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Merck Defense Team not Exactly Small

Amid the many suits that have been brought due to its Vioxx product, Merck & Co. is in the process of building an expansive legal infrastructure.

In an effort to avoid being stuck with liabilities that some say could reach $18 million, Merck has already hired a handful of lawfirms.  This has come as a surprise to some as the company highly values its privacy, usually choosing to use its in-house lawyers.

Hughes Hubbard & Reed, a 300-lawyer New York law firm has been retained as the company's national counsel in the Vioxx suits.  Reed Smith, Baker Botts, Dechert, and Venable have also been hired according to court documents.  Merck could pay up to $100 million to these law firms in 2005 for litigation related to Vioxx, with as muc has $20 to $50 million going to the lead counsel.  Although Hughes Hubbard & Reed look to be in the driver's seat right now for that lead counsel position, analysts warn that the makeup of Merck's legal team will likely change when all is said and done.  Regardless of any changes, one thing is clear, Merck will not be suffering from a shortage of lawyers any time soon.

Companies Choosing to Settle More and More

The New York Law Journal reported on Tuesday that a pattern has emerged among companies with the recent crackdown on corporate misbehavior.  They wish to settle.

Attorneys say that, unlike individuals accused of wrongdoing, companies believe that a quick settlement allows them to rebound from the allegations quicker than long, publicized court battle does.  Even if lawyers think they have a strong case, companies are choosing to settle.  Not only does the market view litigation adversly, regardless of the outcome, but due to the crackdown on short leash the government has given companies, companies are more likely to lose battles that they may have won in the past.

Not only are companies choosing to settle more frequently, but they are choosing to do so at the earliest possible chance, many times, immediately followowing the filing of a complaint.  If a company chooses to not settle immediately, it risks indictment and certain bankruptcy. 

Sarbanes Oxley Survives First Challenge

In the first court test of the Sarbanes Oxley Act U.S. District Judge Karen O. Bowdre rejected Richard Scrushy's argument that the act is unconstitutionally vague and should not be a part of the indictment accusing him of extensive fraud while he was cheif executive at HealthSouth.

Attorney's for Scrushy claimed that by using such phrases as "willfully certifies" and "fairly represents," the act makes it virtually impossible for corporate officers to tell if they are complying with the law and it is therefore unconstitutionally vague.  In rejecting Scrushy's argument, Bowdre stated that jurors, not a judge should decide the key issues raised in Scrushy's case.

"If the jury finds that the reports did not fairly present, in all material aspects, the financial condition and results of operations of HealthSouth, the jury must then determine whether Mr. Scrushy willingly certified these reports knowing that the reports did not comport with the statute's accuracy requirements," she wrote.

Originally indicted last year, Scrushy became the first  CEO charged under the Sarbanes Oxley Act.  When asked to comment on Bowdre's ruling, the defense admitted that they were not surprised and stated that do not intend to appeal the ruling.

US Airways & GE Reach Financing Agreement

It was reported on Friday that US Airways and General Electric, the airline's largest creditor, have agreed on an aircraft leasing and financing deal that will free up $140 million in cash for US Airways in an effort to heal the struggling airline

The agreement will also reportedly save US Airways, which remains under bankruptcy court protection, more than $80 million per year in the future.  As part of the deal, US Airways will also be able to lease up to 31 new 70 and 90-seat regional jets over the next three years from GE in an effort to jump start the airline's stalling strategy to expand its flight offerings to smaller markets. 

In order for the deal to take effect, however, US Airways will have to jump a few hurdles.  First off, it must acquire apprvoal for the deal from the bankruptcy court by December 17.  Once approval is obtained, the airline then must then achieve certain cost cutting requirements by mid-January.  This may be difficult considering much of the savings will need to come from concessions made by the airline's employees.  Finally, the agreement requires the airline to step out of bankruptcy court protection by June 30.

Oracle Bid Once Again Rejected

Although the holders of a majority of PeopleSoft's shares voted in favor of Oracle Corp.'s $9.2 million takeover bid, PeopleSoft's board once again rejected Oracle's offer.

