Lee D. Rudy

Partner

EDUCATION
  • Fordham University School of Law
    J.D. 1996
  • University of Pennsylvania
    B.A. 1992, cum laude
ADMISSIONS
  • New York
  • Pennsylvania
  • USDC, Eastern District of Pennsylvania
  • United States Court of Federal Claims

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Lee D. Rudy, a partner of the Firm, practices in the area of corporate governance litigation, with a focus on transactional and derivative cases. Representing both institutional and individual shareholders in these actions, he has helped cause significant monetary and corporate governance improvements for those companies and their shareholders.

Lee regularly practices in the Delaware Court of Chancery, where he served as co-lead trial counsel in the landmark case of In re S. Peru Copper Corp. S’holder Derivative Litig. (2011), a $2 billion trial verdict against Southern Peru’s majority shareholder, and In re Facebook, Inc. Class C Reclassification Litigation (2017), which forced Facebook and its founder Mark Zuckerberg to abandon plans to issue a new class of nonvoting stock to entrench Zuckerberg as the company’s majority stockholder. Lee also recently served as lead counsel in In re Allergan, Inc. Proxy Violation Securities Litigation (C.D. Cal. 2017), which was brought by a class of Allergan stockholders who sold shares while Pershing Square and its founder Bill Ackman were buying Allergan stock in advance of a secret takeover attempt by Valeant Pharmaceuticals, and which settled for $250 million just weeks before trial. Lee previously served as lead counsel in dozens of high profile derivative actions relating to the “backdating” of stock options.

Prior to civil practice, Mr. Rudy served for several years as an Assistant District Attorney in the Manhattan (NY) District Attorney’s Office, and as an Assistant United States Attorney in the US Attorney’s Office (DNJ), where he tried dozens of jury cases to verdict. Mr. Rudy received his law degree from Fordham University, and his undergraduate degree, cum laude, from the University of Pennsylvania. Mr. Rudy is licensed to practice in Pennsylvania and New York.

Experience
Ongoing Cases
  • On January 31, 2018, Xerox announced that it had agreed to sell majority control of Xerox to Fujifilm in exchange for Fujifilm’s controlling interest in a joint venture owned by Fujifilm and Xerox.  Kessler Topaz initiated an action in the New York Supreme Court on behalf of Iron Workers District Council of Philadelphia & Vicinity Benefit and Pension Plan (“Iron Workers”) seeking to enjoin the transaction, which provided no control premium to Xerox shareholders, while significantly overvaluing Fujifilm’s 75% interest in the joint venture. 

    Following several weeks of expedited discovery and a two-day preliminary injunction hearing, on April 27, 2018, Justice Barry R. Ostrager issued an order enjoining Xerox or Fujifilm from taking any further action to consummate the transaction.  Justice Ostrager accepted the overwhelming majority of facts alleged by Iron Workers and other suing shareholders, which included Darwin Deason – Xerox’s third largest shareholder – who was likewise seeking to re-open the director nomination period to run a full competing slate of alternative directors for election at Xerox’s upcoming 2018 Annual Meeting. 

    Among other things, Justice Ostrager determined that Xerox’s “hopelessly conflicted” CEO, Jeffrey Jacobson, “collaborated with Fuji[film] to make himself indispensable to the transaction” after learning that the Xerox board was actively searching for his replacement.  Justice Ostrager further found that Mr. Jacobson “was consistently acting without the knowledge of the entire Xerox Board,” as the majority of directors were unaware that Mr. Jacobson continued to negotiate the transaction after the board unanimously determined that he should stop discussing the potential transaction with Fujifilm.  Justice Ostrager held that the full board likely breached its fiduciary duties by failing to properly oversee Mr. Jacobson’s negotiations with Fujifilm and for ultimately acquiescing to the unfair transaction that Mr. Jacobson negotiated.  

    The law and shareholders alike presume that corporate fiduciaries act in good faith to protect shareholders’ best interests.  This injunction confirms that corporate fiduciaries should and must be held accountable when they put their interests ahead of the interests of the shareholders they are supposed to serve.

