Monthly Archives: May 2015

May 14, 2015

Political Contributions Disclosure: SEC Sued Over Petition Inaction

Yesterday, the newly-formed “Campaign for Accountability” (CfA) sued the SEC in the US District Court for DC for failing to act on the rulemaking petition submitted last year by the Citizens for Responsibility and Ethics in Washington (CREW). Interestingly, this lawsuit is not filed by the folks behind the much more popular rulemaking petition on this topic, the one submitted by Harvard Professor Lucian Bebchuk in 2011 that attracted more than 1 million comments in support (although CREW submitted this letter last month supporting that older petition).

The complaint is worth reading for a number of reasons:

– It opens with the parade of horrors wrought by the Citizens United decision by SCOTUS
– Talks about how institutional investors want to see this type of disclosure
– Goes into the history of shareholder proposals on this topic
– Reveals a number of discrepancies between companies who have voluntarily adopted disclosure policies in this area and what companies are actually doing (Counts #22-26)
– Mentions that political contributions disclosure showed up on the SEC’s Reg Flex Agenda in ’13. (Counts #28-29) Apparently, they believe that list of potential rulemakings is more than aspirational, which I have contended before…

Investors Seek More “Usable” Director Attribute Disclosure (+ Diversity Disclosures)

Speaking of rulemaking petitions, here’s a new one recently submitted by a group of 9 public pension funds that seeks the SEC to include a board matrix or chart in proxy statements, as well as including a nominee’s gender, race and ethnicity – thus taking the board attribute disclosures elicited by Item 407(c)(2)(v) a step further…

Dodd-Frank Rollback: Senator Shelby’s Discussion Draft

Here’s news from this blurb from Goodwin Procter (note that it appears this bill impacts only financial institutions; not other types of public companies):

On May 12, Senator Richard Shelby, the Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, announced that the Committee had released a draft of “The Financial Regulatory Improvement Act of 2015.” The Committee also issued a section-by-section summary. Senator Shelby said, “this discussion draft is a working document intended to initiate a conversation with all members of the Committee who are interested in reaching a bipartisan agreement to improve access to credit and to reduce the level of risk in our financial system. I look forward to engaging with members of the Committee on specific proposals in the discussion draft.” Democrats on the Banking Committee, including the senior Democrat, Sherrod Brown, have agreed to some changes that provide regulation relief for small banks and credit unions but in public statements have opposed broader changes in the draft bill. Senate Republicans require a few Democratic votes in order to reach the 60 necessary to go to a full vote. Observers expect discussions about the bill to continue for several months, with significant changes to the draft before the bill is brought on for a full vote.

Also note – per this blog – that a House Subcommittee will hold Round 2 of its hearings on a group of capital formation bills…

Aretha! Going Strong at 73

I was lucky enough to see Aretha Franklin & her 30-piece orchestra last night. Like watching royalty. Sounds great at 73!


– Broc Romanek

May 13, 2015

IFRS: Dead in the US?

Here’s an excerpt from this article:

Sounding a death knell for the more-than-decade long effort to fully “converge” International Financial Reporting Standards with U.S. Generally Accepted Accounting Principles, James Schnurr, the chief accountant of the Securities and Exchange Commission, said that he probably won’t recommend that the SEC should mandate IFRS or that U.S. companies should have the choice of preparing their financials under those standards.

Speaking at the 14th annual Baruch College Financial Reporting Conference in New York City, Schnurr said that “there is virtually no support to have the SEC mandate IFRS for all registrants.” Further, he said, “there is little support for the SEC to provide an option allowing [U.S. public] companies to prepare their financial statements under IFRS.” Since 2007, the commission has permitted foreign private issuers in the United States to report their financials under IFRS without reconciling them to U.S. GAAP. (Under the pre-2007 regime of reconciliation, foreign issuers had to identify and quantify the material differences they reported under IFRS in terms of U.S. GAAP.)