Oracle's bid recieved support from from holders of nearly 61% of PeopleSoft's shares.  Regardless of the support from the shareholders, Oracle was unable to take possession of the shares due to PeopleSoft's refusal to lift its poison pill provision.  If Oracle were to take posession of the shares the provision would flood the market with newly issued shares, diluting Oracle's ownership stake and making acquisition of PeopleSoft pohibitively expensive.  PeopleSoft has expressed a willingness to lift the poison pill, but only if the price is right.

In order to prevail now, Oracle must either raise its $24-a-share bid, proceed with what would likely be a lengthy proxy battle or get help from the Delaware judge ruling on the legality of PeopleSoft's poison-pill antitakeover defense.  Of course, at the rate things have been going, Oracle is also probably seriously considering just walking away and seeking out other acquisitions.  In an efffort to avoid that from becoming necessary, Oracle has extended its deadline for the $9.2 million offer to December 31.

CEO of SC Johnson & Sons to Lead Nike

The Milwaukee Journal Sentinel reports that William Perez, current president and CEO of Racine, Wis.-based S.C. Johnson & Sons, will become the new president and CEO of Nike, the world's dominant athletic shoe producer.  He takes over for Phil Knight, the current president and CEO who co-founded the company in 1968 and sold shoes out of his car.  Perez was a salesman for S.C. Johnson starting 34 years ago and worked his way up to the top positon in the company in 1997.  S.C. Johnson will return to family leadership, with current chairman H. Fisk Johnson, son of former CEO C. Samuel Johnson, taking over the reins of the consumer products company.  Perez's salary will be $1.35 million, with bonuses of up to 125 percent of his salary.

Wisconsin Statute Automatically Pierces Corporate Veil

On November 10, in the case of Rayner v. Reeves Custom Builders Inc., the Wisconsin Court of Appeals, held that the consumer protection provisions of Wis. Admin. Code sec. ATCP 110 autmotically pierced the corporate viel due to the way in which the code defines "seller."

In the case, Reeves Custom Builders, Inc had been hired by the plaintiffs to perform remodeling services on their house.  The plaintiffs became dissatisfied with the work and eventually sued not only the company itself, but Arthur and Beth Reeves in their capacity as owners and officers of the company.

Arthur and Beth claimed that they were protected from being held personally liable under the theory of limited liability.  The court, however, saw it differently.  In making its decision, the court relied on the consumer protection provisions in the Wisconsin Administrative Code.  The section the court relied on defined sellers as "persons engaged in the business of making or selling home improvements and includes corporations...and any other form of business organization or entity, and their officers, representatives, agents and employees."  The section also made sellers personally liable for their actions.  The court held that the definition of seller in the section specifically pierces the corporate veil and held Arthur and Beth personally liable due to the fact that they were officers of the company.

While the Reeves claimed this holding would abrogate centuries of corporation limited liability law and give plaintiffs carte blanche to sue even mere employees, the court disagreed.  The court pointed out that its holding only made individuals liable as sellers when they commit violations of their own volition and not for any wrongdoing that can be imputed to the corporate entity.

While the case certainly weakens corporate veil, it is important to note that the court didn't come to its decision lightly.  While the court held felt the legislature had intended to pierce the corporate veil with the statute, it seems as though it may not have come to the same decision if it didn't think it was making the right policy decision.

New Section of Sarbanes Oxley to Go Into Effect

Law.com reports that many public companies are racing to with setion 404 of the Sarbanes Oxley Act which goes into effect today.  The section requires requires companies to set up and test internal financial financial controls for items such as cash balances and inventory in an effort to ensure accuracy.

In addition to the adopting internal controls, companies must also submit to regular financial audits and retain outside auditors to check and approve their internal controls.   Essentially this means that companies must now submit to two audits, one for the numbers and one for the controls.

While the cost of compliance will likely become more reasonable as companies become more familiar with section 404, on average, public companies are expected to pay an average of $3.1 million to comply with section 404 this year.

