June 15, 2017

MD&A: Better Read Those Client Alerts!

This Shearman note flags the SDNY’s recent decision in Xiang v. Inovalon Holdings. To make a long story short, the plaintiff in a Section 11 case alleged that the issuer should’ve disclosed the effect of pending tax changes on its earnings in response to Item 303’s “known trends” requirement.  The court refused to dismiss this claim, holding that the plaintiff adequately pled knowledge on the part of the company.

How did the plaintiff establish knowledge?  That’s where the plot thickens. Here’s what the blog has to say:

The Court also found that plaintiffs had adequately pleaded that Inovalon should have disclosed its increased tax liability under Item 303, which requires disclosure of known trends reasonably expected to have a material impact on the registrant’s revenues or income.

Plaintiffs adequately pleaded that defendants knew of the tax change by pleading that Inovalon was a client of Deloitte, and as such “would have received Deloitte’s January 23, 2015 client alert” regarding the impending tax reforms.  This directed communication, the Court held, adequately alleged actual knowledge even though allegations of public information alone have been held insufficient to establish such knowledge in other cases.

Aside from making a subscription to our sites even more of a necessity, this case shows both the resourcefulness of the plaintiffs’ bar and the potential need for companies to incorporate the “client alert” communications from their professional advisors into their disclosure controls & procedures.

Yesterday, a member posted a query in our “Q&A Forum” asking us to re-run our “Regulation FD Survey.” We actually had that “Quick Survey on Reg FD Policies & Practices” already posted. Please participate!

Board Diversity: Female CEOs Have More Women on the Board

This Equilar blog says that S&P 500 companies whose CEO is a woman have more women on their boards – a lot more. Check out the stats in this excerpt:

In analyzing the boards of directors at those companies with female CEOs using BoardEdge data, Equilar found that 33.2% of board seats were occupied by women. In 2016, just 21.3% of S&P 500 boards overall were female, according to the Board Composition and Recruiting Trends report, and just 15.1% of board seats in the Russell 3000 overall were occupied by females in 2016, as noted in the recent Equilar Gender Diversity Index report.

Also on the board gender diversity beat, this Davis Polk blog says that SEC Chair Jay Clayton is getting heat from Congress to push for more gender diversity disclosure:

Citing research that found that only half of S&P 100 companies referenced gender when disclosing their board diversity, Representatives Carolyn Maloney (D-NY) and Donald Beyer (D-VA) asked Clayton to consider the SEC staff’s review of the existing rule previously ordered by former SEC Chair White. In March, Representative Maloney reintroduced a bill on board gender diversity that would require the SEC to establish a group to study and make recommendations on ways to increase gender diversity on boards. Companies must also disclose the gender composition of their boards.

Representative Gregory Meeks (D-NY), along with 28 other House Democrats, requested that Clayton go further, and to work on a rule proposal. That letter also asked the SEC to share with Congress the status of the SEC staff’s review.

10b5-1 Plans: They Really Do Work

Over on, Mike Melbinger recently blogged about Harrington v. Tetraphase Pharma., Inc. (D. Mass.; 5/17), which held that the use of a 10b5-1 plan implemented prior to an alleged fraud will undermine allegations that trades made pursuant to that plan are indicative of scienter.

As Mike put it, the decision is important “because it illustrates how executives’ sales of stock made (or begun) prior to a period of adverse public information and declining stock price can still be protected.”

John Jenkins