However, he added, “there does seem to be continued support for the objective of a single set of high-quality globally accepted accounting standards.” The chief accountant stressed that the U.S. Financial Accounting Standards Board and the International Accounting Standards Board continue to communicate and keep each other’s views very much in mind when each considers its own actions.

Schnurr bemoaned the current emphasis on the deterioration of relations between FASB and IASB. “The conversation seems to quickly transition to convergence, or the lack thereof, often with an adversarial, U.S. GAAP vs. IFRS, tone. Conversations on this topic typically highlight the differences and shortfalls in the efforts towards convergence in an attempt to suggest that the two sets of standards will never be able to achieve uniformity,” he said.

PCAOB Issues “Audit Committee Dialogue”

Last week, the PCAOB issued this “Dialogue” report – addressed to audit committees – that highlights key areas of recurring concern in PCAOB inspections of large auditors as well as certain emerging risks to the audit. As noted in this Cooley blog, the report also provides targeted questions that committee members may ask their auditors on each topic.

Delaware Senate Passes Fee-Shifting Bill (Now on to the House)

Here’s news from this Delaware Online article:

Lawmakers in the Delaware Senate voted 16-5 on Tuesday to approve legislation that would ban corporations from adopting bylaws that impose corporate legal costs on shareholders who file unsuccessful lawsuits. The fee-shifting legislation has been controversial, attracting opposition from the U.S. Chamber of Commerce. The Chamber says the legislation protects frivolous shareholder litigation and threatens Delaware’s business-friendly image. “Companies that incorporate in Delaware have valued the state’s clear and fair corporate law principles,” said Lisa A. Rickard, president of the U.S. Chamber Institute for Legal Reform. “But they are increasingly becoming victims of ‘extortion through litigation.'” More than nine of every 10 corporate mergers or acquisitions are challenged in court.

The Delaware State Chamber of Commerce remained neutral on the legislation, which is sponsored by Delaware Sen. Bryan Townsend, a Newark Democrat and a practicing corporate lawyer at Morris James in Wilmington. In May 2014, the Delaware Supreme Court upheld a bylaw adopted by a private non-stock corporation, ATP Tour Inc., that shifted legal costs onto the loser in shareholder litigation. Delaware lawyers, concerned that stock corporations could seek similar bylaws, recommended that the General Assembly change the law to ban such bylaws.

The legislation now heads to the Delaware House of Representatives.

Meanwhile, here’s two blogs by Allen Matkins’ Keith Bishop:

It’s Time To Put A Stop To Fee-Shifting (But Not In the Way You Might Think)
Here’s One Way To Recover Attorneys’ Fees Without Adopting A Fee Shifting Bylaw

– Broc Romanek

May 12, 2015

Today’s Webcast: “The NYSE Speaks ’15: Latest Developments and Interpretations”

Tune in today for the webcast – “The NYSE Speaks ’15: Latest Developments and Interpretations” – to hear NYSE Staffers John Carey, Tanya Hoos and Jamie Patturelli discuss all the latest. Please print out this deck of “Course Materials” in advance…

Just a few days left to the Form SD filing deadline. Here’s a recap of the 15 filed so far – and here’s a tip on how to avoid conflict minerals smelter/refiner list errors…

NYSE Proposes Shareholder Approval “Share Issuances” Exemption for New Companies

Recently, the NYSE proposed amendments to Sections 312.03(b) & 312.04 of the NYSE Listed Company Manual to exempt “Early Stage Companies” from having to obtain shareholder approval before issuing shares for cash to related parties, affiliates of related parties or entities in which a related party has a substantial interest since these companies frequently have to rely on private placements to their founders or other significant existing shareholders or their executive officers or directors for capital-raising…

Nasdaq’s New FAQ on Net Share Settled Convertible Securities

This Gibson Dunn blog is about a new Nasdaq FAQ – here’s an excerpt:

