Getting them out the door before Keith Higgins’ imminent departure, Corp Fin dropped a whopping 35 new CDIs yesterday, covering a broad range of topics. Here’s the inventory:
– 5 new Exchange Act Forms CDIs: Form 20-F
– 2 new Securities Act Forms CDIs: F-Series Forms
– 7 new Exchange Act Rules CDIs: Rules 3a11-1 to 3b-19
Yesterday, the SEC announced that Enforcement Director Andrew Ceresney will leave the agency by the end of the year. The release notes that the SEC filed more than 2,850 enforcement actions & obtained more than $13.8 billion in monetary sanctions during his tenure. The SEC also charged over 3,300 companies & over 2,700 individuals – including many CEOs, CFOs, & other senior corporate officers. Stephanie Avakian will become the Acting Director of Enforcement.
This announcement is on the heels of the one about Keith Higgins’ pending departure. As Broc blogged a few weeks ago, this exodus of Senior SEC Staffers is normal when the Administration changes hands…
Earnings Calls: Salty CEOs Earn a PG-13 Rating
My language can be a little salty at times – & one of my phobias is letting a profanity slip out at a really inappropriate time. That’s why I took a particular interest in this CNBC piece about CEOs swearing during conference calls. Holy . . . uh. . . Cow – I thought the stats would be much worse!
Corp Fin recently issued a no-action letter to Morgan Stanley regarding the use of “conditional offers to buy” – or “COBs” – in connection with IPOs. COBs are intended to facilitate sales to retail investors by providing a way for them to commit to a deal without having to be available to their financial advisors during the period between pricing and the commencement of trading. This Cydney Posner blog reviews the mechanics of the COB process laid out in Morgan Stanley’s request.
COBs are not a new idea – and have been sanctioned in concept by Corp Fin since at least 1999’s Wit Capital no-action letter. What’s interesting about Morgan Stanley’s letter is that it lays out detailed procedures that are to be followed in using COBs as part of the offering process. The desire to obtain some comfort on those procedures may reflect Morgan Stanley’s past regulatory issues in this area – the bank was fined $5 million by FINRA in 2013 for shortcomings in its IPO procedures applicable to conditional offers & indications of interest.
Whistleblowers: SEC’s 2016 Annual Report
In the wake of its latest 8 figure whistleblower award, the SEC published its 2016 Annual Report to Congress addressing the whistleblower program. Kevin LaCroix at The D&O Diary recently blogged the highlights. These include:
65% of the award recipients were insiders of the entity on which they reported information of wrongdoing to the SEC. Of these insiders, approximately 80% raise their concerns internally or understood that their supervisor or compliance personnel were aware of the violations, before reporting the information to the SEC.
From FY 2012, the first full fiscal year the program was in operation, to FY 2016, the number of whistleblower tips has increased by more than 40 percent. Since the program incepted in August 2011, the agency has received a total of 18, 334 whistleblower tips. In FY 2016, the agency received 4,218, representing an increase of 295 over FY 2015, an increase of 7.5%.
What are the most common categories of whistleblower complaints? During fiscal 2016, corporate disclosures & financials led the pack (22%), followed by offering fraud (15%) and manipulation (11%). The type of violation reported has remained generally consistent over the past five years.
This blog from Keith Bishop directs some pointed criticism at the secretive nature of the whistleblower program.
Whistleblowing: What Does the Future Hold?
This blog from Dorsey & Whitney’s Brynn Vaaler speculates about the future of the SEC’s whistleblower program under the Trump Administration. While it’s too early to know what changes may be in store, some form of the program will likely survive:
Although the current whistleblower program has been criticized by conservative groups such as the U.S. Chamber of Commerce (in part because it does not require whistleblowers to give notice to their employer at the same time they give it to authorities), the program has relatively broad bi-partisan support and has given rise to a cottage industry of law firms specializing in representing whistleblowers.
