According to this Reuters article, the world’s largest asset manager has a message for boards – we expect you to act on climate change risk & gender diversity – and if you don’t, you may not be able to count on our vote.
BlackRock recently posted its 2017-2018 engagement priorities, and these issues are at the top of the list. When it comes to gender diversity, BlackRock’s clearly communicates its expectations – and the potential consequences for companies that disappoint them:
Over the coming year, we will engage companies to better understand their progress on improving gender balance in the boardroom. Diverse boards, including but not limited to diversity of expertise, experience, age, race and gender, make better decisions. If there is no progress within a reasonable time frame, we will hold nominating and/or governance committees accountable for an apparent lack of commitment to board effectiveness.
BlackRock’s message on climate change is equally forceful:
For directors of companies in sectors that are significantly exposed to climate risk, BlackRock expects the whole board to have demonstrable fluency in how climate risk affects the business and management’s approach to adapting and mitigating the risk. We have the same expectation of boards wherever a company faces a material, business-specific risk. We would assess this both through corporate disclosures and direct engagement with independent board members, if necessary.
BlackRock also makes a push for more and better disclosure of climate risks. As with board diversity, BlackRock indicates that it will use its vote to pressure companies who lag on addressing & disclosing climate change issues – and may vote against the re-election of certain directors it deems most responsible for board process and risk oversight.
BlackRock’s emphasis on climate change engagement responds to a now withdrawn shareholder proposal calling upon it to “walk the walk” on climate change. The proposal – which Broc blogged about last year – criticized BlackRock’s proxy voting record on climate change shareholder proposals & called on it to review its voting policies.
Activism: Has Chief Justice Strine Become “Wolfsbane”?
According to this CNBC article, Leo Strine – Delaware’s “secretly powerful” chief justice – says that hedge funds are “wolves” who damage ordinary investors. Here’s an excerpt:
Strine’s main argument is that the “current corporate governance system … gives the most voice and the most power to those whose perspectives and incentives are least aligned with that of ordinary Americans.”
That has allowed such investors to act and manipulate decisions by corporations that often are not in the long-term best interest of average shareholders, he said. He points to the “continuing creep toward direct stock market control of public corporations,” which he says bears no accountability toward human investors.
Strine’s ideas are laid out in an upcoming Yale Law Journal article, and are consistent with his prior writings expressing concern about whether financial intermediaries appropriately represent the interests of the people whose money they invest.
The Chief Justice’s hedge fund critics have responded to his most recent volley by saying that a justice should not be on the record “condemning a group of people who tend to litigate in his court and the lower Delaware courts,” and that he doesn’t offer much in terms of a fix for what he sees as a flawed system. None of these critics would agree to be quoted – “fearing retribution from Strine.”
Strine doesn’t condemn all hedge funds – his argument is a little more nuanced than that, and focuses on the need to take consider the impact of short-term activist strategies on the lives of the human beings institutions purport to represent. He also speaks well of an alternative approach that at least one leading hedge fund has already adopted:
Evidence suggests that hedge fund activism is perhaps most valuable when it involves a somewhat rougher form of relationship investing of the kind for which Warren Buffet is known. The activist may need to knock a bit loudly, but once let in, assumes the duties and economic consequences of becoming a genuine fiduciary with duties to other stockholders and of holding its position for a period of five to ten years, during which it is a constructive participant in helping the rest of the board and management improve a lagging company. Nelson Peltz and his Trian Fund Management might be thought of in this manner.
Chief Justice Strine’s an intimidating guy – but he’s hardly the first Delaware judge to use his position as a “bully pulpit.” Members of the Chancery Court have often written and spoken outside of the courtroom during their tenure – including current Vice Chancellor Travis Laster & former Chancellor William Allen. That’s just how they roll in Delaware. Other litigants don’t appear to have been too daunted by the scholarship of these “secretly powerful” figures.
This Perkins Coie memo reviews the 9th Circuit’s recent decision in Somers v. Digital Realty – which held held that employees who report securities law violations internally, but not to the SEC, are still protected as “whistleblowers” under Dodd-Frank. The ruling aligns the 9th Circuit with the 2nd Circuit and against the 5th Circuit – and the split may be heading for the Supreme Court.