While the FAQ speaks specifically to flexible settlement provisions where an issuer can settle conversions through cash, shares or a combination of both, a NASDAQ representative has told us that NASDAQ’s new position is equally applicable where net share settlement is mandatory. In addition, we understand from NASDAQ that its position is the same, regardless of how the issuer ultimately elects to settle conversions where the securities provide for flexible net share settlement. Issuers will still need to assess whether other provisions of NASDAQ’s shareholder approval rules may be applicable to a particular offering (for example, if the transaction might result in a change of control) or whether other terms of the convertible securities might implicate the 20% Rule (for example, certain conversion price adjustment provisions, any make-whole provisions, or provisions requiring additional cash payments to investors at the time of conversion such as payments for forgone future interest).

The New York Stock Exchange (“NYSE”) historically has taken a similar view that net share settled or flexible net share settled convertible securities should be viewed as being issued with a conversion price below the greater of book or market value. We understand based on a discussion with a representative of the NYSE that the NYSE has also expressly revised its position on this issue to be consistent with NASDAQ.

We view NASDAQ’s and the NYSE’s new position as a very welcome and pragmatic change, which should enhance the ability of smaller issuers to issue net share settled or flexible net share settled convertible securities and access the convertible securities market.

Tune in to our July webcast with the Nasdaq Staff! “Nasdaq Speaks ’15: Latest Developments and Interpretations”

– Broc Romanek

May 11, 2015

Today’s Webcast: “P4P – What Now After the SEC’s Proposal”

Tune into today’s webcast – “P4P: What Now After the SEC’s Proposal” – featuring Compensia’s Mark Borges, Deloitte Consulting’s Mike Kesner, Morrison & Foerster’s Dave Lynn & Gibson Dunn’s Ron Mueller to learn everything you need to know about the SEC’s new proposal. And we’re posting memos in our “Pay-for-Performance” Practice Area on

And tune in tomorrow for this webcast on this site – “The NYSE Speaks ’15: Latest Developments and Interpretations” – to hear NYSE Staffers John Carey, Tanya Hoos and Jamie Patturelli discuss all the latest. Please print out this deck of “Course Materials” in advance…

FOIA: MuckRock Tracks the SEC’s Progress

Recently, I got turned on to “MuckRock,” a free site that tracks the progress of FOIA requests at government agencies. The site went live five years ago, the brainchild of a recent college grad (here’s an interview with the founder). Here’s the page that lists the progress of FOIA requests at the SEC – and here’s an example of a FOIA request to the SEC from MuckRock…

Poll: Will You Participate in Commenting on SEC’s P4P Proposal?

Comments on the SEC’s pay-for-performance proposal are due on July 6th. Here’s a poll regarding your level of participation in the comment process on the SEC’s pay-for-performance proposal:

survey service

By the way, I went to the Wizards-Hawks playoff game on Saturday, where Paul Pierce worked his magic – here’s a 1-minute video of that moment from inside the stadium:

– Broc Romanek

May 8, 2015

More on “Does SEC Enforcement Treat Bigger Companies Differently?”

I love being human. I am sometimes wrong, that’s for sure. And by reading this follow-up to one of my blogs by David Smyth about “Does SEC Enforcement Treat Bigger Companies Differently?,” I can honestly say that I was wrong. I am not as close to the SEC enforcement process as David and his arguments that their might be some bite to the study by Jonas Heese makes sense on its face. Here’s an excerpt from David’s blog (and here’s another blog about this study):

I have two thoughts about Heese’s claims. As Vincent Vega once said, “That’s a bold statement.” The facts are the facts, and if the SEC is less likely to beat up on labor-intensive firms, that tendency must be attributable to something. But I am extremely skeptical that it is related to presidential election years or the locations of corporate headquarters relative to the districts of senior congressmen. Believe me, Senators and Members of Congress who serve on the SEC’s oversight committees can be quite overbearing and can distract from the Enforcement Division’s mission. But the vast majority of those distractions come in the form of low-value information requests that are tedious and hard to respond to. As for outside pressure not to investigate a particular person or company, though, while the SEC’s record isn’t perfect, my experience was that the Commission was pretty insulated.