Representative Outcomes
  • Kessler Topaz served as lead counsel in class action litigation challenging a proposed private equity buyout of Amicas that would have paid Amicas shareholders $5.35 per share in cash while certain Amicas executives retained an equity stake in the surviving entity moving forward.

    Kessler Topaz prevailed in securing a preliminary injunction against the deal, which then allowed a superior bidder to purchase the Company for an additional $0.70 per share ($26 million). The court complimented Kessler Topaz attorneys for causing an “exceptionally favorable result for Amicas’ shareholders” after “expend[ing] substantial resources.”

  • This shareholder derivative action challenged a conflicted “roll up” REIT transaction orchestrated by Glade M. Knight and his son Justin Knight.

    The proposed transaction paid the Knights millions of dollars while paying public stockholders less than they had invested in the company. The case was brought under Virginia law, and settled just ten days before trial, with stockholders receiving an additional $32 million in merger consideration.

  • Kessler Topaz, as co-lead counsel, challenged the take-private of Arthrocare Corporation by private equity firm Smith & Nephew.

    This class action litigation alleged, among other things, that Arthrocare’s Board breached their fiduciary duties by failing to maximize stockholder value in the merger. Plaintiffs also alleged that that the merger violated Section 203 of the Delaware General Corporation Law, which prohibits mergers with “interested stockholders,” because Smith & Nephew had contracted with JP Morgan to provide financial advice and financing in the merger, while a subsidiary of JP Morgan owned more than 15% of Arthrocare’s stock. Plaintiffs also alleged that the agreement between Smith & Nephew and the JP Morgan subsidiary violated a “standstill” agreement between the JP Morgan subsidiary and Arthrocare. The court set these novel legal claims for an expedited trial prior to the closing of the merger. The parties agreed to settle the action when Smith & Nephew agreed to increase the merger consideration paid to Arthrocare stockholders by $12 million, less than a month before trial.

  • Kessler Topaz served as Co-lead counsel in this shareholder class and derivative action, challenging the acquisition of real estate investment trust Cole Real Estate Investments, Inc. by fellow REIT American Realty Capital Properties, Inc.

    Plaintiffs challenged the Cole directors’ decision to approve the acquisition or “internalization” of Cole’s external manager, which was owned by Cole insiders, as they alleged that it diverted potential merger consideration in the ARCP transaction from Cole’s public shareholders to the company’s insiders. After securing expedited proceedings, Kessler Topaz engaged in expedited discovery and sought to enjoin the multi-billion dollar transaction. The night before the preliminary injunction hearing was scheduled before the Court, Kessler Topaz reached agreement with defendants to settle the litigation, securing $64 million in value for Cole shareholders and providing for significant additional disclosures concerning the transaction so that Cole shareholders could make a fully informed decision on whether to approve the merger. Following the settlement and the close of the transaction, ARCP publicly disclosed massive accounting issues that affected the value of the stock portion of the consideration paid in the transaction. As a result, Kessler Topaz renegotiated the settlement agreement to ensure that Cole shareholders would not be foreclosed from pursuing additional remedies against ARCP in connection with their accounting issues that had reduced the value of the consideration paid to Cole shareholders in the merger.

  • On September 12, 2017, the Delaware Chancery Court approved one of the largest class action M&A settlements in the history of the Delaware Chancery Court, a $86.5 million settlement relating to the acquisition of ExamWorks Group, Inc. by private equity firm Leonard Green & Partners, LP.

    The settlement caused ExamWorks stockholders to receive a 6% improvement on the $35.05 per share merger consideration negotiated by the defendants. This amount is unusual especially for litigation challenging a third-party merger. The settlement amount is also noteworthy because it includes a $46.5 million contribution from ExamWorks’ outside legal counsel, Paul Hastings LLP.

  • Just one day before trial was set to commence over a proposed reclassification of Facebook's stock structure that KTMC challenged as harming the company's public stockholders, Facebook abandoned the proposal.

    The trial sought a permanent injunction to prevent the reclassification, in lieu of damages. By agreement, the proposal had been on hold pending the outcome of the trial. By abandoning the reclassification, Facebook essentially granted the stockholders everything they could have accomplished by winning at trial.

