Monthly Archives: December 2016

December 14, 2016

Shareholder Activism: Will Dividend Investors Change the Game?

This blog from Covington & Burling’s Len Chazen argues that the migration of fixed income investors to dividend-paying common stocks during 2016 could result in these investors becoming an independent force to be reckoned with in shareholder activism.  Here’s an excerpt:

 Dividend-minded shareholders are a potential third force in the contest for influence between institutional investors who want the corporation to be managed to enhance long-term profitability, and shareholder activists who want the board to maximize the current price of the stock. As supporters of higher dividends these new shareholders are natural allies of the activists, but unlike the typical shareholder activist, they have a long term stake in the corporation and an interest in limiting stock buy backs and dividends to a level that does not impair the ability of the corporation to continue paying dividends in the future.

Governance Survey: Silicon Valley v. S&P 100

This Fenwick & West study surveys the landscape of Silicon Valley’s governance practices and compares them with those found at S&P 100 companies. Not surprisingly, the study found significant differences between Silicon Valley and Corporate America. Here are some highlights:

– Silicon Valley directors & executives owned larger average equity stakes in their companies than did their peers at S&P 100 (10.3% v. 2.8%).

– The total voting power of Silicon Valley directors & executives also skews higher than the S&P 100 (14.2% v. 4.8%)

– Silicon Valley companies have smaller boards (8.2 directors v. 12.4) & less frequent meetings (8.1 v. 8.9) than S&P 100 companies

– More insiders serve on Silicon Valley boards, but 52% of Silicon Valley boards have an independent chair as compared to only 18% of the S&P 100.

Consistent with other surveys, this study also found Silicon Valley boards to be significantly less gender diverse than their S&P 100 counterparts – 26% did not have a single woman director, while all S&P 100 companies had at least one. As in other surveys, however, this one indicates that there appear to be signs of improvement on the diversity front.

The study also addresses other governance metrics and tracks changes over time.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Issuing Shares Via Blockchain: Delaware Poised to Act
– Describing an Officer’s Duties 101
– Data Privacy: More Federal Agencies Join Enforcement Bandwagon
– Stats: Controlled Companies
– How Law Firms Should Strengthen Their Cybersecurity

John Jenkins

December 13, 2016

Calling All Corporate Secretaries! Your Golden Ticket Is Here!

John & I had a lot of fun taping our 6th “news-like” podcast. This 8-minute podcast is about the director who was insider trading during a board meeting, placing an order for the target company’s stock when the deal was not yet announced! We also discuss the SEC’s “links to exhibits” proposal.

For those in charge of managing the board, this podcast explains how this SEC enforcement case is your “Golden Ticket”! You want to be aware of this case because it’s a great hook to get the attention of your directors when you’re reminding them of their insider trading & Section 16 obligations. Shucks, it may even help you when you ask for a raise! I highly encourage you to listen to these podcasts when you take a walk, commute to work, etc.

This podcast is also posted as part of our “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…

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Cap’n Cashbags: Insider Trading During a Board Meeting

What can be better than a reenactment of how this situation went down? In this 30-second video, a director places a trade with her broker to buy shares in the company being acquired while she is learning about the not-yet-announced deal:

“Off the Record, On the QT, and Very Hush Hush” – Part I

Loving today’s entry by John in his new “John Tales” blog on Check it out…

Broc Romanek

December 12, 2016

Insider Trading: High Court Says Tipper’s Gift = “Personal Benefit”

Last week, the US Supreme Court officially removed stock tips from this year’s holiday gift list.  In Salman v. United States, the Court unanimously affirmed that a tipper’s gift of inside information can satisfy the “personal benefit” requirement of Dirks v. SEC.  The Court rejected the view of the 2nd Circuit’s 2014 decision in U.S. v. Newman, which required a “tangible benefit” in order to support an insider trading conviction. In his opinion, Justice Alito wrote that:

To the extent the Second Circuit held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends . . . we agree with the Ninth Circuit that this requirement is inconsistent with Dirks.

This Sullivan & Cromwell memo notes that although Salman resolves uncertainties that Newman created about the personal benefit requirement, it leaves many unanswered questions:

Salman removes the uncertainty about insider-trading liability introduced by Newman, reaffirming the long-standing principle that a mere gift of information to “a trading relative or friend” is sufficient to constitute the requisite “personal benefit” to support liability for both the tipper and tippee. Yet Salman left unanswered important questions about the reach of liability, including:

(1) what sort of relationship is sufficient to meet the “relative or friend test”?