But . . . investigating cases and seeing them through to the end is hard. And if the SEC is looking at a particular set of facts that requires the agency to rely on strained interpretations of the laws and regulations under its jurisdiction, it’s easier to bring those cases against defendants who are not as well funded and less likely to mount serious defenses. If a large hedge fund and a smaller defendant are engaged in similar conduct the SEC finds questionable, that smaller defendant is a softer target. I honestly hate to say it. And I never write publicly about the matters in which I serve as defense counsel. But I have seen – and am currently seeing – intense focus by the Enforcement Division in areas where the SEC’s authority is quite weak, but the costs of litigating are financially and emotionally prohibitive. This is obviously a purely anecdotal “analysis”, but it’s not nothing either. I suspect Heese is actually onto something with his facts but has latched onto simplistic causes that may not match up.

Meanwhile, in this blog, Kevin LaCroix tackles the issue of D&O coverage for when the SEC issues a subpoena – and whether that constitutes a claim.

In the News: Politician Criticism of Buybacks

Last year, I blogged about a flurry of articles in the media criticizing the zany pace of buybacks (and last month, I blogged about BlackRock’s letters to CEOs about them). As noted in this article, the topic is now becoming a political hot potato as Senator Tammy Baldwin has sent this letter to the SEC “about the adequacy of the SEC’s rules governing repurchases on the open market.” In addition, SEC Commissioner Stein delivered this speech, noting that the SEC should be evaluating whether action in this area is warranted…

Activism & Buybacks: Seeking Board Seats to Apply Pressure

This DealBook article describes how a former Goldman banker who was placed in General Motors by the Obama Administration as part of the bailout has now put himself up for a seat on the GM board, as part of a campaign from four hedge funds to persuade the company to buy back at least $8 billion worth of shares by next year. This Form 8-K from GM files a “Notice of Director Nomination.” Also see this blog – entitled “At GM, The Year’s Most Interesting Activist Project” – from “The Activist Investor”…

– Broc Romanek

May 7, 2015

Our New “Regulation D Handbook”

Spanking brand new. By popular demand, this comprehensive “Regulation D Handbook” covers how to engage an independent auditor, from the factors to be considered and engagement letter issues. This one is a real gem – 101 pages of practical guidance – and its posted in our “Regulation D” Practice Area.

Political Contributions Disclosure: Required by Executive Order?

With the million-plus commentators supporting the rulemaking petition for political contribution spending seeming to have no effect on the prospects of the SEC wading in on this issue comes this news from this blog:

At least 70 of the top 100 companies in the U.S. would be covered by a proposed executive order to require federal contractors to disclose their political spending, according to an analysis released by Public Citizen. The liberal watchdog group and other supporters of regulating money in politics have called on President Barack Obama to issue an order requiring government contractors to disclose their spending to influence elections, including money funneled through nonprofit organizations such as the U.S. Chamber of Commerce and others, which don’t disclose their donors.

If Obama were to issue such an order, it would reach at least 70 percent of the Fortune 100 companies, according to a Public Citizen analysis released April 27. The group reviewed government contracts held by the 100 largest companies in the U.S.—as ranked by Fortune Magazine for 2014—and found that 70 of the companies had federal contracts totaling $100,000 or more from April 2014 to April 2015. Obama administration officials have acknowledged considering such an order, but have given no indication that it will be issued.

White House spokesman Josh Earnest said earlier this month that the Obama administration has no specific plans to push for stronger campaign finance laws as the 2016 presidential election campaign gears up, with predictions of record spending from super political action committees (PACs) and other outside organizations not formally linked to candidates or political parties.

