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Monthly Archives: May 2019

May 23, 2019

Shareholder Proposals: Big Tech Hits the Big Time

In this article, the WSJ says big tech has “arrived” because Amazon, Google and Facebook had so many shareholder proposals this season – 12, 13, 8, respectively. But I think protesting poop emojis are a truer sign…

Amazon’s Annual Meeting: Dancing Emojis!

I feel that I would not be doing my job if I didn’t tell you that there were dancing poop emojis outside of Amazon’s annual meeting. Or maybe I had to mention it because I’m so proud of my younger son – who graduates from UCLA next month – for landing an engineering gig at Amazon in the fall. My older son is at Google, working on the “Stadia” project. I’m a proud papa. Did you know that some Google offices have fire poles to get between floors…

Conference Pointers: Quite Literally

I’ve done some silly stuff over the years when I’ve spoken at conferences to keep the audience engaged – often I pick up some cool swag in the exhibit hall & throw it out to the audience at the midpoint of the panel (eg. nerf footballs). Here’s one of those moments from a dozen years ago at the Society of Corporate Secretaries’ annual conference:

Broc Romanek

May 22, 2019

More on “Board Meetings: How to Handle Director Notes?”

Over on the “Mentor Blog,” I recently blogged about how to handle a director who wanted to take notes at a board meeting. Jon Cohen of Snell & Wilmer had this awesome response to my post: “I had a ‘discussion’ with a director of a client who insisted on taking, and retaining, detailed notes of board meetings. When he couldn’t be easily dissuaded, I offered him this custom-made note pad. After that, we had a much better discussion.”

In the March-April issue of “The Corporate Counsel” print newsletter – which was mailed a few months ago – check out our own analysis of note-taking during board meetings, as well as our comprehensive analysis of board minutes & resolutions…

“Celebrity” Directors: Sometimes Not a Good Thing

Recently, I blogged about how Shaq should be considered a legitimate director despite his celebrity status. I was reminded by some members that sometimes a celebrity director is not that hot an idea. Here’s one story that a member sent in:

We had a client about twenty years ago whose CEO was a buddy of a former NFL player and they put him on the board. This ex-NFL guy wasn’t the sharpest knife in the drawer. To make a long story short, the poopy hit the proverbial fan with the company, with all sorts of potential for people to second-guess board decisions. It’s at this point that the ex-NFL guy is talking to one of my partners and says, “Boy, I’m glad I’m only a celebrity director. The real directors are in a tough spot here, aren’t they?” My colleague broke it to him gently.

Happy Anniversary Baby! 17 Years of Blogging & Counting

A few weeks ago marked my 17th anniversary – 17 years! – of my blither & bother on this blog (note the “DealLawyers.com Blog” is nearly 16 years old – not shabby!).

It’s the one time of year that I feel entitled to toot my own horn – as it takes stamina & boldness to blog for so long. A hearty “thanks” to all those that read this blog for putting up with my personality. As I was one of the first lawyers to blog, my track record is amongst the longest as a blogger – lawyer or otherwise…

And “double thanks” for John & Liz joining our team a few years ago. It’s been great to have such wonderful people to work with – and they certainly can blog as well as me, or anyone else out there!

Broc Romanek

May 21, 2019

SEC’s Upcoming Roundtable: Short-/Long-Termism

Yesterday, SEC Chair Clayton issued this statement indicating that a roundtable on short- and long-term management of companies will be forthcoming. The date & agenda are not yet known. This follows the SEC’s “request for comment” in December about the nature, content and timing of earnings releases & quarterly reports…

By the way, Chair Clayton will also host a roundtable of former SEC Chairs during the SEC’s 85th anniversary “program & dinner” coming up on June 3rd. This kind of roundtable normally would be fascinating, but I think a lot of alumni are going to that thing to catch up with each other & won’t be too interested in programming. But what do I know…

The SEC is Questioned Over Lag Bringing Volkswagen Case

Here’s the intro from this WSJ article:

A federal judge sharply questioned why securities regulators took so long to sue Volkswagen AG over its bond offerings, years after other government agencies resolved litigation over the auto maker’s diesel-cheating scandal. U.S. District Judge Charles Breyer on Friday suggested the SEC’s March 2019 lawsuit makes it look like a “carrion hawk that simply descends when everything is all over and sees what it can get from the defendant,” according to a transcript provided to The Wall Street Journal.

