This week, we highlight an overview of a Report from the EY Center for Board Matters on Board Retirement and Tenure Policies across companies in the Fortune 100. The data showing that a significant number of directors are currently approaching retirement illustrates the current opportunity for boards to review their oversight needs and engage in strategic director succession planning.
Last week, the Federal Trade Commission (FTC) secured a major appellate victory in its quest to challenge lax corporate cybersecurity practices through its general enforcement authority over “unfair” trade practices. Since 2005, the FTC has brought dozens of administrative actions against companies with allegedly deficient cybersecurity, claiming both “unfair” and “deceptive” practices. Until now, the FTC’s complaints had not been the subject of a relevant appellate holding and went largely unchallenged in federal court, with the vast majority—more than 50 cases—resulting in settlement. But, in FTC v. Wyndham Worldwide Corporation, the U.S. Court of Appeals for the 3rd Circuit granted the FTC a broad victory in affirming, on interlocutory appeal, the district court’s refusal to dismiss an FTC “unfair” trade practices claim against the Wyndham chain of hotels, marking the first time any federal appellate court has given its imprimatur to the FTC’s cybersecurity enforcement practices. The 3rd Circuit also rejected Wyndham’s fair-notice arguments, finding that Section 5 of the FTC Act gave Wyndham adequate notice of its potential liability such that no additional notice-and-comment rulemaking was required. In light of the 3rd Circuit’s broad affirmation of the FTC’s cybersecurity enforcement authority without any further requirement of additional rulemaking, companies should be on immediate notice that they are likely subject to continued—and, quite possibly, increased—FTC enforcement actions for their cybersecurity practices based on existing FTC guidance.
On August 6, 2015, the Staff of the Securities and Exchange Commission’s (SEC) Division of Corporation Finance issued new compliance and disclosure interpretations (C&DI Questions 256.23 through 256.33) regarding the meaning of “general solicitation” and “general advertising” for purposes of an unregistered securities offering made in reliance on Regulation D under the Securities Act of 1933. On the same day, the Staff also issued a no-action letter concurring with Citizen VC, Inc.’s conclusion that the procedures described in its request letter would create a substantive, pre-existing relationship and thus would not constitute general solicitation or general advertising within the meaning of Rule 502(c) of Regulation D. The following highlights the SEC’s new guidance.
This week, we highlight a summary blog post of Brain Cheffins' academic paper "Corporate Governance Since the Managerial Capitalism Era". In his article, Mr. Cheffins explores the widespread institutionalization of corporate governance concepts and frameworks by U.S. public companies in the wake of corporate scandals beginning in the 1970s. Interestingly, Mr. Cheffins contrasts the checks and balances provided by good governance against systemic controls inherent in the days of managerial capitalism - including powerful labor unions, restrictions on access to risky financial mechanisms, protections from competition due to government regulation and few foreign rivals, and a general sense of restraint following the Great Depression and World War II.
With Gov. John Kasich (R-OH) officially in the race for president, the total number of Republican candidates for president stands at 17, while Democrats, led by former Secretary of State Hillary Clinton (D-NY), total five. This crowded field of presidential candidates has produced a wide variety of tax policy positions and plans for tax reform as evidenced in the Democratic and Republican candidate breakdown. While almost every candidate has acknowledged the need for tax reform, many have been slow to disclose the specifics of their reform proposals. Nonetheless, general themes are taking shape, with Republicans favoring lower rates overall and Democrats seeking to ease the tax burden on middle-class taxpayers. Candidates in both parties seem focused on the need for stimulating economic growth.
The 9th Circuit just denied rehearing en banc in a closely watched decision that declined to adopt a broad interpretation of its influential sister circuit’s watershed opinion in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), which raised the bar for criminal prosecutions in tipper/tippee insider trading cases. A previous post discussing this case can be found here. In United States v. Salman, No. 14-10204 (9th Cir. July 6), reh’g denied (Aug. 13, 2015), Senior Judge Jed S. Rakoff of the Southern District of New York, sitting by designation, wrote for the 9th Circuit panel that a tippee (i.e., a person who knowingly receives material, nonpublic information from a source who is bound by a duty of confidentiality (i.e., a tipper)) could be held liable for insider trading even without proof that the tipper expected any pecuniary or similarly valuable personal benefit in exchange for providing the information. In the process, Judge Rakoff narrowly construed Newman, a recent major precedent from his home circuit, which, given the 2nd Circuit’s volume of insider trading prosecutions, had appeared to many to signal a judicial retreat from expansive remote-tippee liability.
On August 18, 2015, the U.S. Court of Appeals for the D.C. Circuit reaffirmed its April 2014 decision in NAM v. SEC, where it held that certain portions of the SEC’s conflict minerals reporting requirements unconstitutionally compel speech. As we covered in previous blog posts, the court granted the SEC’s motion for rehearing following the court’s May 2014 decision in American Meat Institute v. U.S. Department of Agriculture. In its American Meat Institute decision the court addressed the standards of review that apply to commercial speech, including the standards applied in NAM v. SEC.
Antitrust Development: FTC Releases New Statement of Enforcement Principles for Unfair Methods of Competition Under Section 5 of the FTC Act
On August 13, 2015, the Federal Trade Commission (FTC) released a Statement of Enforcement Principles for “Unfair Methods of Competition” claims brought under Section 5 of the FTC Act. Section 5 empowers the FTC to challenge conduct constituting either unfair methods of competition, or unfair or deceptive acts or practices that impact commerce as unlawful violations, 15 U.S.C. § 45(a). This marks the first time that the FTC has provided guidance on the overarching principles behind its enforcement of the unfair methods of competition prong of the statute – “Section 5’s ban on unfair methods of competition encompasses not only those acts and practices that violate the Sherman or Clayton Act but also those that contravene the spirit of the antitrust laws and those that, if allowed to mature or complete, could violate the Sherman or Clayton Act.”
In recent years, taking advantage of expanded jurisdictional provisions in Dodd-Frank, the U.S. Securities and Exchange Commission (SEC) has brought an increasing number of enforcement actions, including complex matters with difficult factual and legal issues, through administrative proceedings, rather than in federal court as has traditionally been the case. As the Wall Street Journal observed in June and August of 2015, this practice has been widely criticized, but the SEC has insisted that it maintains legal authority to choose the forum in which to bring its cases and has published non-binding criteria to guide its decisions in this regard. On August 12, 2015, U.S. District Judge Richard M. Berman, of the Southern District of New York, dealt a setback to the SEC by preliminarily enjoining its administrative proceeding against former Standard & Poor’s Ratings Services executive Barbara Duka. Judge Berman found that the SEC’s procedure in hiring administrative law judges (ALJ) for such administrative proceedings was “likely unconstitutional,” because SEC staff—and not the SEC commissioners—hire ALJs. Judge Berman found that such a practice is likely to be in violation of the Appointments Clause and insulates the SEC’s administrative law judges from removal, even by the president of the United States. Judge Berman joins Judge Leigh Martin May of the Northern District of Georgia, who recently halted two other SEC administrative proceedings on the same grounds.
This week, we highlight Pay Governance LLC’s article on Where Women Are on Board: Perspectives from Gender Diverse Boardrooms. The article discusses the importance of gender diversity in the boardrooms of U.S. publicly traded companies. Topics discussed in this article include:
- A Snapshot on the International Trends
- “Gender Diverse” Boards in the S&P 500
- Themes from Gender Diverse Boardrooms
On August 5, 2015, the Securities and Exchange Commission (SEC) voted 3-2 to approve its controversial pay ratio rules. The rules were adopted pursuant to the mandate of Section 953(b)(1) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The pay ratio rules add the new Item 402(u) under Regulation S-K to require U.S. public companies to disclose (i) the median of the annual total compensation of all employees of the company (except the chief executive officer (CEO)), (ii) the annual total compensation of the CEO and (iii) the ratio of these two amounts. The following provides a general summary of the rules.
On August 4, 2015, the Federal Trade Commission issued updated best practices guidance for merger reviews. This is the first guidance that the FTC has issued on the merger review process since the 2006 merger review reforms. The FTC highlights three techniques that filing parties can use to reduce the time and burden associated with merger review.
Recommended Reading: Die Another Day: What Leaders Can Do About the Shrinking Life Expectancy of Corporations
This week, we highlight The Boston Consulting Group’s piece Die Another Day: What Leaders Can Do About the Shrinking Life Expectancy of Corporations. This article identifies the following trends as it relates to the life expectancy of corporations:
- Company life spans are shrinking. Public companies traded in the US now have a one-in-three chance of not successfully surviving the next five years
- Companies are not just dying younger; they're also more likely to perish at any point in time. Almost one-tenth of all public companies fail each year, a fourfold increase since 1965
- It's a broad-based phenomenon: most types of businesses in most industries run the risk of dying younger
- To defy the odds and ensure longevity and prosperity for their companies, leaders need to build governance models oriented to multiple time scales
OFAC Releases Crimea Sanctions Advisory; Adds Additional Russian and Ukrainian Persons to Specially Designated Nationals and Sectoral Sanctions Identifications Lists
As part of our continued coverage on U.S. sanctions against Russia and Ukraine, we share with you some detail on new guidance involving Crimea released by OFAC, originally featured on our AG Trade Law blog.
On July 30, 2015, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued a Crimea Sanctions Advisory highlighting certain practices that have been used to circumvent or evade U.S. sanctions involving Crimea and suggesting measures to mitigate Crimea sanctions risks.
On July 21, 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama.
Here's the SEC's overview of which mandatory rulemaking provisions of the Dodd-Frank Act it has addressed so far: Implementing the Dodd-Frank Act.
On July 20, 2015, the U.S. Court of Appeals for the 7th Circuit issued an opinion that could dramatically change the class action landscape for companies that are victims of hackers. In Remijas v. Neiman Marcus Gp., the 7th Circuit reversed the district court, ruling that Neiman Marcus (NM) customers whose credit card information was compromised had standing to bring a class action suit against the retailer.
Sometime in 2013, hackers attacked NM and stole the credit card numbers of its customers. In mid-December 2013, NM learned that approximately 350,000 cards were exposed to malware and that 9,200 of those cards were discovered to have been used fraudulently. In 2014, the plaintiffs—on behalf of the 350,000 other customers whose data may have been hacked—brought a suit for negligence, breach of implied contract, unjust enrichment, unfair and deceptive business practices, invasion of privacy and violation of multiple state data breach laws.
Amendments to the DGCL
Several significant amendments to the Delaware General Corporation Law (DGCL) were signed into law on June 24, 2015, and will go into effect on August 1, 2015. Most significantly, these amendments:
- Prohibit fee-shifting – After the revised Sections 102 and 109 take effect, any provisions in the certificates of incorporation or bylaws of Delaware corporations that would seek to “fee shift,” or impose liability on a stockholder for attorneys’ fees or expenses of the corporation (or anyone else) in connection with “internal corporate claims” (e.g., breaches of fiduciary duties) will be prohibited.1
- Authorize Delaware forum selection clauses – In the new Section 115, the DGCL (1) expressly authorizes the inclusion of Delaware exclusive forum provisions for internal corporate claims in the certificates of incorporation or bylaws of Delaware corporations and (2) prohibits provisions in such certificates of incorporation or bylaws that would disallow bringing internal corporate claims in Delaware.2
Rebutting the Fraud-on-the-Market Presumption in Securities Class Actions: Halliburton Class Certified Over Price Impact Objections
On July 25, 2015, Judge Barbara Lynn of the Northern District of Texas issued a formative opinion in the class actions securities arena. The case,The Erica P. John Fund, Inc., et al. v. Halliburton Co., et al., No. 3:02-CV-1152-M, is viewed as a bellwether among securities class actions due to its treatment of novel issues regarding, among other things, a defendant’s ability to disprove reliance—i.e., a causal link between alleged misrepresentations and an eventual drop in stock prices upon correction—for purposes of class certification.
Rather than requiring plaintiffs to prove reliance for each individual shareholder, securities class action cases have long permitted a more efficient approach to establish the necessary causal link. This approach, set forth in Basic v. Levinson, 485 U.S. 224 (1988), invokes a rebuttable presumption in favor of reliance if certain elements are met. Recently, in connection with the Halliburton case, the Supreme Court held this presumption can be rebutted if a defendant shows an alleged misrepresentation did not affect the market price of a security. If the presumption is rebutted, the class cannot be certified.
On July 15, 2015, the Department of Labor (DOL) issued an Administrator’s Interpretation (No. 2015-1) providing guidance on the classification of employees as independent contractors under the Fair Labor Standards Act (FLSA).
The DOL made clear its position that the FLSA requires an expansive definition of the term “employee”: “In sum, most workers are employees under the FLSA.” The DOL reiterated that the proper test for determining independent contractor status is the economic realities test (as opposed to the common law control test). The economic realities test generally provides that independent contractor status is to be determined based on an analysis of six factors: (1) whether the work performed is an integral part of the employer’s business; (2) whether the worker’s managerial skills affect the worker’s opportunity for profit or loss; (3) how the worker’s relative investment compares to the employer’s investment in the work performed; (4) whether the worker performs a special skill and initiative; (5) whether the relationship between the worker and his or her employer is permanent or indefinite; and (6) the nature and degree of the employer’s control over the worker.
Akin Gump litigation partner and cybersecurity practice co-head Michelle Reed was interviewed by Metropolitan Corporate Counsel for its September issue. The article, “Buying Cyberinsurnace Helps Uncover System Weaknesses,” covers cyber threats facing companies, data protection and cyberinsurance risk assessment, among other topics.
In a Securities and Exchange Commission (SEC) concept release issued earlier this month, the SEC requested the public’s input on more than 70 questions surrounding the sufficiency of current disclosure requirements on audit committees, which were primarily adopted in 1999 in Item 407 of Regulation S-K and supplemented by the Sarbanes-Oxley Act of 2002. The deadline is September 8, 2015, to submit comments to the SEC. A handful of comment letters have been posted to the SEC’s website so far and generally affirm the value of independence and integrity of a company’s auditors and the audit committee’s role, but also caution against creating additional forced boilerplate in SEC filings.
As presented in this Thomson Reuters Mid-Market M&A Review for the first half of 2015, worldwide announced mid-market M&A deals valued up to $500 million totaled US$440.9 billion, reflecting a 6.3% increase year-on-year.
The Americas region (by target domicile) led the market, with over US$125.3 billion of announced deal activity, representing a 28.4% share of the market. The European region (by target domicile) led the market in terms of deal count, with 6,796 transactions, representing 33.6% of the 20,204 deals announced worldwide. The Real Estate sector comprised 15.0% of announced value, followed by High Technology, and Industrials, with 14% and 12.4% of the total market, respectively.
A U.K.-government-commissioned survey of 500 businesses known as “small and medium sized enterprises” (SMEs) in the United Kingdom released in July 2015 found that more than one-third of the businesses had never heard of the country’s principal international anticorruption law. Commissioned by the U.K.’s Ministry of Justice (MOJ) and Department for Business, Innovation and Skills in January 2014, the survey evaluated the business awareness of, compliance with and overall impact of the U.K. Bribery Act of 2010 (“Bribery Act”), the country’s antiforeign bribery statute that went into effect on July 1, 2011.
This week, we highlight Matteo Tonello’s discussion on corporate boards and their oversight of company risk in the recent publication of The Conference Board Director Notes. This post was published in the Harvard Law School Forum on Corporate Governance and Financial Regulations.
In his post, Tonello discusses the many challenges corporate boards face in managing company risk, and he provides the following recommendations to help corporate boards enhance their risk governance:
- Get educated on the new board oversight of risk culture expectations
- Complete a risk culture gap assessment
- Consider a Board & C-Suite Driven/Objective-Centric approach to ERM and Internal Audit
- Regulators should consider safe harbor provisions in the area of board risk oversight
- Hold the CEO accountable for building and maintaining effective risk appetite frameworks and providing the board with periodic consolidated reports on the company’s residual risk status.
On July 14, 2015, Iran and the P5+1 countries (China, France, Germany, Russia, the United Kingdom and the United States), with the High Representative of the European Union for Foreign Affairs and Security Policy, finalized the Joint Comprehensive Plan of Action (JCPOA), a nuclear agreement that would grant Iran sanctions relief in exchange for implementing significant limitations on its nuclear program.
Under the agreement, Iran will be required to remove two-thirds of its uranium-enriching centrifuges and reduce its existing low-enriched uranium stockpiles by up to 98 percent, among other nuclear-related measures. President Obama emphasized Tuesday that the agreement, which is expected to freeze most of Iran’s nuclear efforts for a decade, is “not built on trust,” but “verification.” The International Atomic Energy Agency (IAEA) will monitor and verify Iran’s nuclear-related measures and inspect its facilities, including military sites. If any issues or disputes arise over Iran’s nuclear commitments, a joint commission, consisting of the P5+1 and Iran, will attempt to resolve the matter over a 30-day period. If unresolved after 30 days, the issue will be referred to the United Nations Security Council (UNSC), which will vote on whether to continue sanctions relief or re-impose sanctions on Iran.
In exchange, most European Union (EU) and U.N. sanctions against Iran will be lifted. The United States will generally remove sanctions that apply to non-U.S. persons. U.S. sanctions will continue to apply to non-U.S. entities owned or controlled by U.S. persons, but certain transactions by such entities may be licensed if they are consistent with the terms of the JCPOA. U.S. sanctions that apply to U.S. persons will largely remain in place, with the exception of a permissible licensing regime for the importation into the United States of Iranian carpets and foodstuff (including caviar and pistachios), and trade in civil aircraft and parts. In sum, Iran will still be subject to robust U.S. sanctions, but opportunities will exist for certain non-U.S., as well as U.S., companies in a limited number of industries.
This month, Duff & Phelps published its 2015 Fairness and Solvency Opinions Report, covering six recurring transaction structures often pursued by our clients. Why are certain transaction types prevalent? We believe the seeds were planted when the financial crisis unleashed massive deflationary forces across the globe. The relentless efforts of the Fed (and other central banks) to stimulate growth with unprecedented monetary easing have driven interest rates to historic lows. These two macro trends – stagnant growth and low interest rates – are contributing factors to several transactions we discuss in the report, as listed below. To access the report, click here.
- Corporate Spin-Off Transactions
- Master Limited Partnerships (MLPs) and YieldCos
- Real Estate Roll-up Transactions
- Going-Private Transactions for Chinese Companies
- Dividend Recaps
- Affiliate Party Transactions
This week we highlight ProxyPulse’s 2015 Proxy Mid-Season Report, by Broadridge and PwC’s Center for Board Governance. The report shows an uptick in shareholder activism and provides information on voting outcomes for director elections, say-on-pay, and proxy access proposals.
In March, we highlighted a previous edition of their 2015 Proxy Mid-Season Report, which similarly looked at the growth of proxy access proposals and CEO pay, as well as increased shareholder pressure for cybersecurity disclosure.
The popularity and number of co-investments has been on the rise. Co-investment opportunities are seen by investors as more unique, lower-cost alternatives to typical private equity fund investments. For fund sponsors, offering co-investment rights is a way to differentiate themselves from other sponsors. Both co-investors and sponsors benefit from the relationship-building that typically occurs in connection with co-investments.
With any co-investment, the first thing that must be decided is the economic terms of the co-investment. Typically (but not always), co-investments are on a no-fee, no-carry basis. Once those basic economic terms have been resolved, a structure for the co-investment must be determined. Both direct investments into a sponsor’s acquisition vehicle and investments into one or more sponsor-controlled limited partnerships or limited liability companies that, in turn, invest into the sponsor’s acquisition vehicle are popular alternatives, with each alternative having its own set of issues.
On July 1, 2015, the U.S. Securities and Exchange Commission (SEC) proposed new rules pursuant to Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which, if adopted, would require national stock exchanges to establish listing standards that would require listed issuers to adopt so-called clawback policies for the recovery of excess incentive-based compensation in the event that the issuer is required to prepare an accounting restatement resulting from material noncompliance with any financial reporting requirement. The proposed rules will be subject to a 60-day comment period, following which the SEC will publish its final rules however, as discussed at the end of this Alert, any new rules would not take effect for some time.
Proposed DOL Rule Seeks to Require the Provision of Overtime Pay to Millions of Additional Employees
The Department of Labor (DOL) has announced a proposed rule that would amend the executive, administrative and professional exemptions under the Fair Labor Standards Act (FLSA). The exemptions exclude workers in such positions from the minimum-wage and overtime-pay requirements of the FLSA.
The DOL estimates that, in the first year of the proposed rule, approximately 4.6 million workers that are now exempt under current regulations would become entitled to overtime payments under the FLSA. Under the current salary test, employees qualify for the above exemptions only if they receive a salary that exceeds $455 a week (equivalent to $23,660 for a full-year worker), in addition to meeting other requirements related to their job duties. Under the proposed rule, the minimum salary threshold would increase to $921 per week (equivalent to $47,892 annually and equal to the 40th percentile of earnings for full-time salaried workers) and would be automatically adjusted via a to-be-determined formula. Additionally, the DOL’s proposed rule seeks to adjust the highly compensated employee (HCE) annual compensation level from $100,000 to $122,148 annually, or equal to the 90th percentile of earnings for full-time salaried workers (so-called HCEs must also perform certain job duties, though the requirements are less stringent than for non-HCEs).
Click here to read the full alert.
This week we highlight F. William McNabb III recent keynote address at Lazard’s 2015 Director Event, “Shareholder Expectations: The New Paradigm for Directors.” Mr. McNabb is the Chairman and CEO of Vanguard. This post was published in the Harvard Law School Forum on Corporate Governance and Financial Regulations.
In his keynote address, McNabb discusses Vanguard’s six principles on corporate governance structure, these principles include:
- Independent oversight and, more broadly, appropriate board composition.
- Shareholder voting rights that are consistent with economic interests.
- Annual director elections and minimal anti-takeover devices.
- Sensible compensation tied to performance.
Please click here to read his full address.
On June 18, 2015, Congressmen Jim Langevin (D-RI) and Jim Himes (D-CT) sent a letter to the Securities and Exchange Commission (SEC) calling for updated cybersecurity disclosure guidance for publicly traded companies. Shareholders need information regarding the impact of cyber-attacks on businesses in order to assess the value of shares and make long-term investment decisions. Cybersecurity threats can include theft of intellectual property, loss of sensitive data and decreased confidence in the marketplace. The letter asks the SEC to discuss the impact on investor protection, cybersecurity best practices, what circumstances require an 8-K filing and other related topics.
The congressmen also recommend additional 10-K disclosures, urging the SEC to view cybersecurity as “a priority for government, corporations, and consumers alike – it should be viewed not as a cost, but as an investment.”
Akin Gump Partner Gary McLaughlin and Counsel Galit Knotz have written an article titled “What Really Is the FCRA’s ‘Willfulness’ Standard?” recently published by Law360. With a discussion of the Fair Credit Reporting Act (FCRA) requirements and liability for employers, the article also explores the interpretation of “willfulness” and provides guidance to employers facing potential FCRA litigation.
The article notes that the surge of class actions against employers for FCRA violations is largely due to the availability of statutory damages that can reach up to $1,000 per class member where “willfulness” is shown, even where no injury exists. At the same time, district courts are beginning to provide guidance on the nuanced issues these lawsuits raise, with a number of recent decisions treating FCRA willfulness as a question of law in class actions against employers. An understanding of these decisions will aid employers in reviewing their compliance with FCRA obligations and in forming their litigation strategy.
To read the full article, please click here.
This week, we highlight this article on "Audit Committees: 2015 Mid-Year Issues Update", which summarizes current issues of interest for audit committees.
Those issues include understanding and dealing with:
- Financial reporting
- Independent auditors
- Internal audits
- Reporting and disclosure
- New auditing standards
- Financial activism
On June 19, 2015, final rules (colloquially known as Regulation A+) go into effect. These new rules create an exemption that is substantially similar to the existing framework of Regulation A under the Securities Act but are intended to ease the burden of Securities Act registration for small public offerings by increasing the size of offerings (from $5 million to up to $50 million) and providing for the preemption of state blue sky laws in certain offerings. We previously provided a more detailed summary of these rules, which can be found here, and the complete set of final rules can be found here.
While the new rules have generated a great deal of excitement at the prospect that the rules will serve as an additional capital raising avenue for startups, there is an equal amount of skepticism that the expense and distraction of complying with the new rules will not make the Regulation A+ framework an ideal source of funding for your everyday startup. Nonetheless, the amount of debate by both supporters and opponents of the new rules suggests that the use of Regulation A+ will be closely monitored by the market.
Akin Gump partners Michelle Reed and Natasha Kohne and counsel Jenny Walters have written the article “Fiduciary Duties of Directors Are Key to Minimizing Cyber Risk,” which was published by NACD Directorship magazine, the publication of the National Association of Corporate Directors.
The article notes that cyber risk is one of the biggest concerns for corporate directors, yet many companies are not properly addressing their vulnerabilities. With that as a starting point, Reed, Kohne and Walters outline the risks awaiting corporate directors, including class action lawsuits and derivative suits against directors and officers themselves.
The best way to protect yourself and your company, the authors write, is to elevate cybersecurity “to an enterprise-level risk management issue” with proper follow-up. This includes taking steps before a breach ever occurs and being prepared to “respond to the regulatory investigations, class actions, and derivative suits that are sure to follow.” With proper due diligence and risk management, they conclude, directors can chip away at the enormous potential liability that exists, “transforming a company’s greatest risk into one of its greatest strengths.”
To read the full article, please click here.
This week, we highlight Deloitte’s M&A Trends Report 2015, its annual comprehensive look at the M&A market. As you can read in the report, corporate America expects the robust pace of M&A to extend or even accelerate in 2015 across the board: in private and public businesses, in multiple industry sectors, in companies and private equity firms of all sizes.
As previously discussed here, the Delaware Senate had already approved legislation that would prohibit corporations from adopting charter or bylaw provisions that shift a corporation’s legal costs to stockholders who are unsuccessful in litigation with respect to “internal corporate claims.” Now, that legislation (S.B. 75) has, easily and without much discussion, been passed by the Delaware House of Representatives. The legislation will now go to Delaware’s governor. Given the relatively easy road the bill has taken in reaching the ’governor’s office (notwithstanding some very vocal opposition to it), it seems likely the governor will sign it, after which it will become law.
The Securities and Exchange Commission (SEC) proposed a new round of changes to its check-the-box registration form for investment advisers, Part 1A of Form ADV (“ADV 1A”), and proposed some minor changes to its recordkeeping rule. The proposed new ADV 1A questions would elicit new information relating to separately managed accounts. The proposed revisions also would incorporate “relying adviser” registration that was first contemplated in the SEC staff’s no-action letter to the American Bar Association in January 2012 (the “2012 ABA Letter”) directly into Form ADV for private fund advisers.
On June 4, 2015, the U.S. Office of Personnel Management (OPM) announced that it was the victim of a data breach in which records of more than four million current and former agency employees were accessed. According to the White House, the attack originated from China, though whether or not the attack was state-sponsored remains unclear. Agency officials stated that they detected the breach in April, but that it may have begun as early as last year.
Social security numbers of agency workers, as well as other personally identifiable information, was accessed. OPM is responsible for security clearances for government workers, and the information accessed could have the potential to reveal identities of covert U.S. operatives and other intelligence officials.
This week, we highlight this paper on What Can For-Profit and Nonprofit Boards Learn from Each Other?, by Nicholas Donatiello, David Larcker and Brian Tayan.
With the ever-expanding development and use of Sharia-compliant funds across the globe, below is a summary of some of the key issues to consider when establishing a Sharia-compliant fund.
Islamic (or “Sharia-compliant”) investing or financing is based on Islamic principles and jurisprudence (Sharia), which are derived from a number of sources, including, primarily, the Quran. These principles must be kept in mind when trying to determine the Islamic acceptability of proposed financing or investing techniques. Sharia is not a codified system of law and interpretations of the key principles can vary, particularly between the different “schools of thought."
Click here to read the full article.
This week, we highlight the US Proxy Season Halftime Report – Governance Trends, by Veritas Executive Compensation Consultants, referred to on the Harvard Law School Forum on Corporate Governance and Financial Regulations. This report discusses the trends related to governance practices that are carrying through from recent years, based on an analysis of ISS Voting Analytics data.
As we have discussed before, several issues keep up boards of directors and general counsels at night.
The recent Law in the Boardroom Study, performed by Corporate Board Member and FTI Consulting and discussed here, confirms that several of these issues continue to worry directors and GCs.
Cybersecurity tops the list for both directors and GCs, and each group also cites Operational Risk, Corporate Reputation and Crisis Preparedness as top 5 issues. In addition, directors are concerned about Succession Planning and GCs about Regulatory issues.
- The hidden complexities of executive compensation
- Early results from the equity plan scorecard (part 2)
- Latest trends in executive pay
- Proxy season update: changes in CEO pay
Last week, the Delaware Senate, in response to a prior Delaware Supreme Court ruling that was previously discussed here, voted to approve legislation that would prohibit corporations from adopting charter or bylaw provisions that shift a corporation’s legal costs to stockholders who are unsuccessful in litigation with respect to an “internal corporate claim” (defined in the legislation as “claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery”).
Also worthy of note, the legislation provides that “the certificate of incorporation or the bylaws may require, consistent with applicable jurisdictional requirements, that any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in this State, and no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of this State.” The legislation, which, as previously discussed here, has been controversial, is now headed to the Delaware House of Representatives where it will, no doubt, be the subject of much discussion and debate.
In response to the initial proposal received last August from the national securities exchanges and the Financial Industry Regulatory Authority (FINRA), the U.S. Securities and Exchange Commission (SEC) announced on May 6, 2015, that it has approved a two-year pilot program that would widen the minimum quoting and trading increments, which are known as ‘tick sizes,’ for select stocks of companies with smaller market capitalizations. The SEC stated that it plans to use the pilot program to assess whether wider tick sizes would enhance the market quality of these stocks and improve liquidity and capital formation for the benefit of issuers, investors and other market participants. A copy of the SEC order approving the tick size pilot program is available here. The program will begin by May 6, 2016.
In accepting the proposal, the SEC made a number of changes to the pilot program as it was originally proposed. The significant changes include the following:
- The pilot program duration will be two years rather than one year. In connection with this extension, the national securities exchanges and FINRA will now provide a joint assessment of the program to the SEC, which will be made public eighteen months from the start of the program (based on the first twelve months of data). Previously this assessment was to be provided six months from the end of the one-year program.
- The market capitalization threshold for securities to be included in the pilot program has been reduced to a $3 billion threshold from the proposed $5 billion threshold.
- Regarding the trade-at prohibition (described in more detail below), the venue limitation that required price-matching executions to occur where the person’s quotation was displayed has been removed and the size of block transactions eligible for the trade-at prohibition exception has been reduced (it is now defined as orders of at least 5,000 shares or for a quantity of stock having a market value of at least $100,000) in order to better reflect trading in smaller-capitalization companies.
- Data disclosure required by the pilot program related to market-maker profitability have been revised to make data collection less burdensome and to assure the protection of confidential business information.
A new study released on May 7, 2015, by the Ponemon Institute revealed that criminal cyberattacks on health care organizations were the most prevalent cause of data breaches in 2014. The report underscores the need to think “beyond HIPAA” and to prepare accordingly to address the risks of data breaches, which more than 90 percent of health care organizations experienced last year.
The Institute estimates that data breaches cost the health care industry $6 billion in 2014, or more than $2 million per organization. In the event of a cyberattack, liability for directors and officers of companies could arise, especially if they did not engage in adequate preparedness activities.
Cyberattacks also represent a critical, high-stakes risk for companies’ reputations—a harm that is typically not covered by insurance. The majority of organizations do not believe that their incident response plans have adequate funding and resources, and the majority fail to perform certain kinds of risk assessments.
The report makes it clear that health care breaches are on the rise, and there is significant room for improvement when preparing to avoid an otherwise inevitable breach. Companies should consider the following six key elements of an effective cybersecurity risk management program:
1. Understand what health care data are targeted and evaluate health care-specific risks.
2. Know where your data reside.
3. Ensure that security protections reviewed by regulators meet or exceed industry standards.
4. Identify third parties with access to your data, limit access scope, and address privacy and data security risks through careful contracting.
5. Mitigate risks where possible.
6. Establish and test your incident response plan with outside counsel.
Newly confirmed Attorney General Loretta Lynch has made it clear that she plans to get tough on financial crime. During her confirmation hearing in January, Lynch testified that she “looks forward to taking a very aggressive stance” in reviewing the conduct of financial institutions for potential illegality. She plans to review not only past conduct, but current and prospective conduct as well. In an apparent response to criticism that the U.S. Department of Justice (DOJ) had in the past considered some financial institutions too big to prosecute, Lynch testified that in her view no one is “too big to jail.” She has said she will continue using the DOJ’s law enforcement power to make “major changes” to the way financial institutions are structured. If entities fail to take a DOJ investigation seriously enough, or fail to take sufficient preventative steps, they may find themselves facing criminal charges.
While Lynch seems keen to avoid the criticism that some parties leveled at her predecessor for a supposed failure to aggressively prosecute large financial institutions, she also has an encouraging history of rewarding corporate cooperation. In 2012, during Lynch’s tenure as United States Attorney for the Eastern District of New York, her office declined to take any enforcement action against a major investment bank that cooperated with the DOJ in its case against an individual employee who was prosecuted for violations of the Foreign Corrupt Practices Act (FCPA). In subsequent remarks about that declination, Lynch has said she credited the corporation’s internal controls, self-reporting and extensive cooperation with the government. This may indicate that, although Lynch intends to prioritize prosecutions of financial crimes as Attorney General, she could be sympathetic to companies that are sufficiently vigilant about preventing and reporting wrongdoing.
