February 12, 2019

‘Arbitration Bylaws’ Shareholder Proposals: Corp Fin Permits Exclusion (& Chair Clayton Weighs In)!

Last month, I blogged about Johnson & Johnson’s unusual request to exclude a shareholder proposal that would have required arbitration of all federal securities law claims brought against the company.  Yesterday, Corp Fin granted the company’s no-action request & permitted it to exclude the proposal from its proxy materials. The company is a New Jersey corporation, and sought to exclude the proposal on the grounds that its implementation would violate applicable state law.

New Jersey’s AG submitted a letter supporting that position – and this excerpt from the Corp Fin’s response letter indicates that it was dispositive:

When parties in a rule 14a-8(i)(2) matter have differing views about the application of state law, we consider authoritative views expressed by state officials. Here, the Attorney General of the State of New Jersey, the state’s chief legal officer, wrote a letter to the Division stating that “the Proposal, if adopted, would cause Johnson & Johnson to violate New Jersey state law.” We view this submission as a legally authoritative statement that we are not in a position to question.

Since the permissibility of mandatory arbitration bylaws is a “hot potato” political issue, the issuance of the no-action letter was accompanied by a lengthy statement from SEC Chair Jay Clayton clarifying exactly what the Staff was – and wasn’t – saying.  In particular, he noted that Corp Fin was not addressing the permissibility of the proposed bylaw under federal law:

The staff of the Division of Corporation Finance explicitly noted that it was not expressing a view as to whether the proposal, if implemented, would cause the company to violate federal law. Since 2012, when this issue was last presented to staff in the Division of Corporation Finance in the context of a shareholder proposal, federal case law regarding mandatory arbitration has continued to evolve. Further, I am not aware of any circumstances where the Commission has weighed in on the legality of mandatory shareholder arbitration in the context of federal securities law.

Jay Clayton went on to say that he agreed with the Staff’s approach & would expect it to take a similar approach if the issue arose again.  He also reiterated his prior statements to the effect that any policy decision should be made by the SEC in a measured and deliberative manner. The Staff earns some style points for the way it finessed the mandatory arbitration issue here – but credit  New Jersey’s AG with a big-time assist.

The Weed Beat: Banking on Cannabis

As of the end of 2018, medical marijuana has been legalized in 33 states and its recreational use has been legalized in 10 states – but if you’re in the legal cannabis business, just try & take your money to the bank. Perhaps because Canada experienced a communist revolution shortly after it legalized marijuana, the drug remains illegal under U.S. federal law. That makes banks very skittish about getting anywhere near these businesses.

This Davis Polk memo reviews the current uncertainties that banks face when dealing with the cannabis industry and reviews 2 pieces of proposed legislation – the SAFE Act and the STATES Act – that would clarify the regulatory framework & make it easier for these businesses to establish banking relationships. This excerpt from the intro summarizes what the proposed statutes are intended to accomplish:

Neither bill would federally legalize cannabis or deschedule cannabis from Schedule 1 of the Controlled Substances Act (CSA). Instead, the bills would permit depository institutions, in the case of the SAFE Act, or financial institutions, in the case of the STATES Act, to provide financial services to cannabis-related businesses (CRBs) that comply with state laws regulating legalized cannabis-related activity. Both bills would benefit from changes that would take into account a broader range of financial services or the realities of possible diligence in the financial sector.

The feds aren’t the only ones trying to make cannabis companies more bankable – check out this recent blog from Keith Bishop about proposed California legislation that would permit the state to charter limited purpose “cannabis banks.”

Tomorrow’s Webcast: “Earnouts – Nuts & Bolts”

Tune in tomorrow for the webcast – “Earnouts: Nuts & Bolts” – to hear Pepper Hamilton’s Michael Friedman, Cravath’s Aaron Gruber, Fredrikson & Byron’s Sean Kearney and K&L Gates’ Jessica Pearlman – discuss the nuts & bolts of earnouts, and how to prevent this popular tool for bridging valuation gaps from becoming a post-closing albatross for your deal.

John Jenkins