA, in Citigroup Global Mkts. v. Bacon. In Texas, therefore, the role of the common law is restricted under both federal and state arbitration statutes.

One distinct difference remains between the TAA and the FAA. In Hall Street, the United States Supreme Court held the FAA voided an agreement that an arbitration award can be set aside if factual findings are not supported by substantial evidence or legal conclusions are erroneous. The Texas Supreme Court refused to apply that holding to identical terms in the TAA in Nafta Traders, Inc. v. Quinn (2011), because an “arbitrator derives his power from the parties’ agreement.” The Court in Hoskins reiterates its criticism of Hall Street’s “textual analysis.”


Earlier this year, the Chancery Court of Delaware denied approval of a proposed settlement of a derivative action based solely on a personal benefit the named plaintiff was to receive. Plaintiff Marvin Smollar brought a derivative action on behalf of VitalSpring Technologies, Inc. in an attempt to remedy certain alleged corporate governance failures. The parties reached a settlement of the litigation, and Smollar was able to achieve “much of, it not most of, the relief which he sought,” including a shareholder’s meeting, the appointment of two independent directors and a special review committee, and the hiring of an independent auditor. In addition to that relief, the settlement agreement also afforded Smollar the opportunity to sell back his VitalSpring shares at the price he paid for the stock. This was a unique and personal benefit not afforded to VitalSpring’s other shareholders, and it was especially beneficial to Smollar because there is little opportunity to trade in VitalSpring stock due to the federal securities laws and certain provisions in VitalSpring’s stock purchase agreement. In fact, counsel for neither party could identify a sale of VitalSpring stock within the last year.

Despite the fact that the settlement was recommended by the special review committee and the board of directors and generally supported by a majority of VitalSpring’s shareholders (eleven shareholders objected to Smollar’s personal benefit), the Chancery Court denied approval based on Smollar’s equity buy-back. The court explained that its task in assessing a proposed settlement is to determine whether the settlement is fair and reasonable and that an award of disparate benefits to the representative plaintiff, who owes a fiduciary duty to other shareholders, “will be closely scrutinized by the Court.” The court rejected Smollar’s argument that the settlement should be approved because the bulk of the settlement benefits were obtained through his efforts even before his equity buy-back was negotiated. Instead, the court characterized the buy-back as “self-dealing” that “drifts far from the conduct expected of a fiduciary” and distinguished a case where the named plaintiff’s personal benefit also resulted in a corporate benefit, unlike in this case. Even though the special committee and board of directors recommended the proposed settlement, the court believed that they did not properly assess how Smollar’s personal benefit discredited the fairness and reasonableness of the settlement and denied approval.

The case remains pending and illustrates the limitations on what benefits can be given to a named plaintiff who chooses to prosecute a derivative claim under Delaware law. Smollar v. Potarazu, C.A. No. 10287-VCN, 2016 Del. Ch. LEXIS 4 (Jan. 14, 2016


This month, in a case of first impression, New York’s highest court held that under New York law, courts should review a going-private merger under the business judgment rule, provided among other things that the merger is approved by a Special Committee of independent directors and a majority of the minority stockholders. In re Kenneth Cole Prods., Inc., No. 54, 2016 N.Y. LEXIS 1059 (N.Y. May 5, 2016). In a going-private merger, a majority shareholder seeks to effectively remove public investors and gain ownership of the entire company. Plaintiffs who challenge going-private transactions often ask that courts review such transactions under the so-called entire fairness standard, which puts the burden on a company’s directors to show that they engaged in a fair process and obtained a fair price for the company. By contrast, under the business judgment rule, courts defer to the good faith determinations of officers and directors acting in the company’s interests.

In Kenneth Cole Productions, the Court of Appeals of New York specifically adopted the standard of review set by the Delaware Supreme Court in Khan v. M & F Worldwide Corp. (MFW), 88 A.3d 635 (Del. 2014). The Delaware Supreme Court held in MFW that “in controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.” Id. at 645. The New York Court of Appeals applied this standard and determined that dismissal was appropriate where the plaintiff failed to sufficiently and specifically plead facts that would negate any of the six conditions enumerated in MFW. As a result, the business judgment rule applied, and the court deferred to the determinations of the special committee, which recommended approval of the merger at issue. Notably, the court made this determination based only on the pleadings and without permitting the plaintiff to proceed with discovery. This decision clarifies New York law regarding the standard of review in a going-private transactions, and shows that New York courts may rely upon Delaware case law at least with regard to lawsuits challenging these transactions. The full text of the Opinion is available here.