The companies identified in the Public Citizen study as holding government contracts represent a wide variety of industries, including car manufacturing, defense, technology, energy and banking. The individual companies with contracts include Apple Inc., AT&T Inc., Bank of America Corp., Boeing Co., Exxon Mobil Corp., General Motors Co. and more. Nine of the top 10 companies on the Fortune 100 list were identified as government contractors, with the retail giant Wal-Mart Stores Inc. as the only exception. “Because the federal government buys everything from toothbrushes to nuclear missiles, it is no surprise that most large companies are significant government contractors,” Weissman said in the Public Citizen statement.

The Public Citizen study looked at contracts signed within the last year and aggregated totals to establish whether a company had received more than $100,000 in contracts. Public Citizen added that the 30 companies in the top 100 that didn’t have $100,000 in government contracts came disproportionately from the insurance industry.

Corporate Loan “Proxy Put” Provisions Trigger D&O Litigation

Here’s an excerpt from this blog by Kevin LaCroix:

In the face of increasing investor activism, companies have adopted a number of defensive measures. Among these measures are a particular type of provision found in many corporate borrowers loan agreements – requiring the company to repay loans before they are due if a majority of the board is ousted – that are drawing increasing scrutiny. As these types of provisions have become more common, they have also attracted litigation. The boards of nearly a dozen companies have been hit with lawsuits alleging that the directors violated their fiduciary duties by allowing their companies to enter into credit agreements with these provisions. Developments in these cases may have implications for corporate boards. At a minimum the number of lawsuits that have been filed against corporate boards may have implications for D&O insurance underwriters.

– Broc Romanek

May 6, 2015

Earnings Releases: The True Story Behind Twitter’s Leak

In this blog, Q4’s Darrell Heaps does a great job explaining what really happened last week with Twitter’s leaked earnings release (also see this article where Selerity explains how they figured out Twitter’s leak). Here’s an excerpt:

Following Twitter’s earnings leak this week there has been a huge amount of speculation about what happened. Numerous media outlets and blogs speculated (and others) that it was a URL sniffing bot that guessed the filename of the earnings release.

It’s not surprising that they went this route, because this has happened before (4 in 2011). Yes, there have been URL sniffing breaches before. Yes, there are bots out on the web guessing URLs and trying to download documents. However, any reputable IR website vendor protects against this, including Nasdaq.

The truth is that this was not URL sniffing, this was human error. According to Nasdaq’s statement: “Yesterday at 3:07 pm EDT, inadvertently posted Twitter’s (TWTR) earnings release prematurely on its investor relations website. The posting was caused by an operational issue that exposed the release on Twitter’s IR website for approximately 45 seconds. During those seconds the site was scraped by a third party that publicly disseminated the earnings information….”

It was simply that someone posted the PDF 1 hour early by mistake. (at 3:07pm and 57 seconds exactly). The person quickly realized the mistake and pulled the document down within 45 seconds. My guess is they thought they moved quickly enough….but no.

Darrell’s key take-aways are:

1. Bots are everywhere and they will find your mistake and publish it on Twitter.

2. Your Investors are using Twitter and will react instantly. 80% investors now using social.

3. Documents on IR websites have to be secure, this is table stakes for IR website vendors. Although this isn’t what happened to Twitter.

4. Disclosure controls and procedures both at your IR website vendor and within your own company are paramount in making sure sensitive information is handled correctly. This is what happened to Twitter.

5. There is no silver bullet. Web technology such as bots, sniffers, Twitter, etc. are all evolving quickly. You need to understand these changes and evolve how your firm and your partners handle sensitive information. This is a moving target.

Cybersecurity: DOJ Issues Best Practices Guidance

Last week, the DOJ released guidance entitled “Best Practices for Victim Response and Reporting of Cyber Incidents.” As noted in these memos, the guidance outlines steps companies should take before, during, and after an incident, and includes a summary checklist. The guidance also states the DOJ’s positions on the legal permissibility of a number of monitoring techniques and the impermissibility of many forms of so-called “hacking back.”