In addition to her focus on financial crime, Lynch also plans to prioritize the DOJ’s efforts to combat the growing threat of cyber crime. One of her first acts as Attorney General was to deliver remarks at the DOJ Criminal Division’s Cybersecurity Industry Roundtable. She has also noted that there are “cyber issues in every type of case” the DOJ prosecutes now. The DOJ’s Criminal and National Security Divisions have been focused on cyber security for some time, and while apprehension and prosecution are important, Lynch is equally focused on prevention. She plans to improve the technological resources available to law enforcement, and continue developing the DOJ’s partnerships with private industry in order to stay a step ahead. This is consistent with her previous focus on prosecuting cyber criminals in the Eastern District. In 2013, for example, Lynch announced charges against multiple hackers in connection with a cyber attack on the worldwide financial system that allegedly resulted in nearly $50 million in losses. Discussing the arrests, she said she would “not relent until all those responsible for these financially devastating cybercrimes are brought to justice.”
This week, we highlight this PwC publication entitled Cyber: Think Risk, not IT, which looks at cybersecurity through the lense of risk management.
- an overview of the current state of cyber risk management practices
- an analysis of the regulatory response to the recent uptick in cyber threats
- PwC’s view on what financial institutions should be doing to become cyber resilient
The Bureau of Economic Analysis of the U.S. Department of Commerce requires all U.S. persons that own or control more than 10 percent of the voting securities (a “Direct Investment”) of a “foreign” business enterprise to report on its BE-10 Benchmark Survey of U.S. Direct Investment Abroad for the fiscal year 2014. Form BE-10 is due by May 29, 2015, for respondents reporting fewer than 50 Foreign Affiliate forms (as discussed below) and June 30, 2015, for 50 or more forms. Official BE-10 forms and instructions can be found here, on the Bureau of Economic Analysis website.
Click here to read the full alert.
On April 28, 2015, pursuant to the mandate in Section 953(a) of the Dodd-Frank Act, the Securities and Exchange Commission (SEC) proposed new rules that, if adopted, would require public companies to disclose in their annual-or special-meeting proxy or information statements on the relationship between executive compensation actually paid and the financial performance of the registrant. The proposed rules, which are discussed more fully below, are set forth in Release No. 34-74835. Public comments on the proposed rules must be received within the 60-day period following their publication in the Federal Register.
On April 28, the Securities and Exchange Commission (SEC) Division of Investment Management (the “Division”) published a Guidance Update setting forth cybersecurity concerns and advice for the registered investment companies and investment advisers it regulates. This is the most recent instance of the SEC’s continued focus on cybersecurity. Cybersecurity was highlighted in the spring of 2014 as part of the National Exam Program (NEP) Examination Priorities released by the SEC’s Office of Compliance Inspections and Examinations (OCIE). OCIE’s cybersecurity priorities were discussed in more detail in the SEC’s Compliance Outreach Program, which highlighted compliance-related issues that should be addressed by compliance officers and other senior executives of investment funds and advisers. Subsequently, in February of this year, the OCIE issued a Risk Alert following sweep exams conducted to analyze cybersecurity threats faced by investment advisers and broker-dealers. The results increased the SEC staff’s concern regarding preparation of investment advisers for cybersecurity threats, especially as compared to that of broker-dealers.
The Division is now providing practical advice and specific measures that funds and advisers can implement in order to better prepare for the barrage of cybersecurity threats facing funds and all companies on a daily basis.
Click here to read the full alert.
On Monday, April 27, 2015, the Supreme Court agreed to hear an important constitutional case that could dramatically limit the viability of class action lawsuits claiming millions or billions of dollars in statutory damages for technical violations of federal privacy, data breach and consumer protection laws. The Supreme Court took the case at the urging of a number of companies and groups—such as Facebook, Google, Trans Union, the U.S. Chamber of Commerce and the Consumer Data Industry Association—with a strong stake in discouraging such abusive and costly class actions.
At issue in Spokeo v. Robins (No. 13-1339) is whether Congress can lawfully confer Article III standing on a plaintiff or group of plaintiffs for a bare violation of a federal statute and in the absence of any concrete harm (so-called “statutory injury”). The case arises from a dispute between Spokeo, Inc., an operator of a “people search engine” that generates search results based on publicly available information, and Thomas Robins, an individual who appeared in Spokeo’s search results. Robins filed suit against Spokeo in 2010 on behalf of a putative class of “millions of individuals” over allegedly willful violations of the Fair Credit Reporting Act (FCRA). The Ninth Circuit held that Robins possessed Article III standing to bring suit based on Congress’ creation of a private right of action for willful FCRA violations—and that no further injury allegation was required.
After the employment relationship is terminated, employers should be aware of former employees’ social media activity to ensure continued compliance with any post-employment obligations, including nondisclosure of proprietary or confidential information. For example, if a former employee is subject to a nonsolicit of employees, that former employee may be within his or her rights to take to social media to tout how great their new employer is or how much he or she enjoys their new job, but taking that message one step further and encouraging his or her former employer’s employees to join them at the new employer would likely be an actionable breach of the nonsolicit.
This week, we enjoyed reading this article on Trends in Board of Director Compensation by Steve Pakela and John Sinkular. The article discusses the various trends and key elements associated with the compensation of non-employee directors, including:
- Cash Compensation
- Equity and Cash Compensation Mix
- Equity Grant Design
- Board Leadership Compensation
- Stock Ownership Guidelines and Requirements Contemporary Best Practices
On Wednesday, April 22, 2015, the House passed H.R. 1560, the Protecting Cyber Networks Act, sponsored by House Intelligence Committee Chairman Devin Nunes (R-CA), with Ranking Member Adam Schiff (D-CA) as lead cosponsor. The bill passed by a wide margin of 307-116, and was followed a day later by passage of H.R. 1731, the National Cybersecurity Protection Advancement (NCPA) Act of 2015, by a vote of 355-63. That bill is sponsored by Homeland Security Committee Chairman Michael McCaul (R-TX).
Chairman Nunes’ bill amends the National Security Act of 1947 to require the Director of National Intelligence (DNI) to develop and promulgate procedures to facilitate the sharing of classified and declassified cyber threat indicators in the possession of the federal government with private entities. It also authorizes private entities to conduct information system monitoring activities and operate defensive measures for cybersecurity purposes, and to share or receive any cyber threat indicators with/from other private entities or an “appropriate federal entity” (defined as Commerce, DOE, DHS, DOJ, DNI or Treasury). The bill requires that federal and non-federal entities that share cyber threat indicators scrub such indicators of all personally identifiable information before sharing.
A recent decision from the United States District Court for the Southern District of New York allowing a U.S. Securities and Exchange Commission (SEC) civil enforcement action to proceed against two former stockbrokers for alleged insider trading violations sheds additional light on application of the 2nd Circuit’s decision in United States v. Newman, No. 13-1837-cr(L) (2d Cir. Dec. 10, 2014). In the new decision, SEC v. Payton, No. 14 Civ. 4644 (S.D.N.Y. Apr. 6, 2015), Judge Jed S. Rakoff upheld the SEC’s allegations that traders Daryl Payton and Benjamin Durant III of Euro Pacific Capital improperly traded software company SPSS, Inc.’s stock based on material nonpublic information regarding the company’s pending acquisition by IBM. Payton and Durant allegedly received the tips from their Euro Pacific colleague Thomas Conradt, who in turn received them from his roommate, Trent Martin. Martin, in turn, originally learned of details regarding the IBM acquisition from a law firm associate working on the SPSS/IBM deal.
As previously reported, the 2nd Circuit’s December 2014 Newman decision attempted to clarify and delineate the boundaries of insider trading liability in tipper-tippee scenarios by holding that: (1) the personal benefit provided to the tipper—which has long been recognized as a necessary precondition in order for tipper-tippee insider trading liability to attach—must amount to a potential gain to the tipper of a pecuniary or similarly valuable nature and must resemble a quid pro quo; and (2) a tippee must know that the insider received a personal benefit. The Newman decision has been the subject of much commentary and has led the government to abandon prosecution of some criminal cases in which the evidence of the personal benefit to the tipper, or the tippee’s knowledge of the benefit, was deemed insufficient under Newman. Indeed, in February 2015, the U.S. Attorney’s Office for the Southern District of New York dropped the criminal insider trading charges pending against defendants Payton and Durant in light of Newman.
Click here to read the full alert.
On April 14, President Obama notified Congress of his intent to rescind Cuba’s designation as a State Sponsor of Terrorism (SSOT), issued in March 1982, saying the Cuban government “has not provided any support for international terrorism during the preceding six-month period; and the government of Cuba has provided assurances that it will not support acts of international terrorism in the future.” Although there are slightly different processes that the President Obama may take, Cuba will apparently be removed from the U.S. Department of State’s SSOT list, absent congressional action within 45 days from notification.
On December 12, 2014, the National Labor Relations Board (“NLRB” or the “Board”) issued a final rule that substantially revised its existing procedures for conducting union elections. The new rule significantly accelerates the existing union election process. The new rule took effect on April 14, 2015.
Plaintiffs in securities litigation may wish that issuers were required to disclose material information at all times, but the securities laws do not impose a continuous disclosure duty. Instead, a panoply of narrower legal requirements governs disclosure issues. These disclosure requirements have grown over time from line items in Exchange Act reports and disclosure required to avoid deceptive and manipulative conduct to an array of laws, regulations and court decisions covering selective disclosure, insider trading and an expanded list of matters that must be described in current reports. In light of these complex disclosure requirements and a lack of clarity in the case law, many companies simply err on the side of prompt disclosure of material events.
A special situation arises, however, when an issuer has made a prior disclosure that is no longer accurate. In these circumstances, a company subject to the reporting obligations of the Exchange Act may be hesitant to supplement the prior disclosure before next required in a periodic report. These concerns are often heightened when the company made an error in disclosure about a historical event, an event has not unfolded as projected in a forward-looking statement or an unanticipated development has occurred. Company representatives may fear that the new disclosure would call undue attention to the inaccuracy or reduce the company’s flexibility in continuing negotiations with a third party.
On March 25, 2015, the U.S. Securities and Exchange Commission unanimously adopted final rules to amend Regulation A, as mandated by Title IV of the Jumpstart Our Business Startups Act (JOBS Act). Whereas the existing Regulation A provided an exemption from Section 5 registration requirements for certain smaller securities offerings by private companies, the new rules create an exemption that is substantially similar to the existing Regulation A framework, while at the same time expand the size of offerings and provide for the preemption of state blue sky laws in certain offerings. Below is a brief summary of certain key takeaways from the new rules. The final rules can be found here.
This week, we highlight Deloitte’s recent issue of CFO Insights. In this report, Deloitte discusses several practical steps that CFOs should take to prepare their companies to manage increasingly vocal and influential investors, including:
• Identify issues that might attract activists’ attention
• Address shareholder demands for information, transparency, and access
• Attract and retain top talent in investor relations
On March 18, 2015, nearly two years after the enactment of Brazil’s 2013 Clean Companies Act (CCA), Law No. 12,846, Brazilian President Dilma Rousseff issued Decree No. 8,420 (the “Decree”) implementing the CCA. This week, an English language translation of the Decree was made available (registration required), warranting a reminder that companies and individuals doing business in Brazil must ensure their compliance with Brazil’s anticorruption legislation.
Most agree that the CCA is largely in conformance with the U.S. Foreign Corrupt Practices Act (FCPA), the U.K. Bribery Act (“Bribery Act”) and other international anticorruption regimes. The CCA prohibits entities from providing, or attempting to provide, anything of value to Brazilian public officials or foreign public officials (where conduct in furtherance of bribery occurs within Brazil). Like the U.S. and U.K. anticorruption laws, this gives the CCA certain extraterritorial application. One key difference from the FCPA and the U.K. Bribery Act, however, is that the CCA imposes strict liability. The CCA does not require a showing of corrupt intent, which is required to show criminal liability under the FCPA. It also does not require that the bribe benefit the company, which is a required element of a corporate offense under the U.K. Bribery Act.
As presented in this Thomson Reuters Mergers & Acquisition Review, worldwide mergers and acquisitions (M&A) activity was up by 25 percent compared to the first quarter of 2014. The deal value of $854.2 billion reflected the strongest first quarter since 2007.
While 27 deals were announced during the first quarter of 2015 with a value greater than $5 billion, the number of deals was down by 3 percent compared to 2014. First quarter 2015 M&A also fell 7 percent by value and 21 percent by number of deals compared to the fourth quarter of 2014, which ranked as the strongest three-month period for new deal announcements since the fourth quarter of 2010.
Today, negotiators from the United States, Iran and other world powers announced they have agreed on a framework for a Joint Comprehensive Plan of Action regarding Iran’s nuclear program to be finalized by June 30, 2015. This framework provides a path towards potential easing of international sanctions on Iran, if negotiators succeed in working out a final agreement with Iran in the weeks ahead. However, there have been no changes yet in established U.S. and EU sanctions measures. Moreover, the scope of potential sanctions relief ultimately possible through this process appears to be limited to sanctions measures that focus on Iran’s nuclear program and does not extend to other Iran sanctions connected with antiterrorism and proliferation.
On April 1, 2015, President Obama signed an executive order establishing a new sanctions program targeting individuals and entities responsible for, or complicit in, cyber-enabled activities that threaten the national security, foreign policy, economic health or financial stability of the United States. This establishes a new sanctions program in the tradition of other U.S. “policy-based” sanctions regimes such as U.S. sanctions against international terrorist organizations and narcotics traffickers, which are not specific to any one country. President Obama’s statement on the executive order explains that while the government will use every tool at its disposal to prevent and respond to cyber attacks, it is often difficult to pursue bad actors due to weak or poorly enforced foreign laws, or because some foreign governments are unwilling or unable to stop those responsible. The executive order is intended to address situations where, for jurisdictional or other issues, certain significant malicious cyber actors may be beyond the reach of other authorities available to the U.S. government.
U.S. Securities and Exchange Commission (SEC) Chair Mary Jo White explained and defended the SEC’s policy for granting so-called “WKSI waivers” in a speech she made at the Corporate Counsel Institute on March 12, 2015. White’s remarks represent yet another development in the ongoing dispute (both within and without the SEC) regarding the SEC’s Well-Known Seasoned Issuer (WKSI) waiver policy, which we’ve been following on this blog (see here and here). Under the SEC’s rules, an issuer that has engaged in certain criminal activities or other misconduct – absent a waiver— is automatically disqualified from taking advantage of WKSI rules, which could dramatically affect the issuer’s ability to access the capital markets and maintain its financial health.
As we reported previously, the SEC revised its guidance on WKSI waivers on two separate occasions in 2014. Then, following the SEC’s decision to grant Royal Bank of Scotland Group plc’s waiver request following its criminal conviction for conduct relating to the manipulation of London Interbank Offered Rules (LIBOR), SEC Commissioner Kara Stein issued a scathing public dissent, in which she feared that the SEC “may have enshrined a new policy—that some firms are just too big to bar.” Stein went on to say that, “If we are going to abrogate our own automatic disqualification provision . . . then we should consider discarding these provisions entirely, along with the pretense that they have any real meaning.” These statements fueled an already-existing sentiment in the media and certain political circles that WKSI waiver requests from global financial institutions and other large, powerful companies were being rubber-stamped by the SEC, regardless of how egregious the underlying misconduct. Sen. Elizabeth Warren D-MA), for example, stated that, “Big corporations should not get special treatment when they break the law, and the SEC needs to learn from its past failures in oversight, to demonstrate no one is above the rules, and to show some backbone.”
Best Practices in Social Media for Employers
Part 3 – Disciplining Employees for Conduct on Social Media
Part 3 – Disciplining Employees for Conduct on Social Media
As discussed previously (see Best Practices in Social Media for Employers Part 2), adopting a National Labor Relations Act (NLRA)-compliant social media policy is the first step in ensuring that the policy can be enforced. However, employers should also be aware of the potential risks associated with disciplining employees for violations of such a policy.
If an employee is disciplined or terminated for misconduct on social media in violation of an employer’s policy, the National Labor Relations Board (NLRB or the “Board”) is one of the few places the employee can turn to for recourse, since the employee’s termination is unlikely to fall under any of the more commonly known employment laws, such as Title VII of the Civil Rights Act, the Americans with Disabilities Act or the Fair Labor Standards Act. In recent years, employees, including nonunion employees, that have been terminated for violating social media policies have filed unfair labor practice charges with the NLRB against their employers in the hope of obtaining damages or reinstatement of their employment.
This week, we highlight Broadridge’s first 2015 edition of ProxyPulse. This report takes a retrospective look at the 2014 mini-season, analyzing beneficial shareholder data from over 1,000 U.S. public company shareholder meetings held between July 1 and December 31, 2014. The report identifies the following highlights of the 2014 mini-season:
- Ownership and voting: Institutional shareholders owned 59% of the street shares while retail shareholders owned 41%. Institutional ownership rose by 3 percentage points, consistent with recent trends. While institutions voted 83% of the shares they owned, retail shareholders voted only 28% of their shares.
- Director elections: 125 directors failed to receive majority shareholder support, a 26% increase over the 2013 mini-season. Additionally, 344 directors failed to attain at least 70% support - an important benchmark for many companies and proxy advisors.
- Say-on-Pay: Average shareholder support for pay plans declined by 3 percentage points over the 2013 mini-season. 35 companies failed to attain majority support for their say-on-pay vote.
- Retail voting participation: Over 22 billion retail shares went un-voted during the 2014 mini-season, which equates to just over 29% of street shares outstanding. Low rates of retail voting present an opportunity for greater company engagement with shareholders.
The U.S. Supreme Court found middle ground in Omnicare this week, holding that issuers’ statements of opinion issued in registration statements can be the basis for liability under Section 11 if either the speaker does not actually hold the stated opinion, or the statement omitted facts regarding the basis for the opinion and those omissions made the statement misleading in context. Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435 (March 24, 2015).
On 24 March 2015, the Financial Conduct Authority (FCA) (the UK financial conduct regulator) released its 2015/2016 Business Plan.
This is an important document for anyone whose business is affected by UK regulation as it sets out:
- the FCA’s key priorities
- explains how the FCA plans to pursue its objectives
- how the FCA will measure its success.
Click here to read the full alert.
On Thursday, just three months after a district court judge in Minnesota denied Target’s motion to dismiss the consumer class action following the retailer’s massive 2013 data breach, the court granted preliminary approval of a $10 million settlement agreement requested jointly by Target and the consumer plaintiffs. Settlement funds will be distributed in a claims-made process run by a settlement administrator, with a cap of $10,000 per victim. Unclaimed funds will not revert back to Target, but instead will be split among all breach victims who submit claims. Class plaintiffs have also requested a whopping $6.75 million in attorney’s fees. The district court will have to approve plaintiffs’ fee request, which is disproportionately large at 67.5 percent compared to typical settlements, which hover around 33 percent.
The settlement also requires certain governance and internal control changes, some of which harken back to Federal Trade Commission-mandated consent decrees. The settlement requires Target to increase security protocols through a variety of initiatives, including appointing a chief information security officer to oversee the company’s global information security program. The company must maintain a program that identifies internal and external security risks to shoppers’ personal information, have a written information security program and provide security training to its employees. These security measures are not as conciliatory as they sound, however. Most of these requirements were likely already in place following the breach.
The Securities and Exchange Commission (SEC) announced on March 13, 2015, that it had charged eight officers, directors and major shareholders for failing to file amendments to their Schedule 13Ds to disclose steps to take their respective companies private. The respondents agreed to settle the proceedings, without admitting or denying the SEC’s allegations, by paying financial penalties.
Section 13(d)(1) of the Exchange Act and Rule 13d-1(a) require any person or group who has acquired, directly or indirectly, beneficial ownership of more than 5 percent of a class of registered equity securities to file a Schedule 13D with the SEC no later than 10 days after it accumulated beneficial ownership of more than 5 percent. Section 13(d)(2) and corresponding Rule 13d-2(a) require the prompt filing (within two business days) of an amendment when there is a material change to the facts contained in the Schedule 13D.
In California, home to Silicon Valley, Biotech Beach and innumerable innovative firms making everything from drones to electric cars, the state government is on the verge of reshaping many existing privacy and cybersecurity regimes. Since California regularly sets the pace for important regulatory changes in the United States and abroad, the resulting market impact may be significant.
The particular areas of interest currently under review include the following:
- “smart television” restrictions
- on-board vehicle computer use and data collection restrictions
- usage of body video camera footage by law enforcement
- collection and usage of geolocation data from mobile applications
- establishment of a minimum standard for encryption of personal information
- drone and unmanned aerial vehicle use and restrictions.
Click here to read the full alert.
Today the advisory committee charged by the Federal Communications Commission (FCC) with providing critical assistance to the communications industry with a sector-specific implementation of cybersecurity risk management and a path forward for accountability approved a more than 400-page report that identifies best practices, provides a variety of important tools and resources for communications companies of different sizes and types to manage cybersecurity risks, and recommends a path forward. Chairman Wheeler attended the meeting and called the work of the group “damn important.”
The Cybersecurity Risk Management and Best Practices Final Report (the “Final Report”) was produced by Working Group 4 of the Communications Security Reliability and Interoperability Council (CSRIC). The CSRIC is a FCC advisory committee composed of public, private and public-interest community participants, and the CSRIC working group that developed the Final Report was helmed by the commercial communications industry and included over 100 expert participants working in five major industry segments: broadcast; cable; satellite; wireless and wireline. The Final Report suggests priorities and best practices for voluntary cybersecurity risk management in each of these segments.
The fate of “loser plays” fee-shifting bylaw/charter provisions has yet to be finally determined. As previously mentioned in a blog here, fee-shifting language has, however, shown up in a number of ways, both with respect to Delaware and non-Delaware entities, although caution has been urged when considering the adoption of such a provision. After the Delaware Legislature punted the issue to its 2015 session, all eyes have been on Delaware to see what action is recommended and eventually taken there.
As expected, both sides of the argument have weighed heavily into the Delaware battle. Large pension funds as well as the Council of Institutional Investors, among others, have urged the Delaware Legislature to restrict the use of fee-shifting provisions while others, including the U.S. Chamber of Commerce and several large corporations, have advocated in favor of such provisions.
Foreign Corrupt Practices Act Discussions at the 2015 ABA White Collar Institute Focus on M&A, Self-Reporting and Individual Prosecutions
The prosecution of corporations always makes good headlines. But the emerging trends in these corporate prosecutions tend to be at the margins and therefore less reported—prosecutors commit to sustained and vigorous enforcement of white collar criminals; defense attorneys push back that sentences are overly harsh and that innocent conduct is increasingly characterized as fraud. These messages all played out among the largest annual gathering of lawyers focusing on white collar crime, the ABA White Collar Institute in New Orleans, Louisiana, earlier this month.
The Foreign Corrupt Practices Act (FCPA) was front and center at the conference, as it has been for the last decade. But at least three relatively new messages were included in the discussion.
This week, we highlight Deloitte’s Post-merger integration report 2015. This in-depth survey report provides compelling analysis of the post-merger integration phase of the M&A lifecycle – a phase that can make or break the success of a deal.
On Thursday, March 12, 2015, House Energy & Commerce Subcommittee on Commerce, Manufacturing, and Trade Chairman Michael Burgess (R-TX), along with Reps. Marsha Blackburn (R-TN) and Peter Welch (D-VT), released draft text of new data security and breach notification legislation. The bill, titled “Data Security and Breach Notification Act of 2015,” would create a federal uniform data security and breach notification standard.
The bill is very similar to other breach notification bills introduced in recent weeks, in that it would require covered entities to implement systems to secure private data and would require notice to affected individuals in the event of a breach. However, the security requirements are more broad in nature; indeed, the bill requires covered entities to only “implement and maintain reasonable security measures and practices to protect and secure personal information in electronic form against unauthorized access as appropriate for the size and complexity of such covered entity and the nature and scope of its activities.” A summary released by the subcommittee states, “The requirement is a technology and process neutral standard to protect consumers while being flexible enough to allow for innovation and new technologies.”
On March 9, 2015, following failed diplomatic efforts to bring Venezuela in line with its human rights commitments under international law, President Obama issued an Executive Order (E.O.) declaring Venezuela a national security threat. The E.O. implements the Venezuela Defense of Human Rights and Civil Society Act of 2014, which the President signed into law on December 18, 2014 (see prior alert here).
The E.O. orders sanctions against seven of Venezuela’s military and security officials responsible for the human rights abuses associated with the anti-government protests that began in February 2014 and the persecution of persons in Venezuela exercising freedom of speech or assembly. The E.O. also expands the basis for making further sanctions designations beyond those outlined in the law to address more generally the erosion of democratic processes and public corruption by senior government officials in Venezuela. Notably, the E.O. provides the authority to sanction persons who have materially assisted, sponsored or supported such actions.
Click here to read the full alert.
At its meeting on March 4, the SEC’s Advisory Committee on Small and Emerging Companies approved its rather limited recommendations to update the definition of “accredited investor” as it applies to natural persons as found in Rule 501 under the Securities Act of 1933. Focusing on the importance of smaller public companies and emerging companies as drivers of the U.S. economy and the reliance by these companies on raising capital from “accredited investors” utilizing Rule 506 of Regulation D under the Securities Act, the Committee chose a “do no harm” approach so as not to shrink the existing pool of accredited investors (and the pool of capital they bring to the table). In recommending that the existing income and net worth thresholds remain unchanged, the Committee stated that it was unaware of “any substantial evidence that the current definition of accredited investor has contributed to the ability of fraudsters to commit fraud or has resulted in greater exposure for potential victims” and thus saw no benefit in raising either threshold or excluding “retirement assets” from the net worth calculation.
Yesterday, Federal Trade Commission (FTC) Chairwoman Edith Ramirez and FTC Bureau of Consumer Protection Director Jessica Rich announced that the FTC will begin a “Start with Security” campaign, through which the FTC will give nationwide presentations to corporate groups on specific data security topics and best practices. Ramirez said that “more attention needs to be paid to data security” and that the FTC “want[s] to be more concrete in some of the guidance we’re putting out there.”
CFIUS Annual Report Confirms Strong Chinese Investment and Renewed Concern about Foreign Governments’ Efforts to Acquire US Critical Technology
On February 26, 2015, the Committee on Foreign Investment in the United States (CFIUS) released its annual report to Congress summarizing its activities in 2013. CFIUS is an inter-agency committee that reviews the national security risks associated with foreign acquisitions of, and investments in, U.S. businesses that could result in foreign control of U.S. businesses, known as “covered transactions.”
According to the report, CFIUS conducted reviews of 97 covered transactions in 2013, a slight decline from its review of 111 notices in 2011 and 114 notices in 2012. Manufacturing investments accounted for 36 percent of the notices reviewed, and approximately one-third of those were in the computer and electronic products subsector, which includes semiconductors. Thirty-three percent of the notices reviewed were in the finance, information and services sectors. Mining, utilities and construction accounted for another 21 percent of the notices reviewed.
On Thursday, March 5, 2015, Sen. Ed Markey (D-MA), along with Sens. Richard Blumenthal (D-CT), Sheldon Whitehouse (D-RI) and Al Franken (D-MN), introduced legislation that would grant the FTC authority to issue new rules pertaining to data brokers.
The bill, titled the “Data Broker Accountability and Transparency Act,” defines data brokers as any “commercial entity that collects, assembles, or maintains personal information concerning an individual who is not a customer or an employee of that entity in order to sell the information or provide third party access to the information.”
The bill would require the FTC to promulgate rules for data brokers that would prohibit obtaining or soliciting information from consumers under false pretenses. It would also require that data brokers establish procedures to ensure the accuracy of the information they collect and maintain. Further, data brokers would be required to permit access by individuals to information collected about them at least once per year upon request, at no cost. Data brokers would be required to verify an individual’s identity before permitting access to the information, and would not be allowed to collect or retain any information submitted during that verification process. Individuals would have the right to dispute the accuracy of any information about them and have it corrected.
In addition to the risks associated with employers’ use of social media as related to the recruiting and the hiring process (previously discussed here), employers should also be aware of potential pitfalls associated with restricting or monitoring employees’ use of social media.
Some of the biggest issues and risks related to restricting and monitoring employees’ use of social media arise under the National Labor Relations Act (NLRA). The NLRA is a federal law that grants employees the right “to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of . . . other mutual aid or protection.” 29 U.S.C. § 157. Concerted activity includes allowing employees to discuss their terms and conditions of employment.
ISS Issues FAQs on Proxy Voting Policies Regarding Bylaw and Charter Amendments Adopted Without Shareholder Approval
Existing (ISS) voting policy is to recommend against the election of boards of directors if charter or bylaw amendments were enacted without shareholder approval and in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders.
ISS recently issued FAQs intended to clarify the types of amendments that would not automatically be deemed “materially adverse” and amendments that generally would be deemed “materially adverse.”
On Friday, February 27, 2015, the White House released a revised version of its 2012 proposal for a consumer privacy bill of rights. The revised legislative proposal largely tracks with the 2012 proposal in that it focuses on seven core principles for the collection, use and security of consumers’ personal data:
1. Transparency: Covered entities would be required to provide clear and concise notices about their privacy and security practices.
2. Individual Control: Covered entities would be required to allow consumers to exercise control over what data is collected about them and how it is used.
3. Respect for Context: Would require that covered entities collect and use data in ways that are consistent with the context in which consumers provide such data. Would require internal reviews of privacy and security practices for data collected outside of such contexts.
4. Focused Collection and Responsible Use: Would require covered entities to only collect, retain and use data that is reasonable in light of context. Would require deletion or de-identification of data within a reasonable time period after use.
5. Security: Covered entities would be required to identify reasonable risks and implement safeguards designed to protect against breach, theft, loss, etc. of personal data.
6. Access and Accuracy: Covered entities would be required to grant individuals access to, or an accurate representation of, data collected about them upon request. The consumer would have the right to correct or amend the data.
7. Accountability: Covered entities would be required to take steps appropriate to the privacy risks associated with their data collection activities, including employee training, conducting periodic internal risk assessments, and constructing appropriate security systems and procedures.
Proxy Access Developments: ISS Issues FAQs on Voting Policies Regarding Proxy Access Proposals; Several Companies Voluntarily Adopt Proxy Access Bylaws
On February 20, (ISS) published long-awaited FAQs clarifying its voting policies on proxy access proposals that would allow investors to include director nominees in the company’s proxy materials.
Moving away from its historical case-by-case approach, ISS generally will now recommend in favor of management and shareholder proposals with the following parameters:
- a maximum ownership threshold of not more than 3 percent;
- a maximum holding period of not more than three years of continuous ownership for each member of the nominating group
- “minimal or no limits” on the number of shareholders that can form a nominating group
- a cap on the number of nominees to “generally” 25 percent of the board.
ISS will review “for reasonableness” any other restrictions on the right of proxy access and generally will recommend a vote against proposals that are more restrictive than the guidelines described above.
At its open meeting today, Feb. 26, the Federal Communications Commission (FCC) voted 3-2 along party lines to adopt an order on net neutrality, or open Internet. The text of the order is not yet released but, based upon descriptions at today’s meeting, we have prepared this brief summary. As expected, the order reclassifies broadband Internet access service as a telecommunications service under Title II of the Communications Act, with forbearance from 27 of the 48 Title II regulations. The FCC characterizes the order as reflecting a “modern regulatory approach” that protects consumers and innovators, and incents Internet service providers (ISPs) to continue building fast and competitive broadband networks. The new open Internet rules will apply both to fixed and mobile broadband, and will include the following components.
As the use and reach of social media continues to increase and evolve, employers should be aware of the latest risks and issues to consider during the recruiting and hiring process.
The results of an August 2014 online survey conducted by Jobvite show the following:
- Ninety-three percent of recruiters will review a candidate’s social media profile before making a hiring decision.
- Seventy-three percent of recruiters have hired a candidate through social media.
- Fifty-five percent of recruiters have reconsidered a candidate based on their social media profile.
On Friday, February 13, 2015, President Obama delivered the keynote speech and signed an executive order on cybersecurity information sharing at the White House cybersecurity and privacy summit held at Stanford University. Also participating in the summit from the federal government were the secretaries of Homeland Security and Commerce, the administrator of the Small Business Administration, the deputy secretaries of Energy, Homeland Security and Treasury, and senior White House and other agency officials. From the private sector, speaking participants included at the CEO, president or COO level, a range of companies including AIG, Apple, American Express, Bank of America, Box, CloudFlare, FireEye, FirstBank, ID.me, Intel, Kaiser Permanente, LexisNexis, MasterCard, Palo Alto Networks, QVC, Pacific Gas & Electric, PayPal, Symantec, Visa, Walgreens and Yubikey. Other speakers included academics, public interest organizations and chief security officers from major companies. The White House also invited an audience of other stakeholders and experts.
The Executive Order
The executive order (EO) seeks to make it easier for the federal government and the private sector to share cyber threat information while awaiting additional action by Congress on cybersecurity legislation. It is intended to further what the president called in his address at the summit, the “shared mission” between government and industry concerning cybersecurity. “So much of our computer networks and critical infrastructure are in the private sector, which means government cannot do this alone. But the fact is that the private sector can’t do it alone either, because it is government that often has the latest information on new threats. There’s only one way to defend America from these cyber threats, and that is through government and industry working together, sharing appropriate information as true partners.”
In anticipation of the upcoming 2015 proxy season, many companies are in the process of drafting their proxy statements. The compensation discussion and analysis (CD&A) section of the proxy statement has received a great deal of attention over the past several proxy seasons as companies try to achieve successful say-on-pay votes and seek to keep up with current trends and market expectations for executive compensation disclosures. Many changes being made to the CD&A relate to presentation, with companies trying to turn the CD&A into a more visually appealing and digestible document. Companies have begun using charts and graphs with increasing frequency, and are also placing greater emphasis on presenting certain information, such as including executive summaries or lists of best and worst compensation practices. As companies consider whether to implement certain of these evolving CD&A presentation practices, they should consider whether such practices will enhance the overall quality of their compensation disclosures. The following factors may assist companies in preparing their CD&A and in considering how to implement new presentation practices:
Apparently, about $1 million if you are the CEO of Johnson Controls, Inc. At least, that is one possible takeaway from the action of the board of directors of Johnson Controls with respect to the behavior of its CEO, Alex Molinaroli. According to the Company’s 2014 proxy statement, Mr. Molinaroli’s annual bonus for fiscal year 2014 was reduced by 20 percent as a consequence of his actions in connection with an extramarital affair.