Whistleblowing supporters include Rep. Jeb Hensarling (R-Texas), chair of the House Financial Services Committee and chief proponent of legislation that would unwind most of Dodd-Frank. Hensarling’s Financial Choice Act – which as Broc recently noted, could profoundly affect the SEC’s ability to adopt regulations – does not touch the existing legislative structure for SEC whistleblower awards. Similarly, although the Trump transition website calls for dismantling Dodd-Frank, it is silent on whistleblowing. As a result, the speculation is that whatever happens to Dodd-Frank, the SEC’s whistleblower program will survive in some form.
The SEC’s settlement with United Continental on Friday shows that it’s a very short trip from a violation of corporate policy to a books & records violation. The proceeding involved United’s decision to re-institute a non-profitable route from Newark Airport in order to benefit the former chair of the Port Authority.
The reinstitution of the route departed from United’s normal procedures and the requirements of its corporate ethics policy. The SEC’s order lays out its view of the legal implications of those departures:
Contrary to United’s Policies, the required written authorization of the Director – Ethics and Compliance Program or of the Board of Directors was not requested or obtained before initiating the South Carolina Route, and, thus, required records were not created or maintained. United thereby violated Section 13(b)(2)(A) of the Exchange Act. United also violated Section 13(b)(2)(B) by failing to devise and maintain a system of internal accounting controls that was sufficient to provide reasonable assurances that assets are used, and transactions are executed, only in accordance with management’s general or specific authorization, including in a manner consistent with United’s Policies.
This Steve Quinlivan blog has more details – & suggests that this proceeding marks the arrival of the “Domestic Corrupt Practices Act.”
“Dela-fornia” Corporations, Part II: Abstentions Won’t Protect A Director
I recently blogged about Keith Bishop’s discussion of the wide-ranging applicability of California’s corporate statute to foreign corporations. Keith recently blogged again on this topic – this time, he focused on Section 316 of the statute, which addresses director liability for unlawful loans & distributions. Here’s an excerpt:
Given the potential for personal liability, some directors, deciding that discretion is the better part of valor, may simply abstain in any vote to approve these actions. However, abstaining is neither valorous nor efficacious. Section 316(b) deems that a director who abstains from voting will be considered to have approved the action if he or she was present at the board or committee meeting at which any of the above actions was taken. To avoid the risk of liability under Section 316(a), a director must either not show up or vote against these actions.
Does this requirement apply to foreign corporations? For the most part, the answer is yes.
“Boardroom War Z”: CII & Canada Take Aim at “Zombie Directors”
As Broc blogged recently on the “Proxy Season Blog,” the Council of Institutional Investors & the Canadian Government have targeted “zombie directors” – directors who failed to achieve a majority vote, yet remain in office. Cooley’s Cydney Posner highlights the CII’s zombie director initiative at Russell 3000 companies, while this FinancialPost article describes proposed legislation that would mandate majority voting for directors of Canadian public companies.
In a press release describing its efforts to have the undead removed from boardrooms, the CII points out that directors who don’t receive majority shareholder support only rarely leave the board:
From 2013 to Oct. 26 2016, uncontested directors in the Russell 3000 did not win majority support 164 times at 104 companies. Total rejections amounted to 195, as 22 directors failed to obtain majority support more than once. Strikingly, out of these 195 rejections, only 36 directors stepped down from their boards as of Oct. 26, 2016. This represents a turnover rate of 18 percent.
Yesterday, the SEC announced that Chair Mary Jo White will leave her position when President Obama leaves office on Inauguration Day. Last week, Broc blogged that Mike Piwowar will almost certainly become interim Chair since he’s the sole sitting GOP Commissioner. Former Commissioner Paul Atkins is heading the financial regulatory transition team for the incoming Administration – and speculation about White’s possible successor has already begun…
Brexit: UK Parliament Must Okay EU Withdrawal
These memos in our “Europe” Practice Area address the recent UK High Court decision to require the UK government to seek approval of British Parliament before notifying the EU of its intention to withdraw. A few weeks ago, the High Court held that the government did not have the constitutional authority to notify the European Council of the UK’s decision to leave the EU without the prior approval of Parliament. The UK government has announced that it intends to appeal the judgment to the UK Supreme Court. That appeal will be heard in December, with a ruling expected in January…
Brexit: Topics for Audit Committees & Management
This Grant Thornton memo gives some advice to audit committees about the topics that they should discuss with management as a result of Brexit. These include:
– Does management have a strategic plan to manage risks and lessen negative effects? Has the organization done a thorough Brexit risk assessment? What hedging strategies are in place for foreign exchange exposure and how does Brexit affect those strategies? To what extent is the company exposed to debt denominated in pounds sterling?