Keeping Confidential Information Safe: Beware of “Slur”

Many of us are scared beyond belief over the spate of crippling cybersecurity breaches over the past few years. But the risk of leaks from the inside looms as large as ever. That’s why I was sad to see the launch of a new website – Slur – which is an open source, decentralized and anonymous marketplace for the selling of secret information in exchange for bitcoin. Hopefully some regulators will check into this site and ensure that laws aren’t being broken…

– Broc Romanek

May 5, 2015

Brain-Teaser: “11:59pm or 12:01am” for Contracts?

In our “Q&A Forum,” this question was recently posed (#8275): “For legal purposes, when does a day end and next day begin? We are reorganizing certain subs as LLCs and our tax group is saying that if we incorrectly incorporate one minute late, we have to file taxes for the full year. So, does anyone know of any legal guidance or precedence on when a new year begins? Is it 12am or 12:01am? Also, why do we sometimes use 11:59pm in certain documents? By the way, the tax group does not know the answer to this.”

I was stuck – so I turned to my advisory board (to whom I am grateful to and for), who gave this host of useful answers:

– When in doubt ask Wikipedia. The answer is the day begins a the first measurable moment after midnight (midnight itself is a transition and straddles both days). So they should file at 12:00:01 a.m. The SEC agrees. For tender offers, the SEC takes the position that a “business day” means “any day, other than Saturday, Sunday or a federal holiday, and shall consist of the time period from 12:01 a.m. through 12:00 midnight Eastern time.”

– US Govt website – – “Is midnight the end of a day or the beginning of a day?” with answer of: When someone refers to “midnight tonight” or “midnight last night” the reference of time is obvious. However, if a date/time is referred to as “at midnight on Friday, October 20th” the intention could be either midnight the beginning of the day or midnight at the end of the day.

To avoid ambiguity, specification of an event as occurring on a particular day at 11:59 p.m. or 12:01 a.m. is a good idea, especially legal documents such as contracts and insurance policies. Another option would be to use 24-hour clock, using the designation of 0000 to refer to midnight at the beginning of a given day (or date) and 2400 to designate the end of a given day (or date).

– Didn’t see anything from the IRS, but here’s what the National Institute of Standards and Technology’s website says: “Is midnight the end of a day or the beginning of a day? When someone refers to “midnight tonight” or “midnight last night” the reference of time is obvious. However, if a date/time is referred to as “at midnight on Friday, October 20th” the intention could be either midnight the beginning of the day or midnight at the end of the day. To avoid ambiguity, specification of an event as occurring on a particular day at 11:59 p.m. or 12:01 a.m. is a good idea, especially legal documents such as contracts and insurance policies. Another option would be to use 24-hour clock, using the designation of 0000 to refer to midnight at the beginning of a given day (or date) and 2400 to designate the end of a given day (or date). These are the guys who are literally in charge of time for the Empire, so in the absence of anything from another Imperial agency, I’d rely on this.

– I would say 12:01 am as the start of a new day. Or 12:00:01 am. I have no good authority to cite for that. But, I have often debated whether midnight is the end of the day or the start of the next. So, I avoid the question by falling clearly into the next day (or 11:59 pm to get the previous day with certainty).

– I asked one of our tax attorneys (who always seems to know everything). She didn’t know the answer, but here is her personal practice: If she needs something to happen before the next day, she uses 11:59 p.m.. If she needs to make sure it happened on that date and not at any time before, she uses 12:01 a.m.. 12:00/midnight is just too ambiguous so she treats that time as the line between the two days.

– See 13e-4. That answers the question (at least in the tender offer context).

– I love the science, but timing this precise seldom really matters outside my legal work. For what it’s worth, I have personal knowledge that EDGAR thinks that it’s still 5:30 until the clock ticks over to 5:31. I once had a filing accepted and treated as filed at 5:30:57. You can’t cut it much closer than that!

– Most – maybe almost all – states have a date counting law that expressly discuss this kind of stuff.

– As I told my buddy, if I could, I’d yell at them, “Stop f’cking around and just sign the damned thing at 11:59 pm!!!”