The judge also ordered the SEC to provide a timeline on when it learned of each fact behind its case — and explain its legal reasoning behind waiting to file the suit—before he would let the case move forward.

Collecting Fines: The Challenges the SEC Faces

Here’s the intro from this WSJ article:

Wall Street watchdogs often tout the fines they levy on alleged wrongdoers. Yet much of that money is never collected. The SEC over the five years ending in 2018 took in 55% of the $20 billion in enforcement fines set through settlements or court judgments, according to agency statistics. During the prior five years, from 2009 through 2013, the SEC collected on 60% of $14.6 billion.

And in 2018, the commission collected just 28% of almost $4 billion. That rate—the lowest in a decade—was due in part to an unusual $1.7 billion settlement with the Brazilian oil company Petrobras that may never require payment to the SEC. The SEC has struggled for years to get defendants to pay more of their fines, although some are almost certain to avoid payment forever. That includes people who went to prison on related criminal charges, or people behind Ponzi schemes who spent the funds they took from defrauded investors.

Meanwhile, this study shows that the SEC’s enforcement actions against companies remain at near-record levels despite the government shutdown…

Broc Romanek

May 20, 2019

How I Wound Up With “Lettering” from the SEC’s HQ

In my self-anointed role as “keeper of the weird” for some of the notables related to the SEC, it’s high time that I share this story. When the SEC announced – fifteen years ago – that it was moving its headquarters from 450 Fifth Street to 100 F Street, I got sentimental & started to inquire about what would happen to the massive letters that comprised the main signage above the entrance of the old HQ. Somehow I reached a facilities person that was the guy for this purpose.

I sent him an email asking whether I could obtain the letters when they were taken down. As you can see from this picture, there were 43 letters bolted into the wall – I was gonna distribute a letter to each of my friends that had worked at the agency with me:

I was surprised when I soon heard back that I would indeed be receiving the letters when they came down. Joy! A few months later, I knew the SEC’s move was complete & the letters had come down. I emailed my guy. Nothing. Tried again a few weeks later. Radio silence. One last try. Nada. I gave up.

A few months later, I emailed the guy because I was feeling sadistic. Amazingly, the guy immediately responded that if I came down right away, he would be happy to share. I was on the way! When I got there, I didn’t receive all 43 letters – but I did receive this nice collection:

So I got that going for me. Since the letters were attached to marble tile, the mounting bolts are four inches long. As Warren Buffett once responded to me when I asked him to speak at our executive pay conference, “If you don’t ask, you don’t receive. And sometimes even if you ask, you still won’t receive.” In this case, I did indeed receive…

Warren Buffet Says Many “Independent Directors” Aren’t

Here’s the intro from this “Directors & Boards” article:

Warren Buffett, the chairman and CEO of Berkshire Hathaway Inc. who’s known as the Oracle of Omaha, slammed independent directors for being too focused on their paychecks, and not on keeping the CEO in check. “You don’t get invited to be on boards if you belch too often at the dinner table,” Buffett said at the company’s annual meeting in Omaha, Neb.

“I’ve been on 20 public company boards; I’ve seen a lot of corporate boards operate. The independent directors, in many cases, are the least independent,” he explained. If directors get about $250,000 a year, and that’s an important part of their income, he added, “they’re not going to upset the apple cart.” The incentive for those directors, he continued, is to go along with the CEO. That way, if the CEO of another company calls about that director, he or she will be described as having never raised any problems. “How independent is that?”

