August 30, 2016

Books & Records: “Chutzpah Strategy” a Winner in Delaware

This comes from Delaware Vice Chancellor Glasscock’s opinion in Pogue v. Hybrid Energy, a books & records case.  Here’s the setting:

The Plaintiff was an employee of the Defendant Hybrid Energy. He alleges that, at the time he was hired in 2011, the Company issued to him a stock certificate representing one million shares of Hybrid common stock. Despite this fact, the record demonstrates that Hybrid, at the time, had no treasury shares available to distribute; its certificate of incorporation authorized the issuance of only 1,500 shares, which were all then outstanding, held by its principal.

The company responded to the plaintiff’s books & records suit by saying that only a stockholder could assert a right to inspect corporate records under Delaware law, and the plaintiff wasn’t a stockholder. The outrageousness of this position prompted the Vice Chancellor to drop the following footnote:

This Court has defined the useful Yiddish word “chutzpah” as “an audacious insolence; a mixture of nerve and gall.” . . .  The paradigm example often given is of a murder defendant, who has killed his mother and father, throwing himself on the mercy of the court as an orphan. Another is alleged here: a company that issues a void stock certificate to an employee to defraud him of his services, defending a books and records request on the ground that said employee is no stockholder.

“Audacious Insolence”? Perhaps. Effective? Definitely – The Vice Chancellor granted the defendant’s motion for summary judgment.

Disclosure Effectiveness: Disclosure Overload Prompts IR Innovation?

This post from “Jim Hamilton’s World of Securities Regulation” highlights NIRI’s comment letter on Corp Fin’s Reg S-K disclosure effectiveness project. NIRI’s concerns center on the problem of disclosure overload, which it attributes to Congressionally-mandated disclosure requirements, fear of litigation, and the desire to satisfy outstanding staff comments or avoid new ones.

Due to its concerns about overload, NIRI urges the SEC to avoid any new disclosure requirements that wouldn’t pass muster under TSC Industries v. Northway’s materiality standard — and to take into account the many voluntary initiatives that companies have undertaken to improve investor disclosure when considering any new mandate.

It’s in discussing these voluntary initiatives that NIRI makes its most interest point — that disclosure overload has prompted companies to innovate in order to give investors what they want:

As a result of this information overload, many companies no longer rely solely on their periodic Exchange Act filings to provide detailed information about their businesses to analysts and investors. Instead, many issuers are presenting professionally designed slide decks during investor day events, non-deal road shows, or at industry conferences.

Many companies have created extensive IR websites with information on the company’s operations, financial metrics, historical stock price performance, company fact sheets, and earnings guidance (where applicable), and to broadcast and replay quarterly earnings calls. In recognition of the importance of these disclosure tools, some companies have hired consultants to improve the readability, visual appeal, and effectiveness of their presentations and/or IR websites.

Attributing most of the IR department’s functions to the fallout from disclosure overload seems like a bit of a stretch  — but there’s no doubt that the overall level and quality of investor engagement has risen sharply over the past decade.  So NIRI may be on to something when it sees a link between increasingly burdensome disclosure mandates and innovation in voluntary disclosure practices.

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