Akin Gump’s Kodak inquiry casts doubt on shareholder claims – which Akin Gump defends
(Reuters) – On July 29, just a day after the U.S. International Development Finance Corporation announced a potential $ 765 million loan to Kodak to develop pharmaceuticals, the company hired Akin Gump Strauss Hauer & Feld to cope with a flood of requests for documents on the case. Kodak’s share price had skyrocketed after news of the loan leaked and, as media raised questions about Kodak directors’ deals and executive stock option grants of Kodak, the company, as Akin Gump explained in a September 15 report on the Kodak board of directors, needed help responding to the Securities and Exchange Commission, the Financial Industry Regulatory Authority and various congressional committees.
Kodak’s board of directors subsequently formed a special committee of two independent directors to determine whether insiders of the company had violated securities laws or their obligations to shareholders in connection with option grants and trading in shares during the negotiation of the loan and after its announcement. The special committee hired Akin Gump – who had not previously served as Kodak’s corporate or securities legal advisor – to conduct an internal investigation.
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Akin Gump’s assignment was to conduct interviews and review documents to answer five questions. Kodak CEO Jim Continenza and board member Philippe Katz engaged in insider trading when they bought Kodak shares a month before the DFC loan announcement, while Kodak executives were pushing for a deal with the government? Did the members of the Kodak board of directors breach their obligations when they approved the grant of stock options to Continenza the day before the announcement of the DFC loan? Did the company violate SEC regulations on fair disclosure in a July 27 email notifying media in its hometown of Rochester of upcoming big news involving government officials? Did two major Kodak shareholders sell Kodak shares after DFC’s announcement based on confidential information? And Kodak board member George Karfunkel illegally donated 3 million Kodak shares to a charity he founded when the stock price soared ?
These questions are of considerable interest to the Plaintiff Bar. The US government ended up canceling the loan offered by Kodak, causing the company’s stock price to drop. The Akin Gump report points out that Kodak is a private company, with a majority of shares held by asset management company Southeastern and a few significant shareholders with seats on Kodak’s board of directors or with close ties to them. members of the Kodak Board of Directors.
But as I told you last month, Kodak faces shareholder securities fraud class action in New Jersey federal court over the DFC flap. A second potential class action lawsuit has been filed in federal court in Manhattan. And other complainant companies have indicated that they are considering shareholder derivative actions alleging that board members have breached their obligations to shareholders.
Akin Gump, as I will explain, concluded that Kodak executives, board members and shareholders did not violate any laws and did not violate any obligations. His investigative documents and analysis should be of great help to Kodak in shareholder litigation, especially since the company is represented in this litigation by none other than Akin Gump.
The firm declined to provide a statement responding to my question about the representation of both the special committee of the Kodak board of directors in an internal investigation and the company in a shareholder dispute. I also emailed the plaintiffs lawyers Singer Steven of Saxena White and James Cecchi of Carella Byrne Cecchi Olstein Brody & Agnello on the Akin Gump report and the company’s dual role, but had no response.
It should be noted that there is precedent for simultaneously conducting an internal investigation and defending a business in civil litigation. King and Spalding, for example, assisted Jenner & Block in his internal investigation GM’s handling of faulty ignition switches after years of the company representing the company against plaintiffs’ ignition switch lawsuits.
So how will Akin Gump’s report help in the shareholder litigation? On the one hand, I suspect it will sharpen the attention of complainants. The lawsuit in the New Jersey case, for example, raises allegations about most of the issues that Akin Gump investigated for the Kodak board of directors. The report, however, suggests that several are dead ends. The June stock purchases by the CEO and a board member, for example, took place before Kodak insiders were certain they were going to get a DFC loan and were reviewed and approved. by the Advocate General. It will not be easy to prove the fraudulent intention of these transactions. The report also said the early leak of DFC loan news was simply a mistake made by a junior Kodak public relations employee who edited an email to remove an embargo on the upcoming DFC ad. This does not appear to be a good basis for a securities fraud claim.
Akin Gump was more equivocal about the gift of board member Karfunkel to Congregation Chemdas Yisroel, which was worth nearly $ 100 million at the time of the donation. The company concluded that the giveaway did not appear to violate securities laws or Kodak policy, but covered that finding by noting that it was “based on limited legal precedent and depended on whether the facts were such. that they have been described to us “. The giveaway, Akin Gump said, “was not advisable from a corporate governance perspective.” The company recommended changes to Kodak’s policies and procedures on such donations “to avoid putting the company in a position where its officers and directors could be perceived to have potentially committed insider trading.”
The report devoted its most in-depth analysis to the potential liability of option granting to CEO Continenza and other Kodak executives, perhaps a hint that Akin Gump is planning options claims like the probable objective of shareholders. Akin Gump examined both whether Kodak’s statements about executive compensation, including the granting of options, could be interpreted as false under securities laws as well as the potential exposure of the board of directors. for the approval of option grants one day before the announcement of the DFC loan.
The defense firm determined that the options were promised long before the DFC loan was outstanding as part of a long-term compensation plan. And the timing of the options’ approval by the board was unrelated to the announcement of DFC’s potential loan, according to Akin Gump.
“The evidence overwhelmingly demonstrates that long before the start of the pandemic and related relief efforts, Kodak intended to come up with options to ‘adjust’ Continenza and streamline executive compensation in general,” says The report. So, said Akin Gump, the breach claims against Kodak’s board of directors are unlikely to survive, given the legitimate business purpose of the grants, the approval of the awards by the attorney general. Kodak and the application of the business judgment rule.
At the very least, the report gives shareholders some insight into the arguments they are likely to see in a future motion to dismiss their lawsuits. Akin Gump made a case for Kodak in the board’s internal report. The same can be expected in shareholder litigation.