The short story is that Mr. Molinaroli and his wife of 28 years were apparently having marital difficulties. Mr. Molinaroli began an affair with the principal of a consulting firm that had a long-standing relationship with Johnson Controls. According to published reports, Mr. Molinaroli’s wife found out and reacted in a very public way. The executive committee of the board (sans Mr. Molinaroli) undertook an investigation, which resulted in Mr. Molinari being cleared of any actual wrongdoing, such as misuse of funds or improper influence. It was determined, however, that Mr. Molinaroli “failed to comply with the Company’s Ethics Policy, which required Mr. Molinaroli to timely alert the Audit Committee to a situation that could be perceived to raise issues of conflict of interest.” The consulting relationship was terminated, and, reportedly, so was the affair. Nonetheless, the board expressed its continuing faith in the leadership of Mr. Molinaroli, who had been with the company for 30 years and was promoted to CEO at the start of 2014.
On February 9, 2015, pursuant to the mandate in Section 955 of the Dodd-Frank Act, the SEC proposed new rules that, if adopted, would require public companies to disclose in their proxy or information statements relating to director elections whether the company permits employees (including officers) or directors to hedge or offset any decrease in the market value of the equity securities of the public company or its affiliates. The proposed rules do not prohibit hedging transactions, but rather are intended to provide transparency to shareholders on whether employees or directors are permitted to engage in transactions that mitigate or avoid the incentive alignment associated with equity ownership. The proposed rules, which are discussed more fully below, are set forth in Release No. 33-9723. Public comments on the proposed rules must be received within the 60-day period following their publication in the Federal Register.
Summary of the Proposed Rules
The proposed rules would add new paragraph (i) to Item 407 of Regulation S-K, which would require disclosure in proxy or information statements relating to the election of directors about whether any employees (including officers) or directors, or any of their designees, are permitted to engage in transactions to hedge or offset any decrease in the market value of equity securities that were either granted to the employee or director by the company as part of their compensation or are held, directly or indirectly, by the employee or director.
On February 10, 2015, the White House announced that it will create a new agency tasked with facilitating the sharing of cyber threat information among other federal agencies. Lisa Monaco, assistant to the president for Homeland Security and Counterterrorism, made the announcement in a speech in Washington, D.C. With serious cyber attacks aimed at the private sector increasing, the federal government is now working to augment and better organize its resources to help identify and reduce these threats. Today’s move underscores the heightened need and efforts of the Obama administration to address cyber threats to both the private sector and federal agencies. “The cyber-threat is one of the greatest threats we face, and policymakers and operators will benefit from having a rapid source of intelligence,” Monaco said in an interview.
Dubbed the “Cyber Threat Intelligence Integration Center” (CTIIC), the agency will be modeled on the National Counterterrorism Center, which was created after the 9/11 terrorist attacks, and will fall under the authority of the director of National Intelligence. Under a new White House plan, industry will share cyber threat information with the Department of Homeland Security, which will share the data with the CTIIC. Further, the new center will share that information with the rest of the federal government and help federal officials aid industry, she said.
During 2014, the Delaware courts again issued a number of decisions directly impacting the M&A practice. Below we describe our picks for the top 5 developments for M&A practitioners with the following key takeaways:
1. MFW standard applied
- Business judgment rule applies to going-private transactions involving a controlling stockholder on the buy-side if the merger is conditioned from the start on the approval of both (a) an attentive special committee of independent directors that can decline the transaction, retain its own financial and legal advisors and negotiate a fair price and (b) a majority of the uncoerced and fully informed minority.
2. Control explained
- A minority stockholder has “control” if it has “actual control” and power over the board’s decision-making process in the transaction.
- A non-majority controlling stockholder who is not on both sides of a transaction will not trigger entire fairness review.
3. Indemnification tested
- A non-consenting stockholder cannot be bound by a broad release of claims in a letter of transmittal or be subject to an uncapped and indefinite indemnification obligation, which requires a direct contractual obligation between the parties.
- Parties should consider the interaction of indemnification provisions with relevant statutes of limitations and survival periods and ensure that the required notices and relevant information are given in a timely manner to preserve a claim.
4. Revlon and fiduciary duties examined
- Revlon does not require an active pre-signing market check, especially if the board has the ability to conduct a passive post-signing check.
- Courts tend to respect decisions by boards in which a majority of the directors are independent, but such deference is very fact-specific and therefore not easily replicated.
5. Delaware reaches out
- Forum selection clauses are enforceable and courts can limit the use of information gathered from books and records requests to actions brought in Delaware courts.
- A fee-shifting bylaw of a non-stock corporation was upheld, but the Delaware legislature will weigh in on this in 2015.
Click here to read an in-depth analysis of these topics.
Directors should make sure that their companies maintain robust compliance programs and disclosure controls and procedures, as the SEC has stepped up its enforcement efforts with a goal of pursuing all types of violations of the federal securities laws. SEC Chair Mary Jo White has vowed to pursue even the smallest infractions, basing the SEC’s “broken windows” enforcement policy on the theory that “minor violations that are overlooked or ignored can feed bigger ones, and, perhaps more importantly, can foster a culture where laws are increasingly treated as toothless guidelines.”i And just over a year into her tenure, she has done just that, with the SEC filing a record 755 enforcement actions in 2014.ii
These enforcement actions span the securities industry and include several first-ever cases. Among other things, the SEC continued its aggressive cross-border anti-corruption enforcement in 2014, filing significant actions against several companies under the Foreign Corrupt Practices Act (FCPA), and obtaining the highest-ever FCPA penalties against individuals. Signaling that “even the smallest infraction” will be pursued, the SEC recently brought enforcement actions against 34 individuals and companies for failure to promptly report their securities holdings and transactions as required under Section 13(d) or (g) and Section 16 of the Securities Exchange Act of 1934, and against 10 micro-cap companies for failing to file required Form 8-Ks disclosing certain financing agreements and unregistered stock sales.
This week the U.S. Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (OCIE) announced the results from a sweep of U.S. broker-dealers and investment advisers on cybersecurity. The review of 57 broker-dealers and 49 investment advisers by the Cybersecurity Examination Initiative was initiated last April, with the questions published in an unprecedented risk alert, discussed here. The results from the review are in and although the SEC didn’t issue a grade, it appears the broker-dealers were better prepared for cybersecurity risks than the investment advisers.
Today, the White House indicated that it has issued an interim report on big data and privacy. The interim report follows an initial report issued in May 2014, which President Obama commissioned in order to examine the impacts and effects that the use of “big data” can have on individuals’ daily lives. The interim report is another building block in the Administration’s efforts to leverage the enormous and varied uses of big data, while at the same time protecting and respecting individual privacy. The White House will soon release an additional legislative proposal concerning student data privacy (previously announced in January), in addition to the Council of Economic Advisors report on discriminatory pricing practices also issued today in conjunction with the interim report.
These reports and legislative proposals are all part of a larger, concerted focus by the administration on cybersecurity, data security, and privacy in general. Additionally, Congress is also working on several different aspects of these issues, and has held several hearings on cybersecurity and data breach notification legislation in the past weeks. Continued debate on these issues is expected for several months as Congress and the Administration both seek to reach agreements in order to better protect the nation from the myriad of cyber threats we now face.
Executive compensation remains a hot topic for yet another year, particularly with pay disparity and pay for performance regulations still looming. We highlight below some of the matters directors should be considering as they craft executive compensation for 2015:
- Say-on-Pay Vote. The vast majority of companies receive what seems to be routine approval of C-suite compensation with approximately 98 percent of companies receiving majority shareholder support for their executive pay packages in 2014.i But boards should not let down their guard. Just because a company had a successful say-on-pay vote one year, does not mean there will not be issues down the road, particularly if there is a misalignment between executive pay and company performance, if pay is extremely high for executives, or if the company has other problematic pay practices.
The increasing cost of healthcare is a significant concern for companies that provide health care benefits to their employees. With certain key provisions of the Patient Protection and Affordable Care Act, more commonly known as Obamacare, still looming, and with health care costs expected to grow 6.8 percent in 2015,i boards of directors need to understand how health care costs will impact their company’s cost structure and strategy going forward. Set forth below are several actions that boards should be considering:
- Review and redesign, if necessary, current health care programs. Many companies are using health care reform as a catalyst to review and redesign their health care programs to slow the rising costs. A growing number of companies are already using private online exchanges to deliver their health care benefits, including Walgreens, Sears Holding Corp., Petco, Kinder Morgan and Darden Restaurants, and more companies are considering jumping on the private exchange bandwagon in the future. Generally speaking, under a private exchange program, employers give their employees a fixed sum of money and require the employee to shop for insurance coverage on a private online exchange. An estimated three million employees are currently getting insurance from their employers through a private online exchange, which number has tripled from a year ago and is projected to grow to 40 million by 2018.ii In addition, according to a report by Aon Hewitt, companies that use the private exchange concept benefit from lower health care costs than most other employers, with coverage rates increasing an average of 5.3 percent in 2015 for companies on a private exchange versus a six to eight percent increase for large self-insured employers.iii
On January 23, 2015, the Securities and Exchange Commission (SEC) Staff issued a no-action letter that would allow issuers to conduct tender offers for their nonconvertible debt securities in a period of only five business days, subject to certain limitations described below.
Although Rule 14e-1(a) of the Securities Exchange Act of 1934 generally requires a minimum offer period of 20 business days for all tender offers (debt or equity), the SEC Staff issued a series of no-action letters from 1986 to 1990 that provided relief from this 20-business-day requirement in the context of certain issuer debt tender offers. Specifically, the SEC Staff granted no-action relief for issuer tender offers for investment-grade, nonconvertible debt securities that are held open for a period of seven to 10 calendar days, assuming certain other qualifications were met.
In recent years, the Committee on Foreign Investment in the United States (CFIUS) has acted to thwart or constrain various foreign investments in U.S. businesses. However, other similar investments have been permitted to proceed without significant interference from CFIUS. Below we discuss practice tips, based on lessons learned from past deals, to help investors successfully navigate these risks and obtain clearance from CFIUS.
As background, CFIUS is an interagency committee that reviews the national security implications of a wide range of foreign acquisitions and investments in U.S. businesses. Specifically, CFIUS has jurisdiction to review “covered transactions” that result in a foreign person’s control of a U.S. business. CFIUS has the authority to review, block and unwind transactions, either prior to or after closing that threaten to impair the national security of the United States.
SEC Staff Will No Longer Issue No-Action Letters on Conflicting Shareholder Proposals During the 2015 Proxy Season
The staff of the U.S. Securities and Exchange Commission’s Division of Corporation Finance (the “SEC Staff”) recently announced that it would refuse to grant no-action relief during the 2015 proxy season to companies seeking to exclude any shareholder proposal on the basis that the shareholder proposal conflicts with a management proposal. The announcement coincided with Chair Mary Jo White’s directive to the SEC Staff to review its long-standing views on when a shareholder proposal conflicts with a management proposal on the same topic and thus may be excluded from a company’s proxy materials. Chair White’s directive was made amid growing criticism from investor groups over the SEC Staff’s decision in December 2014 to grant a no-action letter to Whole Foods, permitting it to exclude a shareholder proposal on proxy access by including its own less-investor-friendly proposal on the subject.
Energy & Commerce Subcommittee Holds Hearing on Data Security and Breach Notification; FTC Releases “Internet of Things” Report
Today, the House Energy & Commerce Subcommittee on Commerce, Manufacturing, and Trade held its first hearing of the 114th Congress, entitled “What Are the Elements of Sound Data Breach Legislation?”
Chairman Michael Burgess (R-TX) opened by stating that the purpose of the hearing was to begin work on a single, federal standard for data security and breach notification. He stated that data security requirements should be flexible and should not extend to sectors already regulated (such as financial firms under the Gramm-Leach-Bliley Act or the health care sector). Several high-ranking Republican members, including Reps. Leonard Lance (R-NJ), Committee Chairman Fred Upton (R-MI) and Marsha Blackburn (R-TN), echoed his support for a single national standard. Each repeated past arguments in favor of a single standard, including ease of compliance and lower compliance costs. Chairman Upton stated that he looks forward to working with Democrats and the White House to advance a bill.
Earlier this month, a federal judge in New Jersey held that a secretly recorded conversation between a former chief executive officer and his general counsel may be used by prosecutors as evidence against the former executive in a bribery trial. The ruling serves as an important reminder regarding the limitations of the attorney-client privilege.
Joseph Sigelman, former CEO of PetroTiger Ltd., has been charged with violating the Foreign Corrupt Practices Act (FCPA) by his alleged participation in a conspiracy with two former colleagues to obtain kickback payments and to pay bribes to a Colombian official in connection with a multimillion-dollar business deal. Sigelman and two of his former colleagues, former co-CEO Knut Hammarskjold and former general counsel Gregory Weisman, allegedly conspired to obtain kickbacks in connection with PetroTiger’s acquisition of another company and pay bribes to a Colombian official to secure a $39 million contract to perform services for Colombia’s national oil company. Sigelman and his co-conspirators allegedly paid more than $330,000 in bribes and attempted to disguise them as payments for phony consulting services allegedly performed by the Colombian official’s wife.
Finding the right mix of people to serve on a company’s board of directors is undoubtedly a difficult task. With increasing globalization, changing marketplace dynamics and shareholder expectations, it is essential that boards have the right mix of experience and expertise to oversee the opportunities and challenges that their companies face. Finding directors with the right skills, however, is not the only thing boards should be considering. As discussed below, to achieve optimal board composition consideration should also be given to the diversity of the board, director tenure and board size, all of which have been making headlines as of late.
President Calls on Congress to Pass Cybersecurity, Data Breach Bills; Congress Begins Action on the Issue
In his sixth State of the Union Address to Congress, President Obama again called on Congress to strengthen the nation’s cybersecurity laws and enact a federal standard for data security and breach notification. Speaking before a joint session of Congress, the president stated that “No foreign nation, no hacker, should be able to shut down our networks, steal our trade secrets or invade the privacy of American families.” His remarks follow a week-long focus on cybersecurity and data security, including the release of several legislative proposals which he urged Congress to adopt.
It appears that Congress is also moving quickly to address the issue. In the House, Dr. Michael Burgess (R-TX), chairman of the Energy & Commerce Subcommittee on Commerce, Manufacturing and Trade, has scheduled a hearing on breach notification legislation on January 27, 2015. The hearing, entitled “What are the Elements of Sound Data Breach Legislation?” is the first step in crafting a breach notification bill in the House, which Chairman Burgess states will be a top priority for his subcommittee. Noting the president’s action on this issue, Burgess stated that “I am encouraged by the president’s recent focus on this issue and call for a national standard, and I agree. Working toward a federal data breach solution is a top priority for our new Congress.”
The new 114th Congress has now convened, and speculation is widespread as to the tax legislative agenda for 2015. Republicans now control both houses of Congress, and new chairmen are in place in leadership roles of both tax-writing committees. While much is new in the Congress and in the two tax committees, many tax legislative issues are recurrent and are likely to demand attention in 2015. Some issues will be driven by calendar deadlines—others will be discretionary with the two chairmen and dependent on the emergence—or failure—of political consensus. Others still could be driven by adoption of a congressional budget resolution for FY 2016 with reconciliation instructions requiring legislative action by the tax committees. This update identifies the critical calendar deadlines that will confront the two tax committees, as well as other significant tax policy issues, such as tax reform, that could emerge in the course of the year.
Click here to read the full alert.
This week, we enjoyed reading this article, How Twitter is Disrupting Shareholder Activism, by Professor Seth C. Oranburg, about how Twitter and other social media platforms are changing the dynamics of shareholder activism.
On January 15, 2015, the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC) and the U.S. Department of Commerce, Bureau of Industry and Security (BIS) released regulatory amendments implementing the Cuba policy shift announced by President Obama in December 2014 (See prior alert here). These changes to the Cuban Assets Control Regulations (CACR) and the Export Administration Regulations (EAR) take effect on January 16, 2015.
While the Cuba embargo remains in place, the changes aim to further engage and empower the Cuban people by facilitating authorized travel to Cuba, authorizing certain commerce, allowing increased remittances and improving the flow of information to and from Cuba. In doing so, these new rules open opportunities in Cuba for companies and individuals in the United States and elsewhere.
Click here to read the full alert.
FTC Revises Hart-Scott-Rodino Thresholds; Minimum Size of Transaction Test Increases to $76.3 Million
On January 15, 2015, the Federal Trade Commission (FTC) announced the latest annual revision to the size thresholds governing premerger notification requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, Section 7A of the Clayton Act, 15 U.S.C. § 18a (the “HSR Act”).1 The HSR Act requires parties to transactions meeting certain size and other tests to file premerger notification forms with both the FTC and the Department of Justice Antitrust Division and observe a mandatory waiting period prior to closing. The new thresholds will apply to transactions consummated on or after the effective date, which is 30 days following publication of formal notice in the Federal Register.
Click here to read the full alert.
The new 114th Congress has now convened and speculation is widespread as to whether tax reform can be successfully pursued in 2015. The successful 1986 Tax Reform Act navigated its way through a politically divided Congress a full generation ago—demanding the very best of our Congress and president, and requiring political leadership, bipartisan cooperation and substantive compromise—the essential hallmarks of the 1986 Act—over a sustained two-year period. Make no mistake about it—to succeed, nothing short of a determined bipartisan effort and shared commitment will be required again.
At present, the fundamental building blocks for a successful tax reform effort are not in place. Those fundamentals include whether tax reform should be structured comprehensively to include both individual and corporate reform (the “1986 Act model”) or whether corporate tax reform should proceed separately and go first. As part of this latter consideration, a fundamental divide must be resolved between those favoring reform for public C corporations and those favoring more expansive “business” tax reform, including sole proprietors and “pass-through” business entities including partnerships, Subchapter S corporations, master limited partnerships (MLPs) and limited liability companies. Finally, a fundamental difference of opinion must be bridged between congressional Republicans who favor structuring tax reform to be “revenue neutral” and President Obama and congressional Democrats who favor raising some additional revenues from tax reform to be utilized for deficit reduction or infrastructure investment. This latter difference extends to the issue of whether “dynamic” scoring or conventional budget scorekeeping conventions should be used to measure the revenue effects of tax reform whatever its underlying structure.
President Obama is continuing to focus on cybersecurity and privacy issues and proposals in the buildup to his State of the Union address, underscoring the importance of addressing these matters and the increase in bipartisan interest in action. During his visit to the Department of Homeland Security’s National Cybersecurity and Communications Integration Center (NCCIC) today, the president announced further actions his administration is taking to enhance cybersecurity and privacy protections, following the announcement of two forthcoming legislative proposals on privacy yesterday.
The president announced that the White House is updating its 2011 Cybersecurity Legislative Proposal to “encourage the private sector to share appropriate cyber threat information with the [NCCIC], which will then share it in as close to real-time as practicable with relevant federal agencies and with private sector-developed and operated Information Sharing and Analysis Organizations (ISAOs) by providing targeted liability protection for companies that share information with these entities.” The proposal would also protect individual privacy by “requiring private entities to comply with certain privacy restrictions such as removing unnecessary personal information and taking measures to protect any personal information that must be shared in order to qualify for liability protection.” The proposal would require the Department of Homeland Security and the attorney general, in consultation with the Privacy and Civil Liberties Oversight Board and others, to develop receipt, retention, use and disclosure guidelines for the federal government.
Today, President Obama announced a series of new bills and voluntary partnerships the White House will launch in order to further protect individual privacy in the wake of several high-profile data breaches at major U.S. and multinational companies. Speaking at the Federal Trade Commission, the president announced that the White House will send Congress two pieces of proposed legislation in the coming weeks.
The first, dubbed the “Personal Data Notification and Protection Act” would create a single, national standard for notifying impacted consumers of a data breach at a private company. The draft legislation would require companies to notify customers within 30 days of the discovery of a breach. The legislation would likely preempt the patchwork of a multitude of state laws pertaining to breach notification. While business interests will likely greet the announcement favorably, several privacy groups are worried that the draft bill could create a weaker standard than is already in place in several states, while not allowing states to enact or retain stronger standards. The bill would also criminalize illicit overseas trade in identities.
This week, we wanted to highlight this article on The Top Ten D&O Stories of 2014, discussing the most significant changes in the directors & officers liability environment and their possible implications for 2015.
Recently, New York City Comptroller Scott Stringer, who oversees five municipal public pension funds with $160 billion in assets, announced an initiative to give shareholders who meet specified criteria the right to nominate directors at U.S. companies. Dubbed the “Boardroom Accountability Project,” the New York City Pension Funds are attempting to use the proxy access process to “improve the responsiveness of corporate boards to shareowners.” As an initial step, the Comptroller, on behalf of the funds, simultaneously submitted shareholder proposals to 75 companies. The Project targeted companies based on their corporate practices regarding board diversity, climate change and/or executive compensation.
Risk management goes hand in hand with strategic planning—it is impossible to make informed decisions about the company’s strategic direction without a full understanding of the risks involved. An increasingly interconnected world economy continues to spawn newer and more-complex risks that challenge even the best-managed companies. According to one survey, reputational risk and cybersecurity/IT risk are the leading concerns among board members. How boards respond to these risks is critical, particularly with the increased scrutiny being placed on boards by regulators, shareholders and the media.
M&A activity has been picking up steam during 2014, and is on track to be the biggest year since 2007. Over $2.5 trillion in deals were announced in the first nine months of 2014, with U.S. deal volume leading the way, up 65 percent this year.1 Europe and the Asia-Pacific region are also experiencing increased deal volume, up 27 percent and 24 percent, respectively, from last year.2 An improving economy, large cash balances and cheap debt are the primary drivers fueling this uptick in M&A activity.
Mega deals contributed to the increase in overall deal volume, signaling growing confidence by boards to undertake large, strategic and transformative deals, with the majority coming from the pharmaceuticals, life sciences, telecom and technology industries.3 The inversion trend, where a U.S. company merges with a foreign company in a country with a lower corporate tax rate, also added to M&A activity, accounting for four of the top 10 largest deals in 2014.4 This trend will likely cool in 2015, however, due to new rules announced by the U.S. Treasury Department and the Internal Revenue Service that make inversion transactions more difficult and less rewarding for companies.
Shareholder activism is on the rise, and activists are becoming more creative in building alliances. With the success that activists are experiencing, and the billions of dollars that they are raising, there is no doubt that activism will continue in 2015.
As of October 15, 249 activist campaigns had been launched so far this year, up from 202 for the same period last year.1Whether they are demanding board seats or the removal of officers and directors, launching a hostile bid or advocating specific business strategies, activists are becoming even more of a force to be reckoned with. And activists are emerging with ambitious and creative tactics, most notably the bidder-activist collaboration model used by Valeant Pharmaceuticals and Pershing Square Capital Management L.P. in their hostile bid for Allergan. Although ultimately losing the bid to another buyer, Pershing Square, as a 9.7 percent shareholder, stands to collect $2.6 billion, which profit will likely spur others to try some version of this approach.
In light of the success that activists have experienced in 2014, activist funds are enjoying an influx of capital. Activist investors raised billions of dollars in 2014, growing their funds under management by $9.4 billion in the first half of 2014 to $111 billion.2Considering that returns are averaging 5.9 percent, compared to a 3.9 percent gain for hedge funds in general, the money will likely keep coming.3As the activists grow, so does the size of their targets. In 2013, the U.S.-listed companies targeted by activists had an average market capitalization of $10 billion, up from less than $2 billion at the end of the last decade.4
Directors are becoming much more attuned to the important role that information technology will play in their company’s future. According to PricewaterhouseCooper’s (PwC) 2014 Annual Corporate Directors Survey, 82 percent of directors believe that their company’s IT strategy contributes to and is aligned either “very much” or “moderately” with setting their company’s overall strategy.1 As the pace of technological change continues to accelerate, it becomes ever more difficult to stay abreast of changes, much less grasp their implications. This poses significant challenges for management and the boards of directors overseeing management’s plans.
Perhaps nowhere are the advances in technology more prevalent than in the information domain. The explosion of mobile technologies and social media is changing the way companies compete. Directors need to understand how these technologies are shaping the competitive landscape and fundamentally changing the rules of engagement with customers. In a digital world where one tweet or one Facebook “like” regarding a company’s products or services can go viral in a matter of seconds, the power has shifted to the customer, who is increasingly socially-connected and well-informed regarding products and pricing. Directors need to assess how these changes in customer behavior, as well as the rise in e-commerce and advances in IT, will affect the company’s business model, particularly for companies in the retail sector. Cyber Monday 2014 set a record for the biggest online shopping day ever.2 And by 2017, e-commerce sales are expected to account for over 10 percent of retail sales in the United States, and 60 percent of all U.S. retail sales are expected to involve the Internet in some way, either as a transaction or as a part of a shopper’s research.3 This dramatic change in the retail experience requires to consider difficult questions, such as how much brick-and-mortar the company needs, whether the company needs to revise its pricing, advertising and marketing strategies, how the company should deal with lead generators, and whether the company is efficiently utilizing its employees, office space and supply chain and distribution channels.
“Boards that choose to ignore, or minimize, the importance of cybersecurity oversight responsibility do so at their own peril.” SEC Commissioner Luis A. Aguilar, June 10, 2014.1
Cybersecurity has become a risky business and boards need to be prepared. At least 3,000 U.S. companies were the victim of some kind of hack last year, and the annual cost of cyber-crime to the global economy is estimated to exceed $445 billion.2 In the wake of prominent breaches, the CEO and CIO of Target resigned, boards of directors of Target and Wyndham Hotels were sued for breach of fiduciary duty, and Institutional Shareholder Services Inc. (ISS) openly campaigned against members of Target’s audit and corporate responsibility committees because “these committees should have been aware of, and more closely monitoring, the possibility of theft of sensitive information.”
Strategic planning again tops the list of topics to which directors want to devote more time.1 Overseeing the company’s direction is one of the core responsibilities of directors. It often requires directors to step back and look at the company’s business from the “20,000 foot level” by considering the major factors that will likely impact their company’s business and ensuring that management has formulated a strategic direction for the company that takes these factors into account. Depending on a company’s international exposure and line of business, management and directors face particular challenges from uneven economic growth and rising geopolitical tensions as they craft their company’s plans for 2015 and beyond.
Despite a resurgent U.S. economy, the global economic outlook remains tenuous. Growth in China, the world’s second largest economy, dipped to a five-year low in the third quarter of 2014. Japan, the world’s No. 3 economy, has slipped back into recession, and most of the Eurozone is battling high unemployment, stagnation and fears of deflation. The United States, however, is on the upswing, having enjoyed three percent growth in four of the last five quarters, and many analysts foresee this level of growth continuing through 2015.2 However, there are growing concerns that the economic malaise being experienced in other parts of the world will eventually slow the U.S. economic engine.
On Wednesday, President Obama announced that the United States will initiate discussions with Cuba to re-establish diplomatic relations for the first time in more than 50 years, and relax other established sanctions restrictions on Cuba. These changes come in conjunction with a number of high-profile developments, including an hour-long call between President Obama and Cuban President Raúl Castro, the first such call between leaders of the two countries since the 1959 Cuban Revolution. Cuba also released detained U.S. Agency for International Development contractor Alan Gross, an unnamed American intelligence agent and other political prisoners held in Cuba.
The White House has indicated that the Administration intends to take a number of actions to move forward toward “normalization” of U.S.-Cuba relations in the weeks and months ahead. However, until concrete actions are taken to amend and implement these changes as a matter of U.S. law, it is important to understand that established U.S. sanctions on Cuba remain unchanged and fully in effect. Provided below is an overview of how the White House has indicated it will proceed with easing U.S. sanctions on Cuba in the months ahead, along with the associated legal, political and policy considerations affecting the potential scope and pace of these changes.
Click here to read the full alert.
Last week, the U.S. Congress passed S. 2142 (the “Venezuela Defense of Human Rights and Civil Society Act of 2014”) and presented the legislation to President Obama for signature. White House officials have indicated that President Obama plans to sign the bill into law.
The stated impetus of the legislation is to respond to reported acts of violence committed by members of Venezuela’s state security forces and intelligence services, and the use of Venezuela’s judicial system for the political persecution of members of the country’s civilian population. While the scope of the bill narrowly focuses on individuals targeted for sanctions in connection with their involvement in such abuses, U.S. businesses have raised concerns that the legislation could provide an incremental step towards broader sanctions against the Venezuelan economy, including the country’s oil industry. The bill directs the President to impose sanctions against any person, including any current or former official of the government of Venezuela or person acting on behalf of that government, who is determined to have:
- perpetrated, or is responsible for ordering or otherwise directing, significant acts of violence or serious human rights abuses in Venezuela against persons associated with the anti-government protests in Venezuela that began on February 4, 2014;
- ordered or otherwise directed the arrest or prosecution of a person in Venezuela primarily because of the person’s legitimate exercise of freedom of expression or assembly; or
- knowingly materially assisted, sponsored or provided significant financial, material or technological support for, or goods or services in support of, the commission of such acts.
Click here to read the full alert.
As we all know, 2014 is shaping up to be one of the most vigorous years for activist investing. Certain activists have generated solid returns for investors and pension funds and other institutional investors are becoming more comfortable allocating capital to managers with an activist streak. At the recent DealBook Conference, Goldman Sachs CEO Lloyd Blankfein said every shareholder is now either an activist or supportive of one.
What that means is that 2015 will likely be another year of board shakeups, heated proxy contests, shareholder proposals and even new forms of activism. We are already hearing from both investors and corporate clients that they are gearing up for some interesting battles. Target companies will be larger in size as activists have more capital to allocate and, because of new guidance from the SEC on proxy advisors, votes may be harder to come by on both sides.
We continue to keep a close watch on the sanctions imposed upon Russian businesses. Here, we discuss the Ukraine Freedom Support Act of 2014, which was passed by the U.S. Congress this week. This was originally featured on our AG Speaking Energy blog.
On Saturday, the U.S. Congress passed the Ukraine Freedom Support Act of 2014 (H.R. 5859), which, once signed by the president, will impose or authorize broad sanctions on Russia’s energy and defense sectors and increase military and nonmilitary assistance to Ukraine.White House officials have indicated that the President is expected to sign the legislation into law.
In a landmark insider trading decision issued on December 10, 2014, the U.S. Court of Appeals for the 2nd Circuit made important pronouncements favorable to the defense on two recurring and important legal issues: (1) what is the standard for an improper personal benefit to a tipper in cases where there is no direct financial quid pro quo; and (2) what level of knowledge regarding the personal benefit is required on the part of a downstream tippee. The Court of Appeals’ decision reins in recent aggressive prosecutions that have pushed the limits of insider trading law. It will also affect future U.S. Securities and Exchange Commission (SEC) enforcement cases, especially those brought in the 2nd Circuit.
In United States v. Newman, No. 13-1837-cr (L) (2d Cir. Dec. 10, 2014), the 2nd Circuit threw out the insider trading convictions of Todd Newman, a portfolio manager at Diamondback Capital Management, and Anthony Chiasson, a portfolio manager at Level Global Investors. Both defendants had been convicted of conspiracy and securities fraud for trading in the securities of Dell and NVIDIA based on material nonpublic information that they obtained from analysts who worked at their firms. The analysts, in turn, had obtained the information via a multi-level disclosure chain originating with insiders working at Dell and NVIDIA. Newman and Chiasson were three and four levels removed from the original tippers, respectively. Their trades in these securities resulted in profits of $4 million and $68 million for their hedge funds. The information at issue consisted of the companies’ nonpublic earnings numbers.
OFAC Clarifies Treatment of Deferred Payments, Oil and Gas “Production,” and Arctic Offshore Projects Under Russia Sanctions Regime
On December 11, 2014, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) released new guidance related to existing U.S. sanctions against Russian entities designated on the Sectoral Sanctions Identification List (“SSI List”). Specifically, OFAC released the following three Frequently Asked Questions (FAQs) on its website:
- FAQ 419 providing guidance regarding the treatment of deferred payment terms under Directives 1, 2 and 3
- FAQ 420 clarifying the meaning of “production” in Directive 4
- FAQ 421 explaining the meaning of “Arctic offshore” projects in Directive 4.
U.S. public companies face a host of challenges as they enter 2015. Here is our list of hot topics for the boardroom in the coming year:
1. Oversee strategic planning in the face of uneven economic growth and rising geopolitical tensions
2. Oversee cybersecurity as hackers seek to infiltrate even the most sophisticated information security systems
3. Assess the impact of advances in technology and big data on the company’s business plans
4. Cultivate shareholder relations and assess company vulnerabilities as activist investors target more companies
5. Consider the impact of M&A opportunities
6. Oversee risk management as newer and more complex risks emerge
7. Ensure appropriate board composition in light of increasing focus on diversity, director tenure and board size
8. Explore new trends in reducing corporate health care costs
9. Set appropriate executive compensation
10. Ensure the company has a robust compliance program as the SEC steps up its enforcement efforts and whistleblowers earn huge bounties
Click here to read an in-depth analysis of these topics.
This week, there has been a flurry of last-minute action on various cybersecurity items in both the House and Senate. Much of the legislative activity involved modest adjustments to, or confirmation of, the authority or responsibilities of some government agencies in the area of cybersecurity, or a focus on existing or needed cybersecurity skills in the government workforce. Most notably, the House and Senate quickly passed Sen. Rockefeller’s Cybersecurity Act (described below) on Thursday by unanimous consent agreements.
