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