SUPREME COURT UNANIMOUSLY RULES THAT SEC SOUGHT DISGORGEMENT IS A “PENALTY” SUBJECT TO A FIVE-YEAR STATUTE OF LIMITATIONS

2 minute read

In Kokesh v. SEC, the Supreme Court determined that the five-year statute of limitations for any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise” in 28 U.S.C. § 2462 applies to claims for disgorgement sought by the SEC as a sanction for violations of the federal securities laws. On October 4, 2009, the SEC brought an enforcement action against Kokesh based on his alleged violations of the securities laws between 1995 and 2009. After a jury found Kokesh liable, the district court imposed a civil penalty based solely on Kokesh’s conduct after October 4, 2004, concluding that the five-year statute of limitations in 28 U.S.C. § 2462 precluded any civil penalty based on Kokesh’s conduct five years before the SEC brought suit. The district court, however, ordered Kokesh to disgorge $34.4 million based on violations going all the way back to 1995—with $29.9 million of that amount resulting from violations before October 4, 2004—because the district court reasoned that disgorgement is not a penalty to which 28 U.S.C. § 2462 applied. The Tenth Circuit affirmed, and the Supreme Court granted certiorari.

Justice Sotomayor, writing for a unanimous court, concluded otherwise. She relied on a 1892 Supreme Court case that defined “penalty” as “punishment, whether corporal or pecuniary, imposed and enforced by the State, for a crime or offen[s]e against its laws.” Huntington v. Attrill, 146 U.S. 657, 667 (1892). From this definition, Justice Sotomayor distilled two principles. First, a penalty redresses a wrong to the public. Second, a penalty is intended to punish and to deter others from committing similar offenses, as opposed to compensating the victim. The Supreme Court reasoned that the disgorgement sought by the SEC is a remedy for violations of public laws against the United States, as opposed to violations against the aggrieved individual. Furthermore, disgorgement is punitive because it is primarily intended to deter violations of the federal securities laws “by depriving violators of their ill-gotten gains.” The Supreme Court noted that in many instances the disgorged funds do not compensate the victims, such as instances when it is not feasible to identify them. Based on the two principles distilled from the definition of penalty, the Supreme Court concluded that SEC sought disgorgement falls within the five-year statute of limitations in 28 U.S.C. § 2462 because disgorgement goes beyond compensation and is intended to punish wrongdoers for violating public laws. Kokesh v. SEC, No. 16-529, 2017 WL 2407471 (2017).

TEXAS ENFORCEMENT OF DELAWARE FORUM-SELECTION CLAUSES IN STOCKHOLDER DISPUTES—THE FIRST SHOE DROPS

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In Pinto Technology Ventures, L.P. v. Sheldon (opinion here), the Supreme Court of Texas enforced a forum-selection clause in an amended shareholder agreement, requiring much of the underlying equity-dilution dispute to be litigated in Delaware. The Court upheld the clause’s validity and explored its scope, in terms of the claims and issues covered, and its enforcement by and against nonsignatories. Because the forum-selection clause appeared in a shareholder agreement, the Court had no cause to address the looming issue in this area—the enforcement by courts outside Delaware of a clause in a corporation’s bylaws, unilaterally adopted by its board of directors, that mandates exclusive jurisdiction in Delaware courts for all internal corporate claims, including all derivative actions, pursuant to the recently enacted Section 115 of the Delaware General Corporation Law.

Sheldon and Konya asserted a variety of claims against the majority shareholders and the officers and directors of their company, IDev, arising from what they contended to be the wrongful dilution of their equity interests. Both had signed iterations of the IDev shareholder agreement. The first two versions of that agreement designated Harris County, Texas, as the forum for any disputes “arising out of” the agreement, but the last three versions prescribed Delaware as the exclusive forum. 