Marsh & McLennan to Lay off 3,000 Workers

The associated press reported yesterday that the world's largest insurance brokerage business, Marsh & McLennan Cos., has announced that it will lay off 3,000 employees, about 5% of the company's global workforce.

The move comes as the company scrambles to deal with the fallout from civil charges filed last month by New York Attorney General Elliot Spitzer alleging improper conduct by the company.  The claims allege that the company cheated its clients by rigging bids for insurance contracts and steering businesss to firms that paid Marsh contingent commissions, payments that Spitzer has compared to kickbacks.

Since Spitzer announced his investigation on October 14, the value of the Marsh's shares has fallen by more than 40%.  Third-quarter profits of the company also fell to $21 million, down 94% from the $357 million profit the company reported in last year's third quarter.  Earnings of the company also have fallen drastically as the result of a $232 million reserve that that was created to settle the Spitzer charges.

The company said most of the 3000 layoffs would come in its risk and insurance business, but addmitted that other areas of the company such as its Putnam asset management subsidiary and its Mercer human resources consulting businesses would be affected by the layoffs as well.  The company also noted that, unfortunately, more layoffs may follow in the future.

News Corp. Protecting Against Takeover

News Corp. took steps on Monday in an effort to protect against a possible hostile takeover from the U.S. Cable Company Liberty Media.

Last week, Liberty Media began a transaction that could increase its voting share in News Corp from 9% to 17%.  This move raised speculation that Liberty's chairman, John Malone, might be planning a takeover bid of News Corp.

In response to Liberty's actions last week, News Corp. announced on Monday that it would give its shareholders the right to buy one News Corp. share at half price for each share they own if any party buys a 15% interest in the company.  This offer, known as a "poison pill" would make it much more expensive for Liberty to purchase the shares it would need to in order to be successful in a takeover effort.

A spokesman for News Corp. said it was too early to tell what Liberty's intentions were, but that the company was not treating them as friendly.  The poison pill provision should help protect News Corp. if Liberty's intentions do turn out to be in conflict with News Corp.'s interest.

Could the Drama Almost be Over?

Earlier this week, Oracle Corp. raised its hostile takeover bid of rival PeopleSoft, Inc. from $21 a share to $24 a share.

In raising its bid, Oracle warned investors that it will walk away from the takeover attempt if a majority of PeopleSoft’s shareholders or its board doesn’t accept the new offer by November 19. Regardless of whether Oracle’s offer is accepted, it appears that Oracle’s 17 month pursuit of PeopleSoft may finally be coming to an end.

Most analysts believe that increasing the bid was done in an effort to eliminate the issue of PeopleSoft’s “poison pill” provision. The legality of the poison pill provision (a provision that makes PeopleSoft stock more expensive for companies attempting to takeover the company) is currently under review in Delaware court. During testimony in the case, PeopleSoft directors hinted that the company would consider not applying the provision if Oracle’s purchase price was more acceptable.

The purchase price was also likely increased in an effort to appeal directly to PeopleSoft’s shareholders. As of Friday, holders of only 5% of the outstanding shares had agreed Oracle's takeover. Only time will tell if Oracle’s new bid will cause holders of an additional 45% of the shares (Oracle needs over 50% of the shares to take over control) to sell their shares before Oracle’s November 19 deadline.

Shareholders' Rights Increase Yet Again

On Wednesday, the Ohio Supreme Court ruled in Dazinger v. Luse, 103 Ohio St. 3d 337 (2004), that shareholders have the right to inspect the corporate records of a wholly owned subsidiary of a corporation they own stock in regardless of whether the shareholders own stock in the subsidiary itself.

In the case, the Dazinger's owned stock in Croghan Bancshares, Inc. The company owned only one asset, Crogan-Colonial Bank. The bank's sole shareholder, was the company, making it a wholly owned subsidiary of the company. The company's sole source of income came from dividends paid by the bank and although the bank and the company were legally two different entities, they shared the same officers and directors. When the Dazinger's demanded to review the corporate minutes of both the company and the bank they were provided only the minutes of the company. The company claimed that the Dazinger's had no right to view the bank's records since they weren't shareholders of the bank.