– It’s neither of those. One practical suggestion, observe the US Naval Observatory’s atomic clock on at midnight in your time zone and see at what precise second the date ticks over. That would reflect (and perhaps define) the official US government position on when a day starts.

This discussion reminds me of the passion around the New Millenium debate. I.e., did the 21st century start 1/1/2000 or 1/1/2001? My view: when counting virtually anything, the first item is numbered 1 not 0 or some fraction. So, if one were to imagine the hypothetical beginning of the current calendar system, there wouldn’t have been a hypothetical year 0. The count would start at January 1, 0001 – the first day of the first year. Each succeeding Millenium therefore ends December 31, X000. So, the first century started 0001 and ended 1000. The 21st started 2001 and will end 2100.

Similarly, the timekeeping at the beginning of that calendar system would have begun at 12:00:01 AM, January 1, 0001 – counting the first second (or whatever fraction of a second you choose) of that first day. Each suceeding day therefore ends at midnight 12:00:00. The next day begins a nanosecond after midnight. So, it seems most accurate to say that each day ends at midnight, and the next day starts “immediately after midnight.”

Now, don’t get me started on “business day.”

Also see these two blogs from Ken Adams on the topic:

– “A Time of Day Constitutes a Boundary Between Periods of Time
– “Revisiting Midnight

What If Your Regulator Was Hacked (But Wouldn’t Admit It)?

This blog by Keith Bishop entitled “Nevada Secretary Of State Denies Hacking Claim” provides food for thought…

How Billable Hours Changed the Legal Profession

As I get older, I love history more and more. And what better topic to learn about than one of the major causes of the legal profession becoming the butt of jokes rather than something to aspire to. Read this Bloomberg article entitled “How Billable Hours Changed the Legal Profession“…

– Broc Romanek

May 4, 2015

Next Wave of Comp Litigation? Director Grants Subject to Entire Fairness Review

Here’s this blog by Steve Quinlivan:

In Calma v. Templeton et al, the Delaware Court of Chancery held that grants of restricted stock units, or RSUs, to directors of Citrix Systems, Inc. were subject to an entire fairness standard of review. The court found that the grants were a conflicted decision because all three members of the compensation committee that approved the grants also received the RSU awards. Citing Delaware Supreme Court precedent, the court noted director self-compensation decisions are conflicted transactions that “lie outside the business judgment rule’s presumptive protection, so that, where properly challenged, the receipt of self-determined benefits is subject to an affirmative showing that the compensation arrangements are fair to the corporation.”

The court rejected the defendants position that prior stockholder approval of the plan ratified the grants at issue. The court found that Citrix did not seek or obtain stockholder approval of any action bearing specifically on the magnitude of compensation paid to non-employee directors.

The case was before the court on a motion to dismiss. Accordingly, the court found the defendants’ motion must be denied unless, accepting as true all well-pled allegations of the complaint and drawing all reasonable inferences from those allegations in plaintiff’s favor, there is no “reasonably conceivable set of circumstances susceptible of proof” in which plaintiff could establish that defendants breached their fiduciary duties.

The defendants contended the grants were entirely fair because the grants were in line with 14 companies identified in Citrix’ proxy as its peer group. The plaintiff claimed that the appropriate peer group should be limited to only five of those companies based on comparable market capitalization, revenue and net income metrics.

In the court’s view the plaintiff raised meaningful questions as to whether certain companies with considerably higher capitalization, such as, Google and Microsoft, should be included in the peer group used to determine fair value of compensation for Citrix’s non-employee directors. The court therefore refused to grant the motion to dismiss.

As a result of this decision, many advisors will now likely recommend that concrete, realistic limitations on grants to directors be built into a plan so that directors can rely on a stockholder approval defense. If the decision becomes a prelude to the next wave of compensation litigation, many companies may submit their grant practice for stockholder approval even if they do not need a new plan approved.