This blog from Steve Quinlivan flags a recent Executive Order that could result in a major shake-up among federal agencies. Here’s an excerpt:
President Trump has issued an Executive Order directing the Director of the Office of Management and Budget (Director) to propose a plan to reorganize governmental functions and eliminate unnecessary agencies (as defined in section 551(1) of title 5, United States Code), components of agencies, and agency programs.
The Executive Order directs the head of each agency to submit to the Director a proposed plan to reorganize the agency, if appropriate, in order to improve the efficiency, effectiveness, and accountability of that agency. The submission must be made within 180 days of the date of the order.
The Executive Order contains a laundry list of factors to be considered by the Director in formulating a reorganization plan – including whether any agency functions would be better left to state or local governments or the private sector. It also requires the OMB’s director to invite public comment on improvements in the organization and functioning of the executive branch, and to consider those comments when formulating the proposed reorganization plan required by the order.
SEC Enforcement: Budget Cuts Looming
Last month, the House Financial Services Committee delivered a sharp rebuke to the SEC’s preliminary budget request – & signaled that the SEC’s recent priorities don’t align with those of House Republicans. Here’s an excerpt from the Committee’s memorandum addressing the request:
The Committee remains concerned that despite receiving significant annual appropriations increases, the SEC has neither met statutory deadlines for the issuance of rulemakings nor significantly improved its annual examination rates for investment advisers. Instead, the SEC has prioritized other objectives that are not central to its mission. For example, the SEC has expended thousands of man-hours and tens of millions of dollars in pursuit of Dodd-Frank mandates unrelated to the causes of the financial crisis while its capital formation objectives languish.
What “other objectives” that the agency has prioritized are likely to be on the budgetary chopping block? Bloomberg reports that the SEC’s Division of Enforcement is front & center, and notes a recently-imposed travel ban is likely the tip of the iceberg:
The measure is part of a series of cuts that the enforcement department – the division responsible for policing federal securities laws – is implementing as it braces for deep spending reductions in President Donald Trump’s budget proposal, according to two people with knowledge of the matter. In addition to the ban on non-essential travel, the department has also imposed a hiring freeze and curbed the use of outside contractors who assist SEC lawyers with cases.
Also, based on the Committee’s reaction to its request, the SEC can forget about a new HQ building.
Cybersecurity: Director Liability for Data Breaches
This Bass Berry memo reviews case law dealing with the potential liability of directors for data breaches. As this excerpt notes, there’s good news & bad news:
As a rising number of companies experience data breaches, director liability lawsuits have inevitably followed. Thus far, however, these suits have been uniformly unsuccessful, failing to move past the motion to dismiss stage. In 2016, despite a continued reluctance on the part of courts to permit these cases to move forward, plaintiffs persisted in pursuing such claims.
Despite their lack of success, the memo speculates that plaintiffs will continue to pursue similar derivative litigation in the hope that they can identify the right legal theory – or the right set of facts.
Snap launched its highly anticipated IPO earlier this month. The deal may be done, but questions about Snap’s no-vote stock remain. This blog from Jim Moloney & company at Gibson Dunn points out that Snap’s capital structure raises some important issues that have escaped most people’s attention. Here’s an excerpt:
The NYSE, NASDAQ, and other self-regulating organizations have rules requiring the submission of certain transactions to a shareholder vote, such as a change of control transactions or certain issuances of more than 19.9% of the Company’s outstanding shares. With most shareholders lacking any voting rights altogether, how Snap and other companies that may follow in their wake can cleanse such transactions via disinterested shareholder approval remains an open question.
Snap’s structure may also put it in a bit of a bind when it comes to the standard of review that courts will apply to major board decisions:
While the presence of non-voting shares does not itself preclude a review under the business judgment standard, it seems one practical effect of Snap’s voting structure is that it may serve to hamper the company’s ability to seek shareholder ratification from disinterested shareholders or other procedural safeguards (e.g., obtaining a “sterilized vote” – from a majority-of-the-minority) that could otherwise help shield the directors’ actions from heightened judicial scrutiny.
Snap: The Debate Over Voting Rights Continues
Meanwhile, the broader debate over Snap’s issuance of non-voting shares rages on. This Reuters article reports that Snap’s capital structure was a topic of discussion at a recent meeting of the SEC’s Investor Advisory Committee. In addition, the IAC has asked the agency to look into whether the non-voting status of Snap’s shares will reduce “public disclosure on executive pay or governance matters.” (Actually, anticipated pay & governance disclosures are spelled out in detail in the “Risk Factors” section of the prospectus – see page 40.)