(2) where a tippee is not a “friend or relative,” what constitutes an exchange sufficient to constitute a non-pecuniary “personal benefit”? and

(3) what will constitute legally sufficient proof of knowledge of a “personal benefit” by remote, downstream tippees?

We’re posting oodles of memos in our “Insider Trading” Practice Area.

UK: Governance “Green Paper” Kicks Off Reform

In late November, the UK government issued a “Green Paper” soliciting input on a variety of potential governance reforms. Proposals include pay ratio reporting, enhanced say on pay approval requirements, minimum holding periods for stock awards, & various alternatives for board level stakeholder input.

From an American perspective, the most provocative aspect of the proposals may be the decision to solicit input on whether corporate governance standards should be imposed on the UK’s largest privately held companies. The US hasn’t crossed that particular Rubicon yet – and it will be interesting to see the British reaction to it.

Transcript: “This Is It! M&A Nuggets”

We have posted the transcript for our recent webcast: “This Is It! M&A Nuggets.”

John Jenkins

December 9, 2016

Corp Fin: CDIs Here, CDIs There, CDIs, CDIs Everywhere!

Getting them out the door before Keith Higgins’ imminent departure, Corp Fin dropped a whopping 35 new CDIs yesterday, covering a broad range of topics.  Here’s the inventory:

– 5 new Exchange Act Forms CDIs: Form 20-F

– 2 new Securities Act Forms CDIs: F-Series Forms

– 7 new Exchange Act Rules CDIs: Rules 3a11-1 to 3b-19

– 2 new Exchange Act Rules CDIs: Rules 12g-3 & 12h-3

– 6 new Securities Act Rules CDIs: Rule 144A

– 7 new Securities Act Rules CDIs: Rule 405

– 6 new Securities Act Rules CDI: Rules 902 & 903

SEC Enforcement Chief to Leave by Year-End

Yesterday, the SEC announced that Enforcement Director Andrew Ceresney will leave the agency by the end of the year.  The release notes that the SEC filed more than 2,850 enforcement actions & obtained more than $13.8 billion in monetary sanctions during his tenure.  The SEC also charged over 3,300 companies & over 2,700 individuals – including many CEOs, CFOs, & other senior corporate officers. Stephanie Avakian will become the Acting Director of Enforcement.

This announcement is on the heels of the one about Keith Higgins’ pending departure. As Broc blogged a few weeks ago, this exodus of Senior SEC Staffers is normal when the Administration changes hands…

Earnings Calls: Salty CEOs Earn a PG-13 Rating

My language can be a little salty at times – & one of my phobias is letting a profanity slip out at a really inappropriate time. That’s why I took a particular interest in this CNBC piece about CEOs swearing during conference calls. Holy . . . uh. . . Cow – I thought the stats would be much worse!

John Jenkins

December 8, 2016

Our New “John Tales” Blog!

Education by entertainment! The new blog on – “John Tales” – will teach you the kinds of things that you don’t learn at conferences, nor in treatises or law firm memos. John Jenkins is a 30-year vet of the deal world & he brings his humorous stories to bear on this new “long-form” blog.

When you check out “John Tales” – located at the top left corner of the home page – insert your email address when you click the “Subscribe” link if you want these precious tales pushed out to you!

Bonus! “Broc Tales” is coming to in January!

House Passes “Creating Financial Prosperity for Businesses & Investors Act”

Here’s the intro from this blog by Stinson Leonard Street’s David Jenson:

On Monday, the House of Representatives passed the Creating Financial Prosperity for Businesses and Investors Act (H.R. 6427) (the “Act”) by a vote of 398 to 2. The Act is actually a compilation of six measures that were previously considered and passed by the House in 2016, but that have thus far seen no action in the Senate. Here is a summary of each piece of legislation, along with links to our prior coverage and to the actual text of each provision.

An Awesome Book! “Niagara”

Full disclosure that the author is my cousin. But that’s what makes it even more remarkable. I just love her new book! And not just because I’m fascinated by the history of Niagara Falls. The book is a true thriller! In this 12-minute podcast, Linda Grace discusses her new book “Niagara” (here’s the related Amazon page & the Facebook page), including:

– What was your motivation for writing the book?
– Even though I’ve been a regular visitor to Niagara my entire life, I learned so much history. How do you know all that?
– Is all that history in the book actually true?
– Part of the history tour focuses on Native Americans. That’s an approach that is probably novel for many out there – but yet, it’s such a rich vein to educate. What led you to include those storylines?
– The book is so much more than just a historical tour of the area. It’s got romance, mystery, mystical, slice of life and more. It’s an emotional whirlwind. Was it always your intention to cover so much ground?
– Is the main protagonist drawn from your life at all?
– Any plans to write another book?