To do business within their borders, every state in the union requires “foreign” entities—corporations and other entities formed under the laws of another state or country—to register and appoint an agent to accept service of process. And registration and appointment of an agent have been widely considered sufficient grounds for “general” personal jurisdiction over those entities. But in recent years, two United States Supreme Court decisions dramatically changed the landscape of states’ exercise of general jurisdiction over foreign corporations. In Daimler AG v. Bauman, 134 S. Ct. 746 (2014)—following on the heels of Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915 (2011)—the Supreme Court held that general jurisdiction over a foreign corporation would exist only when its contacts with a forum state “are so continuous and systematic as to render [it] essentially at home in [that] State.” For this general jurisdictional analysis, apart from an “exceptional case,” a corporation will be considered “at home” only in its state of incorporation and its principal place of business, even if it has engaged in “a substantial, continuous, and systematic course of business” in other states.

In Genuine Parts Co. v. Cepec, the Delaware Supreme Court has now joined several other courts in concluding that subjecting foreign corporations to general jurisdiction based on their registration to do business and appointment of a registered agent “collides directly with the U.S. Supreme Court’s holding in Daimler.” It therefore overruled in part its prior decision in Sternberg v. O’Neil, 550 A.2d 1105 (Del. 1988). As was true in many other states, the Delaware court in Sternberg had held compliance with the registration statute to constitute consent by foreign corporations to general jurisdiction in Delaware. In light of Daimler, the court undertook a detailed reexamination of that statute and related provisions and, noting that those statutes made no mention of consent to jurisdiction, concluded a more “sensible reading” did not include an express or implied consent to jurisdiction by foreign corporations that complied with the registration statute. The court also noted that this more “sensible reading” made better sense in Delaware’s relations with its sister states (and in protecting its turf as guardian of the nation’s corporate laws). “As the home of a majority of the United States’ largest corporations,” the court observed, “Delaware has a strong interest in avoiding overreaching in this sensitive area.” If other states followed the more expansive pre-Daimler approach, “major Delaware corporations with national markets could be sued by … stockholders on an internal affairs claim in any state in the nation because the corporations have had to register to do business in every state”—giving rise to potentially divergent constructions of Delaware corporate law by other states, something the Delaware courts very much wish to avoid.

The Delaware Supreme Court’s decision in Genuine Parts appears correct in light of Daimler. But other courts have come to a different conclusion. Those in that camp have noted that Daimler did not address the issue of “consent” to jurisdiction—the rationale most courts relied on to find general jurisdiction over foreign entities based solely on their registration in the forum state—and therefore have persisted in exercising general jurisdiction based on such express or implied consent even after Daimler. The Genuine Parts opinion collects the cases on both sides of that issue. It notes Pennsylvania is the only state whose statutes expressly provide that registering to do business constitutes consent to or “a sufficient basis for” general jurisdiction. The Delaware court then muses that, after Daimler, the “unconstitutional conditions doctrine” may prohibit states from exacting or coercing consent to jurisdiction as the price for doing business there. The Genuine Parts Court avoided that constitutional issue by construing Delaware’s registration statute as not constituting or requiring consent, but the question may well make its way to the United States Supreme Court from a state that rejects the approach now taken by Delaware.


A long-time insurance company client of Greenberg Traurig has sued the law firm, KPMG, and ten other defendants under conspiracy and other theories in district court in the Southern District of Florida, case number 9:16-cv-80618. The law firm had assisted plaintiff with the development of an offshore insurance product. The Complaint alleges defendants helped form a competitive insurance company that stole clients from plaintiff forcing the plaintiff into a receivership.

Three allegations in the Complaint provide a cautionary tale for both lawyers and their clients. Plaintiff asserts there was an oral agreement at the relationship’s inception that the law firm would not represent a competitor of plaintiff. A complete written client agreement should fully address such issue for the benefit of both sides.

Some of the law firm invoices had numerous redactions. Redactions would usually seem incompatible with the duties of the law firm.

Finally, the Complaint asserts Greenberg Traurig provided plaintiff crucial tax opinions for four years then declined to give needed updates thereafter while doing tax opinions for the competitor. There is a suggestion that the refusal was a result of plaintiff failing to pay its legal invoices. The value of including in a client agreement a clear-cut right to terminate the relationship cannot be overstated.