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From Securities Regulation Daily, January 22, 2015

Shareholder challenges bylaw requiring 3% stake to sue

By Anne Sherry, J.D.

An Imperial Holdings shareholder is suing the company and its board over a bylaw requiring a shareholder to obtain buy-in from 3 percent of stakeholders before suing the company, its directors, or its officers. The class-action plaintiff alleges that the “draconian” and unprecedented minimum-stake requirement violates Florida corporate law and that the directors breached their fiduciary duties in adopting it (Rothenberg v. Imperial Holdings, Inc., January 20, 2015).

Bylaw.  Imperial, a finance company dealing in life insurance policies, adopted the bylaw last November. Its chairman, the activist investor Phillip Goldstein said, “The Board has noticed a disturbing trend of lawsuits brought by shareholders with very small stakes … These lawsuits often result in other shareholders receiving no meaningful benefit and indirectly incurring the cost of the plaintiff's lawyer and the company's lawyer. The Board believes it is in the best interest of the company to require a shareholder claiming to represent a class of shareholders or the company to demonstrate a minimum level of shareholder support.” Goldstein’s Bulldog Investors is Imperial’s largest shareholder. The bylaw is effective immediately, but the company said that it intended to submit it to a shareholder vote at its next annual meeting.

Investigations into wrongdoing. The shareholder complaint attributes the new bylaw to a series of securities class actions and derivative actions taken against Imperial’s directors and officers following a settlement in which Imperial agreed to pay an $8 million penalty to the government and admitted that it lacked appropriate internal controls. The company is currently under investigation by both the SEC and the IRS, the complaint states.

Challenge. The plaintiff calls the bylaw “draconian” and alleges that it eliminates shareholders’ statutory rights to commence and prosecute shareholder class action and derivative litigation. While the bylaw requires written consent from shareholders beneficially owning at least 3 percent of company shares, the complaint argues that the requirement is actually about 4 percent of non-insider shares, given that insiders control over 21 percent of the company.

The director defendants breached their fiduciary duties, according to the plaintiff, by adopting the bylaw with the sole purpose of reducing their risk of liability. The complaint also argues that the bylaw violates Florida corporate law because it does not pertain to “managing the business and regulating the affairs of the corporation” and because it is inconsistent with Florida and federal law. The plaintiff seeks declaratory and injunctive relief barring the defendants from enforcing the bylaw and from holding a shareholder vote without first disclosing all of Imperial’s communications with the FBI, SEC, and IRS.

Attorneys: Stuart A. Davidson (Robbins Geller Rudman & Dowd LLP) and Joseph H. Weiss (WeissLaw LLP) for Harry Rothenberg.

Companies: Imperial Holdings, Inc.

MainStory: TopStory CorporateGovernance DirectorsOfficers FloridaNews

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