On Monday evening (December 8, 2014), the Senate passed a bill to update the Federal Information Security Management Act (FISMA), a 12-year-old law that governs federal government information security. The bill, known as the Federal Information Security Modernization Act (S. 2521), passed by voice vote under unanimous consent in a nearly empty Senate chamber. By law, the White House Office of Management and Budget (OMB) has oversight of federal agencies’ information technology security. However, OMB has recently begun ceding some of its authority in this area to the Department of Homeland Security (DHS), since OMB does not have the resources that DHS does at a time when cybersecurity has become more critical in government operations. The Senate bill, sponsored by Sen. Tom Carper (D-DE), would codify those actions. The House passed its version of FISMA reform in 2013, but, unlike the Senate measure, the House bill did not designate a role for DHS to assist other federal agencies in implementing cybersecurity protections. Instead, the House passed S. 2521 on Wednesday, December 10, 2014, again on voice vote without objection. The bill heads to the president’s desk, where it is expected to be signed into law.
American Bankruptcy Institute (ABI) Reform Commission Releases Report Recommending Significant Changes to Chapter 11
On December 8, 2014, the American Bankruptcy Institute (ABI) Commission to Study the Reform of Chapter 11 published a 400-page report containing far-reaching recommendations. The report is the result of a three-year study process undertaken by a number of leading insolvency and restructuring practitioners charged by ABI with evaluating the U.S. business reorganization laws and proposing reforms “that will better balance the goals of effectuating the effective reorganization of business debtors ─ with the attendant preservation and expansion of jobs ─ and the maximization and realization of asset values for all creditors and stakeholders.”
Click here to read the full alert.
Employers throwing an annual holiday party also throw open a door to a range of potential risks. From unfortunate slip-and-fall accidents to claims of harassment to tragic accidents on employees’ drives home, only one thing is a virtual certainty: any victims will seek to hold the employer responsible for their injuries.
As part of the ongoing conversation on fee shifting, here’s an interesting piece by Professor Coffee on the “loser pays” rule, and its impact on shareholder litigation.
Antitrust-Related Recent Developments: DOJ settles gun-jumping case, FTC issues fines for failure to submit HSR filing and FTC settles with patent assertion entity
DOJ fines particleboard manufacturers $4.95 million for gun-jumping violations
On Friday, November 7, 2014, two companies agreed to pay $4.95 million to settle U.S. Department of Justice (DOJ) allegations that the companies failed to observe the antitrust waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act (“HSR Act”) and entered into an illegal agreement to allocate customers in violation of Section 1 of the Sherman Act.
Global Legal Group recently published the 11th edition of The International Comparative Legal Guide to: Merger Control 2015. Akin Gump lawyers Davina Garrod and Jennifer Harvey contributed to the publication by authoring a chapter entitled “EU Merger Control Reform: Expanding Jurisdiction to Capture Minority Shareholding Acquisitions."
This is an important development that has come to the forefront of merger control issues. As Margrethe Vestager’s position as Commissioner for Competition has now been confirmed, she will decide whether the EU Commission (“Commission”) moves forward with the proposals to reform the EU Merger Regulation (“EUMR”). A decade since the last major overhaul of the EUMR, Commissioner Almunia initiated the reform last summer with a public consultation. The most controversial proposal was a potential extension of the EUMR to include jurisdiction to review non-controlling minority interests. The proposals for reform at the time were rather vague.
On November 18, 2014, the U.S. Court of Appeals for the D.C. Circuit granted the SEC’s motion to rehear the court’s decision in NAM v. SEC. As covered in previous blog posts, the court’s NAM decision held that portions of the SEC’s conflict minerals reporting requirements run afoul of the First Amendment. The D.C. Circuit’s ruling in a subsequent case, American Meat Institute v. U.S. Department of Agriculture, questioned the standard of review that the court applied in the NAM case.
The American Meat case considered whether the scope of the standard of review for claims of government compelled speech established by the Supreme Court in the Zauderer v. Office of Disciplinary Counsel (1985) case. The Zauderer standard is more relaxed than it was in Central Hudson Gas & Electric v. PSC of New York (1980). Under Zauderer, if a government disclosure requirement is “purely factual” and “non-controversial” there must be a “reasonable fit” or “reasonable proportion” between the means and the ends. The conflict minerals court declined to apply the Zauderer standard of review outside of consumer deception, whereas the American Meat court held that Zauderer does in fact “reach beyond problems of deception.”
A recent statement by Justice Antonin Scalia accompanying the Supreme Court’s denial of certiorari in a criminal insider trading case raises fundamental questions about how the courts interpret the federal securities laws and the degree of deference they give to the SEC in the context of criminal enforcement.
Hedge fund manager Doug Whitman was convicted in 2012 on evidence that he traded the stock of several public companies after receiving inside information. Whitman was convicted under Section 10(b) of the Securities Exchange Act, the principal antifraud statute governing insider trading, which makes it unlawful to “use or employ” a deceptive device or contrivance in connection with the purchase or sale of a security. On appeal to the Second Circuit, Whitman argued that he was prejudiced by the trial judge’s instruction to the jury that it could find him guilty if inside information was “at least a factor” in his trading decision. Whitman contended that the threshold should be higher, requiring proof that inside information was a significant factor in his trading decision, consistent with the law in the 9th Circuit.
SEC Adopts New Regulation to Govern the Technology Systems of the National Exchanges and Certain Other Market Participants
On November 19, 2014, the five commissioners of the U.S. Securities and Exchange Commission (SEC) unanimously voted to adopt Regulation SCI, which stands for Systems Compliance and Integrity, to govern the technology infrastructure of the U.S.’s securities exchanges and certain other trading platforms and market participants. The new rules, first proposed in March 2013, are designed to minimize disruptions to the U.S.’s markets and enhance the capability of exchanges and trading platforms to respond to, and remedy, breakdowns in their systems. The rules are the first updates in more than two decades to the technological standards governing exchange-based automated trading systems.
The adoption of Regulation SCI demonstrates the SEC’s commitment to requiring greater vigilance from the entities it regulates on cybersecurity and technological risks. Although Regulation SCI will apply to a relatively narrow category of entities whose systems pose the gravest risk to national trading, the SEC noted that the rules, or a subset of them, may be extended to additional market participants in the future. Also, the SEC’s Office of Compliance Inspections and Examinations issued a risk alert earlier this year similarly indicating that other SEC-regulated entities, such as registered broker-dealers and investment advisors, also need to address their controls over system integrity and risk. As one of the commissioners noted in approving Regulation SCI, “it is imperative that all market participants and registrants are vigilant about identifying and protecting against cybersecurity threats.” This announcement comes on the heels of a recent finding that financial services companies plan to bolster their cybersecurity budgets by about $2 billion over the next two years, according to a PricewaterhouseCoopers survey.
Click here to read the full alert.
Earlier this week, the SEC’s Office of Investor Education and Advocacy issued an Investor Alert reminding investors seeking information and advice online to be wary of fraudulent investment schemes involving social media. In addition to cold calls and spam email, fraudsters are increasingly turning to social media sites to target unwitting investors. The SEC has five tips for those who go looking for investment opportunities online—and the tips translate for offline investment searches, too:
First, the SEC advises investors to be cautious of any unsolicited offer to invest. Difficult though it may be, resist the urge to believe that you are special online. That tempting investment offer in your LinkedIn inbox wasn’t designed just for you. In fact, the SEC encourages investors to report such unsolicited messages advertising “can’t miss” investments to the SEC Complaint Center.
Second, the SEC reminds investors of the common “red flags” of fraud: if it sounds too good to be true, it probably is; nothing in life is guaranteed (especially risk-free investment returns); and true “once-in-a-lifetime” investments are unlikely to be advertised.
Earlier this week, the U.S. Department of Justice (DOJ) issued its second public opinion release of the year in response to a question posed regarding the applicability of the U.S. Foreign Corrupt Practices Act (FCPA) to a propounded set of facts. The opinion announced a decision by the DOJ not to take enforcement action against a U.S. issuer who uncovered evidence of potential illicit payments and substantially inadequate records while conducting due diligence on an intended foreign acquisition target. The DOJ affirmed its position taken in prior publicly released guidance by making clear that the U.S. issuer’s acquisition of the foreign company would not expose the issuer to liability for the foreign company’s prior illegal conduct, where the conduct was not actionable under the FCPA at the time the conduct occurred because there was no U.S. jurisdiction over the conduct under the statute.
An acquiring company may find little practical comfort in the conclusion of the opinion release where it intends to acquire 100 percent of the acquisition target. The opinion acknowledged the basic principle of corporate law—that, by acquiring all the outstanding shares of a company, the acquirer may also acquire successor liability over “the acquired entity’s pre-existing criminal and civil liabilities, including, for example, for FCPA violations.”
According to a recent study by Transparency International (TI), only four of the 41 Parties of the OECD (Organisation for Economic Co-operation and Development) Anti-Bribery Convention (the “Convention”) are “active” enforcers of the Convention. These results also provide an indication of the vigor of global anti-bribery enforcement efforts, because the 41 Parties of the Convention represent approximately two-thirds of the world’s exports and nearly 90 percent of all foreign direct-investment expenditures.
TI’s study reviewed 40 of the 41 Parties’ enforcement actions between 2010 and 2013 and categorized the Parties’ enforcement efforts as “active,” “moderate,” “limited” and “little or no enforcement.” The study found that the United States, Germany, United Kingdom and Switzerland are “active” enforcers. The United States topped the list, with the most investigations and prosecutions. In the second highest category, five countries ranked as “moderate” enforcers: Italy, Canada, Australia, Austria and Finland. The remaining countries all ranked at the bottom of TI’s enforcement scale, with “limited” or “little or no enforcement.”
Proxy advisory firms Institutional Shareholder Services Inc. (ISS) and Glass Lewis have both released their voting policies for the 2015 proxy season. The policy changes for U.S. companies include updates to the firms’ policies on shareholder voting on governance, compensation, environmental and social matters. ISS policy updates are effective for annual meetings held on or after February 1, 2015, while Glass Lewis policy updates are generally effective for annual meetings held on or after January 1, 2015. The policy changes are described below and are available by clicking the following links: ISS Updates and Glass Lewis Updates.
Lisa A. Peterson is a partner in Akin Gump’s Dallas/Fort Worth office, focusing on a wide array of corporate and transactional matters. These include M&A, corporate governance and other general corporate matters, investments in funds, corporations and other entities, and other transactional and commercial matters. She has blogged about a few different topics, including on the developments involving fee-shifting provisions and interesting cases.
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I represent investment vehicles, companies and high-net-worth individuals in connection with their transactional activities and day-to-day business needs.
As noted in a prior blog here, some companies have recently adopted fee-shifting provisions (i.e., language providing that a suing stockholder must pay the corporation’s legal fees and expenses if the stockholder does not obtain a judgment that substantially achieves the full remedy sought). Specifically, such provisions have now shown up in the bylaws of some Delaware and non-Delaware corporations, and at least two corporations, Alibaba Group Holding Limited (a Cayman Islands company) and Smart & Final Stores, Inc., have gone public with variations of fee-shifting bylaws in place.
To date, the Securities and Exchange Commission (SEC) has not taken any action with regard to these provisions, even though, in the Alibaba offering, the existence of the fee-shifting provision was arguably not even adequately disclosed. Some pressure is, however, being brought to bear on the SEC. For example, the chair of the SEC was recently asked by Senator Richard Blumenthal (D-CT) to take action. In his correspondence to the SEC, Senator Blumenthal states that the “potential ramifications” of the ATP decision allowing fee-shifting provisions are “immense,” and he goes on to elaborate on those potential ramifications. Senator Blumenthal then urges the SEC to refuse to permit registration statements to move forward for any company that includes such provisions.
Last week, the Supreme Court heard oral argument in Omnicare, Inc. v. The Laborers District Council Construction, No. 13-435 on whether securities class action plaintiffs must merely show that an opinion in a registration statement was false or whether they must show that defendants knew it was false when they said it. The Supreme Court appears poised to take the middle ground, whereby the issuer must have some reasonable basis for any opinion provided in the registration statement. See Transcript.
The Omnicare case involved a pharmacy operator who was alleged to be giving improper kickbacks to nursing homes who used its services. See background here and here. Plaintiffs sued Omnicare, arguing that its statement of opinion that it believed its operations complied with state and federal laws was false and thus actionable under Section 11. The Defendants responded that plaintiffs’ complaint fails because defendants subjectively believed that their opinion was true at the time, so even if their opinion was wrong in hindsight, they could not be held liable. The 6th Circuit sided with plaintiffs and held that if an opinion is proven to be false—even in hindsight—it is actionable under Section 11.
Yesterday, a coalition of 44 service and retail industry trade associations sent a letter to congressional leadership, urging the House and Senate to adopt a single data breach notification standard at the federal level. The letter, addressed to the Majority and Minority Leaders of each chamber, states that “a single, federal law applying to all breached entities would ensure clear, concise and consistent notices to all affected consumers regardless of where they live or where the breach occurs.”
The coalition letter states that any legislation to address data security and data breaches should cover all types of entities that handle sensitive data, and should not provide exemptions for certain business sectors. The letter cites several recent examples of breaches across different sectors, including the JP Morgan and Apple iCloud breaches, as well as one involving a Department of Homeland Security contractor.
Yesterday, Akin Gump’s New York office hosted several panels on today’s cyber and privacy threats and discussed best practices for addressing them constructively.
Following numerous high-profile data breaches, company leaders across industries are wondering if they are doing everything they can to minimize cyber risk and how to react when there is a breach. In response, our panels provided a comprehensive look at navigating enterprise risk management, data breach response and multi-regulatory compliance.
- Cybersecurity Risk Management and Due Diligence
This panel provided key compliance insights from recent high profile data breaches and discussed mitigating risks with third parties, conducting M&A cybersecurity assessments and developing proper company-wide risk management and data breach response programs.
- Responding to a Cybersecurity Breach
A cybersecurity breach has occurred, now what? This panel discussed necessary investigative steps, with attention to the role played by technical experts, and the benefits and risks of reporting the incident to federal law enforcement agencies. The panelists also addressed what happens if the investigation reveals that personal data about individuals was breached and discussed the regulatory and litigation risks relating to cyber incidents.
- Policy Implications
This panel reflected on updates in proposed privacy and cybersecurity legislation and included a post-election discussion and included analysis of what the 2014 mid-term results may mean going forward.
For more information about our Privacy, Data Protection and Cybersecurity Practice, please click here.
On October 29, 2014, Institutional Shareholder Services Inc. (ISS) introduced an updated version of its global corporate governance scoring solution for institutional investors, designed to help investors identify and measure corporate governance risk across companies.
Like previous versions, QuickScore 3.0 provides a score for each company in its coverage universe that measures the company’s level of corporate governance risk, both overall and based on four broad pillars: (i) board structure; (ii) shareholder rights and takeover defenses; (iii) compensation/remuneration; and (iv) audit and risk oversight. Once implemented, QuickScore 3.0 will support ISS’ voting policy and recommendations.
The SEC elaborates on how to utilize online general advertising and solicitation while complying with the requirements of the Rule 147 Exemption for Intrastate Offerings
A recent Securities and Exchange Commission (SEC) Compliance and Disclosure Interpretation (C&DI) could make it easier to advertise or solicit an intrastate offering on a website or social media platform while still qualifying for the Rule 147 intrastate offering exemption from registration.
As Alibaba president Jack Ma visited Hollywood to meet with studio executives and other industry leaders, Akin Gump entertainment and media practice counsel Christopher Spicer was interviewed by Bloomberg TV for the segment “How Big Will the Entertainment Business Be for Alibaba?”
On October 15, 2014, Institutional Shareholder Services Inc. (ISS) requested comments by October 29, 2015, on its draft voting policy changes for 2015 on select topics. Both of the proposed updates for the U.S. are designed to implement more integrated methods for evaluating (i) equity incentive plan proposals and (ii) independent chair shareholder proposals. ISS expects to release final policies on or around November 7, with the policies taking effect for meetings held on or after February 1, 2015. The proposed changes are described below and are available by clicking here.
As the 2014 midterm elections approach, speculation is widespread as to whether tax reform can be successfully pursued in 2015. The successful 1986 Tax Reform Act navigated through a politically divided Congress a full generation ago—demanding the very best of our Congress and president, and requiring political leadership, bipartisan cooperation and substantive compromise—the essential hallmarks of the 1986 Act—over a sustained two-year period. Make no mistake about it—nothing short of a determined bipartisan effort and shared commitment will be required again.
Gutting the Loss Causation Requirement in Securities Class Actions: 5th Circuit Holds that Insufficient Partial Disclosures May Together Sufficiently Plead Loss Causation
Securities class action plaintiffs generally consider the conservative 5th Circuit to be shark infested waters for pursuing federal securities claims, with very rigorous pleading and proof standards imposed with exactness. After a ruling in Public Employees’ Retirement System of Mississippi v. Amedisys, Inc. (5th Cir. Oct. 2, 2014), plaintiffs may consider the waters slightly less dangerous. In Amedisys, the Court held that a series of five partial disclosures spanning two years may be considered together to plead loss causation.
This week, we enjoyed this article on corporate governance and the creation of the SEC, which discusses the effects of the creation of the SEC on corporate governance.
The authors conclude that there was a 30 percent reduction in board independence, but no corresponding effects on firm valuations. They explain that the evidence is consistent with a "substitution of governance mechanisms" hypothesis, meaning that firms endogenously trade off market-based (board) governance and government-sponsored (SEC) governance.
On October 17, 2014, President Obama directed the federal government to take steps to improve the security of financial transactions in the United States. As part of the “BuySecure” Initiative, the President pledged a greater effort to work with banks and credit card companies to strengthen identity theft protections. As part of the effort, President Obama signed an executive order that will require that all payment cards and terminals issued by the federal government use chip-and-pin technology. According to the order, the transition to chip-and-pin technology is required to be made “as soon as possible,” but requires the Treasury Department to ensure that all new payment processing terminals be equipped to support that technology by January 1, 2015.
The President is also asking federal law enforcement to work more closely with the private sector to uncover identity theft rings and give the Federal Trade Commission more resources to improve its IdentityTheft.gov web site, which offers resources for individuals affected by identity theft.
“Unitranche: Opening The Loan Market For New Participants,” an article by Akin Gump cross-border transactions counsel Catriona McDevitt, has been published by Law360. The article discusses the rise of unitranche facilities in the European loan market “largely as a result of an increasing number of credit funds and nonbank lenders wanting to provide this financing and tap into the loan market for middle market companies.”
Unitranche financing, Catriona writes, “involves one layer of senior secured debt, without a separate subordinated debt structure.” By combining several tranches of debt into a single financing, thereby necessitating only a single loan facility agreement, it “negates the complexity, time and costs involved under first/second lien or subordinated debt financings.”
To read the full article, please click here.
At its meeting on October 9, the Securities and Exchange Commission (SEC) Investor Advisory Committee recommended (by voice vote, with one dissent) that the SEC adopt significant updates to the definition of “accredited investor” as it applies to natural persons as found in Rule 501 under the Securities Act of 1933. The Investor Advisory Committee, established in 2010 pursuant to the Dodd-Frank Act, is charged with reviewing the definition every four years, and these recommendations represent its opening gambit.
At the heart of its recommendations is the committee’s proposal to do away with the current income and net-worth tests created in 1982 and replace them with a standard based on financial sophistication. Such a standard would provide the means for sophisticated investors who do not meet the current financial thresholds to participate in private offerings. Such individuals could include those who have obtained the Series 7 securities license, those with a Chartered Financial Analyst designation, other financial industry employees and those with previous investment experience who, though not meeting the current financial thresholds, may be better equipped to assess the appropriateness of investing in private offerings.
Supreme Court Declines to Review Definition of a “Foreign Official” Under the Foreign Corrupt Practices Act: 11th Circuit’s Definition Stands
On October 6, 2014, the Supreme Court declined to review the 11th Circuit’s decision in U.S. v. Esquenazi, et. al., leaving standing the appellate court’s expansive definition of “foreign official” under the Foreign Corrupt Practices Act (FCPA). The 11th Circuit’s May 16, 2014 decision defined the term “instrumentality of a foreign government”—a term included in the FCPA’s definition of “foreign official,” but left undefined by the statute.
The appropriate definition of the term arose as a key issue at trial in the context of the definition that would be included in jury instructions. The defendants argued for a narrow reading of the term that would apply only to non-state owned entities that “exist for the sole and exclusive purpose of performing a public function traditionally carried out by the government” and are thus “similar to political subdivisions.” The prosecution contended that this narrow reading of the term would render it superfluous by encompassing only entities captured by other prongs of the FCPA’s definition of a “foreign official.” Instead, the prosecution argued that the term “instrumentality” should be interpreted to include both state-owned and non-state owned entities that perform functions on behalf of the government, beyond just entities that are akin to state agencies.
On September 22, 2014, the Securities and Exchange Commission (SEC) announced the highest award to date in its whistleblower bounty program: an amount estimated to be between $30–35 million to be paid to a foreign national who, according to the SEC, provided crucial information that helped investigators uncover a “difficult to detect” ongoing fraud. This is the fourth time the SEC has agreed to reward a whistleblower living abroad, a fact the SEC says demonstrates the whistleblower program’s “international breadth.”
The SEC created the whistleblower program as required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The SEC, under the whistleblower program, can pay awards to individuals providing information about possible securities fraud if the information (1) is provided voluntarily, (2) leads to a successful SEC judicial or administrative action resulting in monetary sanctions exceeding $1 million, and (3) is original—meaning that, the information is derived from the independent knowledge or analysis of the whistleblower and not already known to the SEC. Awards can range from 10 percent to 30 percent of the amount recovered in the enforcement action, with the SEC having considerable authority to determine the amount of the whistleblower bounty within that range. Prior to Dodd-Frank, the SEC only was able to financially pay awards in connection with insider trading cases.
As previously discussed here, the Delaware legislature postponed, until it reconvenes in 2015, its consideration of legislation aimed at limiting enforceability of fee-shifting bylaw provisions to non-stock corporations. Despite the advice of most counsel who have publicly written or spoken on the topic to exercise caution in the adoption of fee-shifting bylaw provisions, a few small U.S. companies (some with active disputes) have, in fact, adopted such provisions and Delaware courts have yet to reach the merits of any case calling into question the adoption of such provisions.
2014-15 Compliance Developments & Calendar for Private Fund Advisers
Registered investment advisers are required to review their policies and procedures on at least an annual basis. As aid to the required review, below is a summary of material developments during the past year and a compliance calendar for the coming 12-month period.
We encourage our investment management clients to consider their regulatory filings requirements and review their policies and procedures.
Click here to read the full report.
This week, we found this article about the board's oversight of cyber risk in the most recent issue of NACD Directorship magazine very timely. The article offers samples of cyber risk disclosures and discusses why and how to think strategically about cyber risk (including an interview with former Secretary of Homeland Security Tom Ridge).
On Tuesday, California Governor Jerry Brown signed into law a new data protection bill, which comes amid revelations of additional high-profile data breaches at Supervalu and Albertson’s grocery stores.
Assembly Bill 1710 now requires businesses in California to provide one year of credit monitoring and identity theft protection services free of charge to customers who are affected by a data breach in which their Social Security numbers, driver's license number or California identification card numbers are breached. The bill also extends current data security obligations for businesses to companies who own or license customer information according to the bill’s co-author, Assemblyman Roger Dickinson.
As companies begin to prepare for the 2015 proxy season, it will be important to anticipate the types of shareholder proposals they should expect so that they can develop a more meaningful response. This can be accomplished by (1) directly engaging shareholders and proxy advisory firms, (2) analyzing data from past proxy seasons and (3) knowing what trends and topics are emerging.
Companies can determine the issues about which their shareholders are most concerned by actively and genuinely engaging them. Engagement can take many forms, and the frequency of such engagement varies among companies. However, whatever the form, the goal is to allow companies to anticipate the expectations of their shareholders. At the same time, thoughtful engagement will give a company the opportunity to communicate the ways it is responding to those expectations. Indeed, the most successful engagement is not limited to the proxy season. Off-season communication allows companies to obtain feedback on the voting results from the most recent annual meetings. It also informs companies of what shareholder expectations will be for the coming year.
This week, we found KPMG’s report on the state of outsourcing and services to be particularly compelling. Disruption is the name of the game in outsourcing today, as it is in virtually every other segment of the global economy. This piece discusses the watershed moment in outsourcing, where buyers are looking for true value over simply cost reduction, and knowledge creation over mass collection of unstructured data. Much of this is, unsurprisingly, being driven by the shift to cloud computing and “as-a-service” delivery.
Earlier this month, we took a look at the terms and conditions that are “market” in outsourcing deals today. With the move to cloud-based solutions, the need for strong negotiation on the correct terms and conditions is brought into sharper focus.
In Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435, discussed here, the respondents fired back at the petitioners in a brief filed with the Supreme Court, posing a simple question:
“Whether an objectively incorrect statement of opinion is actionable under Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, only if it was subjectively disbelieved by the defendant.”
The respondents painted a picture of alleged egregious conduct by the defendants, attempting to make Omnicare’s opinions look unreasonable. Detailing a wide array of violations, respondents alleged, in part, that Omnicare pharmacists illegally recommended that doctors switch patients to off-label uses of drugs, a recommendation that doctors accepted “more than 80 percent of the time,” a result that an Omnicare executive described as “good for us but scary on the power to do this.” They concluded that Omnicare violated the False Claims Act in improperly submitting Medicare and Medicaid reimbursements and that; accordingly, Omnicare’s statement that it believed it was in compliance with state and federal laws was inaccurate.
In City of Providence v. First Citizens BancShares, Inc. (Del. Ch. September 8, 2014), the Delaware Court of Chancery upheld a forum selection bylaw that designated North Carolina as the exclusive forum for certain stockholder litigation and was adopted by the board of directors on the same day the company entered into a merger agreement. This decision provides additional support for the validity of forum selection bylaws, which have become increasingly popular ever since the Delaware Court of Chancery rendered its important Chevron decision in 2013, holding that such bylaw provisions are within the power of the board of directors to adopt under Delaware law. Since Chevron, several courts in other jurisdictions have honored forum selection bylaws and more and more companies are adopting them.
In First Citizens, First Citizens BancShares, Inc., a Delaware corporation headquartered in North Carolina, adopted a forum selection bylaw designating North Carolina courts as the exclusive forum for certain intra-corporate disputes. The board of directors adopted this bylaw on the same day that it entered into a merger agreement. The City of Providence filed a suit in the Delaware Court of Chancery challenging the validity of the bylaw and asserting certain other claims in connection with the merger.
The AG Deal Diary team found that “The Structure of Stockholder Litigation: When Do the Merits Matter?” authored by Minor Myers (Assistant Professor at Brooklyn Law School) and Charles Korsmo (Assistant Professor at Case Western Reserve University School of Law) presents an interesting perspective.
The authors analyzed if the merits matter in stockholder litigation challenging mergers, by comparing class actions alleging fiduciary breach and those seeking stockholder appraisal. They found that the merits appear to matter very little in fiduciary duty class action litigation, where deal size is the strongest predictor of litigation. The authors attribute the difference in the incidence and intensity of fiduciary duty litigation (versus appraisal actions) to certain features of the structure of such litigation, such as a class comprised of all shareholders, lead plaintiffs with small holdings and plaintiffs’ attorneys who control the claims.
Nnedi Ifudu is a Senior Counsel in Akin Gump’s Washington, D.C. office in the international trade group. Recently, she has blogged about the various international sanctions that have been imposed.
What is your main practice area?
International trade—within the trade group, my focus areas are export controls, economic sanctions and anti-bribery compliance.
SEC Enforcement Actions for Failure to File Timely Reports (under Sections 16(a), 13(d) and 13(g) of the Exchange Act)
Last week, the Securities and Exchange Commission (SEC) announced settled charges against (i) 28 officers, directors and major beneficial owners of publicly traded companies that failed to file Schedules 13D and 13G and related amendments and Forms 3, 4 or 5 and (ii) six public companies for failing to report the failure to file their proxy statements or annual reports on Form 10-K. Included in the defendants are several registered investment advisers to private funds, including one that was registered at the time of filing and was filing as a passive holder on Schedule 13G. These actions represent the first sweep for the above forms in more than a decade.
On September 10, the House Judiciary Committee passed, by voice vote, legislation to eliminate certain disparities to antitrust review by the Department of Justice (DOJ) and the Federal Trade Commission (FTC). The Standard Merger and Acquisition Reviews Through Equal Rules Act (SMARTER Act), H.R. 5402, introduced by Rep. Blake Farenthold (R-TX), would codify certain recommendations included in a 2007 report by the Antitrust Modernization Commission.
Click here to read Akin Gump’s client alert on this topic.
In response to an order from the Securities and Exchange Commission (SEC) in June, on August 26, 2014, the SEC announced that it had received a proposal from the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) to establish a tick-size pilot program. The 12-month pilot program would widen the minimum quoting and trading increments, which are known as “tick sizes,” for select stocks of companies with smaller market capitalization. The SEC may approve the pilot program after a 21-day public comment period. The SEC plans to use the pilot program to assess whether changes in minimum quoting and trading increments would improve liquidity and the trading of the stock of small capitalization companies and thereby benefit issuers, investors and other market participants.
AG Deal Diary is delighted to celebrate its first anniversary. We would like to thank our readers for making it such a successful first year.
We have covered a wide range of topics impacting companies, funds, dealmakers and directors from changes in Delaware Corporate Law to a look at the rise in the use of transactional insurance in M&A deals to SEC and securities law developments. We have gotten an especially strong response to our writings on a few hot topics we have followed over the year:
This year, we’ve seen a measured uptick in the volume of outsourcing transactions. Industry experts predicted a 12% to 26% growth rate, led by IT outsourcing, and our practice has felt that quickening pace. Much of the oxygen in the outsourcing world has been devoted to cloud-based transactions, which is widely viewed as the beginning of the fourth major wave in the IT industry.
The shift to cloud-based solutions dictate an even a greater emphasis on negotiating the right terms and conditions. Our market assessment details the current state of the market on various key terms and conditions. We describe what is typically requested by a business that is outsourcing a function and the negotiated outcome (if any) that is typical in large outsourcing transactions.
To learn more, please click here.
As we have discussed over the last few months, the fate of the conflict minerals rule has been uncertain. In April 2014, in the National Association of Manufacturers (“NAM”) case, the Court of Appeals for the D.C. Circuit invalidated portions of the conflict minerals rule on First Amendment grounds. However, it has been widely recognized that the American Meat Institute (“AMI”) en banc review – then pending at the time of the NAM decision – could change the framework for evaluating the conflict minerals rule.
In American Meat Institute, decided on July 29, 2014, a panel of the D.C. Circuit applied a more relaxed standard of review established by the Supreme Court in the 1985 Zauderer case. Until Zauderer, the general test for First Amendment commercial speech restrictions was the test formulated by the Supreme Court in Central Hudson in 1980. Under Central Hudson, the governmental regulation in question had to (i) directly advance the state interest involved, and (ii) be narrowly tailored to serve that end. Zauderer applies to mandated disclosures that are “purely factual” and “non-controversial,” and if a disclosure meets these two requirements, there must be a “reasonable fit” or “reasonable proportion” between the means and the ends. Recently the D.C. Circuit expounded upon the type of government interest that may receive the Zauderer standard of judicial review, rather than a more stringent level of review.
Cloud Hacking Incidents May Prompt Congress and the Administration to Turn Attention Again to Mobile Privacy Issues
With the recent theft and release of several celebrities’ private photographs (many of which appear to have been taken with, and stored on, mobile devices), mobile privacy and the protection of sensitive data stored or transmitted through the cloud has once again come to the forefront of national discussion. While this most recent incident is still under investigation, initial reports indicate that the photographs were obtained by unauthorized intrusions into individuals’ cloud storage accounts.
Although it appears that this most recent privacy breach only concerned the theft of personal photographs, it again highlights the fact that as cloud data storage becomes more prevalent, everyone should be vigilant to guard against the theft of other sensitive information, including confidential business information.
The AG Deal Diary team found “The Siren Song of Unlimited Contractual Freedom,” authored by Leo Strine (Chief Justice of Delaware's Supreme Court) and Travis Laster (Vice Chancellor of the Court of Chancery), to be particularly interesting.
In it, the judges explore the contractual freedom accorded to alternative entities (including LLCs and LPs). The judges identify some of the issues that arise in the negotiations between sponsors and investors using an alternative entity, including the lack of arms-length bargaining power, high transaction costs and unpredictability. They then propose a balanced framework for future structures, including standard fiduciary defaults.
If you find time on the long weekend, it is worth a read. Wishing all of our readers a safe and restful holiday weekend. See you in September.
Akin Gump continues to stay on top of the ever-evolving topic of cybersecurity, and the impact it has on companies, boards and individuals. Last week, The Metropolitan Corporate Counsel interviewed members of our team on a variety cybersecurity-related issues. See a summary here and the full article here.
In a preview of the issues raised in Omnicare, Inc. v. The Laborers District Council Construction, No. 13-435 (discussed here and here), the Second Circuit in Kaess v. Deutsche Bank AG, No. 13-2364 (2d Cir. July 16, 2014) summarily affirmed dismissal of plaintiffs’ claims under the Securities Act of 1933, holding that plaintiffs were required to plead that statements of opinion were both subjectively and objectively false to be actionable. Using the reasoning applied in Fait v. Regions Financial Corporation, 655 F.3d 105 (2d Cir. 2011), the court reasoned that Deutsche Bank’s alleged misstatements regarding trading exposure to mortgage-backed securities were statements of opinion:
With respect to the dismissal of the [Complaint], the district court was correct to hold that DB’s estimation of the extent of its investment in and exposure to residential mortgage-backed securities, as well as its statements about its Value-at-Risk metrics, amounted only to statements of opinion. See Fait at 655 F.3d at 110-11 (“Estimates of goodwill depend on management’s determination of the fair value of the assets acquired and liabilities assumed, which are not matters of objective fact. . . . In other words, the statements regarding goodwill at issue here are subjective ones rather than objective factual matters.”) (internal quotation marks and citations omitted).