Also see John’s blog about Delaware’s Chief Justice Leo Strine thoughts on the role of independent directors…

Broc Romanek

May 17, 2019

Disclosure Simplification: SEC Referral Prompts FASB to Seek GAAP Tweaks

Last August, when the SEC adopted its disclosure simplification rules, it referred to FASB certain Reg S-X & S-K line items that overlapped with GAAP but called for incremental disclosure, and asked FASB to consider incorporating those additional disclosure requirements into GAAP. Here’s an excerpt from this SEC Institute blog describing FASB’s recent response:

On May 6, 2019, the FASB issued an exposure draft related to this “referral” from the SEC. The proposed amendments in the exposure draft would modify disclosure or presentation requirements in a variety of topics in the Codification, ranging from removing the impracticability exception, to the requirement to disclose revenues for each product and service or each group of similar products and services, to adding disclosure of where derivative instruments and their related gains and losses are reported in the statement of cash flows.

A chart summarizing the proposed changes to GAAP appears on page 5 of the exposure draft. FASB also decided not to implement some of potential changes referred by the SEC. These include changes to GAAP that would have required financial statement disclosure of:

– The formula for calculating the number of shares available for issuance under an equity comp plan required Item 201(d) of Reg S-K
– The identity of 10% customers required by Item 101(c) of Reg S-K
– Discounts on shares as a deduction from equity accounts either on the face of the balance sheet or in the notes as required by Rule 4-07 of Reg S-X
– Significant changes in the authorized or issued debt since the date of the latest balance sheet as required by Rule 4-08(f) of Reg S-X
– Amounts of related party transactions on the face of the financial statements as required by Rule 4-08(k)(1) of Reg S-X.

Comments on the proposed changes laid out in FASB’s exposure draft are due by June 28, 2019.

“Test the Waters” for All:  Comments on SEC Proposal

In February, the SEC issued a proposal to expand expand the “test-the-waters” accommodation from EGCs to all companies.  So far, about 20 comments have been submitted on the rule proposal.  This “Corporate Secretary” article says that the bulk of them have been supportive, but comments submitted by the non-profit Better Markets questioned several aspects of the proposal.  Here’s an excerpt from the article describing the organization’s concerns about the rule’s potential impact on unsophisticated investors:

Better Markets, which was founded following the financial crisis with an eye on reforming Wall Street, raises concerns about the SEC’s plan. For one thing, the group argues that the SEC proposal creates ‘a dangerous loophole’ by not requiring issuers, and those authorized to act on their behalf such as underwriters, to validate the status of the investor – to make sure the investor is truly a QIB or an IAI – before a solicitation is made.

‘This loophole would permit solicitations to retail and other investors that either lack financial sophistication or cannot bear the financial risks associated with investing in highly risky investments such as those offered by, for example, penny stock issuers, leveraged business development companies or asset-backed security issuers,’ writes Better Market president and CEO Dennis Kelleher.

Better Markets also wants companies that “test the waters” prior to an offering & decide to move forward to file their testing-the-water communications with the SEC.

SEC Signs Off On Silicon Valley Stock Exchange

Last November, Broc blogged about efforts by some Silicon Valley heavy hitters to establish a new stock exchange for startup tech companies.  While efforts to obtain regulatory approval for the new exchange hit a snag at the time, the SEC approved the application of the Long-Term Stock Exchange last Friday.  This Reuters article summarizes some of the features of the new exchange that are designed to promote long-term thinking on the part of companies that list there:

The new exchange would have extra rules designed to encourage companies to focus on long-term innovation rather than the grind of quarterly earnings reports by asking companies to limit executive bonuses that award short-term accomplishments.

It would also require more disclosure to investors about meeting key milestones and plans, and reward long-term shareholders by giving them more voting power the longer they hold the stock.

It’s that final point – time phased voting – that prompted the CII to file a letter opposing the LTSE’s application. While the CII doesn’t like “tenure voting,” this TechCrunch article notes that it’s an old concept that’s picked up a number of advocates in recent years.  In the end, the SEC approved the application, noting that its rules do not mandate that an exchange impose a “one-share, one-vote” requirement on listed issuers.

John Jenkins

May 16, 2019

What Do In-House Lawyers Want From Law Firm CLE?