The court, relying on Ohio common law, and citing such high profile corporate scandals such as WorldCom and Enron, held that shareholders have the right to inspect the records of a wholly owned subsidiary of the of the corporation in which they own stock when the parent corporation so controls and dominates the subsidiary that the separate corporate existence of the subsidiary should be disregarded. Focusing on the fact that the bank and company shared the same officers and directors the fact that all of the company's income came from dividends paid by the bank, the court felt this was such a case where the separate existence of the subsidiary should be disregarded and ruled that the Dazinger's had a right to inspect the bank's records along with the company's records.

Corporations to Benefit from New Tax Bill

On Monday, the Senate approved and sent to President Bush the American Jobs Creation Act of 2004. The bill repeals an export subsidy that had been deemed illegal by the World Trade Organization (WTO) and replaces it with an even bigger tax break for U.S. Companies.

After the export subsidy was deemed illegal by the WTO, the European Union began slapping tariffs on U.S. goods last March. The tariff rate, which has been steadily increasing, now stands at 12% and has certainly been felt by U.S. companies. Although the main goal of the bill is to repeal the export subsidy in an effort to eliminate the tariffs, many other benefits will be seen by U.S. corporations.

The bill cuts the top tax rate on manufacturers who engage in “domestic production” from 35% to 32%. Not only does the bill reduce the top tax rate, but it defines “manufacturers” more broadly, which will increase the number of companies that qualify for the tax break. The reduction which will be phased in over the next 10 years will save an estimated 200,000 companies $76.5 billion.

The bill will also affect small companies as well. It increases the small business expensing limit from $25,000 to $100,000 through 2007 and changes rules for S-corporations, the largest of which is an increase from 75 to 100 in the maximum number of shareholders an S Corporation is allowed to have.

Corporate Members Right to Company Documents

On September 29, in Lang v. Western Providers Physician Organization, Inc., the Supreme Court of South Dakota addressed the issue of the extent to which members of a non-profit corporation have a right to view documents, books, and records relating to the business concerns of the corporation.

In the case, physician members of Western Providers Physician Organization (WPPO) became concerned after they discovered that WPPO had failed to file annual reports since 1999 and was not in good standing as a South Dakota Corporation. In order to investigate the management of the company, the members eventually requested to have unlimited inspection of the company’s documents, which WPPO refused to provide.

The Court held as long as members of the company have a “proper purpose” for inspecting company documents the company must furnish the requested documents. The Court also held that members will be presumed to have a “proper purpose” to inspect company documents as long as they give a reason for the inspection. Once a reason for inspection is given, the burden is on the company to prove there is an “improper reason” in order to prevent the members from inspecting the documents. Finally the court held that not only does providing a reason give members the right to view documents relating to that reason, but it gives them the right to view all documents "necessary to make an intelligent and searching investigation."

Although other states have previously adopted the position the South Dakota Supreme Court took in Lang, the case still stands as an example of the increasing amount of constraints that are being placed on corporation in today’s business world.

Dismissal of PeopleSoft President Could Help Oracle’s Takeover Efforts

PeopleSoft fired its president and chief executive, Craig A Conway, on Friday, in a move many believe is related to Oracle’s hostile takeover efforts of PeopleSoft.

The board cited a “loss of confidence” in Mr. Conway as their reason for dismissal, but many analysts believe the reason for dismissal was to remove a roadblock in Oracle’s takeover efforts. Conway was a vigorous opponent of the takeover since the bid was first made in June 2003. Company director, George Battle, however, maintains that the reasons dismissal were performance related. “There is no smoking gun, no accounting regularities,” he says. “It was a matter of the board losing confidence in Craig.”

The board named David Duffield, founder and chairman of PeopleSoft, as its new chief executive and appointed Kevin T. Parker and W. Phillip Wilmington as new co-presidents. Although Conway’s dismissal certainly removes an opponent to the Oracle takeover efforts, some analyst believe that the naming of Duffield as chairman indicates that Conway’s dismissal was not done in an effort to pave the way for Oracle’s takeover and that the board remains opposed to an Oracle takeover.