On August 13, 2014, the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC) published guidance (“Revised Guidance”) that revises its 2008 guidance regarding how to treat entities that are owned or controlled by blocked persons—i.e., persons whose property and interests in property are blocked. The 2008 guidance—which is widely known as the “50 Percent Rule”—held that if a blocked person owns 50 percent or more interest of an entity, either directly or indirectly, that entity would automatically be blocked by operation of law. The Revised Guidance reaffirms this 50 Percent Rule, but now requires aggregation when determining blocked persons’ ownership interests. In other words, under the Revised Guidance, an entity is automatically considered “blocked” if one or more blocked persons together own 50 percent or more (directly or indirectly) of the entity, even if the entity itself is not formally identified as a blocked party by OFAC.
OFAC stated that this Revised Guidance equally applies to entities identified on the Sectoral Sanctions Identification (SSI) List, which is part of the Ukraine-Russia sanctions program. Thus, any entity that is owned 50 percent or more (directly or indirectly) in the aggregate by one or more persons on the SSI List is also subject to SSI restrictions.
Yuki Whitmire is a corporate Counsel in Akin Gump’s Dallas office, focusing on securities transactions and corporate matters. Recently, she has blogged about various issues impacting shareholders, including voting standards, shareholder proposals and interim vote tallies.
Antitrust-Related Recent Developments: Comments Requested on Price Fixing Penalty Revisions, FTC Settles Section 5 Claim Against Horizontal Competitors and Apple E-books Settlement
Sentencing Commission Requests and Receives Comments on Price Fixing Penalty Revisions
The U.S. Sentencing Commission is currently seeking public comments on sentencing for price fixing, bid rigging and market allocation agreements among competitors to determine whether the antitrust sentencing guidelines should be revised. The Sentencing Commission has received a host of comments thus far, including a request from the American Antitrust Institute to double the fines on companies that are found guilty of per se violations of the Sherman Act. FTC Commissioner Joshua Wright and D.C. Circuit Judge Douglas H. Ginsburg commented via a joint letter, requesting the Sentencing Commission to boost penalties on individuals in order to improve antitrust deterrence. Commissioner Wright and Judge Ginsburg urge “the Commission to consider increasing the prescribed range of jail sentences and to consider as well other individual sanctions, including enhanced individual fines and, insofar as the law allows, disqualification from holding fiduciary positions for a period of years.” The comments pertain to the Sentencing Commission’s current amendment cycle which ends May 1, 2015.
Limiting the Damage from a Confidential Data Breach: Russian Hackers Reportedly Obtain Internet Credentials of More Than 500 Million Users
On August 5, The New York Times reported that Russian hackers have obtained what could be the largest collection of confidential data in history. The security firm that discovered the breach continues to alert affected companies to possible exposure. Although the hackers remain anonymous, affected companies have unconventional legal tools at their disposal to limit the damage.
To learn more, click here to read our client alert.
This is a reminder that the changes to the Delaware General Corporation Law, which we discussed in more detail here, went into effect on August 1, 2014.
In addition, a change to the law governing the statute of limitations also went into effect on August 1. Specifically, Title 10 of the Delaware Code was amended by adding a new Section 8106(c), which allows parties to agree to an extension of the statute of limitations for up to 20 years without having to use a sealed instrument, as long as the written contract involves at least $100,000.
Electronic commerce, or eCommerce, is rapidly expanding in the member states of the Gulf Cooperation Council (GCC), spurred by the region’s near-universal online access, disposable income and technologically forward-thinking decision making bodies. The term eCommerce refers to transactions completed over computer networks as opposed to within brick and mortar storefronts, and includes ancillary activities like Internet marketing and data collection and analysis.
The potential for online spending in the GCC is among the highest in the world. Nearly 90% of residents have access to the Internet. Compare that figure with 35% access worldwide and 81% in the USA. Additionally, GCC cities Abu Dhabi, Dubai and Riyadh occupy the top three spots on the list of highest per capita disposable incomes in the Middle East according to a recent survey by the Economist Intelligence Unit.
On June 20, 2014, the Texas Supreme Court issued its opinion in Ritchie v. Rupe, 2014 Tex. LEXIS 500 (Tex. 2014). In Ritchie, a minority shareholder in a closely held corporation attempted to force the majority shareholders to buy-out the minority shareholder’s interest in the corporation by bringing a claim of shareholder oppression under § 11.404 of the Texas Business Organizations Code (TBOC), the Texas receivership statute. Under this provision, when actions of governing persons of an entity are illegal, oppressive or fraudulent, a court has authority to appoint a rehabilitative receiver.
On July 29, 2014, the United States and the European Union (EU) announced a significant expansion of sanctions against Russia in response to its continued support of separatists in eastern Ukraine. The measures introduced by both the United States and the EU include broad economic sanctions targeting Russia’s financial, energy and defense sectors that could have significant effects for U.S. and European companies doing business with Russia. In addition to U.S. and EU sanctions, Japan will also likely significantly expand its sanctions against Russia this week.
Shareholder voting standards was a hot topic this proxy season and will likely continue to be of significant interest next proxy season and in subsequent years. This proxy season, shareholders submitted various proposals related to shareholder voting standards, including proposals on access to interim proxy votes (discussed further here) and uniform voting standards for management and shareholder proposals. In June, Nabors Industries’ shareholders approved a shareholder proposal to exclude broker nonvotes from the company’s voting calculation. The shareholder proposal was introduced by the California Public Employees’ Retirement System (“CalPERS”) after close votes on shareholder proposals submitted at last year’s annual meeting. The proposals last year did not receive majority support under the company’s methodology of including broker nonvotes, but would have received a narrow majority if broker nonvotes were excluded.
As proxy season wraps up for many companies, Cheniere Energy Inc. continues to be in the spotlight over its vote-counting methodology. The company was forced to postpone its annual meeting scheduled in June after a lawsuit filed by a shareholder seeking to recover shares of stock that were awarded under the company’s incentive plan last year. The shareholder claims that the plan did not receive requisite shareholder approval, because the company did not count abstentions as a “no” vote as the shareholder claims was required under Delaware law. The complaint also seeks to enjoin a shareholder vote on a proposal that was slated for this year’s annual meeting on increasing the number of shares authorized for issuance under the company’s incentive plan. The Wall Street Journal reported that the company has canceled the compensation plan proposal and has moved to dismiss the lawsuit, saying “the vast majority of the plaintiff’s claims are moot” with the cancellation of the proposal.
Omnicare Petitioners and the United States Battle Over the Scope of Liability for Registration Statements
The Petitioners in Omnicare, Inc. v. The Laborers District Council Construction, No. 13-435 came out swinging in their opening merits brief to the Supreme Court, which granted certiorari earlier this year. See Brief of Petitioners; see also here for background on the case. The Sixth Circuit in Omnicare had previously held that plaintiffs did not have to show actual intent for defendants to be liable under Section 11 for a statement of opinion. Instead, it held that if the statements were objectively false, defendants could be held liable. The Petitioners vigorously contested this holding, saying that it defeats long-standing precedent under Virginia Bankshares Inc. v. Sandberg, which requires proof that defendants subjectively knew the opinion to be false when it was made in order to be held liable.
Petitioners argued that plaintiffs “did not allege, and in fact disclaimed any allegation, that the issuer did not hold the stated belief.” Ultimately, the Petitioners argued, “The word ‘fact’ conveys an element of certainty, . . . Opinions and beliefs, by contrast, are inherently subjective assessments. The only ‘fact’ conveyed by a statement of opinion or belief is the fact that the speaker held the stated belief. It naturally follows that such a statement can be ‘untrue’ as to a ‘material fact’ only if the speaker did not actually hold the stated belief.”
Earlier this month, several significant amendments to the Delaware General Corporation Law (DGCL) were approved. These amendments were originally proposed in April 2014 and will generally go into effect on August 1, 2014.
The main changes affect the provisions regarding:
- short form mergers (Section 251(h))
- escrowing director and stockholder consents (Sections 141(f) and 228(c))
- amendments to certificates of incorporation without stockholder approval (Section 242)
- filing voting trusts (Section 218) and
- incorporator unavailability (Sections 103(a)(1) and 108(d))
For a description of the changes, see this corporate alert here.
A recent decision by the D.C. Circuit has prompted much speculation about possible changes to the traditionally opaque and secretive national security review process administered by the Committee on Foreign Investment in the United States (CFIUS or the Committee). On July 15, 2014, a three judge panel of the D.C. Court of Appeals determined that a presidential order requiring Ralls Corporation (Ralls)—a U.S. company owned by two Chinese investors—to divest its interest in four Oregon wind farms based on national security concerns deprived Ralls of due process of law. The case has now been remanded to the D.C. District Court for further review. Additional information providing the legal and regulatory background can be found here.
Although some observers consider this initial decision to be a victory for proponents of greater transparency in the CFIUS process, the actual implications of the decision, at least at this stage, remain unclear. The decision itself is narrow and limited solely to the due process requirements for a presidential order, which is an extraordinarily rare occurrence in CFIUS proceedings. Nevertheless, the D.C. Circuit’s decision, and the questions left to the District Court, create the possibility of expansive changes to the underlying CFIUS process. We analyze below the aspects of the CFIUS process that remain the same and the significant issues left open by the decision that could eventually lead to changes.
Actavis, Pfizer, Medtronic, Abbvie and Salix have all recently announced plans to merge with foreign competitors and reincorporate in the U.K. or Ireland – a strategy commonly known as an “inversion” (Pfizer’s merger plans with AstraZeneca have already fizzled). Perrigo, a Michigan based pharmaceutical company that inverted into Ireland just last year following its merger with Elan, is reportedly seeking a buyer. Perrigo apparently believes (probably correctly) that its Irish tax residence is worth a premium.
While there are many reasons to pursue a merger with a competitor, a primary driving force behind these inversions is simply to take advantage of the U.K.’s and Ireland’s lower corporate tax rates. The U.S.’s highest marginal corporate tax rate, 35%, is among the highest in the developed world. The U.K. on the other hand has a 21% corporate tax rate, and Ireland’s is only 12.5%. American pharmaceutical companies are at a competitive disadvantage vis-à-vis their foreign peers simply by virtue of their higher tax cost, and inverting can help equalize their tax rates.
As reported here, Apple has appointed a second woman to its board of directors. Sue Wagner is a co-founder of Blackrock with a strong background in finance and M&A across various global markets. She is replacing Bill Campbell and joining Andrea Jung, the former chairman and CEO of Avon Products, on Apple’s eight-member board.
This is a promising development in light of Apple’s earlier commitment to diversify its board, which was made, at least in part, in response to investor pressure. At the same time, there is still a lot of room for improvement, and not just on Apple’s board, which could add one more director (following a bylaw amendment adopted by the board or the shareholders). As we mentioned before, research has shown that companies need at least three women on the board to make a substantial difference.
Future director selections will bear fruit on how strong Apple’s commitment to diversity really is.
But, for now, good to see it on the menu. Will others take heed?
Michelle A. Reed is a litigation partner in Akin Gump’s Dallas office, focusing on complex civil litigation matters. Recently, she has blogged about the Halliburton case, the Omnicare case and cybersecurity issues.
What is your main practice area?
I like to think of myself as the defense for the in-house, securities and M&A lawyers. I’m a litigator, focusing on defending companies, officers and directors in securities class actions, M&A litigation, derivative suits, SEC investigations, and cybersecurity/data privacy compliance and investigations. When a deal goes awry, I lead the cleanup crew defending the work that was done.
Obama Administration Imposes New Sanctions on Key Russian Energy, Financial and Defense Companies; EU Considering Expanded Sanctions Against Russian Companies
The Obama Administration announced new sanctions on Wednesday, July 17, 2014, targeting key companies in Russia’s energy, financial and defense sectors, as well as other companies, regional separatist governments, and individuals associated with the unrest in Ukraine.
The new sanctions against Russia are the most severe so far and can be divided into two parts: (1) restrictions on certain financial transactions with four of Russia’s largest financial and energy companies, and (2) an expansion of the “Specially Designated Nationals and Blocked Persons” (“SDN”) list published by the Office of Foreign Assets Control (OFAC) to include additional entities and individuals whose property are now blocked. In addition, the EU is also likely to expand its sanctions criteria and designate additional Russian companies by the end of the month.
Can You Replace Your Manager? Delaware Case Emphasizes the Importance of Carefully Considering LLC Agreement Provisions
Common sense might lead one to expect that a controlling stakeholder has the power to replace the manager of a limited liability company (LLC), but this might not be the case when the underlying LLC agreement provides otherwise. A recent Delaware decision highlights the importance of thoughtful consideration when drafting LLC Agreements to make sure that the agreement actually provides for what the LLC members intended.
In 2009 Caiola Family Trust v. PWA, LLC (April 30, 2014), the Delaware Chancery Court decided that the plaintiffs, the non-managing members of an LLC holding a 90 percent interest in the LLC, did not have the power to remove the LLC’s managing member or a property manager appointed by the LLC’s managing member. The court made this determination even though the LLC’s managing member only held 10 percent of the LLC’s interests. The defendants in the case were the LLC’s managing member and that entity’s own managing member.
In response to years of criticism concerning the influence of proxy advisory firms, such as ISS and Glass Lewis, over proxy voting of investment advisers, the Securities and Exchange Commission (SEC) has issued new guidance in its Staff Legal Bulletin No. 20. Historically, investment advisers, in interpreting two prior SEC no-action letters requiring advisers to vote on all matters, have relied on the guidance of proxy advisory firms in fulfilling the duties of care and loyalty owed to their clients with respect to proxy voting. The new SEC guidance clarifies the responsibilities of investment advisers when retaining proxy advisory firms and the extent to which a proxy advisory firm is subject to federal proxy voting rules. The effect of this guidance is that investment advisers may feel less compelled to rely solely on proxy advisory firms, or may abstain from voting altogether, when they deem it to be in the best interests of their clients.
On July 8, 2014, in closed session, the U.S. Senate Committee on Intelligence voted 12-3 to report the Cyber Information Sharing Act (CISA). The bill would grant legal immunity for companies to share cyber threat data with the government, and is informally known as “CISPA 3.0,” a revised version of cyber security and information sharing legislation previously introduced, which met heavy opposition from privacy and civil liberties advocates. CISA’s passage through committee was met with similar dismay.
CISA would authorize private companies to monitor their own networks for cyber threats and implement countermeasures to block those threats. Sharing of cyber threat data would be permitted only for cybersecurity purposes, and companies would be required to avoid sharing employee and consumer personal information. Threat data would be sent to the Department of Homeland Security and then shared in real time with other federal agencies through a portal.
In response to growing cybersecurity threats, the oil and gas industry recently chartered an information clearinghouse to share critical information and coordinate industry-wide responses to cyber-attacks. To learn more, check out our Speaking Energy blog.
In early July, the Securities and Exchange Commission’s (SEC) Division of Corporation Finance issued several new interpretations (at 255.48-49 and 260.35-38) (C&DI) relating to the verification of “accredited investor” status for securities offerings pursuant to Rule 506(c). Adopted as part of the JOBS Act, Rule 506(c) permits the use of general solicitation in securities offerings, provided that all participating investors are “accredited investors” as defined in Rule 501 and the issuer takes “reasonable steps” to verify such status. These new C&DIs offer guidance on determining and verifying “accredited investor” status for natural persons, which turns on such person’s income or net worth. The SEC is expected to come out with revisions to the definition of “accredited investor” later this month pursuant to its obligations under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Interested readers should check out our preview of those potential changes here.
The first two C&DIs clarify that (i) if a purchaser’s annual income is not reported in U.S. dollars, the issuer may use either the exchange rate in effect on the last day of the year for which income is being determined or the average exchange rate for such year and (ii) assets held jointly with another person who is not the purchaser’s spouse may be included in the calculation of net worth to only the extent of the purchaser’s percentage ownership in such assets.
Last month, in Biolase, Inc. v. Oracle Partners, L.P. (Del. June 12, 2014), the Delaware Supreme court affirmed the oral resignation of a director while on a board call.
Bottom line: DGCL Section 141(b) is permissive (not mandatory): “Any director may resign at any time upon notice given in writing or by electronic transmission to the corporation.” Delaware courts have consistently held that the word “may” in this statute is permissive and does not mean “may only.”
In connection with the duties imposed on it by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC is set to come out with further revisions to the definition of “accredited investor” in July 2014. Under Rule 506 of Regulation D under the Securities Act, issuers can raise unlimited funds from accredited investors in private offerings. In addition, hedge funds often make use of the exemptions afforded by Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940, which rely on a fund’s ability to use the private placement exemption under the Securities Act, usually by way of Rule 506. When the SEC last reviewed the definition of “accredited investor” in July 2010 in connection with the passage of the Dodd-Frank Act, the definition was revised to exclude the value of a person’s primary residence in the calculation of such person’s net worth for purposes of meeting the minimum $1 million net worth test. The Government Accountability Office’s July 2013 report and market survey (titled Alternative Criteria for Qualifying as an Accredited Investor Should Be Considered, herein the “GAO Report”) notes that this revision resulted in certain investors no longer qualifying as accredited investors. What the SEC has in store this time around may be even more far-reaching.
Under the current definition set forth in Rule 501 of the Securities Act, an individual is an “accredited investor” if such person (i) has a net income in excess of $200,000 (or $300,000 with a spouse) in each of the prior two years and reasonably expects the same for the current year or (ii) has a net worth in excess of $1 million (either alone or with a spouse), excluding the value of such person’s primary residence. These thresholds have been largely unchanged since the 1980s.
Today, the House Education Subcommittee on Early Childhood, Elementary, and Secondary Education and the Homeland Security’s Subcommittee on Cybersecurity, Infrastructure Protection, and Security Technologies held a joint hearing on data mining and student privacy. The hearing was relatively short, with only the chairman and ranking member of each subcommittee, along with three other members, in attendance.
The general tone of the hearing was that the collection and use of student data can be a powerful tool that can significantly impact student performance and learning, and that Congress should be careful not to inhibit its use for educational purposes; however, both members and witnesses cautioned that there is potential for data to be misused for non-educational purposes, and that existing law and school system security practices may not be doing enough to safeguard the data.
Everybody Wins: The Supreme Court Upholds the Fraud-on-the-Market Presumption of Reliance But Allows Defendants to Fight Back
On Monday, the U.S. Supreme Court saved securities class-action plaintiffs from their worst nightmare and upheld the fraud-on-the-market presumption of reliance in securities class actions filed under Section 10(b) of the Securities Exchange Act of 1934. At the same time, however, the Court ruled that defendants have a right to rebut the presumption before class certification with evidence of lack of price impact. Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, 573 U.S. __ (June 23, 2014).
As previously discussed here, a recent decision of the Delaware Supreme Court upholding a “fee-shifting” bylaw provision gave rise to proposed legislation aimed at limiting such provisions to non-stock corporations. The legislation was expected to be presented to the Delaware General Assembly prior to June 30 (the end of the current session).
Given the outcry from various sources (including the U.S. Chamber of Commerce), the Delaware legislature has postponed its consideration of such legislation until 2015. Accordingly, the match between those wanting the right to adopt such provisions (corporations) and those wanting those rights limited (some stockholders, governance advocates, etc.) will have to wait until the Delaware General Assembly reconvenes in 2015. In the meantime, there will be no shortage of discussion of the topic with each side advocating and lobbying strongly for its position. Given the current status of play, corporations should continue to be cautious when considering the adoption of fee-shifting bylaw provisions.
Last week, SEC Commissioner Luis Aguilar outlined expectations for directors of public companies to manage cybersecurity risk. If you think it is enough that a board of directors reviews annual budgets for privacy and IT security programs, assigns roles and responsibilities for privacy and security, and receives regular reports on breaches and IT risks, think again. The SEC appears to be raising the bar for directors everywhere to be responsible for overseeing cyber-risk management.
Noting an average annual cybercrime cost of $11.8 million to a sample of U.S. companies, Commissioner Aguilar highlighted major data breaches affecting companies nationwide—Adobe (38 million customer accounts), Target (40 million customers), Snapchat (4.6 million users), U.S. banks (websites offline) and securities exchanges (infrastructure attacks).
An interesting recent trend in the M&A space is the continued increase in the use of transactional insurance policies in M&A deals, particularly coverage for representations and warranties. Much of this growth has been driven by financial sponsors who in many cases use it strategically as a tool to differentiate a bid in a very competitive marketplace for deals. Understanding the development of this market and how this tool can be utilized effectively is more important than ever for M&A professionals so as not to be at a competitive disadvantage to firms who are actively working these insurance tools into their playbook in pursuing, structuring, completing and exiting transactions.
For example, Willis M&A placed approximately 60 representation and warranties policies in 2013 and 21 in the first quarter of 2014 on North American transactions, with a similar increase and an equal number of policies placed internationally through its London office in the first quarter of 2014. In North America, these policies represented a gross premium of approximately $19 million in 2013 and approximately $6.6 million in the first quarter of 2014. Much of this activity is driven by middle market transactions, but policies are also regularly being implemented in transactions valued in excess of $1 billion, particularly in sectors such as technology.
When we predicted the issues boards will have to confront in 2014, we identified cybersecurity at the top of the list. In the wake of a series of high-profile data breaches, this issue has proven to be front and center for corporations and their leaders. The White House, Congress and the SEC have all made inroads to address this sprawling web of issues. Last month, we looked at the SEC’s guidance to the securities industry on cybersecurity and offered a roadmap for U.S. companies.
Today, the National Association of Corporate Directors just released Cyber-Risk Oversight report, which offers practical tips to corporate boards. We suggest taking a look at the executive summary here.
Criminal Exposure for Securities Fraud Expanded in the Fourth Circuit, Rejecting Janus for Criminal Matters
Last month, in Prousalis v. Moore (May 7, 2014), a criminal securities fraud case, the Fourth Circuit held that the Supreme Court’s interpretation of Rule 10b-5(b) in Janus Capital Group, Inc. v. First Derivative Traders (2011) is inapplicable outside the context of the implied private right of action for private plaintiffs. Rule 10b-5(b) imposes liability for those who “make” fraudulent misstatements in the offering or purchasing of securities. In Janus, the Supreme Court held that only those with “ultimate authority” over a fraudulent statement can be primarily liable for making it. Accordingly, even if someone is actively involved in the creation of a fraudulent statement, that person cannot be primarily liable if he/she lacks ultimate authority. Instead, a plaintiff would have to rely on a theory of secondary liability, which can be challenging given the Supreme Court’s decisions in Central Bank Denver, N.A. v. First Interstate Bank of Denver, N.A. (1994) and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. (2008).
While Janus was a case involving the private right of action, the Supreme Court did not clearly limit its interpretation to that context. Its application outside of private securities class actions has been ambiguous, resulting in uncertainty on whether the Securities and Exchange Commission (SEC) and DOJ must similarly prove that defendants had “ultimate authority” over any alleged misstatement. In some cases, the SEC has attempted to bypass this question by bringing misstatement actions under other securities law provisions, like Section 17(a) of the Securities Act. While not coextensive, Section 17(a) contains language nearly identical to Rule 10b-5. The SEC has also brought misstatement actions under a theory of scheme liability, which stems from Rule 10b-5(a) and (c), rather than subsection (b), which was the focus of Janus.
Francince E. Friedman is Senior Policy Counsel in Akin Gump’s Washington D.C. office, focusing on public law and policy. Recently she has blogged about cybersecurity, data brokers, geo-location tracking, online advertising and social media.
Terms like “web security” and “data breach” are now familiar to most Americans in light of recent, significant issues with the websites and databases of some large U.S. companies. But web security encompasses more than just protection of consumer data on corporate systems, it is also critical in preventing the widespread introduction of malware directly onto user computers and networks. Most people know they should not open emails from unknown senders or click on strange links, but they may not know that simply visiting a mainstream website could infect a computer or network with malware without a single click. This “malvertising”—which has already become a problem for many popular sites—can deliver viruses with the ability to steal personal information, usernames and passwords. Worse, it can carry viruses that give criminals the ability to take over an infected computer altogether.
Malvertising is so insidious and effective because it can appear on a website and infect a computer system without any warning, and without any action on the victim’s part. The problem is compounded by the difficulty website owners encounter in policing potential malware. Many popular websites use advertising services managed by other companies. This arrangement means website owners often do not have a direct relationship with their advertisers, and may not even know which ads are appearing on their sites. Hidden malware could impact many users before the website owner ever becomes aware of it.
On May 29, 2014, the Securities and Exchange Commission petitioned the U.S. Court of Appeals for the District of Columbia Circuit for a rehearing of the First Amendment issues in the conflict minerals case. The SEC, however, asked the Court to hold the case for a rehearing or rehearing en banc until after the Court issues a decision in the American Meat Institute v. United States Department of Agriculture case.
The decision reached in American Meat has significant implications for the First Amendment claims asserted by the National Association of Manufacturers in the conflict minerals case. As we have mentioned, the American Meat case is addressing the longstanding precedent established in Zauderer v. Office of Disc. Counsel as to whether the government may compel disclosures of “purely factual and uncontroversial” commercial information for reasons other than preventing consumer deception. In American Meat, the Court could decide that compelled factual disclosures that are “reasonably related” to a government interest are permissible. A decision to the contrary would be more in keeping with the result the Court reached in the conflict minerals case, where the Court applied the intermediate standard of review (without deciding whether the highest level of review might apply). A decision along these lines would be more likely to maintain the status quo, namely, that companies are not required to label products as “DRC Conflict Free,” “DRC Conflict Undeterminable” or “Have Not Been Found to be DRC Conflict Free.”
Last week, Mary Jo White, the Chair of Securities and Exchange Commission (SEC), outlined various initiatives focused on reforming the U.S. equity markets and improving transparency for investors as part of a broader review by the SEC of the investment environment. If these proposals are adopted, they will affect market participants of all types, including exchanges, alternative trading venues, clearing firms, broker-dealers, and investment advisers.
Click here to read Akin Gump’s full analysis.
On August 1, 2013, the Delaware legislature effected amendments to the Delaware General Corporation Law allowing corporations to elect to be formed as, or convert to, a public benefit corporation (PBC) (Subchapter XV of Chapter 1, Title 8 of the Delaware Code). We previously summarized Delaware’s PBC statute here. Since then, have businesses taken advantage of the PBC statute? And have other jurisdictions followed Delaware’s lead?
Since the amendments became effective, nearly 90 Delaware corporations have incorporated as, or have converted to, PBCs. In the first three months, after the law was enacted, 55 Delaware PBCs were created: 39 newly formed and 16 converted from existing entities (see Plerhoples, Alicia E. Delaware Public Benefit Corporations 90 Days Out: Who's Opting In? 14 U.C. DAVIS BUS. J. L. 2 (forthcoming June 2014)). That breaks down into approximately 70 percent newly formed PBCs versus 30 percent converted PBCs. This is a very small percentage of the more than 130,000 businesses formed or incorporated in Delaware in a typical year, but is more than any other PBC jurisdiction except California, where similar legislation was adopted over a year earlier. It has been estimated that, in total, approximately 350 PBCs (including similar forms) have been incorporated in the United States.
On May 6, 2014, the U.S. Court of Appeals for the Second Circuit issued its opinion in City of Pontiac Policemen’s and Firemen’s Retirement System v. UBS AG, No 12-4355, slip op. (2d Cir. May 6, 2014) (“City of Pontiac”), a case with implications for the extraterritorial reach of U.S. securities laws. Three foreign institutional investor plaintiffs and one domestic investor plaintiff had purchased foreign-issued shares on a foreign exchange and brought claims arising out of those transactions under U.S. securities laws. At issue in City of Pontiac was “whether the bar on extraterritorial application of the United States securities laws, as set forth in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), precludes claims arising out of foreign-issued securities purchased on foreign exchanges, but cross-listed on a domestic exchange (the so-called ‘listing theory’).” City of Pontiac, slip op. at 4. The Second Circuit determined that the Morrison bar precludes such claims. Id.
The foreign institutional investor plaintiffs argued unsuccessfully that the Morrison bar did not apply to their claims because the securities at issue were cross-listed on the New York Stock Exchange. In support of their position, plaintiffs relied on language in the Morrison opinion that section 10(b) of the Securities Exchange Act of 1934 provided a cause of action arising out of “transactions in securities listed on domestic exchanges.” City of Pontiac, slip op. at 11 (quoting Morrison, 561 U.S. at 267). The Second Circuit rejected this theory, slip op. at 12, holding it irreconcilable with Morrison’s reasoning that “the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States.” Morrison, 561 U.S. at 266.
The legislation, which was introduced by Subcommittee Chairman Al Franken (D-MN) on March 27, 2014, would amend the Electronic Communications Privacy Act to require that companies obtain individuals’ permission before collecting location data from their smartphones, tablets, or in-car navigation devices, and before sharing such information with others.
As discussed here, a recent decision of the Delaware Supreme Court could be a game changer in the world of stockholder litigation. In ATP Tour, Inc. v. Deutscher Tennis Bund (Del. May 8, 2014), the Delaware Supreme Court found that a bylaw containing a fee-shifting provision (i.e., a provision providing that a suing stockholder must pay the corporation’s legal fees and expenses if the stockholder doesn’t obtain a judgment that substantially achieves the full remedy sought) was valid as long as not for an improper purpose, noting that the intent to deter litigation is not necessarily an improper purpose.
Today, the Federal Trade Commission (FTC) released a long-awaited report on the data-broker industry. In the report, the FTC characterized data brokers as operating with a “fundamental lack of transparency.” The report, which is the culmination of an investigation begun in December 2012, does not call for any FTC enforcement action, but does recommend that Congress act to give consumers more control over how their data is collected and used.
The report specifically recommends the creation of an online portal where consumers can view what data is being collected, and “opt out” of data collection or correct mistakes in their data profiles. The legislative recommendations would require data brokers to disclose what raw data they use to draw inferences about a consumer, and would require consumer-facing sources to disclose the names of brokers to which they supply their customers’ data.
Conflict Minerals Update: Court Denies NAM's Motion to Enjoin Enforcement, SEC’s June 2 Deadline Remains In Effect
On May 14, 2014, the U.S. Court of Appeals for the District of Columbia Circuit issued a per curium order denying the motion filed by the National Association of Manufacturers (“NAM”) to stay the SEC’s Conflict Minerals Rule. The court previously held on April 14 that it is unconstitutional for the Rule to require companies to declare which of their products “have not been found to be DRC Conflict Free.” NAM had argued that a stay was warranted because, among other things, it would be able to demonstrate in later proceedings that the court should vacate the Rule as purposeless. NAM also argued that reporting issuers would suffer substantial harm in the form of billions of dollars of unrecoverable compliance costs, if they are required to comply with a rule that the court ultimately overturns.
A recent decision of the Delaware Supreme Court may be a game changer in the world of stockholder litigation. In ATP Tour, Inc. v. Deutscher Tennis Bund (Del. May 8, 2014), the Delaware Supreme Court addressed the validity of a fee-shifting provision in a non-stock membership corporation’s bylaws.
The corporation at hand was ATP Tour, Inc. (ATP), the operator of the men’s professional tennis tour. Several members of ATP were disgruntled over certain tournament modifications and sued ATP and many of its directors in Delaware District Court. ATP prevailed on the merits in a jury trial.
On May 8, 2014, the Office of Foreign Assets Control (“OFAC”) issued the Ukraine-Related Sanctions Regulations (“URSR”), 31 C.F.R. Part 589. The URSR implement the sanctions set forth in Executive Orders 13660, 13661, and 13662. The below summary provides a synopsis of key sections of the regulations.
- Prohibited Transactions: All transactions that are prohibited with respect to sanctioned individuals and entities under previous Ukraine-related Executive Orders remain prohibited under the new regulations. These prohibited transactions include:
- the transfer, payment, export, withdrawal of property by designated parties;
- the contribution or provision of funds, goods, or services by, to, or for the benefit of designated parties;
- the receipt of any contribution or provision of funds, goods, or services from designated parties; and
- any transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of the prohibitions described above.
“A letter of intent is the invention of the devil [that] should be avoided at all costs.” – Stephen R. Volk, Esq. on the infamous Texaco-Pennzoil case. Our friends at Akin Gump’s Speaking Energy blog take a hard look at L.O.I.s and offer some very practical tips on how to avoid an L.O.I. from becoming an I.O.U. Read it here.
David J. D’Urso is a corporate partner in Akin Gump’s New York office, focusing on private equity M&A transactions. Recently, he has blogged about cases before the U.S. Supreme Court and Delaware LLC agreements.
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The Senate Homeland Security & Governmental Affairs Permanent Subcommittee on Investigations released a report on May 14, 2014, regarding the security of online advertisements. Entitled “Online Advertising and Hidden Hazards to Consumer Security and Data Privacy,” the report concludes that “the [online advertising] industry contains significant vulnerabilities that cyber criminals have used to initiate malware attacks against consumers, often without the consumers even having clicked on an advertisement.” During the course of its investigation, the bipartisan subcommittee learned that criminals have found methods to circumvent malware scanning processes, target vulnerable consumers and place malware on consumers’ computers and mobile devices through online ads.
The U.S. Securities & Exchange Commission (SEC) provided cybersecurity guidance to the securities industry in the form of a Risk Alert issued by the SEC’s Office of Compliance Inspections and Examinations (OCIE) on April 15, 2014. The guidance, which is neither a rule nor a regulation, outlines a series of questions that the SEC is sending to approximately 50 registered broker-dealers and investment advisers. According to one SEC official, the OCIE decided to issue a Risk Alert and publish the questions in an attempt to encourage widespread diligence on cybersecurity. The Risk Alert notes that it “is intended to empower compliance professionals in the industry with questions and tools they can use to assess their firms’ level of preparedness, regardless of whether they are included in OCIE’s examinations.” Although the Risk Alert applies specifically to the securities industry, the questions will likely serve as a model for companies nationwide and provide a framework for discussing cybersecurity best practices.