There are few non-chargeable events that law firms fret about more than their CLE programs for clients & potential clients. Of course, that fretting usually focuses more on the PowerPoint slides than things like actually seeking input from prospective attendees about what they’re looking for and who they would like to see participate in the program.

This recent In-House Focus survey of in-house lawyers concerning their own experiences with law firm CLE provides some interesting perspectives on these topics. For example:

– 70% of survey respondents said CLE programming should feature diverse lawyers, presenters and faculty. But just 30% of respondents agreed that diversity is adequately represented in current CLE content. At the same time, nearly two-thirds of respondents believe that participating in CLE programming is an effective way for law firms to connect diverse lawyers to clients.

– 52% of respondents to IHF’s survey agreed that law firms should do a better job of facilitating introductions of their diverse lawyers to their clients, while just 5% disagreed. Further, 62% believe CLE programming is a good way to cultivate relationships between diverse lawyers and clients.

– 62% of respondents believe law firm CLE is not adequately tailored to in-house lawyers. Additionally, two-thirds agree that CLE content is more tailored to law firm practitioners than in-house lawyers. In fact, another 79% of respondents said they would be more inclined to watch a CLE program that included in-house lawyers as presenters who speak to their issues.

– When asked what are some things that would make CLE more pertinent to in-house lawyers, many responses revolved around the need for real-world examples. Some responses included: “concepts to reduce outside legal expenses,” “when to involve outside counsel and how to engage them,” and “case studies and sample scenarios from current in-house lawyers.”

You should really check out the whole survey. As somebody who has spent his entire career in a law firm environment, I thought it was pretty eye-opening.

Crypto Mom Wants SEC to Wear “Reasonableness Pants”

You may agree or disagree with her remarks, but a speech by SEC Commissioner Hester Peirce – aka “Crypto Mom” – is always bloggable Her recent speech at Rutgers-Camden Law School is no exception. In discussing the SEC’s enforcement program, she makes no bones about her opposition to the enforcement approach favored during the tenure of former Chair Mary Jo White:

Most enforcement recommendations the Commission receives from the staff are legally straightforward and not controversial, but a small subset causes me to ask whether we are wearing our reasonableness pants.

In particular, I am not a fan of the so-called “broken windows” philosophy, a more-is-always-better, punish-the-small-violations approach to enforcement. Instead, I assess, when reviewing an enforcement recommendation from our staff, whether the recommendation is using our enforcement resources wisely. I ask, was there a meaningful violation? Is this a matter that could have been handled by our exam program? Are there other appropriate responses in lieu of an enforcement action, such as a rulemaking, interpretative guidance, or an educational bulletin for investors?

While she devotes much of her discussion to the SEC’s enforcement program, her “reasonableness pants” comments extend to the agency’s approach to rulemaking & interpretive guidance as well:

Lots of people want the SEC to wade into a whole range of issues that are not properly within our purview. Increasingly, we are urged to tell companies how many women to have on their boards, to limit the ways companies and their shareholders may resolve disputes, to direct financial firms to avoid providing capital for certain industries, or to prohibit investors from getting access to certain products we think investors should not have in their portfolios.

We do not have the time, resources, or authority to do these things. We have other things to do that are not headline-grabbers, but are neatly within our core mission.

Issues that should take priority in her view include things like updating transfer agent rules, disclosure modernization, fixed income & equity market structure, and ensuring that companies and investors across the country can participate in the capital markets. Peirce said these issues may not be as “trendy” as those that the SEC is being urged to undertake , but “subsequent generations will look back at us in disgust and wonder why we sacrificed the health of our capital markets for the chance to look cool for a moment.”

Rookies of the Year:  Do New Activist Directors Add Greater Value Than Other Newbies?

According to this recent study, “rookie activist directors” – unseasoned independent directors appointed at the prompting of activists – add greater value to a company than other unseasoned independent directors.  Here’s the abstract:

We examine the value-enhancing role of unseasoned independent directors nominated through shareholder activism events (Activist UIDs). Firms appointing Activist UIDs experience a larger value increase than those appointing Nonactivist UIDs, particularly when Activist UIDs have relevant experience, when they sit on the monitoring committees, and when their sponsors hold large target ownership.