On the heels of the IAC’s actions, the Council of Institutional Investors is reportedly lobbying the major indices to exclude Snap, because “they’re tapping public markets but giving public shareholders no say.”
I just have one simple question – “What did some of these institutions think they were buying?” Sure, the investment decisions & voting decisions at most institutions come from different sides of the house, but that only goes so far. The fact that many institutions were frothing at the mouth to buy non-voting shares from this company a couple of weeks ago really takes the wind out of the sails of their governance complaints.
Update: Several folks have pointed out that the CII is advocating on behalf of index funds. Those funds – unlike many of the institutions who bought in the deal – won’t have any choice but to buy the stock if Snap’s no-vote shares get included in a relevant index. That’s a fair point, and I shouldn’t have lumped them in with the others.
Conflict Minerals Case: Final Judgment’s on the Way
Cooley’s Cydney Posner blogs that it’s time to say “so long” to the conflict minerals case:
The parties to the conflict minerals case have filed in the D.C. District Court a “Joint Status Report,” which requests that the Court enter a final judgment in accordance with the decision of the Court of Appeals. As a result, it will be case closed for National Association of Manufacturers v. SEC, which decided that the requirement in the conflict minerals rule to disclose whether companies’ products were “not found to be DRC conflict free” violated companies’ First Amendment rights.
Once the final judgment is in hand, the rule’s fate rests with the SEC. Although the agency is reviewing the rule, for now, it’s business as usual in terms of annual conflict minerals disclosure requirements.
Here are the results from a recent survey on board minutes & auditors:
1. When it comes to board minutes, our company:
– Provides copies of board minutes to auditors upon request in electronic form only – 48%
– Provides copies of board minutes to auditors upon request in paper form only – 7%
– Provides copies of board minutes to auditors upon request in electronic and paper form – 13%
– Doesn’t provide copies of board minutes to auditors – but we do allow inspection of minutes onsite – 31%
– Doesn’t provide copies of board minutes to auditors – nor do we allow inspection of minutes onsite – 1%
2. Our auditors ask for copies or inspection of board minutes:
– Each quarter – 97%
– Once a year – 1%
– On irregular basis – 2%
– They never ask for board minutes – 0%
Revenue Recognition: New Disclosures Will Be a Challenge
Speaking of auditors, Deloitte provides this heads up on the disclosure requirements associated with the implementation of FASB’s new revenue recognition standard. For some companies, the new standard will require them to completely rework their income statements, but all companies will have to grapple with several new disclosure requirements:
The new standard will require entities to disclose much more information about revenue activities and related transactions than they do currently. Consequently, they will need time to implement and test appropriate processes, internal controls, and disclosure controls and procedures (including the identification of relevant personnel and information systems throughout the organization) for (1) data-gathering activities, (2) the identification of applicable disclosures on the basis of relevance and materiality, and (3) the preparation and review of disclosures, including the information that supports such disclosures.
Companies are going to need to be ready to address all of the new disclosure requirements in their first filing after implementation. Deloitte predicts that things could get messy:
The requirement to consider disclosures as part of preparing quarterly or year-end financial statements most likely will significantly affect an entity’s ability to meet reporting deadlines that are already tight (particularly for SEC filings). In addition, an entity may be unable to obtain the information it needs to satisfy the disclosure requirements (e.g., because of problems related to the collection, preparation, or review of data needed for disclosures), which could result in late filings and the identification of deficiencies in internal controls (e.g., material weaknesses).
New disclosure requirements that may prove challenging to implement include those relating to performance obligations, judgments & estimates, contract balances, and disaggregation of revenues.
The Time May be Ripe for a Debt Buyback
This O’Melveny memo says that the current climate of market uncertainty & the potential for interest rate increases makes this a good time for issuers to think about repurchasing some outstanding debt. This excerpt summarizes the available alternatives for debt buybacks:
Cash repurchases of debt generally can be structured as open-market or private repurchases, cash tender offers, or redemptions pursuant to the contractual terms of the governing indenture. These methods vary in terms of implementation time, cost, and the portion of a given debt series that can be repurchased at one time. The scale of repurchases and the structure used may also depend on restrictive covenants in the company’s indentures and other agreements, as well as the availability of operating losses to offset any taxable gains resulting from the repurchases.
