March 10, 2015

NYSE Broadens “Late Filer” Rule to 10-Qs & “Materially Defective” Filings

As noted in this memo from the NYSE, the exchange has amended its rules so that companies that don’t timely file their 10-Qs with the SEC – or who has a 10-K or 10-Q that’s materially defective – is considered a “late filer.” Previously, only a late 10-K would cause a company to be deemed “late.” “Materially defective” situations include filing a 10-K without an auditor’s report or the auditor subsequently withdraws its report, or a company discloses that its financials should no longer be relied upon. Hat tip to John Newell of Goodwin Procter!

I’m sad to note the passing of fellow blogger Jim Hamilton. Here’s an “in memoriam” note from his blog.

Disclosure Usability: Guess Which Symbol Matches Which Director Attribute!

As noted in this 40-second video, some companies are using nifty symbols to supplement their director attribute disclosures (note: symbols are fuzzy in the video due to low resolutions in the proxy that don’t work neatly when copying into a vid):

Fee-Shifting & Exclusive Venues: Delaware Legislature Proposes Amendments

As I blogged yesterday on, here’s news from Cliff Neimeth of Greenberg Traurig:

With these proposed amendments, the Delaware legislature is prepared to act over organic fee-shifting and exclusive venue provisions and to consider amending Delaware’s appraisal statute. The proposed amendments – new DGCL Sections 102(f) and 109(b) – would, if adopted, preclude the adoption of fee-shifting bylaws and C-of-I provisions in the case of Delaware stock corporations.

As you recall, the ATP decision involved a non-stock association and its purported (broader) application outside that context has been vehemently criticized by numerous constituents. Several public companies have adopted such bylaws in the wake of the ATP decision and were forced (with considerable embarrassment) to reverse such adoption when they realized that their reading of ATP was a stretch or at least premature, and also due to institutional stockholder backlash and proxy advisor “withhold vote” policies effectively opposing such provisions implemented by unilateral board action.

Here are a few random thoughts on the proposed amendments:

– In the case of exclusive venue bylaws (now commonplace for hundreds of public companies in Delaware and in at least four other jurisdictions), the proposed amendments – DGCL Section 115 – would statutorily validate such provisions on a facial basis. Meaning, they still can be subject to challenge “as applied” given a particular set of facts and circumstances (e.g., adoption after the commencement of subject litigation or in some other context constituting a breach of fiduciary duty).

– The Delaware Court of Chancery recently upheld the adoption by a Delaware corporation of bylaws selecting North Carolina as the exclusive venue for intra-corporate disputes. The proposed amendments to the DGCL would permit such foreign jurisdiction selection so long as the organic language does not 100% foreclose such actions in Delaware courts.

– Under the proposed amendments, stockholder agreements containing such provisions that bind the contracting parties would, however, remain permissible.

– The personal jurisdiction issue raised in the commentary is easily addressed by adding consent to jurisdiction and other language in the relevant bylaw or charter provision. These provisions also are written subject to waiver by the corporation so that there is a “fiduciary out” in the case of a potential “as applied” challenge.

– The initiative to amend Section 262 is in response to the increasing practice of merger arbs and hedge funds to purchase shares post-record date (for the vote on the merger agreement) and assert appraisal rights so long as it can be demonstrated that the record date holder (e.g, CEDE & Co.) holds more shares that were not voted for the merger agreement than the number of shares for which the beneficial owner (the fund) is seeking appraisal. Because Cede & Co. holds shares in fungible bulk for its participant and customer accounts, that condition can be readily satisfied.

– Recent Delaware decisions ( and Merion Capital) have confirmed that the beneficial owner does not need to demonstrate that it’s specific shares were not voted for adoption of the merger agreement.

– In that statutory interest for properly perfected appraisal shares is 500 bps above the prevailing federal discount rate, even if the Delaware Court of Chancery were to determine that the fair value of the appraisal shares was the merger deal price (which a couple of recent cases in fact held), the arb still makes a tidy profit because of the statutory interest rate spread.

– Various inconsistencies in DGCL 262 regarding the procedures for beneficial owners and record date holders to perfect appraisal are the subject of potential legislative clarification.

As always, all remains to be seen, but it is expected that the proposed fee-shifting and exclusive venue amendments will be adopted substantially as proposed.

– Broc Romanek