Most of the companies in the study seem to have been small caps, and I think that needs to be taken into account when considering the study’s results. Established activist investors are likely to have access to a deeper and higher quality pool of director candidates than most small caps could find on their own.

John Jenkins

May 15, 2019

SEC Modifies 10-Q & 8-K Cover Pages (Again)

Yesterday, a couple of our sharp-eyed members alerted us to the fact that the SEC tweaked the cover pages of Form 10-Q & Form 8-K yet again over the past few days. The changes were made to bring these forms more closely in alignment with Form 10-K.  Here’s an excerpt from this Gibson Dunn blog with the skinny on the latest changes:

– In the Form 8-K, the table showing the “Title of each class,” “Trading Symbol(s),” and “Name of each exchange on which registered” appears immediately after the checkbox for “Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))”; and

– In the Form 10-Q, the table showing the “Title of each class,” “Trading Symbol(s),” and “Name of each exchange on which registered” appears immediately after the line “(Former name, former address and former fiscal year, if changed since last report).”

Here are the SEC’s updated versions of  Form 10-Q & Form 8-K. You can find the Word version of the Form 10-Q cover page in our “Form 10-Q” Practice Area, and the Word version of the Form 8-K cover page in our “Form 8-K” Practice Area.

Staggered Boards: Investors Still Want Them Gone

Remember waaay back on Monday when I blogged about how staggered boards are now good again? Yeah, well, investors don’t appear inclined to agree.  You don’t have to take my word for it – this Corporate Secretary article says that you can just ask Kellogg’s:

Kellogg Company shareholders have backed a move to introduce annual elections for directors but will have to vote for additional measures if the change is to be implemented – a hurdle they have not overcome at a previous attempt. The vote took place at the Kellogg AGM held late last month in Battle Creek, Michigan. Specifically, the proposal called on the company’s board to reorganize itself into one class with each director subject to election every year.

The hurdle referenced in the article is a clause requiring a charter amendment to remove the staggered board to be approved by 2/3rds of the outstanding shares – and that supermajority vote requirement has thwarted previous attempts to undo these provisions.

Corporate Governance: Wait, Nobody Said Anything About a Test!

For me, the best part of passing the bar examination was the knowledge that I’d never have to take another test again in my life.  That’s why it was disheartening to learn that I just might have to take another one in the highly unlikely event that a public company someday wants to consider adding me to its board.

That’s because this fall, the NACD plans to roll out a voluntary certification program for board members, and it includes a certification exam.  Don’t expect it to be quite as easy as the written exam you took when you got your driver’s license – the test has been designed by a committee whose members include a former Delaware Supreme Court Justice, a former SEC general counsel, & a former head of the FASB.

UCLA’s Prof. Stephen Bainbridge wants to sign up for the exam.  He was a year ahead of me in law school and was an editor of the Law Review.  On the other hand, I was one of those people who will be eternally grateful for UVA’s “B mean” grading policy.  I’m guessing he probably wouldn’t even have to study for it.  Me?  Well, if I ever do have to take it, let’s just say that I hope it’s open book & there’s some kind of prep course.

John Jenkins

May 14, 2019

Proxy Strike Suits: What We’re Hearing About This Year’s Targets

It’s proxy season, which means it’s also proxy strike suit season. We’ve recently heard reports from several members that plaintiffs are targeting disclosures surrounding whether brokers will be permitted to vote on particular proposals & the effect of abstentions and non-votes, as well as disclosures relating to compensation plans being submitted for a shareholder vote.

Here’s what we have learned:

– The plaintiffs’ bar has been sending demand letters to companies alleging inadequate or inaccurate disclosure about the vote required to approve proposals included on the company’s proxy materials, and threatening legal action in the event that corrective disclosure is not provided.

– Similar demand letters have been sent to companies with compensation plans on the ballot, alleging inadequate disclosure under Item 10(a) of Schedule 14A, which relates to general disclosures relating to compensation plans being submitted for shareholder approval.