This podcast is also posted as part of my “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…

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Broc Romanek

December 7, 2016

Corp Fin Director Keith Higgins to Leave!

Yesterday, the SEC announced that Corp Fin Director Keith Higgins is leaving in early January. I am happy for Keith – sad for the rest of us. Keith did an amazing job under tough circumstances. For example, getting the “disclosure effectiveness” project off the ground was a huge challenge. Having seen the launch of the “aircraft carrier” up close, I know how difficult it is to engage in comprehensive reform. Directors never get the time to achieve their goals these days, as Congress gives them plenty to do. I’m sure we would have even seen more change during Keith’s tenure if he was given the leash.

And Keith is among the best speakers out there. His wit never dimmed, even wearing the “Gov” mantle…I’m glad that Keith got this rousing standing “O” at the ABA meeting last month…

Deputy Director Shelley Parratt will serve as Acting Director as she did during the last transition…

Gender Diversity: Smaller Company Boards Lag

This Equilar study notes that smaller companies lag the S&P 500 when it comes to gender diversity. Only 1.4% of S&P 500 boards of directors in 2016 failed to include at least one woman, which decreased from 11.6% in 2012. In contrast, 23.8% of Russell 3000 companies had all-male boards.

The diversity gap also shows up in board recruitment. Smaller company boards often serve as the first stop on the path to large cap directorships, but Russell 3000 companies lag their larger peers in the percentage of first time directors who are female:

In fiscal 2015, 1,155 directors joined Russell 3000 boards that had never served on any public company board. Of these directors, only 15% were female. Meanwhile, in the S&P 500, of newly elected directors who never served on an S&P 500 or Russell 3000 board, 25.5% were women in 2015.

Fewer women first-time directors at smaller companies could adversely affect the pipeline for large cap positions.

It’s Done: 2017 Executive Compensation Disclosure Treatise – With “Pay Ratio” Chapter

We just wrapped up Lynn, Borges & Romanek’s “2017 Executive Compensation Disclosure Treatise & Reporting Guide” — and it’s headed to the printers. This edition has a major update to the key chapter on the new SEC’s pay ratio rules & more! All of the chapters have been posted in our Treatise portal.

How to Order a Hard-Copy: Remember that a hard copy of the 2017 Treatise is not part of a membership so it must be purchased separately. Act now as this will ensure delivery of this 1600-page comprehensive Treatise soon after it’s done being printed. Here’s the “Detailed Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature. Order Now.

Broc Romanek

December 6, 2016

IPOs: No Action Blessing for “Conditional Offers to Buy”

Corp Fin recently issued a no-action letter to Morgan Stanley regarding the use of “conditional offers to buy” – or “COBs” – in connection with IPOs. COBs are intended to facilitate sales to retail investors by providing a way for them to commit to a deal without having to be available to their financial advisors during the period between pricing and the commencement of trading. This Cydney Posner blog reviews the mechanics of the COB process laid out in Morgan Stanley’s request.

COBs are not a new idea – and have been sanctioned in concept by Corp Fin since at least 1999’s Wit Capital no-action letter. What’s interesting about Morgan Stanley’s letter is that it lays out detailed procedures that are to be followed in using COBs as part of the offering process. The desire to obtain some comfort on those procedures may reflect Morgan Stanley’s past regulatory issues in this area – the bank was fined $5 million by FINRA in 2013 for shortcomings in its IPO procedures applicable to conditional offers & indications of interest.

Whistleblowers: SEC’s 2016 Annual Report

In the wake of its latest 8 figure whistleblower award, the SEC published its 2016 Annual Report to Congress addressing the whistleblower program. Kevin LaCroix at The D&O Diary recently blogged the highlights. These include:

65% of the award recipients were insiders of the entity on which they reported information of wrongdoing to the SEC. Of these insiders, approximately 80% raise their concerns internally or understood that their supervisor or compliance personnel were aware of the violations, before reporting the information to the SEC.