– How will Brexit affect the carrying value of assets or business units exposed to the UK or EU?
– Will the company see significant translation gains and losses in terms of functional currency? Are foreign subsidiaries using the right functional currency?
– How will Brexit affect historical guidance? How will Brexit affect customers and suppliers and the company’s interactions with them? How will this affect existing guidance?
– What are the implications for communications? How and what does the company plan to communicate to stakeholders about the effect of Brexit – including investors, customers, vendors and employees?
– How will Brexit affect the company’s financial statements? For entities that have significant exposure, what should they expect to see in the June 30 quarter, and what might they see going forward?
The audit committee & management should also discuss what kind of additional regulatory compliance and reporting burdens might result from Brexit, as well as whether there are potential benefits – such as lower borrowing costs resulting from a delay in Fed interest rate increases.
This blog from Steve Quinlivan notes a recent settled SEC enforcement proceeding against PowerSecure International involving allegedly inadequate segment reporting. Here’s an excerpt:
According to the SEC, PowerSecure’s Form 10-K for the year ended December 31, 2015, outlined errors in prior period disclosures and revised its segment reporting disclosure to reflect information for the years ended 2012 to 2014 on a basis consistent with its 2015 reportable segments. In its 2015 filing, PowerSecure also concluded that its disclosure controls and procedures for that three year period were not effective due to a material weakness in its internal control over financial reporting that it identified in 2015 related to its misapplication of GAAP related to segment reporting.
Segment reporting has long been an area of intensive focus by Corp Fin. Determining the appropriate reportable segments is often a complex process involving a lot of judgment – & this means that staff comments often create some anxiety for a company’s accounting personnel.
In my own experience, I’ve seen a number of clients receive multiple, highly detailed comments probing how they determined their reportable segments. Responding to these comments often results in several rounds of follow-up comments – & has occasionally culminated in a Staff request for a conference call involving several Staff accountants & senior company officials. Those calls are fun. . .
This is another area where a regular review of peer company comments & responses can be a very valuable exercise. Comment letters often provide an early warning of the Staff’s interest in segment reporting practices within a particular industry & allow companies to see how their peers have responded to challenges to their own decisions about reportable segments.
For many years, I have been raising the possibility of climate change-related corporate and securities litigation. However, despite my best prognostication, the climate change-related corporate and securities lawsuits have basically failed to materialize – that is, until now. On November 7, 2016, investors filed a purported securities class action lawsuit in the Northern District of Texas against Exxon Mobil Corporation and certain of its directors and officers.
The lawsuit specifically references the company’s climate change-related disclosures, as well as the company’s valuation of its existing oil and gas reserves. One lawsuit doesn’t make a trend, and many of the lawsuit’s allegations relates specifically to Exxon Mobil and its particular disclosures. Nevertheless, the filing of the lawsuit raises the question whether there may be other climate change-related disclosure cases ahead.
Securities Class Actions: Are We Headed into a Perfect Storm?
Here’s an excerpt from this blog by Lane Powell’s Doug Greene:
Although I don’t know if we’re about to enter a period of quirky cases, like stock options backdating, I’m confident that we’re going to experience a storm of securities class actions caused by a convergence of factors: an increasing number of SEC whistleblower tips, a drumbeat for more aggressive securities regulation, a stock market poised for a drop, and an expanded group of plaintiffs’ firms that initiate securities class actions.
