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One open question from the Supreme Court’s Liu decision relates to determining “legitimate expenses” that must be deducted from disgorgement awards so the “net profits” can be distributed to victims. At a recent SEC Speaks conference, Enforcement Division Chief Counsel Joseph Brenner and Chief Litigation Counsel Bridget Fitzpatrick provided insight for those trying to understand what might constitute “legitimate expenses” in context of a disgorgement award. This McGuireWoods memo summarizes remarks from the conference, including these relating to determining legitimate expenses:

Chief Counsel Brenner noted that the Enforcement Division would be on the lookout for “expenses” that in its view were just wrongful gains under another name, such as expenses that furthered the scheme, or deductions for the defendant’s personal services to the fraudulent enterprise. If defense counsel believe there are legitimate expenses that should be deducted from a potential disgorgement amount, Chief Counsel Brenner recommended counsel to consider the following questions:

1. What makes the expense legitimate within Liu’s framework — in particular, did the expense provide actual value to investors, was the expense consistent with how investors understood their money would be used, or is the expense really just disguised profits?

2. If the expenses are legitimate, how closely were those expenses tied to the unlawful profits? Thus, the Enforcement Division may not view all “legitimate” expenses as deductible if they were in furtherance of the violation.

3. What is the right amount of the offset?

With respect to the third point, Chief Counsel Brenner stated that, in the Enforcement Division’s view, counsel must come prepared to demonstrate both the entitlement to a deduction for a legitimate expense and its amount. Based on practical experience gained since Liu, the Staff stated that counsel can make a more persuasive case for a reduction from the full amount of disgorgement by doing the work up front to support both the basis for the deductible legitimate expense and, critically, its amount. In the Staff’s view, it is not sufficient for counsel to claim it is too difficult or resource-intensive to quantify the expense, or to claim that the analysis supporting a request was work product that the Staff could not review.

NYSE Proposes Changes to Shareholder Approval Requirements for Certain Equity Issuances

In early October, the NYSE proposed changes to its rules on shareholder approval requirements relating to certain equity issuances set forth in Section 312.03 of the NYSE Listed Company Manual. In the proposed amendments, the NYSE notes that the changes would make the NYSE’s rules for cash sales to related parties substantively identical to those of Nasdaq. This Mayer Brown blog walks through the proposed amendments that would affect Section 312.03(b) and 312.03(c), here’s an excerpt:

The NYSE proposes to amend Section 312.03(b) to limit the class of related parties that would require shareholder approval. Section 312.03(b) as amended would require prior shareholder approval only for sales to directors, officers and substantial security holders and would no longer require approval for sales to such related party’s subsidiaries, affiliates or other persons closely related or to entities in which a related party has a substantial interest. Further, Section 312.03(b) as amended would no longer require shareholder approval of issuances of more than 5% of outstanding shares to a related party so long as they are issued at a minimum price. The NYSE proposes to require that any listed company obtain shareholder approval for a transaction in which a director, officer or substantial security holder has a 5% or greater interest (or such persons collectively have a 10% or greater interest) in the company or assets to be acquired or in the consideration to be paid in the transaction and the issuance of shares could result in an increase in outstanding shares of 5% or more.

With respect to Section 312.03(c), the NYSE proposes to replace the reference to “bona fide private financing” with “other financing in which the company is selling securities for cash.” This change would effectively eliminate the 5% limit for any single purchaser but retain the minimum price requirement.

Refreshing Governance Documents – Recent Trends

As companies start preparing now for the coming proxy season, a common to-do item involves reviewing governance documents for any potential updates. Many companies monitor peer companies for governance document changes and a recent Sullivan & Cromwell memo provides a good recap of recent trends in governance documents. The memo acknowledges that many companies have revised governance documents in response to Covid-19 to ensure they’re able to operate remotely.

Among other provisions, the memo discusses refreshment trends for advance notice bylaws, ESG oversight, and federal exclusive forum provisions. One area getting a lot of attention these days is board composition. As companies take steps to ensure governance documents are current and say the right things, the memo is a good reminder to make sure the governance provisions synch with your company’s actual practices. Here’s an excerpt about provisions relating to board leadership and evaluation guidelines:

Shareholders, institutional investors and proxy advisors are now calling for enhanced transparency around why a company’s independent board leadership structure is appropriate for the company. In response, many companies are providing more detail in their corporate governance guidelines regarding their processes for determining their leadership structures, the roles and responsibilities of their board leader(s) and their board evaluation practices.

Acknowledging several of the recent board diversity lawsuits, the memo notes that the plaintiffs’ complaints referenced statements that were included in corporate governance documents, including committee charters and proxy statements. The plaintiffs allege these disclosures do not accurately represent the companies’ practices. As more companies consider whether to provide enhanced transparency around their leadership structures and evaluation practices in their corporate governance guidelines and other governing documents, it is important to ensure that any disclosures remain consistent not only with the company’s other public disclosures, but also with the company’s actual practices.

– Lynn Jokela