Regardless of the true reason for Conway’s dismissal and Duffield’s appointment, Oracle still is far from completing its takeover of PeopleSoft. Thursday, it was announced that PeopleSoft’s earnings for the quarter would be stronger than expected and Friday shares of PeopleSoft’s rose to $22.83, $1.83 higher than Oracle’s current $21 per share bid. Oracle will also be in court today attempting to remove a poison pill provision which, if allowed to remain, would make purchasing a majority of PeopleSoft’s stock, and thus taking over the company, prohibitively expensive.

Foreign Companies Fleeing U.S. Market Citing Sarbanes-Oxley

On Monday, the Wall Street Journal reported that European companies listed on the U.S. stock market are leaving the market to avoid having to comply with what they believe are unreasonable requirements of the Sarbanes-Oxley Act.

One such company, Intershop Communications AG, recently decided to depart the U.S. market reporting that complying with Sarbanes-Oxley would cost the company over $600,000 in extra accounting and lawyers' fees annually. Many other European companies are finding themselves in the same position. While thirteen foreign corporations continue to be listed on the NASDAQ, ten foreign corporations are in the process of leaving voluntarily. The number of foreign corporations listed on the NYSE is also decreasing as the number listed this year (eight) on the NYSE is half of last year's number.

The foreign corporations that have decided to leave the U.S. market to avoid having to comply with Sarbanes-Oxley have discovered leaving the U.S. market itself is no easy task. Currently, the only way a foreign corporation can avoid Sarbanes-Oxley, as well as other U.S. regulations, is to deregister with the SEC. In order to deregister, a foreign company must prove that it has fewer than 300 U.S. shareholders. Even if a small percentage of a foreign company’s stock is held by U.S. shareholders, proving the number of shareholders can be extremely difficult. In fact, doing so took Intershop over eight months even though less than 5% of its stock was held by U.S. shareholders.

Fortunately, the SEC says it is considering making it easier for foreign corporations to deregister. If a group of European industry associations have their way, the percentage of stock held by U.S. shareholders will the determining factor instead of the number of U.S. shareholders, something they believe is much easier to prove. No matter what changes occur, if any, it is clear that the number of foreign corporations listed on the U.S. markets is likely to continue to decrease in the coming years.

Weinstein Action Dismissed

Holding there was no cause of action for aiding and abbetting a breach of fiduciary duty and refusing to recognize the claimants' "holder action", a Georgia court on Friday dismissed an action (The Wienstein action) against Arthur Anderson, SSB and WorldCom Directors concerning their involvement with WorldCom.

The case was brought in June 19, 2002 by a class of shareholders who purchased WorldCom stock prior to April 29, 1999 and held the stock through June 25, 2002 (the date WorldCom announced it would undertake a massive restatement of its financial statements) because misrepresentations made to them convinced them that the stock was a good investment. The claim asserted that a group of WorldCom Directors breached their fiduciary duty to the shareholders by failing to institute or enforce proper corporate governance procedures and that all defendants (SSB, Arthur Anderson and the Directors) aided and abetted WorldCom's breach of fiduciary duty because they knew that WorldCom's financial statements were false and did nothing to correct the problem.

The court dismissed the case on two grounds. First, the court dismissed the aiding and abetting claims against all defendants by holding that Georgia did not recognize a cause of action for aiding and abetting a breach of fiduciary duty. The court then went on to dismiss the breach of fiduciary duty claims against the WorldCom directors on the grounds that Georgia did not recognize "holder actions." The court explained that a "holder action" is an action in which plaintiffs allege that material misrepresentations caused them to hold on to stock they acquired before the alleged misrepresentations occurred. The court felt that proving reliance on misrepresentations that occur after stock has been acquired would be virtually impossible and therefore such claim could not be maintained.

Weinstein v. Ebbers (In re Worldcom Secs. Litig.), 2004 U.S. Dist. LEXIS 18592

Federal Court Greenlights Oracle's Hostile Takeover of Wounded Duck, PeopleSoft, Inc.