– These demand letters typically arrive shortly before the scheduled date for the annual meeting, and a number of companies have filed DEFA 14As to reflect revised disclosure relating to these matters.

– Resolution of the issues raised in the demand letters is typically accompanied by a demand for legal fees.

These are not new areas of proxy disclosure for plaintiffs to pursue. Compensation plan disclosures have long been an attractive target, and disclosures about the effect of abstentions & non-votes were the subject of at least one high-profile case in 2014 & a number of demand letters over the last few years. It’s also easy to see why plaintiffs might like to single out disclosures in these areas for potential challenges.

When it comes to broker non-vote disclosures, the application of NYSE Rule 452 is sometimes unclear, and the Exchange’s interpretation of what proposals are “routine” does not always align with what one might expect. On top of that, the impact of broker non-votes on the outcome of any given proposal may depend on state law, charter provisions, and the nature of the proposal itself. In other words, this is complicated stuff – and it’s easy to make a mistake.

Item 10(a) of Schedule 14A seems more straightforward – essentially requiring companies to summarize the material features of the plan and information about the number of participants & how they are selected. But these requirements are also very open-ended, and leave plenty of room for second-guessing disclosure decisions. We’ll have more on this in the next issue of The Corporate Counsel newsletter.

Uber IPO: The Biggest Loser?

Uber’s IPO didn’t exactly have a gangbusters first day of trading.  There have been plenty of IPOs that have had worse openings than Uber’s 7.6% decline from its IPO price, but according to this Gizmodo article, the sheer size of the deal made the dollar losses suffered during Uber’s first day the largest in U.S. history:

According to University of Florida professor Jay Ritter, Uber’s 7.62 percent decline since hitting the NYSE makes it “bigger than first day dollar losses of any prior IPO in the U.S.” In terms of percentage losses, Uber’s dip doesn’t even scratch the surface of the worst IPOs. But the staggering valuation of the company makes it, in raw scale, “among the top 10 IPOs ever” including companies outside the U.S., Ritter told Gizmodo in a phone interview. That single digit decline resulted in an estimated $617 million paper losses.

Oh well, easy come, easy go. To make matters worse, the article points out that this first-day loss comes despite the fact that Uber’s IPO valuation of $76.5 billion represented a significant haircut from the  $90 billion and $120 billion valuation that some analysts placed on the company just a month before the offering.

Direct Listings: A Lot to Like If You’re a Venture Investor

We’ve previously blogged about the willingness of some unicorns to bypass IPOs and pursue direct listings. With Uber & Lyft’s IPOs both landing with a resounding thud, this WSJ article says that there may be a lot to like about this alternative for venture investors. This excerpt quotes Canaan Partners’ Michael Gilroy on why that’s the case:

Mr. Gilroy said one advantage of direct listings is they are cheaper. Companies holding direct listings still hire bankers, but the costs are notably lower than the traditional process. “The fees are far too high for what they’re doing” in an IPO, he said. A direct listing lacks mechanisms like greenshoe options, which allow bankers to buy shares to help keep the price stable—so direct listings risk a large drop in prices when shares first hit public markets. However, because direct listings don’t raise new capital, existing shareholders benefit because their ownership isn’t diluted.

In addition, direct listings eliminate lockup agreements, which restrict the sale of shares by existing holders. That can be attractive for employees and venture capital investors, who can sell shares immediately. With traditional IPOs, they often have to wait several months to sell their holdings. “VCs are not professional public investors,” said Mr. Gilroy. “Six months can be a significant difference in your return profile for the company.”

As Liz blogged last month, Slack’s already on its way to a direct listing – and if the stock pops, that may prompt more high-profile, cash-rich unicorns to consider this alternative.  Regardless of its deal structure, a lot may be riding on how Slack performs out of the gate. If it lays an egg, this Axios Pro Rata newsletter says that unicorns may be yesterday’s news as far as Wall Street’s concerned.

John Jenkins

May 13, 2019

Insider Trading: So That’s What Friends Are For?