The memo reviews the mechanics of each alternative & addresses the disclosure and tax aspects of a debt repurchase.
According to a recent BTI study, the number of businesses facing “bet-the-company” litigation has quadrupled since 2014. BTI interviewed over 300 lawyers at US companies with more than $1 billion in annual revenues, & over 50% of those companies reported dealing with bet-the-company suits in 2016. This compares to 37% in 2015 and just 12% in 2014.
Big-ticket litigation is widely perceived to be a uniquely American phenomenon, but Kevin LaCroix has been following developments on the international front – & there may be storm clouds gathering there as well, as this excerpt from a recent D&O Diary blog suggests:
A number of high-profile cases are now working their way through European courts. These cases are being closely watched and their progress could affect the likelihood of further future litigation. If the claims are successful, they could “pave the way” for similar shareholder actions in the future.
These cases include actions in the U.K. involving RBS and Tesco, as well as actions filed in Germany against Volkswagen.
D&O Liability: On the Rise Globally
Consistent with these litigation trends, this recent Allianz study says that D&O liability exposure is increasing across the globe. Here’s an excerpt from the study’s executive summary:
Tightening regulations, emerging technologies, increasing shareholder activism, intensifying class action litigation activity, escalating merger objections and IPO activity and the rise of regulator activism are among the many challenges facing corporate directors and officers. Executive liability is increasing yearly, particularly in areas such as employment and data protection.
The study flags the growing influence of third party litigation funders in the growth of collective actions & notes the impact of an increasingly aggressive regulatory environment on D&O liability:
There is a growing trend towards seeking punitive and personal legal action against officers for failure to follow regulations and standards. According to AGCS analysis, the number one cause of D&O claims by number and value is non-compliance with laws and regulations.
Take Shelter: The Securities Litigation Storm is Here!
I feel a bit like the prophet Jeremiah this morning – so here’s some more glum news from the D&O Diary, which provides this summary of Cornerstone Research’s annual class action review:
There were a record 270 securities class action lawsuits filed in 2016, which is 44 percent greater than the number in 2015 (188) as well as the average number of class action lawsuits filed during the period 1997-2015 (also 188). The filing activity increased as the year progressed; the number of filings in the second half of 2016 was 21 greater than in the year’s first half. The filing activity in the second half of 2016 was the highest for any semiannual period between 1996 and 2016.
What’s driving the increase? Delaware’s hostility toward disclosure-only settlements is a big part of the story:
Much of the increase in 2016 filing activity is attributable to the increase in federal court merger objection filings; there were 80 federal court merger objection lawsuit filings during the year, more than four times greater than the number in 2015 (as plaintiffs’ lawyers shifted their filings from state court to federal court, as a result of Delaware state court rulings hostile to the kind of disclosure-only settlements that largely characterize the resolution of these cases). The 80 federal court merger objection lawsuit filings during 2016 was the highest number since Cornerstone Research first began separately tracking the M&A lawsuits in 2009.
The litigation exposure of US exchange-listed companies was the highest in 20 years. To put that more concretely, during 2016, approximately 1 in 25 listed companies was the subject of a “traditional” class action lawsuit – and that number doesn’t include merger objection suits!
Have a nice day, everybody. If you need me, I’ll be hiding under my desk.
As we’ve noted in several prior blogs, in recent months, the SEC’s Division of Enforcement has made a cottage industry out of going after companies with provisions in their standard severance agreements that it believes may discourage whistleblowing. In addition to these SEC actions, last year, Congress enacted legislation – the Defend Trade Secrets Act, or DTSA – protecting whistleblowers who disclose trade secrets.
This Perkins Coie memo provides some suggested language for inclusion in severance agreements to address the issues identified by the SEC & to conform to the DTSA’s requirements. Here’s an excerpt with the language:
Savings Clause for Confidentiality Provisions. The “savings clause” BlueLinx agreed to include in its severance agreements to resolve the SEC’s charges is broader in its application than Rule 21F-17 requires. We continue to recommend the shorter version:
“Nothing in this agreement is intended to or will be used in any way to limit employees’ rights to communicate with a government agency, as provided for, protected under or warranted by applicable law.”