    As background, in 2010 Mark Zuckerberg signed the "Giving Pledge," which committed him to give away half of his wealth during his lifetime or at his death. He was widely quoted saying that he intended to start donating his wealth immediately.

    Facebook went public in 2012 with two classes of stock: class B with 10 votes per share, and class A with 1 vote per share. Public stockholders owned class A shares, while only select insiders were permitted to own the class B shares. Zuckerberg controlled Facebook from the IPO onward by owning most of the high-vote class B shares.

    Facebook's charter made clear at the IPO that if Zuckerberg sold or gave away more than a certain percentage of his shares he would fall below 50.1% of Facebook's voting control. The Giving Pledge, when read alongside Facebook's charter, made it clear that Facebook would not be a controlled company forever.

    In 2015, Zuckerberg owned 15% of Facebook's economics, but though his class B shares controlled 53% of the vote. He wanted to expand his philanthropy. He knew that he could only give away approximately $6 billion in Facebook stock without his voting control dropping below 50.1%.

    He asked Facebook's lawyers to recommend a plan for him. They recommended that Facebook issue a third class of stock, class C shares, with no voting rights, and distribute these shares via dividend to all class A and class B stockholders. This would allow Zuckerberg to sell all of his class C shares first without any effect on his voting control.

    Facebook formed a "Special Committee" of independent directors to negotiate the terms of this "reclassification" of Facebook's stock structure with Zuckerberg. The Committee included Marc Andreeson, who was Zuckerberg's longtime friend and mentor. It also included Susan Desmond-Hellman, the CEO of the Gates Foundation, who we alleged was unlikely to stand in the way of Zuckerberg becoming one of the world's biggest philanthropists.

    In the middle of his negotiations with the Special Committee, Zuckerberg made another public pledge, at the same time he and his wife Priscilla Chan announced the birth of their first child. They announced that they were forming a charitable vehicle, called the "Chan-Zuckerberg Initiative" (CZI) and that they intended to give away 99% of their wealth during their lifetime.

    The Special Committee ultimately agreed to the reclassification, after negotiating certain governance restrictions on Zuckerberg's ability to leave the company while retaining voting control. We alleged that these restrictions were largely meaningless. For example, Zuckerberg was permitted to take unlimited leaves of absence to work for the government. He could also significantly reduce his role at Facebook while still controlling the company.

    At the time the negotiations were complete, the reclassification allowed Zuckerberg to give away approximately $35 billion in Facebook stock without his voting power falling below 50.1%. At that point Zuckerberg would own just 4% of Facebook while being its controlling stockholder.

    We alleged that the reclassification would have caused an economic harm to Facebook's public stockholders. Unlike a typical dividend, which has no economic effect on the overall value of the company, the nonvoting C shares were expected to trade at a 2-5% discount to the voting class A shares. A dividend of class C shares would thus leave A stockholders with a "bundle" of one class A share, plus 2 class C shares, and that bundle would be worth less than the original class A share. Recent similar transactions also make clear that companies lose value when a controlling stockholder increases the "wedge" between his economic ownership and voting control. Overall, we predicted that the reclassification would cause an overall harm of more than $10 billion to the class A stockholders.

    The reclassification was also terrible from a corporate governance perspective. We never argued that Zuckerberg wasn't doing a good job as Facebook's CEO right now. But public stockholders never signed on to have Zuckerberg control the company for life. Indeed at the time of the IPO that was nobody's expectation. Moreover, as Zuckerberg donates more of his money to CZI, one would assume his attention would drift to CZI as well. Nobody wants a controlling stockholder whose attention is elsewhere. And with Zuckerberg firmly in control of the company, stockholders would have no recourse against him if he started to shirk his responsibilities or make bad decisions.

    We sought an injunction in this case to stop the reclassification from going forward. Facebook already put it up to a vote last year, where it was approved, but only because Zuckerberg voted his shares in favor of it. The public stockholders who voted cast 80% of their votes against the reclassification.

