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Secret witnesses may appear in overvaluation case

In a New Jersey class action, plaintiff shareholders of publicly held Ascena Retail Group alleged that the company misrepresented the value of its goodwill and trade names to inflate the stock price artificially.

In re Ascena Retail Grp., Inc. Sec. Litig.

In this securities putative class action litigation, plaintiff shareholders alleged that the defendants (Ascena) misrepresented the value of Ascena’s goodwill and trade names in order to inflate Ascena’s stock price artificially. In June 2017, Ascena announced an impairment charge to those assets of $1.3 billion “causing Ascena's already-declining share price to fall precipitously. Ascena ultimately declared Chapter 11 bankruptcy in July 2020.” The defendants moved to dismiss for failure to plead material misrepresentation or scienter or both. The court granted the motion to dismiss but allowed the plaintiffs to amend their complaint.

New Jersey U.S. District Court Dismisses Plaintiffs’ Complaint That Public Company Defendant Overvalued Its Goodwill

In this securities putative class action litigation, plaintiff shareholders alleged that the defendants (Ascena) misrepresented the value of Ascena’s goodwill and trade names in order to inflate Ascena’s stock price artificially. In June 2017, Ascena announced an impairment charge to those assets of $1.3 billion “causing Ascena's already-declining share price to fall precipitously. Ascena ultimately declared Chapter 11 bankruptcy in July 2020.” The defendants moved to dismiss for failure to plead material misrepresentation or scienter or both. The court granted the motion to dismiss but allowed the plaintiffs to amend their complaint.

SEC v. Bluepoint Inv. Counsel

This case dealt with a suit by the SEC against the defendants for alleged violations of the Securities Act. The ruling digested here was a short ruling on motions in limine. The key motion considered here was a motion to exclude evidence of Amiran’s value not known by GTIF (a plaintiff’s entity) when valuations were prepared. The court denied the motion to exclude the SEC’s expert on the basis that she used information that was known or knowable. The court noted that her assumptions can be challenged on cross-examination.

U.S. District Court Rules on Known or Knowable Issue and Allows Testimony of SEC Valuation Expert—Can Be Challenged on Cross-Examination

This case dealt with a suit by the SEC against the defendants for alleged violations of the Securities Act. The ruling digested here was a short ruling on motions in limine. The key motion considered here was a motion to exclude evidence of Amiran’s value not known by GTIF (a plaintiff’s entity) when valuations were prepared. The court denied the motion to exclude the SEC’s expert on the basis that she used information that was known or knowable. The court noted that her assumptions can be challenged on cross-examination.

In Re Cellular Tel. P’ship Litig.

In this coordinated action involving 13 partnerships that were involved in freeze-out transactions by AT&T of minority shareholders, AT&T breached its fiduciary duties and effectuated the freeze-out through an unfair process and by paying an unfair price. The freeze-out was subject to the entire fairness standard of review. AT&T bore the burden of proving that the freeze-out was entirely fair to the minority partners. AT&T failed in that proof and thereby sought to capture future value for itself. AT&T did not employ any procedures that insured fairness to the minority partners. The lead partner of the valuation firm had a long-standing relationship with AT&T, and internal AT&T personnel influenced the outcome of the valuation. The court determined the fair value of the interest as a remedy to the situation.

Delaware Chancery Court Rejects Partnership Valuation in a Freeze-Out as Unfair to Minority Partners

In this coordinated action involving 13 partnerships that were involved in freeze-out transactions by AT&T of minority shareholders, AT&T breached its fiduciary duties and effectuated the freeze-out through an unfair process and by paying an unfair price. The freeze-out was subject to the entire fairness standard of review. AT&T bore the burden of proving that the freeze-out was entirely fair to the minority partners. AT&T failed in that proof and thereby sought to capture future value for itself. AT&T did not employ any procedures that insured fairness to the minority partners. The lead partner of the valuation firm had a long-standing relationship with AT&T, and internal AT&T personnel influenced the outcome of the valuation. The court determined the fair value of the interest as a remedy to the situation.

In re Multiplan Corp. Stockholders Litig.

This case dealt with a motion to dismiss the claims of the plaintiffs (by the defendants) in a stockholder suit against a special purpose acquisition company (SPAC). The claims were primarily that the plaintiffs’ claims were derivative, which failed to plead demand futility and that the business judgment rule applied. Many of the parties’ arguments centered around unique characteristics of a SPAC. In concluding that the entire fairness standard of review applied, the Delaware Chancery Court noted that “the fact that a reasonably conceivable impairment of public stockholders’ redemption rights—in the form of materially misleading disclosures—has been pleaded in this case.” The case was to go forward against all but two defendants.

Delaware Chancery Court Allows Breach of Fiduciary Suit to Move Forward on a SPAC

This case dealt with a motion to dismiss the claims of the plaintiffs (by the defendants) in a stockholder suit against a special purpose acquisition company (SPAC). The claims were primarily that the plaintiffs’ claims were derivative, which failed to plead demand futility and that the business judgment rule applied. Many of the parties’ arguments centered around unique characteristics of a SPAC. In concluding that the entire fairness standard of review applied, the Delaware Chancery Court noted that “the fact that a reasonably conceivable impairment of public stockholders’ redemption rights—in the form of materially misleading disclosures—has been pleaded in this case.” The case was to go forward against all but two defendants.