Last week Chief U.S. District Judge Vaughn Walker put an end to the U.S. Department of Justice's attempt to block Oracle Corp. from acquiring rival software company PeopleSoft. In rendering his decision, Walker rejected the government’s position that allowing the takeover would hurt competition.

According to the Wall Street Journal, Oracle is not interested in acquiring PeopleSoft for its sale of new software. Instead, Oracle is mostly attracted to the $1.2 billion that PeopleSoft Customers pay annually for software upgrades and support. Revenue based on upgrades and support has been rising even as PeopleSoft's sales of new software have decreased.

Oracle's takeover plan includes drastically cutting PeopleSoft spending by cutting over 6,000 PeopleSoft Jobs, and severely limiting research and development and marketing at the company. However, it remains unclear as to whether this plan will be successful as PeopleSoft customers are already forcing Oracle to expand its promises of support for PeopleSoft products.

While the Federal Court's decision last week may have been a big step forward in Oracle’s attempt to acquire PeopleSoft, it appears that Oracle still has a little work to do before the takeover becomes a reality.

Attorney-Client Privilege Being Honored Less Frequently in Corporate Cases

As the world of corporate governance becomes increasingly more scrutinized, corporate lawyers are learning what once may have been protected under the attorney-client privilege may not be anymore.

While the public's need for "confidential" information has been growing recently in the area of corporate law in general due to corporate scandals such as Enron, the difficulty in asserting the privilege is most pronounced in cases involving in-house corporate lawyers (lawyers employed by a corporation directly as opposed to being employed by a law firm). Lawyers experienced with the scenario claim that the problem is that in-house lawyers typically hold multiple responsibilities and are relied on not only to render legal advice but to provide valued business wisdom as well. Because of their multiple responsibilities, it is not always clear when they are rendering legal advice, which is protected, as opposed to business advice, which is not.

The problem is further complicated by technology. As e-mail becomes more and more popular as a means of communication, maintaining confidentiality surrounding legal advice rendered becomes more difficult as most corporations do not take the steps necessary to protect the confidentiality of their e-mails.

While these recent developments have made it more unclear as to when the attorney client-privilege can be asserted in corporate cases, one thing is clear, courts are less likely to honor the privilege now more than ever.

Delaware Court Hears Ovitz’s Summary Judgment Plea

According the the associated press, former Walt Disney Co. president Michael Ovitz has asked that he be removed from the list of defendants in a shareholder suit by making a summary judgment plea to a Delaware court on Wednesday.

The shareholders brought the suit against the Disney board of directors and Ovitz claiming that Ovitz’s $140 million severance package was too large based on his limited tenure with the company (just over one year) and that Disney CEO, Michael Eisner, gave Ovitz the generous package solely based on the duo’s longstanding friendship.

The shareholders allege that by allowing the severance package, the board of directors violated their duty to see that Ovitz’s severance payments were reasonable and that Ovitz, as a director, breached his fiduciary duty to the shareholders by accepting the unreasonably large severance package.

Ovitz’s attorney, Mark Epstein, maintains that other executives and directors besides Eisner were involved in structuring Ovitz’s severance package and that Ovitz should not be held liable for any improper decision they may have made.

Pfizer to pay $369 Million in Asbestos Settlement

CNN has reported that Pfizer Inc. has agreed to take a third quarter pretax charge of $369 million for a settlement with plaintiffs in an asbestos claim.

The settlement marks an end to a 25 year battle in which the a large group of claimants allege that they were harmed by products containing asbestos and other minerals once sold by Pfizer subsidiary, Quigley. Under a reorganization plan that is intended to settle all claims, Quigley will file for Chapter 11 bankruptcy if 75% of the claimants approve of the move. After filing for bankruptcy, Quigley will remain in existence for the sole purpose of managing asbestos related claims.

If approved, the reorganization plan will create a trust that will pay out all pending and future claims. Pfizer will contribute $405 million to the trust over 40 years through a note as well as $100 million from insurance payments and will forgive a $30 million loan to Quigley.