Waiver for Severance Agreements. Severance agreements should also include waiver language designed not to violate Rule 21F-17’s prohibition on interference with SEC whistleblower activity:
“Employee agrees to waive the right to receive future monetary recovery directly from Employer, including Employer payments that result from any complaints or charges that Employee files with any governmental agency or that are filed on Employee’s behalf.”
Because this does not require an employee to waive the right to any future monetary recovery from the government in connection with any communication the employee may have with the SEC, there is no violation of Rule 21F-17.
DTSA Language. To comply with the DTSA, we suggest this language in governing the use of trade secrets:
“Employee may not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that: (a) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document that is filed under seal in a lawsuit or other proceeding.”
Non-GAAP: Corp Fin Focused on “Equal or Greater Prominence”
This Andrews Kurth memo reviews recent Corp Fin Staff comments & enforcement activity surrounding presentation of non-GAAP information – and notes the heavy focus on Item 10(e)’s “equal or greater prominence” requirement. Here’s an excerpt discussing recent comments:
Following the issuance of the May 2016 guidance, the Staff increased its focus on the prominence requirement by issuing comments related to issuers’ failure to comply with the requirement. These comments have included, among other things, a failure to:
– Describe or characterize the most comparable GAAP measure in equally prominent terms if a characterization was provided for the non-GAAP measure (for example, “strong overall results” and “record EBIT”);
– Present the most comparable GAAP measure first in a tabular presentation, including in the required quantitative reconciliation (meaning that the reconciliation should begin with the GAAP measure instead of the non-GAAP measure);
– Present the GAAP measure first in the body of an earnings release or in its headline;
– Provide similar percentages or prior period amounts for the GAAP measure when provided for the non-GAAP measure; and
– Include the required disclosure if the issuer relies on the “unreasonable efforts” exception to exclude a quantitative reconciliation for forward looking non-GAAP measures, specifically identifying the information that was unavailable and its probable significance.
Many comments issued during the second half of 2016 were “futures” comments, but the memo says that after an apparent grace period the Staff may increasingly require amendment of prior filings.
Broc & John: The OTC White Paper & The Absence of Snow
We were in the midst of our strategic planning meetings in Siesta Key when Broc suddenly leapt from his chair, smashed his glass on the floor & shouted – “I can whup any man in this bar!” A group of large gentlemen in motorcycle jackets seemed eager to take Broc up on his challenge. At this point, I suggested that we head to the beach for another podcast – and that’s how this 4-minute podcast on DERA’s OTC White Paper & the Absence of Snow came to be. Anyway, that’s my story & I’m stickin’ to it.
This podcast is also posted as part of our “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
This Baker Donelson memo discusses Wadler v. Bio-Rad Laboratories – a recent whistleblower retaliation case in which a jury awarded a former general counsel $8 million. This case is particularly interesting because the plaintiff was permitted to use attorney-client privileged information in support of his claims:
In a seminal trial court decision, the federal court in the Northern District of California ruled in a whistleblower retaliation case that a fired general counsel of Bio-Rad Laboratories could use as evidence otherwise privileged materials. The Sarbanes-Oxley Act’s protection of whistleblowers preempted the attorney-client privilege and provided key evidence leading to an $8 million jury verdict in plaintiff’s favor.
The former general counsel raised concerns about suspected illegal payments in violation of the Foreign Corrupt Practices Act that led to his termination. After he unsuccessfully reported to management, he went to the audit committee, whose internal investigation concluded no violation had happened.
IPOs: First Publicly Traded Benefit Corp Hits the Market
Rick Alexander at B Lab blogs that Laureate Education has just become first publicly traded “benefit corporation” – and he isn’t a shrinking violet when it comes to expressing his views on the importance of this milestone:
The most important event to take place in the financial world in 2017 has already happened. It was a simple stock offering. But one facet of that otherwise unremarkable transaction signals that the capital markets are open to a change that might just save the planet.
On January 31, Laureate Education completed an initial public offering, raising $490,000,000. Laureate was the first company to go public as a “benefit corporation,” a corporate form that did not even exist ten years ago. While 4,500 benefit corporations have now been created, each of them was privately held until last week’s IPO.