    By abandoning the reclassification, Zuckerberg can still give away as much stock as he wants. But if he gives away more than a certain amount, now he stands to lose control. Facebook's stock price has gone up a lot since 2015, so Zuckerberg can now give away approximately $10 billion before losing control (up from $6 billion). But then he either has to stop (unlikely, in light of his public pledges), or voluntarily give up control. There is evidence that non-controlled companies typically outperform controlled companies.

    KTMC believes that this litigation created an enormous benefit for Facebook's public class A stockholders. By forcing Zuckerberg to abandon the reclassification, KTMC avoided a multi-billion dollar harm. We also preserved investors' expectations about how Facebook would be governed and when it would eventually cease to be a controlled company.

    KTMC represented Sjunde AP-Fonden ("AP7"), a Swedish national pension fund which held more than 2 million shares of Facebook class A stock, in the litigation. AP7 was certified as a class representative, and KTMC was certified as co-lead counsel in the case. The litigation at KTMC was led by KTMC attorneys Lee Rudy, Eric Zagar, J. Daniel Albert, Grant Goodhart, and Matt Benedict.

  • Kessler Topaz served as Co-Lead Counsel in this shareholder class action brought against the directors of Genentech and Genentech’s majority stockholder, Roche Holdings, Inc., in response to Roche’s July 21, 2008 attempt to acquire Genentech for $89 per share.

    We sought to enforce provisions of an Affiliation Agreement between Roche and Genentech and to ensure that Roche fulfilled its fiduciary obligations to Genentech’s shareholders through any buyout effort by Roche. After moving to enjoin the tender offer, Kessler Topaz negotiated with Roche and Genentech to amend the Affiliation Agreement to allow a negotiated transaction between Roche and Genentech, which enabled Roche to acquire Genentech for $95 per share, approximately $3.9 billion more than Roche offered in its hostile tender offer. In approving the settlement, then-Vice Chancellor Leo Strine complimented plaintiffs’ counsel, noting that this benefit was only achieved through “real hard-fought litigation in a complicated setting.”

  • Kessler Topaz served as co-lead counsel in class action litigation arising from Globe’s acquisition by Grupo Atlantica to form Ferroglobe.

    Plaintiffs alleged that Globe’s Board breached their fiduciary duties to Globe’s public stockholders by agreeing to sell Globe for an unfair price, negotiating personal benefits for themselves at the expense of the public stockholders, failing to adequately inform themselves of material issues with Grupo Atlantica, and issuing a number of materially deficient disclosures in an attempt to mask issues with the negotiations. At oral argument on Plaintiffs’ preliminary injunction motion, the Court held that Globe stockholders likely faced irreparable harm from the Board’s conduct, but reserved ruling on the other preliminary injunction factors. Prior to the Court’s final ruling, the parties agreed to settle the action for $32.5 million and various corporate governance reforms to protect Globe stockholders’ rights in Ferroglobe.

  • On behalf of the Erie County Employees’ Retirement System, we alleged that GSI’s founder breached his fiduciary duties by negotiating a secret deal with eBay for him to buy several GSI subsidiaries at below market prices before selling the remainder of the company to eBay.

    These side deals significantly reduced the acquisition price paid to GSI stockholders. Days before an injunction hearing, we negotiated an improvement in the deal price of $24 million.

  • Kessler Topaz served as co-lead counsel in expedited merger litigation challenging Harleysville’s agreement to sell the company to Nationwide Insurance Company. Plaintiffs alleged that policyholders were entitled to receive cash in exchange for their ownership interests in the company, not just new Nationwide policies.

    Plaintiffs also alleged that the merger was “fundamentally unfair” under Pennsylvania law. The defendants contested the allegations and contended that the claims could not be prosecuted directly by policyholders (as opposed to derivatively on the company’s behalf). Following a two-day preliminary injunction hearing, we settled the case in exchange for a $26 million cash payment to policyholders.

  • Kessler Topaz represented stockholders of four closed-end mutual funds in a derivative action against the funds’ former investment advisor, Morgan Asset Management.