Patent assertion entities (PAEs) are a hot topic these days. Sometimes referred to as non-practicing entities or patent trolls, PAEs generate revenue by acquiring and enforcing intellectual property against potential infringers. While not all PAEs are inherently harmful, PAEs have different patent enforcement incentives from companies that develop and/or sell commercial products. A PAE’s unique structure enables it to aggressively pursue royalty licensing agreements in circumstances where a producing company might not, which can impact and raise significant concerns for multi-national corporations and small businesses alike.
Akin Gump attorney George Laevsky recently published an article discussing the renewed interest that antitrust enforcers have displayed in patent assertion entities. The article analyzes the unique characteristics of patent assertion entities that enable them to develop expertise in acquiring, enforcing and maximizing revenue from their patent portfolios. George’s article further overviews recent public statements by Federal Trade Commissioners on their evolving enforcement policies for handling PAE misconduct, including commentary on the FTC’s forthcoming 6(b) study to investigate the actual economic effects of PAE enforcement activities. The article concludes by discussing recent FTC and state attorneys general enforcement proceedings against a notorious PAE that allegedly targets small businesses with misleading license royalty demand letters.
This proxy season, several companies filed suit against shareholder activist, John Chevedden, challenging his shareholder proposals. Three companies, Omnicom Group, Inc., Chipotle Mexican Grill, Inc. and Express Scripts Holding Company, took their challenges directly to court without first seeking no-action relief from the Securities and Exchange Commission (SEC). District courts in New York, Massachusetts and Colorado granted Chevedden’s motions to dismiss claims by Omnicom, EMC Corporation and Chipotle, reversing the prior trend of courts finding in favor of company plaintiffs.
Omnicom Group, Inc. bypassed the no-action process with the SEC this year and instead filed a lawsuit in the U.S. District Court for the Southern District of New York against John Chevedden. Chevedden had submitted a shareholder proposal to over a dozen companies this proxy season seeking to restrict access to interim vote results during contested proxy solicitations (following a decision by the Delaware Court of Chancery in October 2013 that disclosure of preliminary voting results was not materially misleading and did not breach directors’ fiduciary duties or create an unfair election process. See Red Oak Fund, L.P. v. Digirad Corp.). In denying Omnicom’s request for declaratory judgment and motion for summary judgment, the court found that the company did not face imminent injury because Chevedden had promised not to sue the company and found that the possibility of an SEC investigation was remote. As a result, the court granted Chevedden’s motion to dismiss.
Congress has been trying for several years to pass cybersecurity legislation, and the number of bills hitting the hopper has increased steadily over recent months. Nearly half a dozen bills have been introduced since January 2014 alone. Senate Intelligence Committee Chairman Dianne Feinstein (D-CA) and Vice Chairman Saxby Chambliss (R-GA) circulated another draft bill—The Cybersecurity and Information Sharing Act of 2014—last week. The recent uptick is no surprise in light of significant incidents of consumer data theft in the United States.
Like the proposed legislation before it, the draft Cybersecurity and Information Sharing Act is concerned with the theft of personal and financial information from company and government computer systems. In order to combat incidents of theft, the draft bill contains provisions that would allow for greater sharing of information among government and private sector entities. For example, the Secretary of Homeland Security would be required to timely share even classified information about cyber threats with cleared representatives of “appropriate entities.”
I am a believer in the power of women to lead, in many ways and in many situations. Regrettably, there are too many instances where we all feel powerless despite who we are or what we have achieved. Two stories of late bring that home to me: the unfathomable kidnappings of hundreds of girls from their schools in Nigeria and the stabbing of Maren Sanchez at Jonathan Law High School on the morning of what would have been her prom night in my hometown of Milford, Connecticut.
In yesterday's New York Times, Nicholas Kristof suggests that on Sunday, Mother's Day, contributions be made to EdnaHospital.org, a family planning organization in the Horn of Africa, MothersDayMovment.org, which is supporting a clean water initiative in Uganda, or Camfed.org, where a $40 gift pays for a school uniform.
Conflict Minerals Rule Update: U.S. Court of Appeals for the D.C. Circuit Issues Per Curiam Order in Conflict Minerals Case
On May 7, 2014 the United States Court of Appeals for the District of Columbia Circuit filed a per curiam order in response to the appellant’s emergency motion for stay of the SEC’s Conflict Minerals Rule. The Court ordered that the briefing schedule proposed by appellants—the National Association of Manufacturers—be adopted. Appellees’ opposition to the emergency motion will be due by 3:00 p.m. on Friday, May 9, 2014, and appellants reply will be due by 3:00 p.m. on Tuesday, May 13, 2014. Given the June 2 reporting deadline, Appellees’ have requested a decision by May 26, 2014.
As we discussed here, on March 12, 2014, the Division of Corporation Finance of the Securities and Exchange Commission (SEC) revised its previous guidance on granting waivers to well-known seasoned issuers (WKSIs) to continue to qualify as WKSIs despite otherwise disqualifying misconduct. Interestingly, on April 24, 2014, the SEC further updated its revised guidance, as reflected here. Any issuer preparing a WKSI waiver request must be sure to base its request on the latest guidance, which seems to indicate that obtaining a WKSI waiver may be more difficult going forward than in the past.
Specifically, the SEC expanded its description of the framework it will use for determining if a WKSI waiver request establishes a showing of good cause. The SEC added the following language to its guidance, which indicates that the bar has been raised for obtaining a waiver if the underlying cause of the ineligibility was a criminal conviction or a scienter based disclosure violation: “Where there is a criminal conviction or a scienter based violation involving disclosure for which the issuer or any of its subsidiaries was responsible, the issuer's burden to show good cause that a waiver is justified would be significantly greater.”
Conflict Minerals Rule Update: NAM Files Emergency Motion for Stay with D.C. Circuit Court of Appeals
Following through on its April 30 statement, the National Association of Manufacturers, joined by the U.S. Chamber of Commerce and the Business Roundtable, filed an emergency motion for stay of the SEC’s Conflict Minerals Rule with the U.S. Court of Appeals for the D.C. Circuit. NAM’s motion requests an expedited review schedule that would result in a ruling by May 26, 2014. The court will consider four factors when reviewing NAM’s motion: (1) the likelihood of success on the merits; (2) the threat of irreparable injury to the movant if a stay is not granted; (3) whether a stay would substantially harm other parties; and (4) the public interest.
NAM asserts that a stay is warranted because it will demonstrate in later proceedings that the court should vacate the Rule. Among other things, the appellants argue that vacature is appropriate because the Rule has no purpose after the court held on April 14 that it is unconstitutional for the Rule’s to require companies to declare which of their products “have not been found to be DRC Conflict Free.”
If NAM’s motion is successful, covered issuers will not have to file conflict minerals disclosures on June 2. However, May 26 – just five business days before the reporting deadline – is the soonest issuers are likely to know whether the reporting requirement remains in effect. Accordingly, issuers should continue to prepare as though the Rule is effective and should plan to comply with the SEC’s guidance of April 29.
The Supreme Court has granted certiorari in Omnicare, Inc. v. The Laborers District Council Construction, No. 13-435, and will consider whether a statement of opinion in a Registration Statement must be both objectively and subjectively false to be actionable under Section 11 of the Securities Act of 1933. The Supreme Court’s ultimate decision could have far-reaching consequences for companies seeking to become public or making secondary offerings, potentially expanding liability for companies, officers, directors and auditors and possibly increasing D&O insurance costs as well.
Section 11 claims can only be brought for alleged misstatements in registration statements in initial or secondary offerings, and Section 11 has long been heralded by the plaintiffs’ bar as a “strict liability” statute that requires no proof of actual intent. See Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82 (1983). In Omnicare, the Sixth Circuit extended that interpretation to soft information and statements of opinion as well, requiring only proof of objective falsity, in direct contradiction with the Second, Third and Ninth Circuits.
As mentioned here, on April 29, 2014, the National Association of Manufacturers (NAM), Chamber of Commerce and Business Roundtable filed a motion for stay with the SEC. The motion requested that the SEC stay its final Conflict Minerals Rule or at least stay the filing deadline for the Form SD and reports associated with the rule. This request followed the U.S. Court of Appeals for the District of Columbia’s holding that the SEC’s requirement that covered companies state which of their covered products “have not been found to be DRC Conflict Free” violates the First Amendment.
In summary, the petitioners argued that issuers will suffer irreparable injury in the absence of the stay due to loss of First Amendment freedoms and the financial implications of complying with the rule. They argue that the entire rule should be stayed because the resulting compelled statement is closely intertwined with the due diligence and country of origin inquiry. Since the “shaming mechanism” of the rule has been struck down on First Amendment grounds, petitioners argued the benefit of the rule is now questionable. Petitioners emphasized Commissioners Gallagher and Piwowar’s comments that “the listing of products – the apotheosis of the diligence process… is central to the rule.” Without the compelled disclosure requirements, the purpose of the rule is undermined and the due diligence requirements become an unnecessary burden to issuers. Petitioners assert that even the current proposed solutions (e.g., the SEC compiling its own list of products that are not conflict free) require a lengthy determination of the standards for classifying the products. The petitioners argue that there is not enough time to resolve these issues before the June 2, 2014, reporting deadline and thus the rule should be stayed until the process of implementing the court’s decision can be completed.
On May 2, 2014, the SEC issued an order partially staying its Conflict Minerals Rule. Essentially, the order reiterates the SEC’s April 29, 2014, guidance that the Commission will not require companies subject to the conflict minerals reporting requirements to state in their conflict minerals disclosures whether or not their products are “DRC conflict free” in light of the U.S. Court of Appeals for the District of Columbia’s holding that the Rule’s compelled designation of products as not “DRC Conflict Free” is unconstitutional. To read the full order, click here.
Significantly, in a footnote, the order denies a motion for a complete stay of the Rule filed by the National Association of Manufacturers, the Chamber of Commerce and Business Roundtable on April 30. In a separate statement made on April 30, NAM promised to file a motion for injunctive relief with the U.S. Court of Appeals for the D.C. Circuit if the SEC denied its motion; we are monitoring the Court’s docket and will post an additional update as soon as NAM files the anticipated motion.
The SEC issued guidance on its interpretation of the U.S. Court of Appeals for the D.C. Circuit’s recent decision that certain portions of the SEC’s conflict minerals reporting requirements violate the First Amendment, as discussed further here and here. Key points from the guidance include:
1. The June 2, 2014 filing deadline remains effective;
2. Covered companies are not required to state “DRC Conflict Free”, “DRC Conflict Undeterminable”, or “have not been found to DRC Conflict Free,” in relation to their covered products; and
3. An independent private sector audit is no longer required unless the company voluntarily elects to state that its products are DRC Conflict Free.
The White House released its report on “big data” today, making several policy recommendations for the use of personal data in the commercial, educational and health care sectors. The report was spurred at the request of President Obama back in January 2014, when he requested a 90-day study to “examine how big data will transform the way we live and work and alter the relationships between government, citizens, businesses and consumers.” White House Counselor John Podesta led the study, along with John Holdren, Director of the White House Office of Science and Technology Policy, Jeffrey Zients, Director of the National Economic Council, Commerce Secretary Penny Pritzker and Energy Secretary Ernest Moniz.
The ethos of legal practice—steeped in history, procedure and rules—is, in many respects, fundamentally at odds with the “act-now-ask-forgiveness-later” model of social media. But while it can be tempting to avoid potential pitfalls by simply avoiding social media altogether, doing so is ill-advised, both in terms of business and good lawyering. Thankfully, on March 18, 2014, the New York State Bar Association released new “Social Media Ethics Guidelines,” which provide attorneys with a helpful framework of issues to consider relating to the practice of law in the age of social media.
As an initial matter, it is important to note the limitations of the NYSBA Guidelines. As the name suggests, this document is a non-binding advisory publication based on New York’s Rules of Professional Conduct. Other states and jurisdictions may take different views, and the Appellate Divisions may not interpret the rules and case law in the same way as the New York State Bar Association. Nevertheless, the Guidelines do highlight potential considerations that may not be immediately obvious to attorneys using social media and advising their clients about social media usage.
Antitrust-Related Recent Developments: U.S. Supreme Court Declines to Revive Refusal to Deal Monopolization Suit Against Microsoft
On April 28, 2014, the United States Supreme Court reinforced the prevailing view that monopolists rarely, if ever, have a duty to assist rivals by denying cert. in Novell, Inc. v. Microsoft Corp. Novell claimed that Microsoft Corp. violated Section 2 of the Sherman Act, 15 U.S.C. § 2, by withholding certain aspects of its software from competing developers during its rollout of Windows 95. Microsoft’s deviation from its previous practice of providing such information allegedly delayed Novell’s release of its Windows 95 compatible applications.
Novell alleged that Microsoft intentionally altered its existing business practice of providing competitors with Windows technical information in order to monopolize the market for operations systems.1 To support its monopolization theory, Novell presented a memo from former Microsoft CEO Bill Gates, stating that the company should withhold certain code from competitors to gain market advantages for Microsoft Word. The district court held that this constituted insufficient factual evidence to show that Novell was harmed by Microsoft’s conduct, and that “it is well established that a monopolist generally has no duty to cooperate with its competitors.” Novell, Inc. v. Microsoft, 2012-2 Trade Cases P 77,979 (D. Utah 2012).
Federal Prosecutors Face Difficult Questioning in Second Circuit over Standard for Insider Trading Liability
On April 22, 2014, the Second Circuit Court of Appeals heard oral arguments in an appeal by two former hedge fund traders, Todd Newman and Anthony Chiasson, of their convictions for insider trading. On appeal, counsel for Newman and Chiasson argued that the trial court erred by failing to instruct jurors that the government was required to prove that the defendants (who were downstream tippees) knew that the insider who leaked the information at issue received a “personal benefit” for doing so. The district court declined to give such an instruction and concluded that the law did not require that a defendant have knowledge that the insider obtained a personal benefit, but only knowledge that the insider breached a fiduciary duty.
The appeal is one of the most important in the area of insider trading in the last decade and raises fundamental questions about the legal standard required to impose insider trading liability on downstream tippees. A key legal issue to be considered by the Second Circuit in deciding the appeal is whether the trial court’s interpretation of the law is too similar to the parity-of-information standard explicitly rejected by the Supreme Court in Dirks v. SEC (1983) (Dirks). In Dirks, Justice Powell, delivering the opinion of the Court, reasoned that “[i]mposing a duty to disclose or abstain solely because a person knowingly receives material nonpublic information from an insider and trades on it could have an inhibiting influence on the role of market analysts, which the SEC itself recognizes is necessary to the preservation of a healthy market.” Id. at 658.
In a little-noticed part of a December 2013 opinion in the multidistrict Facebook IPO litigation, U.S. District Judge Robert Sweet ruled that plaintiffs could use prospectus language once thought to be a shield against antifraud litigation as a sword to parry an immateriality defense. In reaching this conclusion, Judge Sweet followed a 2010 opinion by U.S. District Judge Jed Rakoff interpreting similar language in litigation over Bank of America’s acquisition of Merrill Lynch. Although the language remains common in securities disclosure documents, issuers and their counsel should consider carefully whether to continue including it.
Facebook IPO and Bank of America Acquisition of Merrill Lynch
Facebook’s 2012 IPO prospectus explicitly instructed investors, “You should not rely on information in public media that is published by third parties.” When investors sued Facebook for failure to disclose the potential impact of increasing mobile usage and product decisions in its registration statement, Facebook argued that news reports about this issue made such nondisclosure immaterial. See In Re Facebook, Inc., IPO Securities and Derivative Litigation, MDL No. 12-2389, slip op. at 77-78 (S.D.N.Y. Dec. 11, 2013). In addressing this argument, Judge Sweet ruled that news reports should not be considered for purposes of the materiality analysis. He explained, “A reasonable investor will not be charged to regard press reports as a reliable source of information after having read such advice.”
Additional SEC Guidance on Social Media: Division of Investment Management Q&As and Division of Corporation Finance C&DIs
The Division of Investment Management of the Securities and Exchange Commission (“SEC”) recently released IM Guidance Update No. 2014-4 to clarify the practical application of the testimonial rule for third-party commentary on social media sites in a series of nine Q&As. The guidance also seeks to assist investment advisers in developing compliance policies and procedures reasonably designed to address participation in the usage of this evolving technology, specifically with respect to the publication of any public commentary that is a testimonial.
The SEC’s Division of Corporation Finance updated their Compliance & Disclosure Interpretations this week to include, among other things, guidance on the permissible use of active hyperlinks to satisfy the requirements of Rules 134(b), 134(d) and 165(c)(1) of the Securities Act of 1933 in the circumstances where certain social media websites may limit the number of characters or amount of text that can be included in a communication. The SEC noted that where an electronic communication is capable of including the required legend, along with the other information, without exceeding the applicable limit on number of characters or amount of text, the use of a hyperlink to the required legend would be inappropriate. This position also applies to written communications that constitute solicitations made in reliance on Exchange Act Rule 14a-12 and pre-commencement written communications subject to Exchange Act Rules 13e-4(c), 14d-2(b) and 14d-9(a).
On April 17, 2014, U.S., EU, Russian and Ukrainian representatives endorsed an agreement outlining initial steps to deescalate tensions in Ukraine. For the moment, the agreement may temporarily stall additional U.S. and EU sanctions against Russia. However, Administration officials, including Secretary of State John Kerry and National Security Advisor Susan Rice, emphasized shortly after the agreement’s announcement that the United States would be ready to impose additional sanctions against Russia if it fails to live up to the agreement. Additionally, events over the weekend, including continued resistance by pro-Russian separatists to the agreement and a deadly gun attack, may threaten the agreement and increase the possibility of additional sanctions.
The agreement’s steps specifically include:
- requiring all parties to refrain from violence
- disarming illegally armed groups
- returning all illegally seized buildings to their legitimate owners
- vacating “all illegally occupied streets, squares and other public places in Ukrainian cities and towns”
- granting amnesty to protestors who cooperate with these conditions.
On March 12, 2014, the SEC updated its guidance regarding the framework it will follow in reviewing a “WKSI waiver” request. Such a waiver – which, if granted, allows an issuer to continue to qualify as a WKSI despite otherwise disqualifying misconduct – is critical to the affected issuer’s ability to access the capital markets. These waivers have become particularly important for bank and other financial holding companies with large networks of subsidiaries, one or more of which may have been charged with mortgage securities fraud or other crimes arising out of the recent financial crisis. Under the revised guidance, the SEC will consider many of the same factors in a waiver request as before, but will no longer highlight certain aspects of the underlying offense as threshold issues, as under the prior guidance. As a result, issuers will need to take greater care in their waiver requests to address all of the various considerations raised by the SEC in its guidance and apply them to the issuer’s particular facts and circumstances.
As publicly traded companies consider potential risks to their assets from a changing climate, the chorus of individuals and institutions advocating for public disclosures of these risk assessments continues to grow. In this post, originally featured on Akin Gump’s Speaking Energy Blog, we discuss the idea of “stranded assets” and recent developments involving ExxonMobil’s response to such shareholder petitions regarding risk analysis and disclosure.
Arjuna Capital, a sustainable wealth management platform, and As You Sow, an environmental corporate responsibility advocacy group, have been advocating for publicly traded companies to assess and disclose the risks that their assets will be “stranded” as a result of changing regulatory regimes designed to address climate change. The rationale underlying these efforts derives from the notion that a “carbon bubble” exists. Author and climate activist Bill McKibben is often credited with introducing the notion, basing it on a U.K. research group’s contention that upwards of 80 percent of the world’s oil, gas and coal reserves would become “stranded” if GHG emissions were controlled sufficiently to limit global warming to an increase of 2º C.
On April 11, 2014, Keith F. Higgins, Director of the U.S. Securities and Exchange Commission’s (SEC) Division of Corporation Finance, gave a speech before the ABA Business Law Section discussing the new Disclosure Project that is being led by the Division of Corporation Finance. In an effort to improve disclosure in SEC filings, the project will involve reviewing specific sections of Regulation S-K and Regulation S-X. The goal, according to Director Higgins, is to determine if the disclosure requirements can be updated (1) to reduce the costs and burdens on companies while continuing to provide material information and (2) to eliminate duplicative disclosures. At the same time, the SEC is trying to determine if there is information not currently required to be disclosed that should be.
Ways to Improve Disclosure Effectiveness
At one point, Director Higgins observed that in addition to SEC updates to Regulations S-K and S-X, companies and their representatives can help improve what Director Higgins referred to as “the focus and navigability” of disclosure documents. Specifically, he recommended that companies improve their SEC filings by (1) reducing repetition, (2) focusing their disclosure and (3) eliminating outdated information.
On April 8, 2014, President Obama signed an executive order to “promote economy and efficiency in Federal Government Procurement[.]” The Executive Order, “Non-Retaliation for Disclosure of Compensation Information[,]”amends Executive Order 11246 covering Equal Employment Opportunity, to include a paragraph prohibiting retaliation against employees of federal contractors who disclose, discuss, or inquire about compensation. The new paragraph prohibiting retaliation will not apply to “an employee who has access to the compensation information of other employees or applicants as part of such employee’s essential job functions . . . unless such disclosure is in response to a formal complaint or charge, in furtherance of an investigation, proceeding, hearing, or action, including an investigation conducted by the employer, or is consistent with the contractor’s legal duty to furnish information.”
Antitrust-Related Recent Developments: Terrell McSweeny Confirmed as FTC Commissioner, Congress Holds Hearings and FTC/DOJ Policy Statement on Sharing of Cybersecurity Information
On April 9, 2014, the U.S. Senate confirmed Terrell McSweeny to serve as FTC Commissioner. Commissioner McSweeny will join Commissioners Edith Ramirez and Julie Brill as the third Democratic member of the five-member Federal Trade Commission (Commission). Commissioners Maureen Ohlhausen and Joshua Wright are the two Republicans. The appointment reduces the possibility of the Commission abstaining from acting as a result of a 2-2 split during its decision-making process.
Commissioner McSweeny has spent most of her career in public service. Her recent appointments include serving as Chief Counsel for Competition Policy and Intergovernmental Relations at the Department of Justice’s Antitrust Division, as a domestic policy adviser to Vice President Joe Biden and as a deputy assistant to President Barack Obama. Commissioner McSweeny has developed a reputation as an insightful and pragmatic problem-solver during her career in public service.
The California Court of Appeals recently issued a decision that an express waiver of the right to challenge a liquidated damages clause that constituted an unreasonable penalty is unenforceable.
In Purcell v. Schweitzer (4th Cir. March 17, 2014), a lender brought a lawsuit after the borrower defaulted on an $85,000 promissory note. The parties entered into a settlement agreement pursuant to which the borrower agreed to pay the lender $38,000 plus 8.5 percent interest, in installments over 24 months, and agreed that any late payment would entitle the lender to have a judgment entered against the borrower for the original liability of $85,000. The stipulation for entry of judgment attached to the settlement agreement described the $85,000 liability as “neither a penalty nor a forfeiture” and stated that the borrower waived any right to an appeal or to contest the judgment.
Carlos M. Bermudez is a corporate partner in Akin Gump’s Los Angeles office, focusing on M&A transactions and corporate governance issues. Recently, he has blogged about several important court decisions in California and Delaware affecting the M&A practice.
What is your main practice area?
Mergers and acquisitions, corporate governance, general company representation and securities. Specifically, I represent a broad spectrum of clients, including public and private companies and private equity funds, in acquisitions, mergers, joint ventures, financings and cross-border transactions.
2013 was a flat year for M&A activity worldwide. Although deals with U.S. targets were up 11.3%, the quiet market meant that a small handful of deals received an outsized share of attention, especially ones that involved activist shareholders.
The trend of activist shareholders increasingly drawing companies into their crosshairs is expected to continue throughout this year. Not only are new activist funds and strategies emerging, but their assets under management are rising and an increasing number of mutual funds and institutional investors are siding with activists, therefore allowing activists to go after these larger companies with some success. As such, companies are considering their strategies should an activist approach.
On April 3, 2014, President Obama signed into law the Support for the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014 (Public Law No. 113-95). The law includes new authority, not specifically identified in previous executive orders, for the President to impose sanctions on individuals who have committed gross human rights abuses in Ukraine associated with anti-government protests that began in November 2013. The law also provides the President authority to impose sanctions on individuals and entities deemed to have engaged in significant corruption in either Ukraine or Russia. Previously, with regard to corruption, Executive Order 13660 only provided the President authority to impose sanctions on persons involved with the “misappropriation of state assets of Ukraine or of an economically significant entity in Ukraine.”
Many companies have watched with anticipation for the final language of the bill. After several weeks of hearings and negotiations in March, the House and Senate initially passed separate legislation. However, they were able to reconcile their separate versions after the Senate passed an amendment removing controversial language regarding the International Monetary Fund (“IMF”). On April 1, 2014, the House agreed to the amended version passed by the Senate, which the President then signed into law. Below we provide a synopsis of the major provisions of the enacted law.
Companies are increasingly taking advantage of the benefits of using “cloud” based services. Those benefits include:
- lower costs
- rapid scalability
- minimum or no upfront capital investment
- pricing on a consumption basis
- shifting the risk of obsolescence or upgrading technology to the cloud provider.
There is a saying that a man who serves as his own lawyer has a fool for a client. The same may be true for a fund that rushes to act as its own shareholder representative without thinking through the consequences.
Chances are you don’t cut your own hair, mow your own lawn or do your own taxes. So why, after selling your portfolio company, would you—a principal of a PE fund—agree to serve as a principal shareholder representative in post-closing litigation matters? The knee-jerk response is typically, “because I want to keep control.” But that control could come at a serious cost and there may be ways to maintain a reasonable level of control without exposing your fund to the unnecessary risks and expenses associated with being a named defendant in post-closing litigation.
Tomorrow, on April 1, 2014, some potentially important new provisions in the Delaware General Corporation Law (the DGCL) will go into effect.
New Section 204 of the DGCL provides corporations with the ability to ratify certain corporate actions that would otherwise have been void or voidable because of their failure to comply with statutory law or the corporation’s organizational documents. Prior to Section 204 becoming effective, Delaware case law had held that such actions could not be subsequently ratified. Beginning April 1, provided they comply with the procedures set forth in Section 204, corporations may ratify such actions.
The Obama administration announced this week that companies with pending license requests to export certain controlled dual-use goods or technology, defense articles or defense services to Russia will face an indefinite hold on receiving approval from the U.S. government. The policy is expected to have a significant impact on Russia and may affect the U.S. trade balance with Russia.
On March 27, 2014, the U.S. Department of State’s Directorate of Defense Trade Controls (DDTC) released an industry notice indicating that it “placed a hold on the issuance of licenses that would authorize the export of defense articles and defense services to Russia. State will continue this practice until further notice.” On March 25, 2014, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) announced on its website that “[s]ince March 1, 2014, BIS has placed a hold on the issuance of licenses that would authorize the export or reexport of items to Russia. BIS will continue this practice until further notice.”
On Wednesday, March 26, 2014, the Senate Committee on Commerce, Science and Transportation held a hearing entitled “Protecting Personal Consumer Information from Cyber Attacks and Data Breaches” and heard testimony from representatives of Target, as well as the University of Maryland (UM), regarding the recent data breaches within their organizations. Testimony was also taken from Edith Ramirez, Chairwoman of the Federal Trade Commission (FTC), who has called on Congress to enhance the Commission’s authority to enforce data security measures. Other witnesses included: Ellen Richey, Chief Enterprise Risk Officer for Visa; David Wagner, President, Entrust, Inc.; and Peter J. Beshar, Executive Vice President and General Counsel, Marsh & McLennan. Prior to the hearing, the Committee released a staff report titled “A ‘Kill Chain’ Analysis of the 2013 Target Data Breach.”
While several Congressional committees held hearings concerning breaches at Target and other retailers back in February 2014, the March 15 breach at UM (the second at the University in as many months) has continued to keep the issue of data security at the forefront of congressional interest.
In February 2014, the American Criminal Law Review published in its 51st edition Asadi v. GE Energy (USA) L.L.C.: A Case Study of the Limits of Dodd-Frank Anti-Retaliation Protections and the Impact on Corporate Compliance Objectives, by Akin Gump’s Nicole H. Sprinzen.
Exploring the intersection of the presumption against extraterritorial application in the context of statutory construction and the protections against retaliation offered by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), the article highlights the limits on the protections to individuals who blow the whistle on U.S. Foreign Corrupt Practices Act (FCPA) violations. Section 922 of Dodd-Frank offers protection against employment retaliation to statutorily defined whistleblowers who report violations of laws, rules or regulations regulated by the U.S. Securities and Exchange Commission (SEC) to the SEC or, in some cases, their employer, or assists in any SEC investigation.
The ongoing conflict between Russia and Ukraine has led to recent changes in sanctions laws that have significance for U.S., European Union (EU) and Russian companies as well as companies that do business within these geographies or with certain nationals from these countries.
In response to the recent Russian military action in Ukraine, the United States, EU and other countries, including Canada, have implemented list-based sanctions targeting persons deemed to be responsible for creating instability in Ukraine. Some Russian officials have indicated that Russia will respond to sanctions imposed by other countries by establishing similar retaliatory sanctions. Thus far, Russia has imposed limited target sanctions on certain U.S. government officials.
For majority stockholders in Delaware companies, the complications and added expenses often caused by minority stockholders may result in a decision to buy out that minority, simplify the company’s capital structure and potentially inject additional capital into the company to fund future growth.
At this point, you might view this as just another deal—analogous in many ways to the original purchase of your majority position. In fact, you may think completing the transaction is as simple as rounding up a few of the largest stockholders and negotiating terms with them. However, for majority stockholders whose majority interest equates to a controlling position, buying out the minority is complicated by the fact of majority control and the resulting fiduciary duties a controlling stockholder may owe to the minority. Controlling stockholders who are not cognizant of these issues could end up in court despite the seemingly ordinary nature of these transactions.
On February 6, 2014, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) published notice that it was listing 11 named parties as “Foreign Sanctions Evaders,” pursuant to Executive Order 13608 (May 1, 2012) (the FSE List). The FSE List targets individuals and entities that OFAC determines have violated, attempted to violate, conspired to violate or caused violations of U.S. sanctions against Syria or Iran. U.S. persons and companies are prohibited from engaging in transactions with parties included on the FSE List unless the transaction qualifies for an exemption from OFAC sanctions. In addition, the prohibition may in effect extend to foreign subsidiaries and controlled affiliates to the extent there is U.S. parent entity involvement in their transactions.
This development underscores the need for entities to add the FSE List to the collection of other restricted-party lists that must be covered and reviewed in diligence activities and other compliance screening. The FSE List is not currently incorporated into the Consolidated Screening List made available by the U.S. government at www.export.gov. Consequently, entities must take care to ensure that their screening practices, whether conducted manually or in reliance on commercial screening software services, cover this list.
Last week in Kahn v. M&F Worldwide Corp. (Del. March 14, 2014), the Delaware Supreme Court upheld the decision of the Court of Chancery in the In re MFW Shareholders Litigation (Del. Ch. May 29, 2013) case and also upheld the grant of summary judgment to the defendants.
In that decision, as we discussed here, the Court of Chancery held that the business judgment standard of review will apply to going private mergers with a controlling stockholder and its subsidiary if and only if the merger is conditioned on two specific stockholder protective measures. Typically, transactions that involve a controlling stockholder are subject to the entire fairness level of review, which shifts the burden to the controlling stockholder to show that the transaction is fair to the minority shareholders.
Garrett DeVries is a corporate partner in Akin Gump’s Dallas office, focusing on securities and M&A transactions. Recently he has blogged about the SEC’s update on share-based compensation and enhanced confidential voting shareholder proposals in proxy statements.
During last week’s oral argument in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317 (“Halliburton II”), the Supreme Court justices sent a strong signal that they would not overrule Basic, but may seek to strengthen defendants’ ability to contest class certification. The two questions presented are (1) whether the fraud-on-the-market presumption established in Basic Inc. v. Levinson, 485 U.S. 224 (1988), should be overruled, and (2) whether the defendants may rebut the fraud-on-the-market presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of their stock.
Going into the argument, defendants knew they likely had three justices on their side: Justices Scalia, Thomas and Alito. In a prior decision in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085 (2013), Justice Thomas remarked, “Basic is a judicially invented doctrine based on an economic theory adopted to ease the burden on plaintiffs bringing claims under an implied cause of action.” Justice Alito further noted in his Amgen concurrence, “[M]ore recent evidence suggests that the presumption may rest on a faulty economic premise. In light of this development, reconsideration of the Basic presumption may be appropriate.” Justice Scalia’s dissent in Amgen specially noted the “regrettable consequences” of Basic. Although Justice Thomas remained silent, Justice Alito focused on how rare it is for defendants to be successful in rebutting the fraud-on-the-market presumption (Transcript at 8). Justice Scalia emphasized how few securities class actions continue to trial once certified (Tr. at 23). Shortly into oral argument, it became clear that the position seeking to overrule Basic would be unlikely to garner a majority vote.
Richard J. Rabin, Alice Hsu, Francine E. Friedman and Renuka S. Drummond discuss the challenges broker-dealers and other financial advisory firms encounter in their efforts to monitor the business-related activities of their associated persons on social media, as required by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended (the Advisers Act).
Existing regulatory regimes that have an impact on social media often conflict, placing firms in the untenable position of having to risk violating one set of laws in order to comply with another. On the one hand, FINRA and the Advisers Act require firms to take steps to prevent financial advisers from using social media in a way that could present an undue risk to investors. On the other hand, the National Labor Relations Board and various state laws place significant limits on firms' ability to monitor or restrict their employees’ social media usage. This article addresses steps companies can and should consider in light of the conflicting regulatory regimes.
To read more, please click here.
U.S. Supreme Court Round-Up: Sun Capital Cert Denied, Omnicare Cert Granted and Whistle-Blower Protection Extended
As first discussed here and here, in July 2013 the First Circuit Court of Appeals held in Sun Capital Partners III, LP, et al. v. New England Teamsters & Trucking Industry Pension Fund that a Sun Capital Partners private equity fund (Sun Capital) constituted a “trade or business” under the controlled group rules of the Employee Retirement Income Security Act of 1974, as amended (ERISA) for multiemployer plan withdrawal liability purposes. Accordingly, a private equity fund (or affiliated funds) can be held liable for pension obligations of a bankrupt portfolio company.