The first Schedule 14N! Back in July, Broc ran a poll asking when we’d see the first proxy access nominee – only 11% of responders thought it would happen this year. The other 89% were wrong – including the 24% who said ‘never’! Here’s the intro from this Gibson Dunn blog:
In what appears to be the first use of a company’s proxy access bylaw, GAMCO Asset Management filed today a Schedule 13D/A and a Schedule 14N announcing that it has used the proxy access bylaw at National Fuel Gas (NFG) to nominate a director candidate for election at NFG’s 2017 Annual Meeting. According to the 13D/A, GAMCO and its affiliates beneficially own in the aggregate approximately 7.81% of NFG’s Common Stock and yesterday delivered a letter to NFG nominating Lance A. Bakrow to the Board of Directors.
NFG amended its bylaws in March 2016 to include a proxy access bylaw & its terms are pretty typical:
The Bylaws provide that a shareholder, or a group of up to 20 shareholders, owning 3% or more of the Company’s outstanding Common Stock continuously for at least three years may nominate and include in the company’s proxy materials directors constituting up to 20% of the board, provided that the shareholders(s) and the nominee(s) satisfy the bylaw requirements. Here is NFG’s proxy access bylaw.
In this blog, Davis Polk’s Ning Chiu also lays out the circumstances…
Delaware Says “No” to Director’s Books & Records Request
Every now & again there’s a case that isn’t likely to have a big practical impact, but is worth noting just because it exists – and the Delaware Chancery Court’s recent decision in Bizarri v. Suburban Waste Services is that kind of case. Most corporate lawyers believe that directors have a virtually unlimited right to access books & records. As this blog from Francis Pileggi notes, it turns out that there are some limits after all:
This opinion provides a rare instance in which the court denies a director unfettered access to the books and records of a corporation on whose board he serves, but this case also involves somewhat extreme facts which are not often replicated.
The court found during trial that the director and stockholder, who was also a member and manager of an affiliated LLC, engaged in efforts to compete with and inflict reputational harm on the entities. The plaintiff’s actions in that regard were “driven by his intense hatred of the entities’ other two owners and principals.” Together with the familial relationship of the plaintiff with one of the entities’ main competitors, it makes the “prospect of the plaintiff misusing the books and records both real and troubling.”
There’s a strong presumption in Delaware that a director is entitled to “unfettered access” to books & records – and it’s up to the company to demonstrate an improper purpose. This is one of the rare cases where the company was able to meet that burden.
CEO Succession: Boards Pass Over Corporate “Fredos”
This Stanford study concludes that boards are pretty good about identifying which potential CEO candidates should be “passed over” – like Fredo in The Godfather:
Our data modestly suggests that corporate boards do a reasonable job of identifying CEO talent. Fewer than 30% of the executives passed over among large corporations are recruited by other firms as CEO. Most (over 70%) are not.
If an executive who is passed over has valuable skills that make him or her a viable CEO candidate, it is likely that another corporation would identify and hire that individual. Furthermore, candidates who are recruited to new firms after being passed over appear to perform worse (relative to benchmarks) than those who were selected at the original company.
I guess Fredo also is a good example of the potential dangers of a disgruntled senior executive.
This DLA Piper memo discusses the early returns from the DOJ’s pilot program to encourage FCPA self-reporting and cooperation, and identifies a new enforcement approach – “declinations with disgorgement.” Consistent with the previously disclosed terms of the program, companies avoiding prosecution have agreed to disgorge all profit realized from their violations. Two recent cases in which the DOJ has elected not to pursue FCPA prosecutions also had several other features in common:
In each instance the DOJ cited the fact that the company self-disclosed. But of seeming equal importance were the robustness of the companies’ internal investigations and the sweeping remediation undertaken. Rounding out the reasons for DOJ’s decision to bring no charges were the agreement to disgorge all profits, which each company agreed not to use for any tax deduction or to accept reimbursement from insurance or any other source, and the obligation to continue to fully cooperate.
The obligation to continue full cooperation includes providing “all known relevant facts about the individuals involved in or responsible for the misconduct,” who are expressly carved out of the declination and could still face prosecution.