New case to address goodwill impairment dispute

Goodwill impairment does not appear often in litigation, but a court case in Tennessee will go forward after a judge ruled not to dismiss the plaintiff’s claims.

Cheng v. Coastal Lb Assocs.

This case concerned the purchase of minority interests in a California limited liability company under the Corporate Code concerning the purchase of these interests in lieu of a liquidation of the company. The appellate court affirmed the trial court’s order confirming the purchase of these interests at a discounted fair market value.

California Court of Appeal Allows a Discount for Lack of Control in the Buyout of 25% Interests in an LLC

This case concerned the purchase of minority interests in a California limited liability company under the Corporate Code concerning the purchase of these interests in lieu of a liquidation of the company. The appellate court affirmed the trial court’s order confirming the purchase of these interests at a discounted fair market value.

Strougo v. Tivity Health, Inc.

In this case regarding alleged fraud in the purchase or sale of securities, the defendants pled a motion to dismiss the plaintiffs’ claims. The parties categorized the defendants’ alleged misstatements into two groups: (1) the Nutrisystem claim, where the defendants allegedly misled investors as to the success of the Nutrisystem acquisition; and (2) the goodwill claim, where the defendants allegedly impaired goodwill by carrying goodwill at a value that exceeded its implied fair value. The court denied the motion to dismiss.

Court Denies a Motion to Dismiss Plaintiffs’ Claims That Defendants “Hid” Losses and Impaired Goodwill

In this case regarding alleged fraud in the purchase or sale of securities, the defendants pled a motion to dismiss the plaintiffs’ claims. The parties categorized the defendants’ alleged misstatements into two groups: (1) the Nutrisystem claim, where the defendants allegedly misled investors as to the success of the Nutrisystem acquisition; and (2) the goodwill claim, where the defendants allegedly impaired goodwill by carrying goodwill at a value that exceeded its implied fair value. The court denied the motion to dismiss.

Cont'l Investors Fund LLC v. TradingScreen Inc.

The defendant did not breach its redemption agreement because a committee of directors, “properly engaged in the judgment-laden task of determining the amount of funds that the company could use for redemptions … [and] determined that using a greater amount of cash to redeem more shares threatened the company's ability to continue as a going concern.” As a result, interest on the asserted obligation back to 2013 was not allowed at 13%, the amount per the agreement.

Company Did Not Breach Its Redemption Agreement Because of Diligence of Directors

The defendant did not breach its redemption agreement because a committee of directors, “properly engaged in the judgment-laden task of determining the amount of funds that the company could use for redemptions … [and] determined that using a greater amount of cash to redeem more shares threatened the company's ability to continue as a going concern.” As a result, interest on the asserted obligation back to 2013 was not allowed at 13%, the amount per the agreement.

Willamette gives insights into shareholder litigation

The Spring 2019 Insights from Willamette Management Associates focuses on shareholder litigation and is edited by Kevin M. Zanni.

In re Finisar Corp. Secs. Litig.

Court denies class certification in securities fraud case, finding defense financial expert is able to rebut presumption of reliance by way of event study that shows defendant’s alleged misrepresentation had no significant impact on company’s stock price.

Defense Event Study Rebuts Plaintiff’s Price Impact Claim

Court denies class certification in securities fraud case, finding defense financial expert is able to rebut presumption of reliance by way of event study that shows defendant’s alleged misrepresentation had no significant impact on company’s stock price.

Baker v. Seaworld Entm’t, Inc.

Court grants class certification in securities fraud case; defense expert’s event study to show absence-of-price-impact fails to rebut presumption of reliance; plaintiff meets predominance requirement and its expert offers valid classwide damages model.

Court Balks at Event Study’s Singular Focus on Misrepresentation

Court grants class certification in securities fraud case; defense expert’s event study to show absence-of-price-impact fails to rebut presumption of reliance; plaintiff meets predominance requirement and its expert offers valid classwide damages model.

Direct Evidence of Price Impact Not Always Necessary, 2nd Circuit Says

In a securities fraud action, appeals court upholds class certification; trial court did not err when it found direct evidence of price impact by way of event study was not necessary to show market efficiency where there was strong indirect evidence.

Waggoner v. Barclays PLC

In a securities fraud action, appeals court upholds class certification; trial court did not err when it found direct evidence of price impact by way of event study was not necessary to show market efficiency where there was strong indirect evidence.

Expert’s Damages Opinion Specific Enough for Class Certification Stage

In a securities case, court applies Daubert analysis to plaintiff expert’s market efficiency opinion and event study; expert is qualified even without academic background, and his damages opinion is sufficiently specific to facts of the case and reliable.

SEC’s Daubert Challenge to Securities Valuation Testimony Fizzles

In an SEC case requiring valuation of restricted securities, court admits most of the testimony of parties’ experts; experts need not be specialists in given field and need not demonstrate familiarity with USPAP or SSVS to qualify under Daubert, court fin ...

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