Sun Capital asked the Supreme Court to review the case, but on March 3, 2014, the Supreme Court denied certiorari. The case will be remanded to the district court for additional factual development regarding the “common control” prong of the “control group” test, which is based on economic ownership instead of voting control. Although the “common control” analysis is complex, generally two entities will be considered to be under common control if one entity owns 80 percent or more of the other entity or when five or fewer persons directly or indirectly own 80 percent or more of two or more entities and have effective control over each entity.
Plaintiff’s Attorney’s Fees in Shareholder Suits Subject to Heightened Scrutiny (In re Theragenics Case)
It’s virtually inevitable: Within hours (or less) of a press release announcing a merger or acquisition involving a public company, a group of shareholders will file a class action lawsuit against the public company target’s directors and officers. The suit will customarily allege, among other things, that the target company’s board of directors breached their fiduciary duties by failing to get a fair price for their company and that the process used to approve the deal was deficient. Shortly thereafter, the target public company typically settles with the plaintiffs for relief that almost always includes increased disclosures to the public company’s shareholders in revised filings with the Securities and Exchange Commission (SEC). Such settlements rarely include any monetary relief for the shareholders, but almost always will include provisions for reimbursement of the plaintiffs’ attorney’s fees and expenses.
In February 2014, the Securities and Exchange Commission’s (SEC) Division of Corporation Finance updated Section 9520 of its Financial Reporting Manual. Section 9520 is part of Topic 9, which provides guidance for Management’s Discussion and Analysis of Financial Condition and Results of Operation, or MD&A. In particular, Section 9520 relates to the disclosure of critical accounting estimates for share-based compensation in the prospectus for a company’s initial public offering (IPO).
As discussed in Section 9520, estimating the fair value of underlying shares of a pre-IPO company can be highly complex and subjective because the shares are not yet publicly traded. Therefore, such estimates are often considered critical, prompting enhanced discussion and analysis.
Fueled by the controversy during the 2013 proxy season over access to interim vote tallies, “enhanced confidential voting” proposals have been submitted to over a dozen high profile companies for the 2014 proxy season, including Verizon Communications, Inc., Amazon.com, Inc. and United Continental Holdings, Inc. A majority of these shareholder proposals have been submitted by shareholder activist, John Chevedden, and are based on a shareholder proposal that was submitted to CenturyLink, Inc. last year. That proposal received 42% approval from shareholders, despite an apparent recommendation against the proposal from proxy advisor Glass, Lewis & Co., according to Reuters. A similar proposal recently also received 40% approval at the annual shareholders meeting of Whole Foods Market, Inc. on February 24, 2014.
The “enhanced confidential voting” proposal would restrict management’s access to a running tally of votes and prohibit their use of such information for the solicitation of votes, except for the purpose of achieving a quorum or “other proper purposes.” Votes on the election of directors and contested proxy solicitations are excluded from the restriction.
When choosing an entity, limited liability companies (LLCs) are an attractive option because they insulate their members from personal liability, allow governance flexibility and provide a single layer of income tax. For these reasons, their use has increased significantly.
Properly using LLCs requires an understanding of the default provisions of the applicable laws of the organizing jurisdiction. Below are some key provisions from the Delaware Limited Liability Company Act to consider when drafting an LLC operating agreement.
1. An LLC must have an operating agreement. It can be written or oral. The statute of frauds does not apply to operating agreements.
2. Only having one member does not make an LLC’s operating agreement unenforceable.
Private equity funds investing in a company should be aware of the possible labor issues that may arise and carefully consider their role in the company.
In a Law360 article, Akin Gump counsel Lauren Leyden, among others, discusses the following issues that private equity funds should be mindful of:
1. Latent wage-and-hour liabilities
2. Human resources after an asset sale
3. Control and liability
4. WARN Act liability
5. Union bargaining obligations
To read the full article on the potential pitfalls, see here.
In the Dodd-Frank Act of 2010, Congress required the Securities and Exchange Commission (SEC) to adopt a rule requiring transparency and disclosure regarding the use of “conflict minerals” sourced from the Democratic Republic of the Congo (DRC). Shortly after the rule’s August 2012 adoption, the SEC found itself defending the rule in court against the National Association of Manufacturers, the Chamber of Commerce, and Business Roundtable (“Plaintiffs”) who argued that the Final Rule is arbitrary and capricious and unconstitutional. The District Court in the District of Columbia ruled in favor of the SEC in July 2013 and the Plaintiffs appealed. A panel of three judges, consisting of Circuit Judge Sri Srinivasan, Senior Circuit Judge David Sentelle and Senior Circuit Judge A. Raymond Randolph, heard oral argument in the D.C. Circuit Court of Appeals in early January 2014.
The SEC answered pointed questions about whether the rule exceeded the scope of the underlying statute and its rule-making authority and about whether the rule’s requirements unduly burden industry. The discourse delineated three main issues: first, the SEC’s choice not to include a de minimis exception to the rule; second, the statutory language substitution of the broader reporting requirement — “may have originated in the conflict region” rather than “did originate,” the latter of which was the language in the underlying Dodd-Frank statute; and third, whether the reporting obligations run afoul of the First Amendment by compelling private speech. Based on the exchange between the panel and counsel during argument, the panel seemed to find the Plaintiffs’ de minimis argument unpersuasive but seemed more compelled by the Plaintiff’s First Amendment challenges.
The fraud-on-the-market presumption of reliance will not go down without a fight in Halliburton v. Erica P. John Fund (No. 13-317), a Supreme Court case that may reshape securities litigation for years to come. At issue, according to Respondents, is (1) whether a “statutory interpretation precedent that Congress has left unchanged for more than a quarter century” should be overruled or modified and (2) whether evidence of price impact may be considered at class certification to rebut the presumption. The Respondents have lined up their cavalry, with eleven amici in their support. The plaintiffs’ bar has risen to the occasion, with heavy hitters Milberg LLP, Bernstein Litowitz Berger & Grossmann LLP, Berger & Montague PC, Labaton Sucharow LLP, Kessler Topaz Meltzer & Check LLP, Pomerantz LLP, and others all authoring briefs in support of Respondents.
Three central arguments are raised by the Respondents and their supporting amici. First, Respondents appeal to the common sense rationale of Basic. Millions of shares change hands daily in modern securities markets, and “the market is interposed between seller and buyer and ideally transmits information to the investor in the processed form of a market price.” They reason that “material statements typically affect the price of a stock through the conduct of analysts who report on significant public statements and market professionals and others who trade on that information,” which price is then relied upon by the ordinary investor.
Uncertainty continues as Broadridge flip-flops over its policy on the disclosure of interim proxy tallies in a proxy contest. In early February 2014, Broadridge announced a new policy that a company and shareholder proponents would only receive results of votes cast in favor of their respective proposals. A few days later, Broadridge reversed course and announced that it would not implement that policy but that “[b]oth sides of a proxy contest will continue to receive interim voting updates for their own and each other’s ballot.”
The policy updates follow last year’s controversy over Broadridge’s disclosure of interim proxy tallies during a contested shareholder proposal at JPMorgan. Historically, Broadridge had disclosed interim vote tallies to the company and to proponents of shareholder proposals who used Broadridge to distribute proxy soliciting materials. The interim vote tallies were reportedly leaked to the public and, days before the annual shareholder’s meeting, Broadridge declined to share interim vote tallies with the shareholder proponents, citing its contractual obligation to broker clients who had expressed concern over the practice. The policy was later reviewed by the Broadridge Steering Committee, which noted in a July 2013 newsletter that Broadridge was taking a neutral stance on the policy but was contractually obligated to cease its practice in response to concerns received from brokers about the early release of their voting data.
Dan Fisher is a corporate partner in Akin Gump’s Washington D.C. office whose focus is on mergers and acquisitions (M&A). Recently, he has blogged about Delaware cases affecting the M&A practice and the financial provisions reviewed in a deal term study. You can read his posts here and here.
What is your main practice area?
I practice at the nexus of M&A, private equity and restructuring. I represent large public companies in traditional M&A transactions, private equity firms and their portfolio companies in transactions and their day-to-day legal needs, and creditors of all sorts (with special experience representing convertible noteholders) in the financial distress and restructuring context.
Last week, in American Capital Acquisition Partners, LLC v. LPL Holdings, Inc. (February 3, 2014), the Delaware Court of Chancery, in connection with a disputed earnout provision, allowed a claim for breach of the implied covenant of good faith and fair dealing to survive a motion to dismiss. In taking this relatively rare step, the court showed a willingness to fill a ‘gap’ in contractual drafting with an obligation to act in good faith, and deal fairly, with respect to a matter the parties did not focus on in negotiations. Specifically, the claims that survived were based on allegations that clients, personnel and opportunities of the acquired company were actively diverted post-closing to another subsidiary of the buyer, thereby impeding the acquired company’s ability to meet the performance guidelines that would have entitled the sellers (plaintiffs) to certain contingent payments (both under the Stock Purchase Agreement (SPA) and their employment agreements).
On the other hand, the court dismissed the claims alleging breach of those implied covenants by the buyer in failing to make technological adaptations to help increase profitability because the plaintiffs anticipated, but failed to bargain for, such an obligation in the SPA.
Update Regarding Chevron Forum Selection Litigation: Chevron Requests Delaware Supreme Court Certification
As discussed here and here, on June 25, 2013, the Delaware Court of Chancery upheld the facial validity of forum selection bylaws unilaterally adopted by the boards of directors of Chevron Corporation and FedEx Corporation. In October 2013, the plaintiffs voluntarily dismissed their appeal of that decision, thereby avoiding the possibility of the Delaware Supreme Court’s (likely) affirmation of the Honorable Chancellor Leo Strine’s decision.
Now, in a similar case in California, plaintiffs are again challenging the Chevron forum selection clause. In response, on January 31, 2014, Chevron requested that the Honorable Jon Tigar, U.S. District Court for the Northern District of California, certify the question regarding the validity of its forum selection bylaws to the Delaware Supreme Court. The hearing for the certification case is scheduled for March 13, 2014.
The Securities and Exchange Commission’s Division of Corporation Finance posted a few additional interpretations (at 260.33 and 260.34) late January relating to the continuation of offerings commenced prior to September 23, 2013, under the new general solicitation regime.
First, the staff confirmed that the transitioning of an offering that would have satisfied the previous version of a private offering to an offering that includes general solicitation would not require the issuer to go back and “verify” the accredited investor status of persons who invested prior to the transition.
Next, the staff confirmed such a continuing offering may be transitioned to the new general solicitation regime even if the offering included non-accredited investors admitted prior to the transition.
On January 13, ISS released FAQs expressing its views on a board’s adoption of director compensation bylaws. To counteract the increasing practice implemented by hedge funds and other dissident shareholders of paying their director nominees compensation arrangements tied to their election to a board or performance-based metrics, some companies are implementing director nomination and qualification bylaws. These bylaws would disqualify any director nominee who receives compensation from a third party. The ISS has now formalized its position on such director disqualification bylaws.
ISS generally opposes the adoption of a director compensation bylaw that would disqualify a director nominee who receives third-party compensation without putting such a bylaw to a shareholder vote. It takes the position that such adoption without shareholder approval could be considered “a material failure of governance because the ability to elect directors is a fundamental shareholder right…[and] [b]ylaws that preclude shareholders from voting on otherwise-qualified candidates unnecessarily infringe on this core franchise right.” Consistent with its policy on “Governance Failures,” ISS could, therefore, recommend a vote against or withhold from director nominees for any such material failures.
On February 5, the House Energy & Commerce Subcommittee on Commerce, Manufacturing and Trade held a hearing titled “Protecting Consumer Information: Can Data Breaches Be Prevented?” The hearing follows two consecutive Senate hearings this week on the same topic and featured testimony from representatives from the Federal Trade Commission (FTC), U.S. Secret Service, Department of Homeland Security (DHS), Target, Neiman Marcus and data security firms, as well as Illinois Attorney General Lisa Madigan.
The first panel of witnesses, consisting of FTC Chairwoman Edith Ramirez, U.S. Secret Service Deputy Special Agent in Charge William Noonan, Attorney General Madigan, and DHS National Cyber and Communications Integration Center Director Lawrence Zelvin, focused on whether Congress should grant regulators and law enforcement additional authority to establish and enforce data security and notification standards. Chairwoman Ramirez reiterated her agency’s call for a national data security standard and breach notification requirement. Attorney General Madigan also called for a national standard, but held the stance that any federal standard should not preempt existing state standards, so long as a state’s standard was equal to or stronger than the national standard. Attorney General Madigan also testified that, in the course of her research and investigation, she has found that “the notion that companies are doing all they can [to secure personal customer data] is false.” She repeatedly pointed to these discoveries to make the case for a national standard. The Attorney General also recommended the creation of a data breach investigative body modeled on the National Transportation Safety Board that would be tasked with investigating the failures of companies to reasonably secure their customers’ data. The DHS and Secret Service witnesses gave detailed testimony about their investigative actions in the wake of the recent data breaches at several retailers.
On Monday, February 3, and Tuesday, February 4, the Senate Banking and Senate Judiciary Committees (respectively) held hearings on the topic of data security and breach notification. Witnesses at both hearings included representatives from the Federal Trade Commission (FTC), the U.S. Secret Service, Target, Neiman Marcus and security firms such as Symantec.
On Monday, the Senate Banking Committee’s Subcommittee on National Security and International Trade and Finance held a hearing entitled “Safeguarding Consumers’ Financial Data.” The hearing focused on the criminal hacking of consumers’ financial data, including payment card information. Witnesses from the FTC and U.S. Secret Service outlined the existing investigative tools and enforcement authority to deal with these types of crimes. Jessica Rich, Director of the FTC Bureau of Consumer Protection, told the Committee that the FTC supports the creation of a federal standard for data security and breach notification, along with civil penalties for non-compliance. Much of the discussion focused on the transition of the payment card industry to a “chip and PIN” security standard, which would place microchips in payment cards and require personal identification numbers for processing retail transactions. Further, there were many questions regarding the extradition and prosecution of criminal actors who commit cyber crimes from locations outside the United States. U.S. Secret Service Deputy Special Agent in Charge William Noonan told the committee that extradition depends on the laws of the country where the hacker is physically located, and that some European countries have better records of extraditing persons suspected of committing crimes than others.
Recently, the 2013 Private Target Mergers & Acquisitions Deal Points Study was finalized by the M&A Market Trends Subcommittee of the Mergers & Acquisitions Committee of the American Bar Association. This bi-annual study, which was first published in 2007, analyzes a variety of deal points commonly negotiated in publicly reported M&A transactions involving a public buyer and a privately held target company. The 2013 study reviews 136 transactions that closed during 2012, with deal values ranging from $17.2 million to $4.7 billion. While the 2013 study reveals a number of interesting insights, this summary focuses on the financial deal points that most directly affect a deal’s bottom line. These findings should provide a useful reference as parties negotiate the appropriate financial terms of their transaction.
Post-Closing Purchase Price Adjustments
The study indicates that 85% of the deals included a post-closing purchase price adjustment, slightly higher than in prior years. While working capital was still the most common adjustment (in 91% of the relevant deals), adjustments for debt, cash and other items increased compared to the previous study. More of the relevant deals excluded current tax assets and current tax liabilities from the definition of “working capital” than in prior years (39% in 2012 versus 20% in 2010). Of the relevant deals, 88% included a payment at closing based on the target’s estimate, and in 74% of such deals the buyer did not have an approval right regarding the payment amount, in each case reflecting an increase over prior years. Most deals (69%) still did not have a separate purchase price adjustment escrow, and in a majority (57%) the true-up was paid from the indemnity escrow, up from 44% in the previous study. Finally, in more deals than in prior years (91% versus 84%), the purchase price adjustment amount did not need to exceed a certain threshold to be paid.
Mainstream media have recently noticed efforts by business interests to address potential risks to their business from a changing environment. As business entities assess potential risks, the drumbeat for disclosure of such assessments in public announcements grows louder. In addition, as discussed below, reporting companies should consider their disclosure obligations in this context in their risk factor disclosure and “forward looking statements” language.
Earlier this month, a former Securities and Exchange Commission member and a former deputy chief accountant, along with a London-based investor activist, called for the Financial Accounting Standards Board (FASB) to require companies with “significant fossil fuel reserves” to disclose information regarding assets that would be rendered “unburnable” by more stringent regulation (and become “stranded assets”).The authors suggest that such disclosure will permit investors to “pass judgment on the future viability of fossil fuel reserves.”
Class Certification Denied? Courts Denied Class Certification in Fewer Than 24 Securities Actions since 2002; Halliburton Petitioners Seek to Change that Trend
There is no shortage of arguments from the defense bar in Halliburton v. Erica P. John Fund (No. 13-317), a Supreme Court case that may be the most significant securities decision to come out of the Court in decades. At issue is whether the Court should overrule the fraud-on-the-market presumption of reliance or, alternatively, whether defendants should be allowed to rebut the presumption by introducing evidence that the alleged misrepresentation did not distort the market price of the stock. The decision will have far-reaching impact on securities class actions: since 2002, although nearly 2,000 cases have been filed, courts have denied class certification on substantive grounds in fewer than 24 cases.
In the last few weeks, the Halliburton Petitioners’ merits brief was followed by 11 amicus curiae briefs, each arguing that the fraud-on-the-market presumption of reliance should be overturned for a myriad of reasons.
In identifying issues facing corporate boards this year, the Financial Times identified board composition and director tenure as major topic. Our discussion on board composition, which was one of the Top 10 Topics for Directors in 2014 identified in our client alert, was mentioned in a column written by Anthony Goodman of Tapestry Networks. Please click here to read more.
Based on a number of cases decided by the Delaware courts in 2013, we have summarized practice tips regarding careful drafting of contractual provisions and complying with technical and statutory requirements:
- Disclaimers of Reliance and Accuracy Clauses Likely Do Not Bar Fraud Claims
- Modification of Default Fiduciary Duties in Limited Liability Companies (LLCs) Versus the Covenant of Good Faith and Fair Dealing
- Attorney-Client Privilege Passes to the Surviving Corporation in a Merger
- No Assignment of Agreements in Reverse Triangular Mergers
- Survival Clauses Can Shorten Statute of Limitations
- Need for Provisions Regarding Status of Former Partners and Valuation of Capital Account
- Earn-Out and Indemnification Provisions Need to be Clear and Specific
- Strict Requirements for Valid Stock Issuance
- Technical Requirements for Valid Stockholder Consents
Click here to read more.
During 2013, in addition to the important changes to the Delaware General Corporation Law (“DGCL”) and the Limited Liability Company Act, described here, the Delaware courts issued a number of decisions that have a direct impact on the M&A practice. Below are our Top 5 case law picks for M&A practitioners:
- A new look at the standard of review in going-private mergers (the Business Judgment Rule)
- Deal process considerations for target company boards
- Validity and enforcement of forum selection clauses
- Financial manipulation and/or missed sales forecasts may lead to a material adverse effect
- Directors must protect the interests of common stockholders (vs. preferred stockholders)
To read more, please click here.
Alice Hsu is a corporate partner in Akin Gump’s New York office, focusing on securities and general corporate matters. Recently, she has blogged about developments involving social media, for example here and here.
Q: What is your main practice area?
A: I advise and represent issuers, underwriters and selling stockholders in public offerings and private placements of equity and debt securities. Specifically, most of my day-to-day advice involves helping clients with issues related to federal securities regulation, corporate governance, disclosure and reporting and other general corporate matters.
Q: How has your practice evolved over the years?
A: Over the last decade, the federal securities laws have evolved a few times, including the Securities Offering Reform in 2005, the Dodd-Frank Act in 2010 and the JOBS Act in 2012. It has been interesting and stimulating to operate in this environment and keep pace with the changes and the various developments affecting our clients in order to provide them the best counsel.
In the wake of recent data breaches at major retailers Target and Neiman Marcus, Senate Judiciary Chairman Patrick Leahy (D-VT) has renewed his efforts to enact stronger data security requirements for companies that collect consumers’ personal data. Sen. Leahy has introduced the Personal Data Privacy and Security Act (S. 1897), detailed in a previous post, which would create a national data breach notification standard. Several other lawmakers have introduced similar legislation or made calls for stronger regulatory enforcement of data security rules. Now, Sen. Leahy has announced that his Committee will hold a hearing on the recent data breaches on February 4, 2014. According to a statement from Committee staff, the hearing will focus on “privacy in the digital age,” including how to prevent data breaches and combat cybercrime. The House Energy & Commerce Committee has also announced it will hold a hearing in early February.
With proxy season just around the corner, I would be remiss if I did not (once again) remind Nominating and Governance Committees that it is time, and it is not too late, for you to mix it up a little . . . or a lot. Think fruit salad: a big, colorful, healthy fruit salad. That’s what Apple’s board of directors has recently vowed to do. In its 2014 proxy statement, Apple has announced that its “[Nominating and Corporate Governance Committee] is committed to actively seeking out highly qualified women and individuals from minority groups to include in the pool from which board nominees are chosen.” Yeah! One good Apple may unspoil the bunch. . . .
But wait a minute. Before we give Apple a standing ovation for its board of directors’ forward-thinking efforts to pursue corporate governance with the same vim and vigor with which the company pursues the development of technology and its product lines, let’s be clear: Apple had uninvited cooks in its kitchen pushing Apple to spice things up a little. Two investor groups, the Sustainability Group and Trillium Asset Management, met with Apple representatives several times this past fall, stating their displeasure and disappointment that Apple had only one woman on its eight-member board. The shareholders threatened to bring the issue to a vote at a February 28 shareholder meeting. Ultimately, they backed off after Apple added language in November to its Nominating and Corporate Governance Committee charter, promising to consider women and minorities.
In light of recent, well-publicized, data security breaches at major retailers and social media company Snapchat, legislators are renewing the call for new federal laws that would strengthen data security and notification requirements.
On December 19, 2013, Target issued a press release disclosing that approximately 40 million credit and debit card account numbers had been hacked from its system, a number that has since risen to potentially as many as 110 million accounts. The breach is currently being investigated by the U.S. Secret Service Electronic Crimes Task Force. Further, state attorneys general across the country said they will examine whether Target provided enough protection for its customers. On New Year’s Eve, an anonymous group or person hacked into Snapchat’s servers and publicly released the usernames and phone numbers of more than 4.6 million Snapchat users. Additionally, on January 11, 2014, retailer Neiman Marcus confirmed that hackers had breached its servers and accessed customer payment information.
As calendar-year public companies approach annual reporting season, issuers should consider whether or not their current risk factor disclosures, as well as their “forward looking statements” language, are adequate in light of recent high-profile cybersecurity incidents. While there are currently no comprehensive federal laws explicitly mandating disclosure in connection with data security breaches (a fact that several legislators are working to change), the emerging and existing business risks have not gone unnoticed by the Securities and Exchange Commission (SEC). In 2011 the SEC advised companies to approach cybersecurity as they would any other part of the business: if cybersecurity is a significant factor that makes an investment in the company speculative or risky, then issuers should address it in their risk factor disclosures. Similarly, if a past incident or current risk of cybersecurity is likely to have a material effect on operations or financial statements, then such incident or risk should be included in their Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The core elements of a prima facie case of contract-related fraud are generally consistent from state to state. But within the basic elements of this cause of action are distinctions between states that become particularly salient in the context of sophisticated business transactions. Choice of law provisions among contracting parties may therefore play an important role in contractual fraud claims. As New York and Delaware are often designated in contractual choice of law provisions, the differences between these states are particularly relevant. In this regard, case law demonstrates that it is likely more difficult to establish a prima facie case of contract-related fraud in New York than in Delaware.
The staff of the SEC's Division of Corporation Finance recently published additional "Compliance and Disclosure Interpretations" [here], starting at 260.28, relating to the bad actor disqualification in Rule 506 under the Securities Act of 1933. The new C&DIs principally relate to the interpretation of "beneficial ownership" and include the following:
- The disqualifying effect of a 20 percent beneficial owner's bad act only applies to the potential sale of securities after the bad actor has acquired 20 percent [CDI 260.28]
- Beneficial ownership is determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934 (i.e. persons who have or share voting or investment power over the securities or have the right to acquire such power within 60 days) and, therefore, it is necessary to look through entities to their controlling persons in determining beneficial ownership. [CDI 260.29 and 30]
- Just because a group that beneficially owns more than 20 percent of the issuer's securities has a member that is a "bad actor" does not necessarily mean that the issuer is disqualified. More than mere group membership by a bad actor is required to apply the bad actor disqualification. The bad actor must have control over the securities owned by the group, such as voting or dispositive control over the entire group's block of securities, in order for the bad actor's group membership to cause bad actor disqualification. A group may also be disqualified if the group itself is subject to orders, convictions, bars, suspensions or expulsions covered by the rule. [CDI 260.31]
- A court or regulatory authority may not exempt the disclosure of a bad act that occurred before September 23, 2013, pursuant to Rule 506(e) under the Securities Act of 1933. The court or relevant regulatory authority may, however, determine that an order that was issued prior to September 23, 2013 would not have triggered disqualification if it were issued after such date because the violation was not a "final order based on a violation of any law or regulation that prohibits fraudulent, manipulative or deceptive conduct." [CDI 260.32]
The boards of all public companies should consider adopting a forum selection bylaw, if they have not already put one in place. The purpose of such a provision is to designate an exclusive venue for stockholder derivative suits and certain other stockholder suits, thereby reducing the high cost of duplicative, multi-forum suits challenging corporate actions. Delaware corporations typically designate the Delaware Court of Chancery, which confers the added benefit of ensuring that the matters in dispute will be heard relatively swiftly by a knowledgeable and highly regarded judiciary. In June 2013, the Delaware Court of Chancery rendered an important decision1 holding that such bylaw provisions are within the power of the board of directors to adopt under Delaware law and are enforceable under Delaware law to the same extent as contractual forum selection provisions.2 Prior to the Chancery Court’s decision, the validity of such bylaw provisions had not been addressed by a Delaware court and at least one other court had questioned their validity.3 In the wake of the Chancery Court’s decision, over 100 companies have adopted exclusive forum bylaws.
Bill Ackman’s public disclosure earlier this year of confidential JC Penney board deliberations not only outraged his fellow directors but also stunned the corporate community. His actions, however, were not without precedent. In 2006, a Hewlett-Packard director leaked confidential corporate information to the press and the company came under attack for methods used to ferret out the source of the boardroom leaks. As hedge funds and other shareholder activists increasingly succeed in gaining seats on corporate boards, boardroom confidentiality is an issue that no board of directors can afford to ignore.
Unfortunately, case law regarding a director’s obligation to maintain the confidentiality of corporate information is limited. Under Delaware law, a director’s fiduciary duty of loyalty requires directors not to misuse or disclose confidential corporate information to others to further their own private interests rather than those of the corporation.1 While a director may believe that conveying confidential corporate information to the press is in the best interests of the corporation, a court will decide with 20-20 hindsight whether the disclosure was consistent with the director’s fiduciary duties. In the JC Penney incident, the board reportedly was considering pursuing legal action against Ackman, whose disclosures the company’s chairman characterized as “disruptive and counterproductive.”2 According to at least one report, Ackman sought, in connection with his ultimate resignation from the board, a release from any potential liability.3
Shareholder activism is on the rise. Through the first three quarters of 2013, activist investors submitted 91 initial Schedule 13D filings, well on pace to eclipse the 109 filings made in all of 2012.1 In addition, proxy fight announcements are at their highest level since 2009.2
So far in 2013, 60 percent of activists’ campaigns have focused on boosting earnings at companies or shaking up their boards.3 And companies with a lot of cash on their balance sheets better beware. With companies sitting on more than $1.8 trillion in cash, 41 activist campaigns this year have demanded that companies return cash to shareholders through either dividends or stock buybacks.4
Activists are increasingly drawing larger companies into their crosshairs. In 2013, activists have gone after such large-cap companies as Apple, Dell and Hess Corporation. According to FactSet SharkWatch, as of October 2013, 50 value maximization and board seat campaigns had been announced against companies with a market value exceeding $1 billion, the most in any comparable period since they started tracking this information in 2005.5 And this trend is likely to continue. Not only are new activist funds emerging, but their assets under management are rising and an increasing number of mutual funds and institutional investors are siding with activists, thereby allowing activists to go after these larger companies with some success.6 In addition, many larger companies have become more vulnerable to an activist attack after having acceded to shareholder demands to destagger boards, eliminate poison pills and give shareholders the right to vote by written consent and call special meetings.
Registrants and investors are increasingly placing greater focus on proxy statement presentation. As a result, over the last few years, proxy statements have evolved into more effective disclosure and marketing tools as registrants have adopted a number of best practices, including providing a proxy statement summary and CD&A executive summary.
RR Donnelley recently released the results of its survey of institutional investor use and review of proxy statements. The results of the survey indicate that registrants are on the right track, but should continue to make improvements in the content and presentation of their proxy statements. A summary of the survey results is available here.
In addition to heightened focus on director tenure, companies are facing increasing pressure to diversify their boards. The SEC requires companies to disclose whether and how the board or nominating committee considers diversity in identifying candidates. Last year, after public outcry over its all-male board, Facebook added a woman director shortly after its IPO. Twitter is facing similar criticism this year.1 During the 2013 proxy season, shareholders submitted 27 proposals to companies seeking to ensure that women and minorities are considered for board positions, up from only eight such proposals in 2012.2 The vast majority of these proposals were withdrawn after proponents and companies reached a resolution. The three proposals that went to a vote averaged 35.8 percent shareholder support, with one proposal winning majority approval.3 The dramatic increase in the number of diversity proposals submitted in 2013 was largely to the efforts of the Thirty Percent Coalition,4 an organization composed of national women’s organizations, institutional investors, senior business executives, some major accounting firms, statewide elected officials and others, whose goal is 30 percent female representation on U.S. public company boards by the end of 2015.5 In early 2013, the organization also sent letters to 127 companies that did not have any women on their boards, urging them to embrace gender diversity.6
The Wall Street Journalrecently highlighted director tenure in an article titled “The 40-Year Club: America’s Longest Serving Directors.”1 While the article noted that fewer than 30 public company directors have at least 40 years’ tenure,2the article also made clear that many public company boards are having difficulty refreshing their ranks. According to the latest Spencer Stuart Board Index, the boards of S&P 500 companies elected 339 new independent board members this past proxy season, down 11 percent from five years ago and 14 percent from 10 years ago.3 Last year they elected just 291 new directors, the smallest number in more than a decade.4 At the same time, the average age of directors continues to climb. The average S&P 500 director is now 62.9 years old, compared to 60.3 ten years ago.5 In addition, mandatory retirement ages keep rising. Of the 72 percent of S&P 500 boards that have a mandatory retirement policy, 88 percent now set their retirement age at 72 or older (compared to just 46 percent a decade ago) and almost a quarter set the retirement age at 75 or older (compared to just 3 percent ten years ago).6 At 20 percent of S&P 500 companies, the average board tenure is 11 years or more.7
Low director turnover is drawing the attention of activist investors and governance advocates who question whether aging boards are keeping pace with the rapid technological advances and other new challenges companies face. Critics also charge that the limited availability of new board seats hampers opportunities for achieving greater racial and gender diversity on boards and compromises board oversight since long-serving directors are more likely to align with management.8 The Council of Institutional Investors, whose members consist of pension funds with more than $3 trillion of assets under management, recently revised its best-practices corporate governance policies to include tenure as a factor boards should consider when determining whether a director is independent.9 In addition, while ISS decided not to revise its 2014 proxy voting guidelines to add tenure to the factors it considers when assessing director independence, 74 percent of institutional investors responding to ISS’ request this past summer for comment on its guidelines viewed long tenure as problematic.10 In sharp contrast, 84 percent of responding issuers said that long tenure was not problematic.11
Whether to separate the CEO and chairman positions is one of the most hotly debated issues in corporate governance. During the 2013 proxy season, calls for an independent board chair were the second most frequent proposal submitted to companies.1 Even though JPMorgan Chase managed to win highly publicized battles in each of the last two years against activists seeking to separate the top posts currently held by Jamie Dimon, board leadership structure will likely continue to be a top priority for activists in 2014.
Proponents of separating the CEO and chair positions typically argue that splitting the roles strengthens the independence of the board, thereby improving the board’s oversight function. Proponents also contend that separation can free the CEO to focus on running the company. Opponents generally counter that a separate chair can undermine the CEO’s authority and result in inefficiency.
Despite the continuing legal challenges and political hardball, as well as the delays and technical glitches, it appears that the Patient Protection and Affordable Care Act, more commonly known as Obamacare, is here to stay. As such, companies need to be prepared for certain key provisions of the statute that are scheduled to take effect in 2014 and beyond. Because these provisions will have a major impact on most companies, boards of directors need to be planning how their companies will comply with these regulations and the effect such compliance will have on their company’s cost structure and strategy going forward.
Set forth below is a brief summary of certain key provisions of health care reform that are looming, followed by actions for boards to consider.
State Insurance Exchanges. By January 1, 2014, each state must either (i) implement its own state-run health insurance exchange, (ii) let the federal government run the health insurance exchange for them or (iii) partner with another state or the federal government to implement a health insurance exchange. These health insurance exchanges, among other things, will facilitate the purchase of and make available “qualified health plans” to qualified individuals and employers. Employees of companies with fewer than 50 full-time employees will generally be eligible to purchase insurance within the state insurance exchange (or federally facilitated exchange) and possibly receive a federal subsidy without any penalty to the company. But, as discussed below, larger companies with employees who purchase insurance through these exchanges will be required to pay a penalty. Enrollment under these health insurance exchanges, which began on October 1, 2013, has been anything but smooth, with technical glitches and delays frustrating the masses who have tried to enroll. Because of these issues, the deadline for the uninsured to sign up for health care coverage and avoid paying a penalty has been extended until March 31, 2014.