Sheldon and Konya had not asserted claims for breach of the shareholder agreement itself, urging statutory and common-law tort claims instead. Nevertheless, the Supreme Court held their dispute fell within the “arising out of” language of the forum-selection clause. It rejected the strict “but for” reasoning of the court of appeals majority that, because their claims derived from statute and common law, they could not “aris[e] out of” the amended shareholder agreement. The Supreme Court stated a desire to avoid “slavish aderence to a contract/tort distinction” and to prevent litigants from evading an agreed forum-selection clause through “artful pleading.” Focusing on “the factual allegations undergirding the [parties’] claims rather than the legal causes of action asserted,” the Court found “the existence or terms of the shareholder agreement are operative facts in the litigation,” and “but for” their status as shareholders and as parties to the shareholder agreement, Sheldon and Konya would not be aggrieved. The Court did note that, if the provision had been tied to “claims arising out of” the shareholder agreement, rather than the broader “disputes arising out of” the agreement, the result might have been different—a decision it reserved, however, for another day.
Next, the Court examined the extent to which the forum-selection clause should be enforced with respect to those who were not parties to the amended shareholder agreement. Sheldon had signed all but the most recent amended agreement. Konya, however, had signed only the first two versions of the agreement—the versions that specified Harris County, Texas as the exclusive forum—and therefore argued he was not bound by the amended versions that prescribed Delaware as the forum. Not so, said the Supreme Court. Every version of the agreement, including those signed by Konya, provided that it could be amended by agreement of the corporation and the holders of a majority of the voting stock. That protocol was followed in the subsequent amendments that adopted the Delaware-forum provision. And so, the Court said, Konya and Sheldon were bound whether they signed the later amendments or not.
Two of the IDev officer-defendants, however, had not signed any version of the shareholder agreement in their individual capacities. Based upon a strict reading of the agreement—which said it conferred no rights on anyone other than the parties—the Court found neither of them could enforce the forum-selection clause against Sheldon and Konya (even if other parties to the case could). In so doing, the Court avoided deciding whether Texas would adopt the “transaction-participant doctrine,” whereby an employee of a party to a contract that contains a forum-selection clause can enforce that clause against another party, like Sheldon and Konya. That question will wait for another day.
So, too, must we await some future decision to learn Texas’s response to a Delaware-only forum-selection clause unilaterally adopted by a company’s board of directors and incorporated into that company’s charter or bylaws, all pursuant to Section 115 of the Delaware General Corporation Law. The Delaware Chancery Court approved such a board-adopted forum-selection clause in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), and two years later, that result was codified in 8 Del. C. § 115. That statute not only allows the boards of Delaware corporations to unilaterally insert Delaware-only forum clauses in bylaws, it also prohibits bylaw or charter provisions that establish exclusive jurisdiction in any forum other than the courts of Delaware. So, a company incorporated in Delaware, whose headquarters and operations are in Dallas, cannot adopt a bylaw that makes courts in Texas the exclusive fora for resolving intracorporate disputes. Neither can it adopt a bylaw that requires such disputes to be resolved only by arbitration, because that, too, would deprive shareholders of access to Delaware courts. Other states’ reactions to this Delaware-centric provision are still developing. Oregon’s Supreme Court, for example, has approved and accepted it, in Roberts v. TriQuint Semiconductor, Inc., 364 P.3d 328 (Ore. 2015). Texas has yet to weigh in.
In any event, legislative history seems to make clear that § 115 has no effect on shareholder agreements, and so provisions there that require disputes to be resolved in arbitration or in the courts of a state other than Delaware will survive. See Bonanno v. VTB Holdings, Inc., C.A. No. 10681-VCN, 2016 Del. Ch. LEXIS 24 (Del. Ch. Feb. 8, 2016). In Texas, the Supreme Court’s guidance and reasoning in Pinto will continue to control such cases.

The Mother of all Holidays!

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The Texas Family Code standard possession order (SPO) sets forth a schedule of weekend possession (first, third, and fifth weekends) each month both as to parents who live within 100 miles of each other, or who live more than 100 miles apart. But there is an approaching holiday that supersedes any conflicting weekend possession regardless of the distance the parents reside apart.

That holiday is Mother’s Day. The SPO provides that a mother who is a conservator of a child under the order shall have possession of the child beginning at 6 p.m. on the Friday before Mother’s Day, and ending at 6 p.m. on Mother’s Day. If that weekend is not one under the SPO that would have been her weekend, then she will pick the child up from the residence of the other conservator who would have had possession that weekend and must return the child to the same place at the end of the Mother’s Day possession.

But wait—there’s more, the same precedence is given to a conservator who is a father for Father’s Day weekend which falls in June of each year.

It is the declared public policy of this state to assure children have frequent and continuing contact with parents who have shown the ability to act in their children’s best interest, and a strong statement about the importance of each parent’s role is made by giving precedence to these special days.

Wishing everyone a Happy Mother’s Day (and an early Happy Father’s Day next month)!

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