Strengthening Corporate Governance through Shareholder Litigation

June 14, 2007

SHARE: Pension Investment & Governance

Seminar Series

Grant & Eisenhofer is a litigation boutique that concentrates on federal securities and corporate governance litigation. G&E exclusively represents institutional investors, both public & private and domestic & foreign, who have been damaged by corporate fraud, greed and mismanagement. The

firm has been named one of America’s Leading Business Lawyers by Chambers and Partners.

G&E has been lead counsel in several of the largest

securities class action recoveries in U.S. History

G&E is lead counsel in securities actions involving Tyco Int’l, Parmalat, Global Crossing, and Marsh & McLennan

G&E successfully litigated the landmark case invalidating “dead-hand” poison pills under Delaware Law

Firm ProfileTel: 302-622-7000 www.gelaw.com

Disclaimer

This presentation and of its all contents are provided for general informational purposes only, and may not reflect current legal developments, verdicts or

settlements. Any information contained in this presentation should not be construed as legal advice and is not intended to be a substitute for legal counsel on any subject matter.

No recipient of content from this presentation should act or refrain from acting on the basis of any content included in this presentation without seeking the appropriate legal or

other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient's state, country or other appropriate licensing jurisdiction. This

information is not intended to create, and receipt of it does not constitute, an attorney-client relationship between you and Grant & Eisenhofer P.A.

The Growing Role Of Institutional Investors

• The ranks of shareholders are dominated by the institutional investor.

• Pension funds and hedge funds own a third of the equity of all publicly traded companies in the U.S., and 50% or more of the equity of the larger companies.

• In last 25 years, equity holdings of institutional investors has risen from 7.2% of outstanding equities in 1950, to 63.4% after the 1Q 2004.

• That 63.4% is valued at over $10 trillion.

• Institutional investors have become increasingly active on corporate governance questions, and have demonstrated a willingness to participate and play a major role in influencing and reforming corporate governance policies.

Improved Corporate Governance Means Improved ROI

THOMPSON FINANCIAL STUDY (9/06)

Target stock price outperform in short and long term relative to control group and relative to same stock before-activism (up to 95%).

Case Study – activists achieve at least one of their goals 45% of the time.

Highest success rate among all categories – removal of CEO (nearly 80%).

Discussion Outline

• Legal Background

• Excessive Compensation

• Shell

The Bull and The Blue Hen Chicken

Wall Street versus King Street

Shareholder Litigation

• Securities Fraud Litigation

– Class Actions

– Opt-out Actions

• Derivative Litigation

– For the benefit of the company

• Individual Litigation

Regulation of Corporate Conduct

FEDERAL versus STATE LAW

• Federal Law (statutes, regulations and court decisions)

– Primarily governs disclosures made by a company

• State Law (statutes and court decisions)

– Primarily governs the conduct of board members and management

Board of Directors

• Oversees the management of the company. Sets the policy and direction of the company.

• Directors typically elected to a board by the company’s shareholders, but may be appointed in certain circumstances.

• Directors owe fiduciary duties to the company and its stockholders. A fiduciary duty is a relationship of trust and confidence.

• Duty of Care

• Duty of Loyalty

Duty of Care

• Responsibility to conduct the business and manage the company in a way that comports with the level of attention a reasonably prudent person would give to his or her own affairs.

• Business Judgment Rule – Courts will not review actions of board unless violate duties or lack of rational basis.

Duty of Loyalty

• Responsibility to act in a manner in which the director believes to be in the best interests of the corporation and its shareholders and not using their authority or their office to benefit themselves.

Duty of Good Faith

• 8 Del. Code, Section 102(b)(7)

– Allows companies to include in its certificate of incorporation a provision that exonerates directors from any claim of monetary liability to the company or its stockholders for claims where directors act in bad faith or otherwise in violation of his or her duty of loyalty.

– Most every public company has such a provision.

Common Catalysts For Activism

• Consistently lagging performance relative to industry peers

• Idle cash/Capital allocation issues

• Entrenched management

• Poor governance and management (executive compensation)

• Possible M&A opportunities spurned by management or board

• Financials not transparent

Books/Records Requests

• Statutory Right Of Shareholders To Inspect Books And Records.

– Proper Purpose

– Scope Of The Demand

• Summary Proceedings For Failure To Respond To Request Within 5 Days.

• Can Be Used To Investigate Corporate Mismanagement, Breaches Of Fiduciary Duty And Other Abuses.

• Can Also Be Used To Obtain List Of Stockholders.

• Available To Record Or Beneficial Holders Of Stock.

Securities Litigation

There are two bodies of law under which securities claims can be brought: (1) Federal law – the laws of the United States; and (2) the laws of the individual states.

FEDERAL SECURITIES LAWS

• Securities Act of 1933 – Applies primarily to securities purchased in Public Offerings through a Registration Statement or Prospectus.

• Securities Exchange Act of 1934 – This statute has Section 10(b) and Rule 10b-5 (adopted by the U.S. Securities and Exchange Commission) and is the general federal anti-fraud statute. Virtually all federal securities fraud cases include a claim under Section 10(b) and Rule 10b-5.

STATE SECURITIES LAWS

Each of the 50 states of the United States has its own laws. These laws are both statutory, adopted by the state legislatures, and common law, based historically on English common law.

• Common Law – Every state has common law, which includes bodies of law dealing with fraud and negligent misrepresentation. These laws differ among the 50 states.