From FY 2012, the first full fiscal year the program was in operation, to FY 2016, the number of whistleblower tips has increased by more than 40 percent. Since the program incepted in August 2011, the agency has received a total of 18, 334 whistleblower tips. In FY 2016, the agency received 4,218, representing an increase of 295 over FY 2015, an increase of 7.5%.

What are the most common categories of whistleblower complaints? During fiscal 2016, corporate disclosures & financials led the pack (22%), followed by offering fraud (15%) and manipulation (11%). The type of violation reported has remained generally consistent over the past five years.

This blog from Keith Bishop directs some pointed criticism at the secretive nature of the whistleblower program.

Whistleblowing: What Does the Future Hold?

This blog from Dorsey & Whitney’s Brynn Vaaler speculates about the future of the SEC’s whistleblower program under the Trump Administration. While it’s too early to know what changes may be in store, some form of the program will likely survive:

Although the current whistleblower program has been criticized by conservative groups such as the U.S. Chamber of Commerce (in part because it does not require whistleblowers to give notice to their employer at the same time they give it to authorities), the program has relatively broad bi-partisan support and has given rise to a cottage industry of law firms specializing in representing whistleblowers.

Whistleblowing supporters include Rep. Jeb Hensarling (R-Texas), chair of the House Financial Services Committee and chief proponent of legislation that would unwind most of Dodd-Frank. Hensarling’s Financial Choice Act – which as Broc recently noted, could profoundly affect the SEC’s ability to adopt regulations – does not touch the existing legislative structure for SEC whistleblower awards. Similarly, although the Trump transition website calls for dismantling Dodd-Frank, it is silent on whistleblowing. As a result, the speculation is that whatever happens to Dodd-Frank, the SEC’s whistleblower program will survive in some form.

John Jenkins

December 5, 2016

SEC Enforcement: Violate Your Policies – Get a Books & Records Sanction

The SEC’s settlement with United Continental on Friday shows that it’s a very short trip from a violation of corporate policy to a books & records violation. The proceeding involved United’s decision to re-institute a non-profitable route from Newark Airport in order to benefit the former chair of the Port Authority.

The reinstitution of the route departed from United’s normal procedures and the requirements of its corporate ethics policy. The SEC’s order lays out its view of the legal implications of those departures:

Contrary to United’s Policies, the required written authorization of the Director – Ethics and Compliance Program or of the Board of Directors was not requested or obtained before initiating the South Carolina Route, and, thus, required records were not created or maintained. United thereby violated Section 13(b)(2)(A) of the Exchange Act. United also violated Section 13(b)(2)(B) by failing to devise and maintain a system of internal accounting controls that was sufficient to provide reasonable assurances that assets are used, and transactions are executed, only in accordance with management’s general or specific authorization, including in a manner consistent with United’s Policies.

This Steve Quinlivan blog has more details – & suggests that this proceeding marks the arrival of the “Domestic Corrupt Practices Act.”

“Dela-fornia” Corporations, Part II: Abstentions Won’t Protect A Director

I recently blogged about Keith Bishop’s discussion of the wide-ranging applicability of California’s corporate statute to foreign corporations.  Keith recently blogged again on this topic – this time, he focused on Section 316 of the statute, which addresses director liability for unlawful loans & distributions.  Here’s an excerpt:

Given the potential for personal liability, some directors, deciding that discretion is the better part of valor, may simply abstain in any vote to approve these actions. However, abstaining is neither valorous nor efficacious. Section 316(b) deems that a director who abstains from voting will be considered to have approved the action if he or she was present at the board or committee meeting at which any of the above actions was taken. To avoid the risk of liability under Section 316(a), a director must either not show up or vote against these actions.

Does this requirement apply to foreign corporations?  For the most part, the answer is yes.

“Boardroom War Z”: CII & Canada Take Aim at “Zombie Directors”

As Broc blogged recently on the “Proxy Season Blog,” the Council of Institutional Investors & the Canadian Government have targeted “zombie directors” – directors who failed to achieve a majority vote, yet remain in office.  Cooley’s Cydney Posner highlights the CII’s zombie director initiative at Russell 3000 companies, while this Financial Post article describes proposed legislation that would mandate majority voting for directors of Canadian public companies.

In a press release describing its efforts to have the undead removed from boardrooms, the CII points out that directors who don’t receive majority shareholder support only rarely leave the board:

From 2013 to Oct. 26 2016, uncontested directors in the Russell 3000 did not win majority support 164 times at 104 companies. Total rejections amounted to 195, as 22 directors failed to obtain majority support more than once. Strikingly, out of these 195 rejections, only 36 directors stepped down from their boards as of Oct. 26, 2016. This represents a turnover rate of 18 percent.

