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Shareholder Suit Challenging Groundbreaking Minimum-Support-To-Sue Bylaw Dismissed

In what is believed to be the first case nationwide seeking to strike down a groundbreaking corporate bylaw aimed at combatting frivolous shareholder class actions, Emergent Capital, Inc., has secured the dismissal with prejudice of a shareholder lawsuit challenging Emergent’s minimum-support-to-sue bylaw.

The bylaw, proposed by Emergent Chairman of the Board Phillip Goldstein and approved by both Emergent’s Board and its shareholders, requires a shareholder to obtain the consent of holders of at least three percent of Emergent's outstanding shares before suing the company or its officers or directors on behalf of other shareholders in a class action or on behalf of the company in a derivative action. The bylaw provides as follows:

Except where a private right of action at a lower threshold than that required by this bylaw is expressly authorized by applicable statute, a current or prior shareholder or group of shareholders (collectively, a “Claiming Shareholder”) may not initiate a claim in a court of law on behalf of (1) the corporation and/or (2) any class of current and/or prior shareholders against the corporation and/or against any director and/or officer of the corporation in his or her official capacity, unless the Claiming Shareholder, no later than the date the claim is asserted, delivers to the Secretary written consents by beneficial shareholders owning at least 3% of the outstanding shares of the corporation as of (i) the date the claim was discovered (or should have been discovered) by the Claiming Shareholder or (ii), if on behalf of a class consisting only of prior shareholders, the last date on which a shareholder must have held shares to be included in the class.

The shareholder plaintiff had sued Emergent and its directors in Florida state court and in federal court in the U. S. District Court for the Southern District of Florida, seeking to have the minimum-support-to-sue bylaw struck down, among other claims. Emergent moved to dismiss the case, arguing that the bylaw had not injured the plaintiff in any way, and that in approving the bylaw, both the Board and the shareholders were fully informed.

After Emergent and its directors filed their motion to dismiss, the lead plaintiff dismissed all claims with prejudice, without any compensation to him or his counsel. In addition to the dismissal with prejudice, the lead plaintiff made a public statement that the defendants “acted in good faith and did not engage in any improper behavior in adopting the bylaw at issue or otherwise.”

The dismissal leaves the bylaw in force, and it leaves the door open for other companies to follow Emergent’s lead in taking action to protect shareholder value against what Emergent Chairman Phillip Goldstein called “a disturbing trend of lawyer-driven knee-jerk strike suits against directors and officers of public companies.” Goldstein said that “we strongly believe this is a very good bylaw that deters such suits without unduly impeding meritorious representative lawsuits.”  

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About this Author

Gardner F. Davis, Foley Lardner, Board Adviser Lawyer, Transactional Securities Attorney

Gardner F. Davis is a partner and corporate lawyer with Foley & Lardner LLP. He advises boards of directors and special committees in regard to fiduciary duty issues in various contexts, and he has extensive experience restructuring financially distressed enterprises, both inside and outside of bankruptcy. He is a member of the firm's Transactional & Securities, Bankruptcy & Business Reorganizations, and Private Equity & Venture Capital Practices.

Mr. Davis frequently represents buyers and sellers in mergers and acquisition...

Lawrence J. Dougherty, Foley Lardner, Complex Financial Litigation Lawyer, White Collar Defense Attorney
Special Counsel

Larry Dougherty is a litigator with Foley & Lardner LLP. His practice encompasses complex litigation in federal and state courts. Mr. Dougherty has experience in diverse subject areas including securities, white-collar defense, intellectual property, product liability, financial disputes, surety insurance, and criminal appeals. He has handled shareholder class actions under the Private Securities Litigation Reform Act, representation in connection with SEC and state enforcement matters, and government investigations and related civil litigation, all involving a variety of alleged wrongdoing. Mr. Dougherty’s clients have included publicly traded and private companies and their present and former officers and directors in the fields of health care, financial services, and consumer products, among other industries. He is a member of the Business Litigation & Dispute Resolution, Intellectual Property Litigation and Appellate Practices.

Michael B. Kirwan, Foley Lardner, Corporate Governance lawyer, Venture Capitalism matters Attorney

Michael B. Kirwan is a partner and business lawyer with Foley & Lardner LLP. He counsels business clients on securities, acquisitions, financings and corporate governance matters. Mr. Kirwan has worked on numerous public and private offerings, including IPOs and follow-on offerings, represented many companies on their periodic reporting obligations and other matters before the Securities and Exchange Commission, represented special committees of various boards of directors, and handled a variety of business combinations and venture capital matters. He has significant...

Michael P. Matthews, Foley Lardner, False Claims Act Litigation lawyer, Securities Class Action Attorney

Michael P. Matthews is a partner with Foley & Lardner LLP and serves as chair of the Tampa Litigation Department and as chair of the firm’s False Claims Act Litigation group. As a member of the firm’s Government Enforcement, Compliance & White Collar Defense and Securities Enforcement & Litigation Practices, Mr. Matthews represents individual and corporate clients in a variety of government enforcement and securities litigation matters, including False Claims Act litigation, securities class actions, shareholder derivative actions, SEC enforcement matters,...