We’ve previously blogged about benefit corporations – which are organized under separate corporate statutes designed to permit boards to consider additional stakeholders alongside shareholders, & give the board discretion to determine the relative weight to place on shareholders’ and other stakeholders’ interests. The “B Corp” concept has gotten a lot of traction in recent years – 30 states now have benefit corporation statutes – and it will be interesting to see how the concept fares among public investors.
There’s one point in Rick’s blog that I want to correct – although Laureate is the first benefit corporation to go public in the US, it isn’t the first publicly traded benefit corporation. As Broc noted several years ago, that honor goes to Natura, which is Latin America’s largest cosmetics company & is publicly traded in Brazil.
Update: Cydney Posner points out that Laureate’s IPO took quite some time to cross the finish line – she first blogged about it in 2015!
Our “Q&A Forum”: The Big 9000!
In our “Q&A Forum,” we have blown by query #9000 (although the “real” number is much higher since many of the queries have others piggy-backed on them). I know this is patting ourselves on the back, but it’s over 15 years of sharing expert knowledge and is quite a resource. Combined with the Q&A Forums on our other sites, there have been well over 28,000 questions answered.
You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis & that any answers don’t contain legal advice.
Last week, I blogged about problems retail investors have had with the use of company websites to distribute earnings releases. Here’s a different type of problem – technical snafus on the earnings call itself. Hey, it happens – so what should you do if it does? Sysco experienced technical problems that prevented some listeners from hearing its recent earnings webcast. Check out this 8-K filing to see how Sysco addressed that problem. Other companies have dealt with technical problems too – these recent 8-K filings by Devon Energy and Premier addressed similar situations.
The short answer in these situations seems to be to furnish an 8-K under Items 2.02 (Results of Operations & Financial Condition) and 7.01 (Reg FD Disclosure), and attach a copy of your earnings call transcript and any other relevant communications to investors about the glitch.
Sysco’s 8-K also includes upfront references to the GAAP information that’s most comparable to the non-GAAP information that it used during its conference call. Although this information is already included in the presentation slides, my guess is that the decision to put it in the body of the 8-K itself represents an effort to conform to Item 10(e) of S-K’s “equal or greater prominence” requirement – which wouldn’t have applied to the conference call, absent the decision to file the materials in response to the glitch.
Earnings Calls: The Trump Factor
This WSJ article notes that there’s a new “elephant in the room” during corporate earnings calls – the President of the United States:
Of the 242 companies in the S&P 500 index that held conference calls or other investor events in January, half mentioned Mr. Trump directly or indirectly, according to a Wall Street Journal analysis of transcripts.
When CEOs or analysts discussed Mr. Trump on conference calls, indirect references were more common. Mr. Trump’s name was used about a third of the times that participants mentioned him or his administration. Half the time, participants simply invoked the “new administration.”
The article says that most references to the new president were full of praise, and criticism was muted. That shouldn’t come as a surprise – after all, as this article points out, nobody wants their company to be on the receiving end of one of POTUS’s tweetstorms.
By the way, if your company does find itself in the cross-hairs of the leader of the free world’s Twitter account, don’t despair – this Cleary memo provides advice on how to deal with the situation.
Delaware: Decision on Supermajority Bylaw May Have Broad Implications
I recently blogged about the Delaware Chancery Court’s decision in Frechter v. Zier – where it invalidated a bylaw requiring a supermajority stockholder vote to remove a director. This K&L Gates memo says that the Court’s decision may have an impact on other bylaws purporting to require a supermajority vote for shareholder action:
This decision also has broader implications for any bylaw provision requiring supermajority stockholder votes to take action for which the DGCL provides a specific voting threshold. Post-Frechter, some examples of potentially problematic bylaw provisions include bylaws providing for a supermajority stockholder vote for the approval of mergers, significant asset sales and dissolutions, all of which explicitly require a simple majority vote of a corporation’s stockholders under the DGCL. Corporations should consider moving any such supermajority voting requirements from bylaws to the certificate of incorporation.
However, the memo notes that bylaw provisions requiring a supermajority vote to amend the bylaws themselves are likely still valid following Frechter.
Update: This Weil blog points out that an earlier Delaware bench ruling suggests that similar provisions in the certificate of incorporation may also be unenforceable.