Constantly changing and overlapping legislative and regulatory requirements are weighing down corporations and usurping more and more board time. It is a telling sign when, according to a recent survey, directors ranked over-regulation second only to the government’s response to the fiscal debt and the debt burden as the greatest external threat to their company’s growth prospects.1
Directors may well have reason for concern. Since 1993, 81,883 new federal rules have been issued,2 and the red tape keeps growing. A recent report of planned regulatory actions lists 2,305 rules in the pipeline, 131 of which are classified as “economically significant” and many of which derive from the Dodd-Frank Act and Obamacare.3 For global companies the regulatory challenge is even more complex. They must expand their focus beyond the country in which they are headquartered, and understand, manage and comply with myriad rules and regulations in multiple jurisdictions.
Executive compensation is a topic that just won’t go away, particularly with pay disparity and pay for performance regulations still looming. We highlight below some of the matters directors should be considering as they craft executive compensation for 2014:
- Say-on-Pay Vote. Say-on-pay proposals, now in their third year, have led to what seems to be routine approval of C-suite compensation for the vast majority of companies, with shareholders at 97 percent of U.S. companies approving executive pay packages and 72 percent of such companies achieving more than 90 percent approval.1 But boards are not letting down their guard. According to a recent survey, 70 percent of directors say their boards took some form of action in response to their company’s most recent say-on-pay vote, with the most common being enhancing proxy statement disclosures, increasing the use of compensation consultants and making compensation more performance based.2 But this does not mean that executive compensation is decreasing. Only three percent of directors surveyed say their company reduced executive compensation during 2013.3
- Proxy Advisory Firm Recommendations. Proxy advisory firms can be a key driver to the outcome of a say-on-pay vote. Companies need to analyze their shareholder base to determine the level of influence proxy advisors have on their investors. And if a proxy advisory firm gives a negative recommendation, companies need to consider whether they want to refute the recommendation through supplemental proxy filings and shareholder outreach. Filing supplemental materials gives companies an avenue to address inaccuracies in the proxy advisory firm recommendation and to further strengthen their case. However, because supplemental filings cost money and draw unwanted attention, many companies opt for direct engagement with major shareholders, as discussed below.
Regulation A currently permits issuers to conduct a limited-scale public offering and subjects issuers that use it to a lighter compliance burden as compared with larger public offerings. However, because of the costs of preparing an offering circular to be filed with the Securities and Exchange Commission (SEC) and the requirement to achieve clearance by the various state securities regulators, especially when compared with the limited amount that may be raised ($5 million), Regulation A has been infrequently used. For example, only one offering was conducted in 2011 under Regulation A. Section 401 of the Jumpstart Our Business Startups (JOBS) Act required the SEC to adopt rules under a new, larger, limited public offering section of the Securities Act of 1933 (the Securities Act) commonly referred to as “Regulation A+.” The Regulation A+ section of the Securities Act increases the offering cap to $50 million and permits sales to be exempted from the review of state securities regulators, but would require (at least) annual filings of audited financial statements.
On December 18, 2013, the SEC proposed rules that would rewrite existing Regulation A to include Regulation A+ requirements to increase the usefulness of its rules relating to smaller public offerings. This new Regulation A would be split into two tiers. Tier 1 would be similar in scope to current Regulation A and would permit sales up to $5 million in any 12 month period ($1.5 million of which may be resales by selling stockholders). Tier 2 would permit sales up to $50 million in any 12 month period ($15 million of which may be resales by selling stockholders). Offerings under $5 million could be conducted under either tier. As with current Regulation A, the sale of securities under either tier, as revised, would involve certain disclosure requirements as specified below, but offerings under Tier 2 would involve additional compliance requirements. Securities sold under Regulation A would not be “restricted securities” and, therefore, would not be subject to holding periods before resale.
Some marriages last forever. Some may only last for hours, weeks or a short few years. Some divorces are quick and quiet. Some are high profile. Think: Brad and Jen, Tiger and Elin, Ashton and Demi. Names, faces and assets differ, but just about every divorce involves drama.
Drama sells magazines. But what the heck does it have to do corporate governance? You might be surprised. Check out the post on the Harvard Law School Forum on Corporate Governance and Financial Regulation entitled “The Impact of CEO Divorce on Shareholders” in which authors David Larker and Allan McCall of the Stanford University Department of Accounting and Brian Tayan of the Stanford Graduate Business School examine the impact that a CEO’s divorce can have on a corporation. They argue that the tumultuous personal life of a CEO—the very person tasked with setting strategy and leading a corporation to better profits and shareholder returns—should be of investor concern because:
- a CEO’s divorce settlement may affect a CEO’s control or influence (e.g., CEO is forced to sell personal shares held in the company);
- a CEO’s divorce may affect a CEO’s productivity, concentration and energy levels;
- a CEO’s divorce, and resulting changes in wealth, may influence a CEO’s risk appetite and decision making.
On December 10, 2013, five federal agencies released the final rules implementing Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Volcker Rule). The Volcker Rule will be effective on April 1, 2014, and will require the banking entities subject to it to fully conform their activities by July 21, 2015.
Similar to previously proposed versions, the final version of the Volcker Rule will continue to restrict insured depository institutions and companies affiliated with insured depository institutions (the banking entities) by (1) prohibiting short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments, for their own account, and (2) limiting their investments in or sponsorships of hedge funds or private equity funds, certain foreign funds and certain commodity pools.
As per the statute, the rules will, however, permit banking entities to invest in or sponsor such a fund in connection with organizing and offering a fund and to retain up to 3% of the total investment in a fund that it organizes for its fiduciary customers. In addition, the final rules exempt certain activities, including market making, underwriting, hedging, trading in government obligations and insurance company activities, and clarify that certain activities are not prohibited, including acting as agent, broker or custodian.
Cybersecurity has become one of the hottest topics in the boardroom as companies wrestle with ever increasing threats to their information systems and intellectual property. A recent study by the Ponemon Institute found that in the past year the number of successful cyber attacks on companies surveyed jumped 42 percent compared to the prior year.1 According to the Department of Homeland Security, the number of cyber threats to critical U.S. infrastructure by mid-2013 had already exceeded the total number of incidents in 2012.2
This dramatic rise in cyber attacks and data breaches has placed cybersecurity on the radar screen of virtually all companies. In addition to potential lawsuits, damage to reputation and loss of customers, companies are facing increasing regulatory scrutiny about the adequacy of their data security measures. The FTC has brought more than 40 actions against companies for data breach, claiming that failures to prevent unauthorized access to consumers’ personal information constitute unfair or deceptive acts. In almost all instances, companies have settled by entering into consent decrees requiring them to implement better information security programs and obtain annual independent audits for 20 years. In one closely watched case, however, Wyndham Hotels is challenging the FTC’s authority to impose cybersecurity standards.
The SEC has also made cybersecurity risk a top disclosure priority. In 2011, the SEC issued guidance regarding company disclosure obligations about material cybersecurity risks and cyber incidents. Since then, the SEC has sent comment letters to at least 50 companies regarding the adequacy of their disclosures. In May, SEC Chairman Mary Jo White instructed her staff to evaluate its current guidance and consider whether more stringent requirements are needed.
On November 25, the U.S. Supreme Court set oral argument for March 5, 2014, in Halliburton v. Erica P. John Fund (No. 13-317), a case that could significantly impact the costs of securities litigation in the United States. The case raises one central question: should plaintiffs be entitled to the fraud-on-the-market presumption of reliance, which allows plaintiffs to form a class of investors without first proving that those investors relied on the supposedly false or misleading information from the company?
The Court’s answer to this question could change the face of securities litigation in the United States. For years, securities class actions have been the textbook example of easy-to-certify classes. Under Rule 23(b)(3), proposed class plaintiffs must prove up the common class action elements: commonality, numerosity, adequacy, typicality and predominance. Many proposed classes are never certified because of the predominance element—individual issues predominate over the common issues. In the case of securities class actions, the question revolves around whether investors actually relied on the alleged fraud and what it would take to prove that they did so.
Since SIGA Technologies Inc. v. PharmAthene Inc. (Del. 2013), the duty to negotiate in good faith is well recognized in Delaware, but it is not as clear when exactly that duty arises. On December 2, 2013, in Osco Motors Company, LLC v. Marine Acquisition Corp., the Delaware district court explained how the duty is created and distinguished Delaware law from New York law. The court distinguished between the express, contractual duty of good faith, created through the parties’ agreement (such as in a letter of intent, as long as such provision is binding), and the implied covenant of good faith and fair dealing, created by statute and implied in parties’ agreements (which must be separately claimed).
In addition, the court disagreed with the defendants’ claim that they did not violate the confidentiality agreement because they used the confidential information, but did not disclose the information. The court confirmed the standard from Martin Marietta Materials, Inc. v. Vulcan Materials Co., that “confidentiality agreements are intended and structured to prohibit both the use and disclosure of confidential, nonpublic information, unless the parties agree otherwise.”
Directors recently ranked strategic planning as the number one topic to which they want to devote more time in 2014.1 It’s easy to understand why: gridlock in Washington is wreaking havoc on business planning. Throughout much of the fall, the American economy was held hostage as political brinkmanship in Washington partially shut down the federal government and brought the country to the edge of defaulting on its debt. Ultimately, Congress managed only to kick the can down the road by voting to reopen the government at current spending levels until January 15, 2014 and to raise the debt ceiling until February 7, 2014. During the interim, congressional leaders will try to hammer out a new budget before mandatory spending cuts agreed to in 2011 kick in. Fearing that “governing by crisis” is becoming the new norm, the business community remains skeptical that any meaningful long-term solution to the nation’s fiscal woes will be reached before the country has to suffer through this fire drill again.
Adding to the uncertainty is growing concern over the Federal Reserve’s massive bond buying program. Critics charge that the unprecedented stimulus program may be creating asset bubbles, and the financial markets have reacted strongly to any news about the Fed’s future plans for the program. Hints this past summer that the Fed was eyeing a pull-back roiled markets around the world and dealt a serious blow to many emerging market economies.
Last week, Akin Gump issued our Top 10 Topics for Directors in 2014. Number 7 on that list: “Ensure appropriate board composition in light of increasing focus on tenure and diversity.” Guess what was Number 7 on our Top 10 Topics for Directors in 2013? You got it: “Ensure appropriate board composition in light of changing marketplace dynamics and increasing calls for diversity.”
Some things bear repeating: exercise, eat right, get enough sleep. Do things that are good for you. Corporations: put women on your boards! If you have been zoned out, on your iPod all year or otherwise still have not been convinced of the value of doing so, take a look at Sheryl Axelrod’s “Disregard Diversity at Your Financial Peril: Diversity as a Competitive Financial Advantage,” published in MCCA’s (the Minority Corporate Counsel Association’s) national magazine, Diversity & the Bar.
The staff of the Securities and Exchange Commission’s Division of Corporation Finance published “Compliance and Disclosure Interpretations” (CDIs) on Wednesday, December 4, 2013. They provide important clarification regarding the scope of the “bad actor” disqualification in Rule 506(d) under the Securities Act of 1933 for certain convictions, cease and desist orders, suspensions and bars (“disqualifying events”) that occur on or after September 23, 2013 and the disclosure obligation in Rule 506(e) for disqualifying events that occurred prior to September 23, 2013. The interpretations are available here starting at 260.14. Our previous post summarizing earlier CDIs is available here.
Rule 506 provides that disqualifying events committed by a list of specified “covered persons” affiliated with the issuer or the offering would result in disqualification from using Rule 506 or require disclosure to investors prior to their purchasing securities. However, Rule 506 also provides a defense for issuers that did not know and, in the exercise of reasonable care, could not have known of that disqualifying event. Prior to the issuance of these CDIs, private funds and other issuers offering and selling securities in reliance on Rule 506 were forced to broadly interpret the covered persons with whom an issuer would have to inquire regarding any disqualifying events and the consequences of a disqualifying event.
The most significant of the new CDIs states that the definition of “affiliated issuer” for purposes of the bad actor disqualification is an affiliate of the issuer that is “issuing securities in the same offering, including offerings subject to integration. . .” with the offering for which Rule 506 is being used (see CDI 260.16). Consequently, fund issuers will no longer need to ask controlled portfolio companies whether they have any disqualifying events.
U.S. public companies face a host of challenges as they enter 2014. Here is our list of hot topics for the boardroom in the coming year:
1. Oversee strategic planning amid continuing fiscal uncertainty and game-changing advances in information technology
2. Address cybersecurity
3. Set appropriate executive compensation as shareholders increasingly focus on pay for performance and activists target pay disparity
4. Address the growing demands of compliance oversight
5. Assess the impact of health care reform on the company’s benefit plans and cost structure
6. Determine whether the CEO and board chair positions should be separated
7. Ensure appropriate board composition in light of increasing focus on director tenure and diversity
8. Cultivate shareholder relations and strengthen defenses as activist hedge funds target more companies
9. Address boardroom confidentiality
10. Consider whether to adopt a forum selection bylaw
Click here to read the full alert as a PDF.
In recent weeks, U.S Department of Justice investigations into currency traders have drawn renewed attention to the permanence of even seemingly fleeting communications. In that investigation, the DOJ is looking at, among other things, Bloomberg chat room transcripts of members of the so-called “Cartel,” a group of currency traders. As a result of such investigations, the days may be numbered for widespread use of Bloomberg chatrooms: the Wall Street Journal reported recently that several large banks are already considering restricting chatroom access. But while regulators and companies have their attention turned to chatrooms, new methods of communication continue to emerge, presenting new challenges for corporate compliance.
Take Snapchat, for instance. For the uninitiated, Snapchat is a smartphone app that allows people to send each other “disappearing” pictures. The sender can choose how long the recipient will be able to view the picture—anywhere from one to ten seconds—before it disappears from the recipient’s phone. Users can also send single-view videos up to 10 seconds long that erase as the recipient plays them. And while Snapchat has its legal uses from the mundane to the prurient, the possibility of its misuse in the securities context is worth attention.
Warning shoppers—or, rather, sellers: a company’s failure to meet sales forecasts may amount to a material adverse effect.
In Osram Sylvania Inc. v. Townsend Ventures, LLC, Osram Sylvania Inc. (OSI), a stockholder of Encelium Holdings, Inc., agreed to purchase the other issued and outstanding capital stock of Encelium not already held by OSI pursuant to a stock purchase agreement, which was executed on the last day of the third quarter of 2011. The $47 million purchase price was based on Encelium’s forecasted sales for the 2011 third quarter, estimated at $4 million, as well as representations relating to Encelium’s financial condition, operating results, income, revenue and expenses.
On November 21, 2013, Institutional Shareholder Services Inc. issued updates to its benchmark proxy voting policies for the U.S. The updated policies will be effective for shareholder meetings on or after February 1, 2014. The updates include changes to ISS policy on board responsiveness to majority-supported shareholder proposals and its policy on pay-for-performance quantitative screen.
With respect to its policy on board responsiveness to majority-supported shareholder proposals, ISS will in the future review the responsiveness of a board to any shareholder proposal supported by a majority of votes cast (rather than the previous policy of reviewing a board’s responsiveness to either (i) a proposal supported by a majority of votes cast in the last year and one of the two prior years or (ii) a proposal supported by a majority of outstanding shares). In addition, when recommending voting on director nominees, ISS adopted a case-by-case approach when considering a board’s responsiveness to shareholder proposals, including a list of factors to consider in assessing implementation of majority vote proposals. Finally, ISS clarified that the board’s rationale as provided in the proxy statement for the level of implementation of a shareholder proposal is one of the factors in such a case-by-case analysis.
In addition, ISS modified its methodology for calculating the relative degree of alignment pay-for-performance screen for a CEO’s pay rank within a peer group. The current calculation uses the difference between a company’s TSR rank and the CEO’s total pay rank within a peer group, as measured over one-year and three-year periods (weighted 40%/60%). The revised calculation will measure this difference simply over a three-year period, which will, among other things, eliminate the effects of over-weighting the most recent year’s pay.
To view the ISS 2014 updates, click here.
Financial advisors should remain keenly aware that, in recent years, plaintiffs and courts have been more carefully scrutinizing fairness opinions rendered in the context of public M&A transactions. Post-Great Recession, the trend in fairness opinions has been toward more robust disclosure on projections and deal economics, in part due to decisions of the Delaware Courts and urging by the Securities and Exchange Commission. The plaintiff’s bar has thus taken to attacking aspects of the fairness opinion that are more tangential. Accordingly, the Delaware Courts are demonstrating an increased sensitivity to the risk of their fact-specific decisions being exploited for claims sounding in principles of general liability. Some of the biggest pressure points that remain the target of shareholder claims include: (i) conflicts of interest, (ii) the analysis used by the financial advisor and (iii) management’s projections.
The Netspend case from earlier this year demonstrated the scrutiny imposed upon a fairness opinion when it is being relied upon as the sole ‘market check’ in the transaction i.e., in a single-bidder process for sale of a company when neither the stockholders nor the court have any market-based indication for the adequacy of the price). The Netspend Board forewent a pre-agreement market check; acquiesced to strong deal protections, including, most notably, ‘don’t ask, don’t waive’ provisions against private equity bidders; and relied upon a weak fairness opinion. The financial advisor who rendered the opinion relied upon the stock price as a basis for valuation, when, in fact, the stock price was highly volatile, resulting in the Court’s finding that the fairness opinion was a” particularly poor simulacrum of a market check’. Vice Chancellor Glasscock criticized the investment bank for using dissimilar comparables, most of which were old and predated the financial crisis. The Court also criticized the investment bank for using projections that exceeded the customary practices of management — highlighting the importance for a financial advisor to ensure that the valuation methods used, and the projections made, are those normally utilized by the company.
As discussed here and here, the Securities and Exchange Commission (SEC) adopted changes to Regulation D and Rule 144A, addressing general solicitation, new filing requirements and “bad actor” disqualification events (among others) applicable to Rule 506 offerings. These changes went into effect on September 23, 2013, and on November 13, 2013, the SEC published additional Compliance and Disclosure Interpretations (C&DIs) relating to Rule 144A and Rule 506(c).
The new C&DIs include the following guidance:
- The continuation of an offering that originally commenced under Rule 506 prior to September 23, 2013, under the new general solicitation regime would require an amendment to Form D to check the 506(c) box. [260.05]
- If a purchaser in a Rule 506(c) offering were not accredited, the issuer would not lose the exemption if the other requirements of a Rule 506(c) offering were followed, such as taking reasonable steps to verify the accredited investor status. [260.06]
- On the other hand, even if all purchasers are accredited investors, an issuer is not eligible to use Rule 506(c) if reasonable steps to verify have not been taken. [260.07]
- Statements reviewed for purposes of verification must be dated within three months of the sale of the security in order to satisfy the non-exclusive verification method specified in Rule 506(c). [260.08]
- An attorney or accountant verifying accredited investor status may be licensed in a foreign jurisdiction and satisfy the non-exclusive verification method specified in the rule. [260.09]
- The verification method for existing investors from a prior sale of securities would not be satisfied if the investor had previously invested in an affiliated issuer, such as a fund with a common sponsor. The previous investment must have been in the issuer in which the investor proposes to invest. [260.10]
- An issuer that commences an offering intending to rely on Rule 506(c) may transition to 506(b) so long as the conditions of Rule 506(b) have been “satisfied with respect to all sales of securities that have occurred in the offering.” An amendment to the Form D would be required. [260.11] The opposite also applies, but note that the language of the interpretation looks to all securities sold in the offering and not just those after transitioning from paragraph (b) to (c) or from (c) to (b) of Rule 506.
- An offering that commences under Rule 506(c) and in which general solicitation has actually occurred may not transition to a pure Section 4(a)(2) offering. [260.13]
We understand that guidance on who is an affiliated issuer for purposes of the Rule 506(d) bad actor disqualification will be published at a later date.
In Great Hill Equity Partners v. SIG Growth Equity Fund (November 15, 2013 - Strine), the Delaware Court of Chancery held that attorney-client privilege passes to the surviving corporation in a merger. The case was brought by the buyer of Plimus, Inc., and claimed that the seller had fraudulently induced the buyer to acquire Plimus. The buyer sought a determination regarding the pre-merger attorney-client communications about the transaction it found on Plimus’ computer systems.
Section 259 of the DGCL provides that “all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation.” The court decided that, in the absence of a contractual provision excluding pre-merger attorney-client communications from the transferred assets, all privileges, including the attorney-client privilege over any pre-merger communications (even regarding the merger negotiations), passed to the surviving corporation in the merger.
As a practical matter, parties should include specific contractual provisions if there is an intent to exclude the transfer of any attorney-client communications.
On August 1, 2013, the Delaware legislature added a potentially important new subchapter to the General Corporation Law, allowing corporations to elect to be formed as, or convert to, a public benefit corporation (PBC) (Subchapter XV of Chapter 1, Title 8 of the Delaware Code). What are the requirements for becoming a PBC? And why would a corporation choose to become one?
Background (for Non-Delaware PBCs)
Traditionally, directors of corporations have had a fiduciary duty to maximize stockholder value in making decisions. However, PBCs, or social purpose corporations as they are known in some jurisdictions, permit a corporation’s directors to also take into account the social purposes of their actions. PBCs are typically required to pursue a general public benefit and make available to the public an annual report measuring their performance in meeting their social goals.
Delaware Supreme Court applies ‘reasonable conceivability’ standard and addresses earn-out and indemnification provisions
Last month, in Winshall v. Viacom International, the Delaware Supreme Court applied the “reasonable conceivability” standard to a motion to dismiss and addressed the earn-out and indemnification provisions in a merger agreement.
The opinion highlights the importance of using clear and specific language to clarify the intent of the parties.
The case was brought by selling stockholders based on the earn-out provisions in the 2006 merger agreement entered into between Viacom International and Harmonix Music Systems, in which Viacom acquired Harmonix. In addition to a $175 million cash payment at closing, the merger agreement provided a contingent right to the selling stockholders to receive certain earn-out payments during 2007 and 2008 based on financial performance, but it did not explicitly require Harmonix to conduct its business so as to maximize the earn-out payments. The merger agreement also contained an indemnification provision requiring the selling stockholders to indemnify and hold harmless Viacom and Harmonix and their affiliates from and against any losses arising out of or by reason of the breach of any representation or warranty of the company in the merger agreement.
Last week, New York Times OpEd columnist Nicholas Kristof joined the chorus of writers and academics calling for public companies to add women to their boards of directors in a piece called “Twitter, Women and Power.” Mr. Kristof criticized Twitter, which is scheduled to launch a blockbuster IPO in November, for seating its board with seven white men. He writes: “. . . the main reason to add women — not just on Twitter’s board, but in politics, business and the news media — isn’t just equity. This shouldn’t be seen as a favor to women but as a step that would be good for all of us . . . In business, there’s abundant evidence that inclusion of women in senior positions is linked to better results.”
Mr. Kristof cites a number of research reports that provide an overwhelmingly strong case for women’s inclusion on corporate boards. These studies find that companies with women on their boards yield higher operating profit, higher return on invested capital and “generally results in increased value for shareholders.” The findings are compelling, indeed, but not new. (See prior post: The Case for Women on Boards: Taking the Long View.)
Court Upholds Claim Against Private Equity Firm for Federal Labor Law Violation Stemming from Closure of Portfolio Company
A decision last month by the district court for the Northern District of Indiana is the latest in a string of recent judicial decisions to confirm that a plaintiff has successfully stated a plausible claim for relief under the WARN Act on the “single employer” theory.
The case, Young v. Fortis Plastics LLC1 was filed by a worker laid off by a manufacturing facility in Forth Smith, Arkansas, alleging violations of the WARN Act upon closure of the facility. The WARN Act seeks to protect workers who suffer job losses due to mass layoffs by requiring that certain employers provide sixty days’ notice to workers before engaging in a mass layoff or plant closure and by enabling aggrieved employees to sue the employer for back pay and benefits upon failure to receive such notice. The federal statute defines “employer” as “any business enterprise” that employs the requisite number of employees. Because the statute does not define the term “business enterprise,” the Indiana district court upheld the application of a multi-factor test based on regulations of the Department of Labor (DOL). The court stated that, due to the nature of mass layoffs and plant closure at issue in the case, a direct employer will often not have the financial means to pay obligations under the WARN Act. As a result, the court deemed it reasonable to require Fortis’ private equity parent to assume those obligations where it could be shown that the private equity firm was partially responsible for the decisions leading to the WARN Act liability.
Applying the DOL five-pronged test to the case, the court found that the plaintiff successfully alleged two of the five prongs, common ownership and de facto control, but not the remaining three: common directors and/or officers; unity of personnel policies emanating from a common source; and dependency of operations. Citing precedent from the Southern District of New York, the court explained that each of the DOL factors is not a necessary element that must be satisfied in order for a plaintiff to succeed under the “single employer” theory, but, rather, that the factors are components of a balancing test that the court will weigh to determine whether the two entities are so interrelated as to constitute a “single employer.”
The Metropolitan Corporate Counsel's November 2013 issue features an in-depth interview with Akin Gump corporate practice co-chair Frank Reddick on compliance. In “Corporate Counsel’s Guide to Compliance,” Reddick discusses, among other topics:
- Reduction of exposure to compliance failures: “The best protection starts with a clear articulation of the risk profile of the company. Managers should have a clear and consistent understanding of the firm’s risk philosophy – the amount of risk a company is willing to accept in pursuit of its business goals.”
- Theories of director liability: “…the potential for directors’ liability runs the gamut from potential liability for failure to put controls in place in the first instance, failure to improve controls once deficiencies are bought to the board’s attention, and failure to investigate once red flags arise or complaints are made.”
Yesterday, the SEC proposed rules to permit companies to offer and sell securities through crowdfunding, as required by the Jumpstart Our Business Startups Act of 2012. Crowdfunding, which has become popular in recent years with the growth in social media, typically involves raising funds for a common cause or venture through small contributions from many individuals. The JOBS Act amended the Securities Act of 1933 by adding a new Section 4(a)(6) that, subject to SEC rulemaking, exempts certain crowdfunding offerings from the registration requirements of the Securities Act. Under the proposed rules, several conditions must be satisfied to qualify for the exemption, including:
- Cap on amount raised. The aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption during the 12-month period preceding the date of the transaction, cannot exceed $1 million.
- Cap on individual investments. The aggregate amount that can be sold to any investor pursuant to the crowdfunding exemption during the 12-month period cannot exceed the greater of:
- $2,000 or five percent of the investor’s annual income or net worth, whichever is greater, if both the annual income and net worth of the investor are less than $100,000; or
- 10 percent of the investor’s annual income or net worth, whichever is greater, not to exceed an amount sold of $100,000, if either the investor’s annual income or the investor’s net worth is $100,000 or more.
- Required use of broker or funding portal. The transaction must be conducted through an SEC-registered intermediary—either a broker-dealer or a new type of entity called a funding portal that complies with the requirements described in the proposed rules.
- Disclosure document. The issuer must file with the SEC on EDGAR and provide to investors and the broker or funding portal certain information, including information about the issuer’s officers, directors and 20 percent shareholders, the issuer’s business and anticipated business plan, the use of proceeds from the offering, the terms of the offering, certain related party transactions, the issuer’s capital structure and financial condition, and details regarding the offering process. The issuer must also provide financial statements of the company that, depending on the size of the offering, would have to be accompanied by the issuer’s tax returns or reviewed or audited by an independent public accountant or auditor.
- Annual reporting. The issuer must file with the SEC on EDGAR and provide to investors an annual report of its results of operations and financial statements within 120 days after the end of the most recent fiscal year. The issuer would be required to file an annual report until (i) the issuer becomes a reporting company under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, (ii) all the securities are purchased or repurchased by the issuer or another party, or (iii) the issuer liquidates or dissolves.
- Eligible issuers. The crowdfunding exemption would not be available to certain companies, including non-U.S. companies, SEC-reporting companies, investment companies, private funds, companies that are disqualified under the bad actor rules, companies that fail to comply with the annual reporting requirements in the proposed rules and companies that have no specific business plan or have a business plan to engage in a merger or acquisition with an unidentified company.
In September 2013, the Delaware Court of Chancery ruled in Costantini, et al. v. Swiss Farm Stores Acquisition LLC that a provision in an LLC agreement that reflects the indemnification language of the Delaware General Corporation Law (DGCL) is interpreted the same way to allow indemnification to a prevailing manager.
Earlier, the court had dismissed the case by Swiss Farm Stores Acquisition LLC (Swiss Farm) against Messrs. Costantini and Kahn for breach of fiduciary duty, because the applicable statute of limitations had run; the dismissal was appealed and affirmed by the Delaware Supreme Court. As a result, Messrs. Costantini and Kahn in this case sought indemnification for their fees and costs incurred in the fiduciary duty litigation.
Sections 145(a) and (b) of the DGCL generally permit Delaware corporations to indemnify their officers, directors, employees and agents in third-party or derivative actions, as long as such person acted in good faith. Section 145(c) generally requires Delaware corporations to indemnify any corporate director or officer who is made a party to a proceeding by reason of his or her service to the corporation and has achieved success on the merits or otherwise.
As discussed here, on June 25, 2013, the Delaware Court of Chancery upheld the facial validity of forum selection bylaws unilaterally adopted by the boards of directors of Chevron Corporation and FedEx Corporation. Last week, the plaintiffs in that case voluntarily dismissed their appeal of that decision, thereby avoiding the possibility of the Delaware Supreme Court’s (likely) affirmation of Chancellor Strine’s opinion.
Social media platforms, including Facebook, Twitter, YouTube and LinkedIn, allow companies to communicate with their investors, customers and the general public, and provide a 24/7 outlet for corporate disclosure. As social media platforms have become more commonplace, companies, and particularly public companies, should consider adopting a social media policy or regularly reviewing their current policy.
If used improperly by a company or its representatives, social media can create significant issues. By having a social media policy, companies can put protections in place, which may help shield a company from certain liability in the event of misuse by its management and employees. To help prevent unauthorized disclosure, a social media policy should restrict the sharing of confidential, classified, material non-public information about the company and its customers, and private information about individuals.
On October 9, 2013, the SEC launched a new website, www.sec.gov/marketstructure, through which it will provide investors and the public with trading data, research and analysis of market activity. This site includes market structure research, interactive data visualization tools to explore a variety of advanced market metrics and dozens of datasets that investors can download to perform their own analyses.
Just last week the SEC issued its largest whistleblower payment to date, awarding an unidentified whistleblower more than $14 million for providing information to the SEC that led to an enforcement action and the recovery of a substantial amount of investor funds within six months of the SEC’s receipt of the tip. This award was only the third under the SEC’s whistleblower program, with the others being relatively small awards of approximately $50,000 and $125,000. Given the life-changing size of this award, the SEC is hopeful that it will encourage more individuals with information to come forward.
It is not unusual to collect signature pages in connection with corporate transactions prior to the transaction and then release them at the time of the transaction. However, Delaware law provides that when a person executes a written consent before actually joining the Board (even if that consent is executed for convenience purposes only to be delivered after he joins the Board) the consent is invalid.
Under Delaware law any action required or permitted to be taken at any meeting of the board of directors may be taken without a meeting if all members of the board consent in writing. In AGR Halifax Fund, Inc. v. Fiscina the Delaware Chancery Court stated that only the lawful board of directors is empowered to take action and that individuals who have not yet been elected to a corporation’s board of directors cannot act as directors. The court concluded that actions taken by individuals who are not members of the board of directors are a nullity. This is true even if these individuals are subsequently appointed as members of the board of directors. Therefore, there seems to be a distinction between directors signing pages in advance of a corporate action and individuals who are not directors signing pages in advance of an action.
This issue often arises in M&A transactions where the target board is replaced in connection with the transaction and written consents of the new board may be collected before the transaction for convenience purposes. A practical solution is for the new directors to expressly deliver their signatures to be held in escrow until their appointment to the new board is official and for the new directors to approve the action by email sent after their appointment to the new board is official in accordance with Section 141(f) of the Delaware General Corporation Law.
Activists. You’ve heard of them. A lot. And, as a board member of a public company you should be wondering to yourself: will they ring our bell? And if they ring, do we answer? And if we answer, what do we say?
Simple questions for sure. But the answers may well vary among the members of your own board and management. Past experiences, conviction of your strategy, risk tolerance and a basic appetite or lack thereof to receive “constructive” criticism are all subjective measures that need to be taken into account before anyone is on the porch.
More likely than not, many of you have never been approached by an activist before - neither individually nor, more importantly, as a part of the company for which you are now a fiduciary. Opening the door to a stranger can be scary. Like riding a horse for the first time. Even scarier when you consider that Loeb, Peltz, Icahn, Ackman and others who emulate them have been to the rodeo once or a hundred times before.
On September 27, 2013, in Washington, D.C., Tax Analysts hosted a panel discussion, including Akin Gump’s partner Patrick Fenn, on the tax implications of the recent Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund case.
The panel discussed the First Circuit Court of Appeals case, which involved pension plan termination liabilities, and the court’s decision that a Sun Capital fund was in an active trade or business for ERISA purposes. This unusual decision could have significant tax and other consequences for private equity funds if they are held to be in an active trade or business.
On September 30, 2013, the SEC opened a page on its website to allow the public to comment on a study entitled “Asset Management and Financial Stability” by November 1, 2013.
The study was published by the Office of Financial Research of the Treasury Department at the request of the Financial Stability Oversight Council, and describes how activities in the asset management industry might 'create, amplify, or transmit stress' through the financial system and thereby pose risks to the financial stability of the country.
According to the report, the U.S. asset management industry oversees the allocation of approximately $53 trillion in financial assets. The activities performed by the asset management firms and the funds they manage range from managing assets on behalf of clients as their agents, to activities similar to those provided by commercial banks and other financial institutions, such as providing liquidity. These diverse activities across the financial system raise questions regarding their possible effects on our financial stability. In addition, the report mentions the limitations on the data currently available to analyze the asset management industry and certain of its activities, and the resulting limited visibility into market practices.
A copy of the report can be found here.