• Statutory Law – “Blue Sky Laws” which are essentially their own versions of the federal securities laws. These laws differ substantially among the states, with some laws allowing plaintiffs to sue under the laws while other states, most notably New York, do not.

Basic Requirements of a Securities Fraud Suit

Whether brought under federal or state law, any lawsuit seeking to assert a claim for fraud has certain basic elements. The goal is to establish that a purchaser of a security suffered damages as a result of a defendant’s false statement about a company. The elements of the claim are:

• Material Misrepresentation - a defendant must misrepresent a material fact about a company.

• Scienter - a defendant must know that the statement was false or must have recklessly disregarded the truth or falsity of the statement.

• Damages – a plaintiff must have suffered actual damages as a result of the misrepresentation. Damages and loss causation are closely linked concepts in many cases.

• Loss Causation – any loss suffered by a plaintiff must have been a result of the defendant’s fraud. Thus, a decline in a security’s price caused by general market factors will not support a fraud claim.

• Reliance – a plaintiff must have relied upon the misrepresentation in making the purchase of the security. In a case under Section 10(b), such reliance can be presumed through a doctrine known as “fraud on the market.” This doctrine sometimes is applicable, and sometimes is not applicable, under state law.

• False Statements to Induce The Purchase of Stocks or Bonds

• Difference Between Price Paid And Value If Truth Had Been Known

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Corporate Governance Litigation

Derivative Litigation

• Shareholder action on behalf of the corporation seeking to redress a wrong being done to the corporation.

• Any benefits from the litigation will be obtained by the corporation, not the individual shareholder.

• Examples of derivative cases:

– rescind an arrangement between a corporation and an officer or director, or outsider, that was not fair to the corporation

– seek reforms in executive compensation

– seek to block transactions between a corporation and insiders that harmed the corporation

Excessive Executive Compensation

• On the rise

• Enron, Tyco, HealthSouth, Global Crossing among many others

Statistics

• On May 3, 2007, Forbes.com reported that the chief executives of America’s 500 biggest companies received a collective pay raise of 38% last year.

• This translates to a collective increase of $7.5 billion, or $15.2 million per executive.

• Exercised stock options account for 48% of these dollars.

• The average stock gain per executive was $7.3 million over the previous year.

• 1993 – Aggregate compensation paid to the top five executives of US public companies represented 5% of company profits; by 2003 the ratio had more than doubled to 10% (total amount paid was roughly $350 billion).

• 2005 – Average S&P 500 CEO took home $13.51 million in 2005, up by more than 16% over the year before.

• 2005 – Average CEO in the US earned 262 times the pay of the average worker. In 2005, a CEO earned more in one workday than an average worker earned in 1 year.

Transparency

• Separate from amount of pay

• SEC Rule change concerning disclosures

• US Congress - The Shareholder Vote on Executive Compensation Act. (non-binding, advisory say on pay)

Shareholder Options

(1) Engagement

(2) Voting

(3) Selling

(4) Shareholder Litigation

Judicial Hurdles

• Demand

• Business Judgment Rule

• Waste

Examples

• Disney

• Lone Star

• Siebel Systems

• Viacom

• Others

Backdating/Spring Loading

• Options Backdating

• Options Spring Loading

• Maxim Integrated Products/Tyson Foods

Royal Dutch Shell Case Highlights

• January 9, 2004: Shell restates its oil & gas reserves.

• March 18, 2004: Shell announces further reductions.

• Shell stock prices drop on all exchanges worldwide.

• Total estimated class-wide damages: over $4 billion.

• Securities class action filed in the US.

• Estimated that over 80% of shareholders are non-US (European).

• Most stock trading on European exchanges.

Shell Settlement

• Payment by Shell of $352.6 million to non-US investors:

– $340.1 million to be distributed to investors with the oversight of the Foundation; and

– $12.5 million to be divided equally among all shareholders who submit a valid claim for relief.

• Payment by Shell of administrative costs (i.e. Foundation, attorneys, etc.; value is > $60 million)

• Approximately $96 million from $120 million SEC fine

• Most Favored Nations protection

• Insurance policy for all non-US investors

• Unique settlement in European context:

– Amicable proceedings;

– Relatively quick;

– Above average recovery (approximately 10-12% of the estimated damages);

– Collective unity of the representative non-US investor group; and

– Reasonable attorney’s fees (<12% of total recovery).

• However: settlement contingent on US court ruling not to include non-US investors who purchased on European exchanges in the pending US securities class action.

Participation Investors

• Current Participants Foundation:

– 71 Participants

– All major shareholders

– Shareholders associations (Euroshareholder members like Dutch private shareholder association VEB)

• New Participants:

– More than welcome to join

– The more the better (representativeness Foundation)

Sidney S. Liebesman

1201 North Market Street

21st Floor

Wilmington, DE 19801

Tel: 302-622-7000

sliebesman@gelaw.com

Disclaimer

This presentation and of its all contents are provided for general informational purposes only, and may not reflect current legal developments, verdicts or

settlements. Any information contained in this presentation should not be construed as legal advice and is not intended to be a substitute for legal counsel on any subject matter.

No recipient of content from this presentation should act or refrain from acting on the basis of any content included in this presentation without seeking the appropriate legal or

other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient's state, country or other appropriate licensing jurisdiction. This

information is not intended to create, and receipt of it does not constitute, an attorney-client relationship between you and Grant & Eisenhofer P.A.