Mike Piwowar may only be “Acting” SEC Chair – but he’s never going to be accused of just keeping the seat warm for Jay Clayton. This WSJ article reports that Piwowar has revoked subpoena authority from about 20 senior Enforcement staffers. That action leaves the Director as the sole member of the Division of Enforcement with the authority to approve a formal order of investigation & issue subpoenas.
Traditionally, the Staff had to obtain the full SEC’s sign-off on a formal order before issuing subpoenas. Former Chair Mary Shapiro gave the Staff temporary subpoena power in 2009, in the wake of the Bernie Madoff fiasco – & the SEC adopted a rule making that authority permanent a year later. Interestingly, because that rule was deemed to relate solely to internal agency procedures, the SEC adopted it without notice & an opportunity to publicly comment.
Acting Chair Piwowar has long been a critic of both the delegation of this authority to the Staff & the manner by which the SEC accomplished it. Here’s an excerpt from his 2013 remarks to the LA County Bar:
Finally, the delegation of authority for approval of formal orders was deemed by the Commission to relate solely to agency organization, procedure, and practice, and therefore not subject to the notice and comment process under the Administrative Procedure Act. The mere fact that we can institute certain rules without obtaining comment from the public does not necessarily mean that we should. Given the significant ramifications for persons who are on the receiving end of a subpoena issued pursuant to a formal order, we should make sure that public comment is allowed on any review of the formal order process.
This action – which ironically occurred without a public announcement – is consistent with Piwowar’s longstanding concerns that the Staff has had too much power & too little oversight when it comes to investigations.
Conflict Minerals Case: Is a Final Judgment Looming?
This blog from Steve Quinlivan reports that a final judgment from a DC federal district court in the long-running challenge to the SEC’s conflict minerals rule may be on the horizon. Judge Jackson has ordered the parties in National Association of Manufacturers, et al, v. SEC to file a joint status report by March 10, 2017 “indicating whether any further proceedings are necessary, and whether the Court should enter an order of final judgment to effectuate the Circuit’s decision.”
As Broc blogged at the time, the DC Circuit previously rejected the SEC’s appeal of an earlier ruling holding that the rule’s requirement to disclose whether products were “not found to be DRC conflict free” violated the 1st Amendment.
Acting SEC Chair Mike Piwowar recently announced that Corp Fin’s 2014 guidance for compliance with the conflicts minerals rule was also under scrutiny by the agency.
The effectiveness of risk management programs generally, as well as legal/regulatory compliance, cyber security risk, and the company’s controls around risks, topped the list of issues that survey participants view as posing the greatest challenges to their companies. It’s hardly surprising that risk is top of mind for audit committees—and very likely, the full board—given the volatility, uncertainty, and rapid pace of change in the business and risk environment. More than 40 percent of audit committee members think their risk management program and processes “require substantial work,” and a similar percentage say that it is increasingly difficult to oversee those major risks.
“Tone at the top,” corporate culture & short-termism also feature prominently in audit committee concerns.
Spanking brand new. By popular demand, this comprehensive “Form S-3 Handbook” covers the entire terrain, from “baby shelfs” to “automatic shelfs” and everything in between. This one is a real gem – 108 pages of practical guidance – and it’s posted in our “Form S-3” Practice Area.
T+2 Settlement Adopted – But Firm Commitments Stay Put
Bryan Pitko notes that the SEC approved the Nasdaq & NYSE’s proposal to move from a three-day (T+3) to a two-day (T+2) settlement cycle for securities transactions. However, despite earlier concerns, it looks like firm commitment underwritings may continue to follow a T+4 settlement cycle. Here’s an excerpt from the blog:
The SEC’s adopting release does not, however, address the shortening of the T+4 settlement standard currently in place for certain firm commitment offerings under the exemption in Rule 15c6-1(c), as previously discussed in our prior posting (available here). It appears that, for now, despite contemplating such a change and soliciting for comment in the proposing release, the SEC and SROs are content to retain T+4 settlement for firm commitment offerings.
You Can Go Home Again (If You’re Mary Jo White)
The NYT Dealbook reports that Mary Jo White has decided to return to Debevoise & Plimpton, the firm she left when President Obama appointed her to serve as the SEC Chair. She joins former SEC Enforcement Director Andrew Ceresney, who also returned to Debevoise when he left the agency at the end of last year.