Webcast Tomorrow: “Form S-8: Share Counting, Fee Calculations & Other Tricks of the Trade”

Tune in tomorrow for the webcast – “Form S-8: Share Counting, Fee Calculations & Other Tricks of the Trade” – to hear Gibson Dunn’s Krista Hanvey, Davis Polk’s Kyoko Takahashi Lin, Kaye Scholer’s Jeff London and Goodwin Procter’s John Newell discuss a topic rife with uncertainty and traps for the unwary.

Taped an interview with NPR a few weeks ago on virtual shareholder meetings and thought they scraped it. But a ton of folks reached out on Friday night and said they heard it on the radio. Luckily, NPR trimmed my 4-minute interview down to 7 seconds because I wasn’t fab…

Rule 10b5-1 Plans: Should You Provide Voluntary Disclosure?

As covered by our “Rule 10b5-1 Plans Handbook” (see pages 40-43), some companies voluntarily disclose when they adopt Rule 10b5-1 plans – and perhaps might even voluntarily provide other types of plan-related disclosures. There are pros & cons to these approaches. One of the pros is “explaining yourself” – so that the market (and the media) understand what you’re doing. For example, here’s a Fortune article on a spate of Rule 10b5-1 plan sales by Twitter officers that were placing downward pressure on Twitter’s stock price. The company no longer uses the plans – the article says it’s unclear if the plans were “cancelled” or “not renewed” – and the company’s stock price has subsequently soared…

– Broc Romanek

May 1, 2015

Corp Fin Comments: More Readable Responses Produces Better Results?

Check out this new study by a trio of professors entitled “Consequences of Writing Not So Readable Responses to SEC Comment Letters.” Here’s the abstract:

An emerging literature shows that shareholders benefit from the Securities and Exchange Commission’s (SEC) filing review process in terms of improved disclosures and reduced information asymmetry. However, SEC filing reviews also impose significant costs on companies because the comment letter remediation process diverts substantial time and resources away from normal operations. Using the Fog index to measure the readability of the company’s response to an SEC comment letter, we find that more readable company responses are associated with shorter response times (i.e., the number of days it takes the SEC to respond to the company’s initial response letter and the number of days it takes the SEC to close the filing review), a lower likelihood the SEC issues follow up comments, fewer rounds of comments, and a lower probability of a restatement stemming from the filing review.

Thus, we identify a relatively easy and inexpensive way for companies to mitigate the costs of the comment letter remediation process. We expect that our results will be of interest to managers, boards of directors, audit committees, and other stakeholders involved in formulating responses to SEC comments because they suggest that response readability can have a significant effect on regulators’ reaction to the disclosure.

I’d be interested in your thoughts before I weigh in with my ten cents…

Will El Paso Pipeline Shake Up Shareholder Derivative Actions?

Recently, Delaware VC Laster delivered a post-trial opinion – In re El Paso Pipeline Partners Derivative Litigation – about a series of related-party transactions known as dropdowns, in which a controlled entity purchases assets from its parent. Notably, $171 million in damages was awarded. We have posted memos about the case in our “Related-Party Transactions” Practice Area. One quote from the court opinion is:

“Recognizing that the derivative action was invented in equity to be a flexible remedy to prevent injustice, it would seem within the power of a court of equity to recharacterize an award of money damages that otherwise would go to the entity as an award of money damages allocated across the units that were outstanding as of the effective time . . .”

If this revision to the common understanding – based on established legal precedent about the distinction & legal implications – of derivative v. shareholder class actions claims is broadly adopted, it may have far-reaching implications…

Happy Anniversary Baby! 13 Years of Blogging & Counting

Sunday will mark 13 years of my blither and bother on this blog (note the Blog is nearly 12 years old – not shabby!). It’s one time of the year that I feel entitled to toot my own horn – as it takes stamina and boldness to blog for so long. A hearty “thanks” to all those that read this blog for putting up with my personality. I’m sure I won’t get more refined with age…

Our May Eminders is Posted!

We have posted the May issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

– Broc Romanek