John Jenkins

December 2, 2016

How Will the SEC Reach Quorum With Only Two Commissioners?

Recently, a member asked why doesn’t SEC Chair White cram in a bunch of rulemakings while she can. Putting aside how she likely would be sensitive to the optics of that, I reminded the member that Commissioner Piwowar can stop any rulemakings simply by not showing up – as the SEC’s rules require three Commissioners to be present to reach quorum (as noted in this blog).

The question then arises as to how will the SEC reach quorum when Chair White leaves on Inauguration Day. At that point, only Commissioners Piwowar & Stein will be on the Commission – and it likely will take the new Administration awhile to getting around to nominating new Commissioners (& then the Senate to confirming them).

No worries. Back in the 90s, President Clinton was slow to nominate new members to federal agencies and the SEC dropped down to a level of two Commissioners for a spell – Chair Levitt & Commissioner Wallman. In order to get business done, the SEC amended its rules to accommodate the Commission when it drops to such a low level. “The Rule of 2” – adopted in 1995 – is still on the books:

§200.41 Quorum of the Commission.

A quorum of the Commission shall consist of three members; provided, however, that if the number of Commissioners in office is less than three, a quorum shall consist of the number of members in office; and provided further that on any matter of business as to which the number of members in office, minus the number of members who either have disqualified themselves from consideration of such matter pursuant to §200.60 or are otherwise disqualified from such consideration, is two, two members shall constitute a quorum for purposes of such matter.

So the quorum rules are different when there are three sitting Commissioners as compared to two. Thanks to Hunton & Williams’ Scott Kimpel for the help finding this rule…

How Will Trump Approach Executive Pay?

Recently, a member asked: “How do you see the Presidential election influencing incentive compensation and corporate governance in 2017?” Here’s my response:

Although it is difficult to know in practice, on paper, there is a wide gulf in difference in how the markets would be regulated between a Trump Administration & a Clinton one. Whereas a Clinton Administration might have been widely influenced by Senator Elizabeth Warren and resulted in restraints on how Wall Street operated, a Trump Presidency might result in unprecedented deregulation at the behest of a GOP Congress. A Clinton Administration was rumored to pick an investor as the next SEC Chair – which would have been a first. It appears that Trump will tap someone who believes that minimal regulation is good regulation.

So I think it’s clear that restraints on how companies can govern themselves will become looser. However, executive compensation specifically could be another matter. Trump ran a populist campaign, often railing about excessive executive compensation. It’s unknown whether that was empty campaign fodder to generate votes – or whether he’ll follow through and do something concrete in this area. And I note that during a House hearing about Mylan’s controversial EpiPen pricing, some GOP reps really grilled Mylan’s CEO about her pay package…

Also see this note from entitled “How The Trump Presidency And Tax Reform May Affect Stock Compensation.” And this Bloomberg BNA article has quotes with experts giving mixed reactions to guessing whether pay ratio will disappear…

Poll: What’s the Future of Pay Ratio Disclosure?

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Broc Romanek

December 1, 2016

Financial Choice Act: Death to Interpretive Guidance at the Commission Level?

Recently, I blogged about how Section 631 of the Financial Choice Act would seriously damage the SEC’s ability to conduct rulemaking. If that didn’t move you, try Section 412 on for size:

The notice and comment requirements of section 553 of title 5, United States Code, shall also apply with respect to any Commission statement or guidance, including interpretive rules, general statements of policy, or rules of Commission organization, procedure, or practice, that has the effect of implementing, interpreting, or prescribing law or policy and that is voted on by the Commission.

As I understand it, Section 631 wouldn’t impact guidance at the Staff level – only guidance issued by the Commission itself. Whew, otherwise it would be nearly impossible to get no-action letters & CDIs out the door. But this would impact the occasional interpretive release that the SEC issues after the Commissioner vote upon it (here’s a list). And while going through the Administrative Procedures Act process is doable – it’s a lot of work & would take much more time to implement…

The Arrival of the Trump Risk Factors

A few weeks ago, I predicted that we would see risk factors related to the change in Administration. This blog by Steve Quinlivan notes that the first batch of these have been filed…

Our December Eminders is Posted!

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

Broc Romanek