February 2, 2018

Mandatory Arbitration: Will the SEC Give Corporate America a Gift?

This Bloomberg article says that the SEC may be open to revisiting the permissibility of bylaws requiring investors to arbitrate their claims against public companies. Here’s an excerpt:

The SEC in its long history has never allowed companies to sell shares in initial public offerings while also letting them ban investors from seeking big financial damages through class-action lawsuits. That’s because the agency has considered the right to sue a crucial shareholder protection against fraud and other securities violations.

But as President Donald Trump’s pro-business agenda sweeps through Washington, the SEC is laying the groundwork for a possible policy shift, said three people familiar with the matter. The agency, according to two of the people, has privately signaled that it’s open to at least considering whether companies should be able to force investors to settle disputes through arbitration, an often closed-door process that can limit the bad publicity and high legal costs triggered by litigation.

The SEC’s willingness to take up the issue is apparently based on its desire to encourage more companies to take the IPO plunge. As I blogged last year, at least one Commissioner is on record as being open to permitting mandatory arbitration bylaws.

The article suggests that any action by the SEC to allow mandatory arbitration would be a “big gift” to companies – but as Broc pointed out in this blog, others say that companies should be careful what they wish for…

Activism: Glass Lewis Says “Hey, Don’t Blame Us!”

Some companies have grumbled that proxy advisors – like ISS and Glass Lewis – are fueling activism by generally supporting insurgent nominees in activist campaigns. This Glass Lewis blog pleads “not guilty”:

This perception isn’t borne out by the overall numbers. We’d caution against reading too much into the data, since the yearly sample of contested meetings is both too small to be free of significant variance, and too big to reflect the particular combination of parties and moving parts that makes each contest unique. That said, Glass Lewis’ support for contests dropped from 40% in 2016 to 32% in 2017, and has historically stayed within that range. Nor has Glass Lewis’ approach to contested meetings changed in a way that would result in increased activist support; our methodologies, our case-by-case approach and our team have remained consistent.

Glass Lewis suggests that the perception that proxy advisors are all-in for activists is fueled by the changing nature of the activism. Larger activists have a lot of capital, sophisticated strategies & a long-term approach, and that’s allowed them to hunt larger game & win proxy advisor support in some cases:

This combination of long-term goals, sophisticated tactics and significant investment has allowed activists to pursue larger, more established companies that perhaps were not previously at risk of a shareholder campaign. As well known companies are targeted, the contests themselves are generating more headlines; and with campaign strategies getting more and more refined, Glass Lewis supported some, but not all, of the highest profile dissidents in 2017 — for example, at Arconic, Cypress Semiconductor and P&G.

There were also a number of large contests where we supported management (General Motors, Buffalo Wild Wings and Ardent Leisure), and as noted above Glass Lewis’ overall support for 2017 contests was at the lower end of the historical range; nonetheless, the combination of high profile contests, and sophisticated campaigns, may explain a perception of increased overall dissident support.

Securities Litigation: You Can Get Into Trouble Without Saying a Word…

Did you know that most securities litigation involves alleged material omissions, not misstatements?  Me either. This recent Katten Muchin article reviews the legal landscape for omissions claims and offers tips to directors on how to reduce their company’s risk of being on the receiving end of such a claim.

John Jenkins