One of the worst things about insider trading is how frequently people are apparently willing to betray the trust of their friends and family. It’s just uncanny how often you see situations involving husbands and wives, parents and children, and longtime friends who trade on information provided to them in confidence. The SEC recently announced a settled enforcement action that allegedly involved another example of this kind of conduct.  Here’s an excerpt from the SEC’s press release:

According to the SEC’s complaint, while Brian Fettner was a guest in the home of a longtime friend who was also the general counsel of Cintas Corporation, Fettner surreptiously viewed documents contemplating an acquisition of G&K Services Inc. by Cintas.  Based on that information and without telling his friend, Fettner then purchased G&K Services stock in the brokerage accounts of his ex-wife and a former girlfriend, and persuaded his father and another girlfriend to purchase G&K shares.  The complaint further alleges that after Cintas and G&K announced the merger on Aug. 16, 2016, G&K’s stock price jumped more than 17 percent, resulting in illicit profits from Fettner’s misconduct of more than $250,000.

The defendant consented to a permanent injunction prohibiting him from future violations of Rule 10b-5 and agreed to pay a penalty of approximately $250,000.  Despite the outcome, if you read the complaint, you may wonder at first what separates what this guy did from Barry Switzer’s infamous eavesdropping?  After all, the SEC alleges that Fettner “surreptiously viewed” documents that were left in relatively plain sight in a room that he seems to have entered with his friend’s permission.

As this recent blog from Keith Bishop points out, the difference may lie in the nature of the relationship between the parties. Under the misappropriation theory endorsed by the Supreme Court in U.S. v. O’Hagan, 521 U.S. 642 (1997), a person who misappropriates material nonpublic information from another may violate the law even without a duty to contemporaneous traders. It’s enough that there be some kind of obligation not to use the information – and the existence of  “relationship of trust and confidence” with the source of the information will do the trick.

While Switzer and the person he overheard were merely casual acquaintances, the people involved here were close friends since middle school – and the SEC’s complaint alleged that was sufficient to establish the kind of relationship whose breach could trigger insider trading liability.  And in this excerpt from his blog, Keith says that’s a conclusion you can add to the list of things that don’t make a lot of sense about insider trading law as it exists today:

The SEC’s allegations illustrate how the misappropriation theory of insider trading has become completely unmoored from the purposes of the securities laws.  Congress did not enact Section 10(b) with a view to protecting guest-host relations.  It is absurd that innocence and guilt turns on whether the guest and the host met in middle school or were only recently introduced.

If you stop & think about the implications of misappropriation theory, then maybe it isn’t all that uncanny about how many of these cases involve friends & family – the way the law has evolved, it’s those relationships that give insider trading allegations force.

Staggered Boards: Now They’re a Good Idea Again

A few weeks ago, I read an article that said eggs are bad again.  As you may recall, eggs were good, then they were bad, then they were good, and now they’re bad again.  Forgive me if I thought about the 50 year controversy over eggs when I read this Fortune article reporting on a new study that says staggered boards are a good thing.  Here’s an excerpt on how stocks of companies with staggered boards have performed in recent years:

In recent years, staggered-board companies have wound up outperforming their peers—and significantly at that. For the five years through March, S&P 500 companies that utilized non-annual voting registered an average total return of 125%; for the index as a whole, the figure was 52%.

Honestly, sometimes the teeter-totter of corporate governance trends is harder to keep track of than the “scrambled, fried, poached or ‘OMG! One bite will kill you!'” controversy surrounding the food formerly known as the “incredible, edible egg.”

Tomorrow’s Webcast: “How to Handle a SEC Enforcement Inquiry Now”

Tune in tomorrow for the webcast – “How to Handle a SEC Enforcement Inquiry Now” – to hear to hear King & Spalding’s Dixie Johnson, Jones Day’s Joan McKown and Cooley’s Randall Lee analyze how to handle a SEC enforcement inquiry now.

