Applied Micro Circuits Corp. is the latest company to agree to corporate governance changes as part of an overall settlement of a shareholder lawsuit.
The designer of microchips for optical networks was sued after it was accused of making a series of false statements during late 2000 and early 2001, which allegedly boosted its stock before crashing when the company's true financial condition was revealed in February 2001, according to the plaintiffs’ lawyers.
Its stock traded as high as $146.69 in March 2000 and is now trading below $4.
After three years of negotiations, the company agreed to add two new independent directors to its board, a requirement that two-thirds of the board and all board committees be composed of truly independent directors and a separation of the positions of chairman and chief executive officer in order to ensure that these positions will be held by different individuals.
Robbins
“I think it’s a growing trend,” says Darren Robbins, partner with the law firm Lerach Coughlin Stoia & Robbins LLP, referring to the number of companies that have recently agreed to corporate governance changes as part of a larger settlement with shareholders.
He certainly should know. In the past few years alone, Robbins successfully completed deals that called for governance changes at more than a half-dozen companies, including Sprint, Occidental Petroleum, E-Trade, JDN Realty, Prison Realty and Hanover Compressor.
He arranged most of these deals while with Milberg Weiss Bershad Hynes & Lerach LLP before the firm split up in May 2004. He along with William Lerach, Patrick Coughlin and John Stoia formed their new San Diego-based firm with 51 partners from their former firm.
The Hanover Precedent
The most significant deal he has made to date was the one with Hanover Compressor, which was completed in May 2003.
That lawsuit alleged that the defendants engaged in insider trading while causing Hanover to improperly report revenues and manipulate the value of its stock through "sham" transactions, which were similar to the now infamous off-the-books SPE deals used by Enron, according to the law firm. Hanover restated its financials in 2002 to correct the accounting misstatements contained in Hanover's 1999, 2000 and 2001 financial statements, the lawyers noted.
Under the settlement, shareholders, among other things, received the power to fill board of directors' seats. It was also the first time a company agreed to rotate its outside audit firm as part of a resolution of a shareholder class action.
The law firm likes to point out that the corporate governance reforms obtained by shareholders in the Hanover settlement provide for the implementation of a package of board reforms that extend far beyond the changes Congress enacted in the Sarbanes-Oxley bill.
What inspired the law firm to push for governance changes when negotiating settlements with companies? Robbins asserts that institutional investors have been demanding these changes.
Today Lerach Coughlin sort of specializes in this clientele. It has approximately 300 public pension funds and Taft-Hartley clients, including the California Public Employees’ Retirement System, California State Teachers’ Retirement System, and Washington State Investment Board, The Regents of the University of California, Tennessee Consolidated Retirement System and the United Brotherhood of Carpenters Pension Fund. “They demand these prophylactics,” Robbins asserts.
He explains that in a bankruptcy or near-bankruptcy situation, it’s extremely rare for investors to recover 100 cents on each dollar invested. It’s more common for them to fetch, maybe, 30 cents or 35 cents for each dollar invested. “They [my clients] say, ‘why do I want to find myself in a situation where I am chasing down a company to get thirty cents on the dollar when I can put in changes?” he elaborates.
So, pushing for governance reform is another way for investors to recover some of their losses. It turns out that the stocks of companies that have agreed to governance changes have surged in price.
For example, Hanover is up more than 50 percent since agreeing to its deal with shareholders in May 2003, while Sprint’s stock is up about 80 percent since Milberg Weiss Bershad Hynes & Lerach LLP completed its settlement with the company. “It may not result in a premium but the discount erodes,” says Robbins.
“This didn’t happen because the company fundamentally changes,” Robbins explains. “Sophisticated investors are willing to reinvest in these companies because of the controls and independence. Every major securities fraud was the result of a corporate governance failure.”
Monks
How does Robbins determine what governance changes to seek? He says his firm works closely with long-time governance activist Robert A.G. Monks, the founder of Lens Investment Management, Institutional Shareholder Services and The Corporate Library, and Richard Bennett, who has worked closely with Monks.
The group analyzes a company’s management functions as well as identifies where the company’s governance failures reside. Is it in the structure of the board? Is it not independent enough? Is it the way the board compensates top management?
Meanwhile, Robbins and his team are currently litigating with Massey Energy over its board independence as well as its environmental failures. In fact, a huge component of that case and another one is environmental.
Warns Lerach: “We’re a very tenacious firm.”
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