SEC: Fix Compliance Program Fast to Avoid FCPA Monitor
This BakerHostetler memo shares some important advice from Kara Brockmeyer, Chief of the SEC’s FCPA Unit:
For a company that violated the FCPA, but wishes to avoid a monitor, the company should be making immediate improvements to its compliance program to prevent future violations so that at the end of the investigation it will be able to demonstrate a track record of having an effective program that is working to prevent violations.
Even a state of the art compliance program will not be effective in convincing the SEC not to impose a monitor if the program has been in place only two months. As Brockmeyer noted, “the late to the party company [in implementing effective compliance measures] is much more likely to get a monitor imposed.”
This November-December issue of the Deal Lawyers print newsletter was just posted – & also sent to the printers – and includes articles on:
– Disclaimers & Limits on Claims Outside of the Contract
– Due Diligence: Patient Protection & Affordable Care Act Considerations
– FCC Licenses: The Forgotten Stepchildren of M&A
– Reverse Break-Up Fees: Move Along, Nothing to See Here
– The Takeaways: Two Chancery Decisions on Informed, Uncoerced Stockholder Approval
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
In this edition of “Strange But True Corporate Stories,” we present Hexagon – a Swedish company that held its quarterly earnings call last week. The company had good news to report – sales & earnings were both up. Was there any bad news? No, nothing really. . . well . . .maybe there’s this one tiny issue that wasn’t worth mentioning during the call:
Swedish measurement technology firm Hexagon has defended the time it took to announce the arrest of its chief executive for alleged insider trading after it came to light he was under arrest during last week’s earnings call with analysts.
After being detained in Sweden on Oct. 26, Ola Rollen was allowed by the Swedish Economic Crime Authority to present Hexagon’s third-quarter results in a conference call on Oct. 28, the agency told Reuters on Tuesday, adding two of its police officers were with Rollen during the call. Analysts on the call were not told Rollen had been arrested or that police were in the room.
The company finally announced – three days after the conference call – that authorities had accused its CEO of insider trading in connection with an investment in a Norwegian company.
My favorite part of this story is the idea of two police officers sitting with the CEO while he was on the conference call. I’m sorry, but I can’t get the picture of Joe Friday & Bill Gannon out of my head.
Board Survey: Positive Trends on Cybersecurity
According to this BDO survey, boards are becoming more engaged on cybersecurity issues, investments to defend against cyber-attacks are increasing, and more companies are putting cyber-breach response plans in place.
Approximately three-quarters (74%) of public company directors report that their board is more involved with cybersecurity than it was 12 months ago and 80% say they have increased company investments during the past year to defend against cyber-attacks, with an average budget expansion of 22 percent. This is the third consecutive year that board members have reported increases in time and dollars spent on cybersecurity. The survey also identified improvements in the number of boards with cyber-breach response plans in place (from 45% to 63%).
That’s the good news. The bad news is that only 27% of companies surveyed are sharing information about cyber-attacks with entities outside of their business – a practice that needs to become more prevalent for the safety of critical infrastructure and national security, particularly at larger organizations.
“You’re Fired!”: Board Governance & CEO Turnover
This Stanford study starts with the proposition that one measure of good governance is a board’s willingness to terminate an underperforming CEO, & then looks into what governance characteristics result in stricter board oversight of the CEO. The study concludes that companies are likely to terminate an underperforming CEO, and identifies the following governance factors associated with stricter CEO monitoring:
– Independent/outside directors
– Experienced/engaged directors
– Significant institutional ownership
– Companies with access to replacement candidates
The study also suggests that “busy boards” – those where a majority of the directors serve on three or more boards – provide worse CEO oversight & are less likely to fire an underperforming CEO.
Yesterday, ISS announced the latest release of its governance ratings product – which also was renamed to “QualityScore” from “QuickScore.” Here’s the 139-page technical document. In addition to board diversity and board refreshment areas being added, one area that appears to have been updated involves proxy access – with subscribers now being able to view the details of a company’s proxy access bylaw provision.