While it appears that the settlement will bring an end to this 25 year old dispute, it certainly does not mark the end to Pfizer’s involvement in asbestos related claims in general as Pfizer and Quigley are named in over 171,000 lawsuits claiming personal injuries caused by exposure to asbestos, silica or mixed dust.

Netflix Shareholders File Suit Against Company Executives

An investor fraud suit was recently filed against the popular online DVD rental company, Netflix in a California Federal Court. The complaint was filed against a number of the company's officers alleging that the company misrepresented its degree of growth in its financial statements during 2003-2004 and this misrepresentation concealed the number of subscribers the company had been losing throughout the year.

The complaint was filed in the U.S. District Court for the Northern District of California on behalf of a class of shareholders who purchased Netflix stock between October 2003 and July 2004. During that time Netflix used a method of calculation for customer churn rate which differed from the method that most publicly traded companies use. By using this method, the shareholders claim that Netflix masked the number of subscribers the company was losing throughout the year.

Although Netflix maintained throughout the year that it was experiencing all time low customer churn rates, the earnings release the company released on July 15 revealed that the company had in fact experienced a much higher churn rate and was attracting far fewer new subscribers than it had in the past. As a result of this earnings release, the value of Netflix stock fell from $32 to $23.03, a decline of 38%.

Complaint Filed by Non-Attorney Corporate Officer a Curable Defect

The California Court of Appeals recently ruled that a complaint filed by a non attorney corporate officer on the behalf of his corporation is not automatically void although corporations must be represented by a licensed attorney under California law.

The dispute arose when CLD Construction, Inc. alleged that the City of San Ramon had breached a contract between the two for the construction of a skateboard facility. In an attempt to initiate the suit, CLD's owner filed a complaint against the City without obtaining a lawyer’s signature on the complaint. Under California common law, corporations, unlike individuals, must be represented in court by a licensed attorney. Unfortunately, by the time CLD realized the mistake it had made by not including a lawyer's signature on the complaint, the statute of limitations on its claim had passed. Because the statute of limitations had passed without a valid complaint being filed, the city requested that the case be dismissed.

While the court supported the common law that corporations must be represented by an attorney, the court felt that dismissing a corporation that initially appears via a non attorney officer or shareholder without giving the corporation an opportunity to obtain an attorney would be unfair.

In order to give CLD a second chance, the court ruled that the mistake CLD had made was a "curable defect." Because the mistake was curable, CLD's complaint was not void and the court could grant the company additional time to amend the complaint to include an attorney's signature which would allow CLD's case against the city to continue.

Senate and Congress at Odds Over Expensing of Stock Options

A group of Senators led by Senator Fitzgerald (R-IL), recently introduced legislation in an effort to protect the powers of the Financial Accounting Standards Board (FASB). The legislation was introduced in response to a bill Congress approved which blocked a new FASB rule that would require corporations to report the granting of stock options to employees as expenses.

The FASB's first attempt at requiring corporations to expense stock option compensation in the early 1990's was unsuccesful as anti-reform intersts blocked the proposal by threatening to dismantle the FASB. Another effort to adopt the requirement in 1994 was blocked by Congress. Sen. Fitzgerald feels that in the wake of recent corporate scandals such as Enron (the top 29 executives at Enron cashed in on over $1.1 billion in stock options before running the company into bankrupcy), now is the time to give the FASB the power to reform corporate governance in an effort to improve corporate accounting practices and to protect shareholders.

Because corporations currently are not required to report the granting of stock options to employees, they can essentially provide compensation to employees without affecting the company's operating earnings. According to a Bear Stearns analyst, the 2003 reported operating earnings of the 100 largest Nasdaq-traded companies would have been 44 percent lower if they were required to expense stock option compensation. Even Enron executive Jeffrey Skilling, in a 2002 Senate hearing, admitted that not requiring stock option expensing allowed corporations like Enron to inflate profitability on income statements.

While the answer to the question of whether the FASB's proposed rule will actually provide additional protection for shareholders is certainly not clear, it is clear that the Senate and the House are on opposite sides of the debate.