John Jenkins

May 10, 2019

SEC Proposes Amended “Accelerated Filer” & “Large Accelerated Filer” Definitions

Yesterday, the SEC voted 3-1 – with Commissioner Jackson dissenting – to propose changes to Exchange Act Rule 12b-2’s definitions of “accelerated filer” & “large accelerated filer.” Here’s the 150-page proposing release. This excerpt from the “fact sheet” in the SEC’s press release announcing the proposal summarizes the proposed changes (we’ll be posting memos in our “Accelerated Filers” Practice Area):

The proposed amendments would:

– Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be an SRC and had no revenues or annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available

– Increase the transition thresholds for accelerated and large accelerated filers becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million

– Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status

As Liz noted in her blog last week about the SEC’s decision to put these proposals on the agenda for yesterday’s meeting, the SEC didn’t change these definitions last year when it adopted rules increasing the size limit for companies to qualify as “smaller reporting companies” from $75 million to $250 million in public float – and that was a point of contention among some Commissioners.

The rule proposals would allow more companies to file periodic reports on a non-accelerated basis.  But seriously, who cares about that?  What’s likely to generate some fireworks during the comment period is the fact that the proposals would increase the number of companies that won’t have to obtain an auditor’s attestation on management’s report on ICFR.

The two sides of the argument didn’t waste any time lining up – here’s SEC Chair Jay Clayton’s statement in favor of the rule proposals, and here’s Commissioner Jackson’s statement on his dissent from the SEC’s decision to issue them.

Internal Investigations: The Consequences of Government “Outsourcing”

The SDNY attracted quite a bit of attention last week with Judge McMahon’s opinion in United States v. Connolly and Black – a decision indicating that government entanglement in an internal corporate investigation could raise the 5th Amendment concerns if the government tried to use testimony provided in the investigation in a subsequent criminal proceeding.

This Wachtell Lipton memo summarizes the implications of the case for companies using internal investigations as a tool for cooperating with governmental authorities:

The lesson for companies conducting internal investigations is not, of course, to stop cooperating with governmental inquiries. Indeed, the judicial admonitions of the Connolly and Black decision are directed principally at the government itself. The opinion is nonetheless important for companies and their counsel; it plainly suggests that, when designing an internal investigation, care must be taken from the outset to ensure that the company (or, in appropriate cases, the board) directs and supervises the investigation, selecting the witnesses to be interviewed, developing the questions to be asked, and assessing the record.

Yes, as the government has often signaled, companies should provide proactive, constructive cooperation in order to secure maximum credit for their efforts. When done properly, such efforts discharge the company’s fiduciary obligations to act in the best interests of its shareholders and other constituents to achieve the best possible resolution under the circumstances.

But the memo goes on to say that, thanks to the Connolly and Black decision, companies should not be afraid to push back if the government attempts to take control over its own internal investigation, and notes that such pushback is consistent with the DOJ’s own guidance to its prosecutors that the DOJ “will not take any steps to affirmatively direct a company’s internal investigation efforts.”

SEC Settlement Policy:  Another Former Enforcement Target Challenges “Gag Rule” 

Earlier this year, I blogged about The Cato Institute’s lawsuit seeking to have the SEC’s rule mandating that enforcement targets agree to “neither admit nor deny” the allegations against them declared unconstitutional on 1st Amendment grounds.  This recent blog from Steve Quinlivan reports that another individual who settled with the SEC on these terms – former Xerox CFO Barry Romeril – has filed a lawsuit seeking relief from the gag rule.  Here’s an excerpt:

The New Civil Liberties Alliance has filed a Motion for Relief from Judgment with the U.S. District Court for the Southern District of New York on behalf of Barry D. Romeril. Mr. Romeril served as the Chief Financial Officer of the Xerox Corporation from 1993-2001. NCLA has asked the court to remove a gag order placed on Mr. Romeril on June 5, 2003 as part of a Consent Order with the Securities and Exchange Commission (SEC) because it violates the First Amendment of the U.S. Constitution. Despite the passage of nearly 16 years, Mr. Romeril continues to be bound by the gag order provision. You can find the associated Memorandum of Law here.

Like The Cato Institute’s action, the motion in this case contends that the gag rule is a content-based restriction on speech, and an unlawful prior restraint under the 1st Amendment.

John Jenkins