Last year, ISS included a question on proxy access, but that was “zero weighted” & was included for informational purposes only. This year, it counts. The QualityScore will give credit to a company for having proxy access – but the existence of any “problematic provisions”- e.g. counting mutual funds under common management as separate shareholders under the aggregation limit, requiring a pledge to hold shares past the annual meeting date, providing the board with broad & binding authority to interpret the proxy access provision or combinations of other problematic provisions – could be deemed sufficient to “nullify the proxy access right” & result in no credit being given. See this Gibson Dunn blog for a larger summary of the changes.
As noted in this blog from Davis Polk’s Ning Chiu, the data verification period began yesterday – and runs through November 11th. QualityScores will be published on November 21st.
By the way, with this rebranding to “ISS QualityScore,” it now has made more name changes than Jefferson Airplane. My favorite was GRid 2.0…although CGQ was nice…
“Hulk-O-Mania” Redux: New Questions on 3rd Party Litigation Funding
If you follow high-brow websites like TMZ and “The Hollywood Reporter” as religiously as I do, you’re no doubt up-to-speed on the controversy surrounding billionaire Peter Thiel’s funding of Hulk Hogan’s recent invasion of privacy suit against Gawker Media. The Hulkster rang the bell to the tune of $140 million in that lawsuit, but Thiel’s role in the case has focused new attention on third-party litigation funding – and that attention hasn’t been limited to the media.
As this D&O Diary blog points out, a pair of recent court decisions in Pennsylvania & Delaware have raised new questions about the legal issues that have long surrounded litigation funding arrangements:
One of the most interesting and important recent litigation-related developments has been the rise of third-party litigation funding. An important part of this development has been the more or less general view that there is nothing improper about these kinds of arrangements and, in particular, that litigation funding does not represent improper champerty or maintenance, as long as the actual plaintiff continues to control the case.
However, a recent decision from a Pennsylvania appellate court suggests that the somewhat unusual litigation funding arrangement involved in an attorney fee dispute was “champertous” and therefore invalid. This decision and another recent decision from Delaware nullified the specific funding arrangements presented to the courts in those cases; the question is what these decisions may say about litigation funding in general.
Some of the broad-brush language employed by the courts in these two cases might cause concern to litigation funders. However, each of these cases involved highly unusual circumstances – the funding arrangements the courts were asked to review were very different from the straightforward funding structures that litigation funding firms typically employ.
Our November Eminders is Posted!
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The SEC recently announced insider trading charges against a board member (who also happens to be a lawyer) who allegedly purchased securities of a target company during a board committee meeting where the deal was being discussed. Here’s an excerpt from the SEC’s press release:
According to the SEC’s complaint, Cope learned confidential details about the planned merger during a board executive committee meeting on Jan. 5, 2016, and proceeded to place his first order to purchase Avenue Financial stock while that executive committee meeting was still in progress. He allegedly placed four more orders within an hour after the meeting ended.
If proven to be true, that’s just. . . wow.
The stock exchanges’ computer surveillance of trades make it so easy to catch insider traders in situations like these that it’s kind of amazing to me that people keep trying. Anyone who has ever done a deal has seen that FINRA inquiry letter that identifies people who engaged in unusual trading around the time of the announcement & asks if anyone on the deal team had any contact with them. These lists are rarely short & they definitely let you know that Big Brother is watching.
The fact that people still roll the dice in this kind of environment reminds me of what Director Joel Coen said about where the title of the Coen Brothers first movie – Blood Simple – came from. He said that the title came from a Dashiell Hammett story: “It’s an expression he used to describe what happens to somebody psychologically once they’ve committed murder. . . They go ‘blood simple’ in the slang sense of ‘simple,’ meaning crazy.”
Poll: Insider Trading in Target Company’s Stock
survey software
John & Broc: Corporate Officer Liability
Broc & I had a lot of fun taping our 5th “news-like” podcast. This 6-minute podcast is about corporate officer liability & the World Series battle of Cubs v. Indians. I highly encourage you to listen to these podcasts when you take a walk, commute to work, etc.
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…