    Plaintiffs alleged that the defendants mismanaged the funds by investing in riskier securities than permitted by the funds’ governing documents and, after the values of these securities began to precipitously decline beginning in early 2007, cover up their wrongdoing by assigning phony values to the funds’ investments and failing to disclose the extent of the decrease in value of the funds’ assets. In a rare occurrence in derivative litigation, the funds’ Boards of Directors eventually hired Kessler Topaz to prosecute the claims against the defendants on behalf of the funds. Our litigation efforts led to a settlement that recovered $6 million for the funds and ensured that the funds would not be responsible for making any payment to resolve claims asserted against them in a related multi-million dollar securities class action. The fund’s Boards fully supported and endorsed the settlement, which was negotiated independently of the parallel securities class action.

  • Kessler Topaz represented the Iowa Public Employees Retirement System as Co-Lead Counsel in a certified class action challenging a brazen insider trading scheme by Valeant Pharmaceuticals to tip Bill Ackman’s hedge fund Pershing Square Capital (“Pershing”) that it intended to launch a hostile takeover attempt to buy rival pharma company Allergan. The case was brought on behalf of Allergan investors who sold stock while Pershing was buying on the basis of this inside information. After three years, Kessler Topaz settled the case just weeks before trial (set for January 2018) for $250 million. At the final approval hearing, U.S. District Judge David O. Carter commented as follows about the litigation and the efforts of plaintiffs’ counsel: “Let me just humbly say, it’s been quite a walk. It has been an extraordinary unique case and extraordinarily well litigated.”

  • Kessler Topaz challenged a coercive tender offer whereby MPG preferred stockholders received preferred stock in Brookfield Office Properties, Inc. without receiving any compensation for their accrued and unpaid dividends.

    Kessler Topaz negotiated a settlement where MPG preferred stockholders received a dividend of $2.25 per share, worth approximately $21 million, which was the only payment of accrued dividends Brookfield DTLA Preferred Stockholders had received as of the time of the settlement.

  • Kessler Topaz represented the Oklahoma Firefighters Pension and Retirement System in class action litigation challenging the acquisition of Safeway, Inc. by Albertson’s grocery chain for $32.50 per share in cash and contingent value rights.

    Kessler Topaz argued that the value of CVRs was illusory, and Safeway’s shareholder rights plan had a prohibitive effect on potential bidders making superior offers to acquire Safeway, which undermined the effectiveness of the post-signing “go shop.” Plaintiffs sought to enjoin the transaction, but before the scheduled preliminary injunction hearing took place, Kessler Topaz negotiated (i) modifications to the terms of the CVRs and (ii) defendants’ withdrawal of the shareholder rights plan. In approving the settlement, Vice Chancellor Laster of the Delaware Chancery Court stated that “the plaintiffs obtained significant changes to the transaction . . . that may well result in material increases in the compensation received by the class,” including substantial benefits potentially in excess of $230 million.

  • Represented shareholders in derivative litigation challenging board’s decision to accelerate “golden parachute” payments to South Financial Group’s CEO as the company applied for emergency assistance in 2008 under the Troubled Asset Recovery Plan (TARP).

    We sought injunctive relief to block the payments and protect the company’s ability to receive the TARP funds. The litigation was settled with the CEO giving up part of his severance package and agreeing to leave the board, as well as the implementation of important corporate governance changes one commentator described as “unprecedented.”

  • Kessler Topaz served as co-lead counsel in this landmark $2 billion post-trial decision, believed to be the largest verdict in Delaware corporate law history.

    In 2005, Southern Peru, a publicly-traded copper mining company, acquired Minera Mexico, a private mining company owned by Southern Peru’s majority stockholder Grupo Mexico. The acquisition required Southern Peru to pay Grupo Mexico more than $3 billion in Southern Peru stock. We alleged that Grupo Mexico had caused Southern Peru to grossly overpay for the private company in deference to its majority shareholder’s interests. Discovery in the case spanned years and continents, with depositions in Peru and Mexico. The trial court agreed and ordered Grupo Mexico to pay more than $2 billion in damages and interest. The Delaware Supreme Court affirmed on appeal.

  • In 2006, the Wall Street Journal reported that three companies appeared to have “backdated” stock option grants to their senior executives, pretending that the options had been awarded when the stock price was at its lowest price of the quarter, or even year. An executive who exercised the option thus paid the company an artificially low price, which stole money from the corporate coffers. While stock options are designed to incentivize recipients to drive the company’s stock price up, backdating options to artificially low prices undercut those incentives, overpaid executives, violated tax rules, and decreased shareholder value.

    Kessler Topaz worked with a financial analyst to identify dozens of other companies that had engaged in similar practices, and filed more than 50 derivative suits challenging the practice. These suits sought to force the executives to disgorge their improper compensation and to revamp the companies’ executive compensation policies. Ultimately, as lead counsel in these derivative actions, Kessler Topaz achieved significant monetary and non-monetary benefits at dozens of companies, including:

    Comverse Technology, Inc.: Settlement required Comverse’s founder and CEO Kobi Alexander, who fled to Namibia after the backdating was revealed, to disgorge more than $62 million in excessive backdated option compensation. The settlement also overhauled the company’s corporate governance and internal controls, replacing a number of directors and corporate executives, splitting the Chairman and CEO positions, and instituting majority voting for directors.

    Monster Worldwide, Inc.: Settlement required recipients of backdated stock options to disgorge more than $32 million in unlawful gains back to the company, plus agreeing to significant corporate governance measures. These measures included (a) requiring Monster’s founder Andrew McKelvey to reduce his voting control over Monster from 31% to 7%, by exchanging super-voting stock for common stock; and (b) implementing new equity granting practices that require greater accountability and transparency in the granting of stock options moving forward. In approving the settlement, the court noted “the good results, mainly the amount of money for the shareholders and also the change in governance of the company itself, and really the hard work that had to go into that to achieve the results….”

    Affiliated Computer Services, Inc.: Settlement required executives, including founder Darwin Deason, to give up $20 million in improper backdated options. The litigation was also a catalyst for the company to replace its CEO and CFO and revamp its executive compensation policies.

  • On January 31, 2018, Xerox announced that it had agreed to sell majority control of Xerox to Fujifilm in exchange for Fujifilm’s controlling interest in a joint venture owned by Fujifilm and Xerox.  Kessler Topaz initiated an action in the New York Supreme Court on behalf of Iron Workers District Council of Philadelphia & Vicinity Benefit and Pension Plan (“Iron Workers”) seeking to enjoin the transaction, which provided no control premium to Xerox shareholders, while significantly overvaluing Fujifilm’s 75% interest in the joint venture. 

    Following several weeks of expedited discovery and a two-day preliminary injunction hearing, on April 27, 2018, Justice Barry R. Ostrager issued an order enjoining Xerox or Fujifilm from taking any further action to consummate the transaction.  Justice Ostrager accepted the overwhelming majority of facts alleged by Iron Workers and other suing shareholders, which included Darwin Deason – Xerox’s third largest shareholder – who was likewise seeking to re-open the director nomination period to run a full competing slate of alternative directors for election at Xerox’s upcoming 2018 Annual Meeting. 

    Among other things, Justice Ostrager determined that Xerox’s “hopelessly conflicted” CEO, Jeffrey Jacobson, “collaborated with Fuji[film] to make himself indispensable to the transaction” after learning that the Xerox board was actively searching for his replacement.  Justice Ostrager further found that Mr. Jacobson “was consistently acting without the knowledge of the entire Xerox Board,” as the majority of directors were unaware that Mr. Jacobson continued to negotiate the transaction after the board unanimously determined that he should stop discussing the potential transaction with Fujifilm.  Justice Ostrager held that the full board likely breached its fiduciary duties by failing to properly oversee Mr. Jacobson’s negotiations with Fujifilm and for ultimately acquiescing to the unfair transaction that Mr. Jacobson negotiated.  

    The law and shareholders alike presume that corporate fiduciaries act in good faith to protect shareholders’ best interests.  This injunction confirms that corporate fiduciaries should and must be held accountable when they put their interests ahead of the interests of the shareholders they are supposed to serve.      

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