Here’s something from the “DealLawyers.com Blog” that I recently posted: Occasionally, you hear that people have received advice to be especially careful about emails so “don’t put it in an email, give him/her a call.” Often the advice is couched in terms of “avoid putting anything in an email that you would be embarrassed to read about on the front page of the Wall Street Journal. Make a call instead.” That advice is insufficient given what often happens in litigation. According to a recent WSJ article regarding pending M&A litigation, it’s alleged that: “[employee of buyer] later testified that [employee of target’s financial advisor] called him and said “we should not email on this.”
And then consider this quote from a recent Delaware Chancery Court opinion:
“On the evening of March 24, [employee of buyer] summarized the situation in an email [to other employees of the buyer]: I have spoken to a number of bankers on our side (for advice) and theirs (for back-channel feedback). There are definitely two other offers as we suspected, both say they need another week of work but the company’s bankers think it is more like 2-3 weeks. Sounds like both are higher but again not a knock-out, I haven’t been able to get more specific info than that.”
Things to bear in mind include:
1. Any advice, if given by one transaction participant to another participant or their representatives, is discoverable. Even if you don’t disclose it, the other person may – and you should assume likely will.
2. While not necessarily wrongful, there can be lots of innocent and/or perfectly valid reasons for making the suggestion to talk rather than exchange email (e.g., to avoid ambiguity or misinterpretation or because time is of the essence) – plaintiffs will likely allege that the person making the suggestion was trying to hide something damaging.
3. Just because you speak with someone and don’t put it in an email doesn’t ensure that the substance of the conversation will not be memorialized in writing – and be discoverable. Even if you don’t put it in an email, the person you talk to may.
The bottom line is: while it is not always possible to avoid saying, doing or writing things that are potentially vague, ambiguous or subject to misinterpretation, and sometimes back-channel communications are authorized for purposes of seeking a bump in price from the buyer, you should not assume that it’s okay to say something so long as you don’t put it in an email. The better advice is to try to “avoid saying, doing or putting anything in an email that you would be embarrassed to read about on the front page of the Wall Street Journal.”
Related-Party Transactions: SEC Approves NYSE’s Exemptions from Shareholder Approval
Cooley’s Cydney Posner’s blog provides the long history behind the SEC’s approval of the NYSE proposal to exempt certain related-party transactions from shareholder approval requirements – despite concerns of the SEC’s Investor Advocate…
SEC Commissioner Aguilar Bids Farewell
On the heels of SEC Commissioner Gallagher issuing a brief farewell statement, Commissioner Aguilar has now issued a lengthy one too. I don’t recall Commissioners doing this in the past. In his statement, Aguilar summarizes the changes in the SEC & in the law during his tenure, lists his accomplishments and notes some “unfinished business.” And this is on top of his recent list of tips for incoming Commissioners.
Can you think back and wonder what you would write for every job you left…
I’m sad to note that former Rep. Mike Oxley passed away on New Year’s Day. As noted in this article, Congressman Oxley served 25 years in the House, representing Ohio, serving as Chair of the Financial Services Committee for the max term of six years and was co-author of the Sarbanes-Oxley of 2002. I had the fortune of interviewing Mike at our conference in 2012, the 10th anniversary of Sarbanes-Oxley. He was insightful, engaging and witty. And Mike was quite the athlete – particularly golf where he could boast that he had six “hole-in-ones” during his lifetime. Six! Condolences to his family & friends, including his colleagues at BakerHostetler.
Our January Eminders is Posted!
We have posted the January issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Last week, the SEC issued a 208-page release that is part proposing, part concept release. Here’s an excerpt from this blog by Steve Quinlivan:
The release begins with the history of transfer agents and the development of regulations. For instance, it answers the mystical question of where DTC got the name for its nominee, “Cede & Co.” It’s short for “certificate depository.” See footnote 87 on page 31. It also explains the odd term “regular way” which sometimes works its way into documents. That apparently is just a reference to normal T+3 settlement. See footnote 262 on page 74.
Importantly, the release signals the SEC’s intent to impose enhanced obligations on transfer agents in the transfer of restricted securities. To combat microcap fraud, the SEC intends to propose rules:
– Prohibiting any registered transfer agent or any of its officers, directors, or employees from directly or indirectly taking any action to facilitate a transfer of securities if such person knows or has reason to know that an illegal distribution of securities would occur in connection with such transfer;
– Prohibiting any registered transfer agent or any of its officers, directors, or employees from making any materially false statements or omissions or engaging in any other fraudulent activity in connection with the transfer agent’s performance of its duties and obligations under the Exchange Act and the rules promulgated thereunder; and
– Requiring each registered transfer agent to adopt policies and procedures reasonably designed to achieve compliance with applicable securities laws and applicable rules and regulations thereunder, and to designate and specifically identify to the Commission on Form TA-1 one or more principals to serve as chief compliance officer.
With respect to Regulation Crowdfunding, the SEC solicits comments on the following topics:
– What services, if any, do commenters anticipate transfer agents providing for crowdfunding issuers?
– How do commenters anticipate transfer agents will comply with their recordkeeping, safeguarding, and other requirements in the context of crowdfunding securities?
– Does the entry of transfer agents into the crowdfunding space pose new or additional risks for the prompt and accurate settlement of securities transactions?
– Transfer agents have traditionally assessed fees on a per shareholder basis. Do commenters believe transfer agents are likely to impose a per shareholder fee in connection with crowdfunding issuances? If so, is a per-shareholder fee appropriate? If not, what other kinds of fees are likely to be charged, and would they be appropriate?
Is There an Accountant Revolving Door?
I’ve blogged numerous times in response to complaints about the revolving door at the SEC for lawyers. This Reuters article talks about a possible revolving door for accountants too (and throws some dirt about the PCAOB)…
As noted in this Cooley blog, there could be Congressional action in the area of cybersecurity disclosure soon enough. Here’s an excerpt from the blog:
Senators Jack Reed and Susan Collins have introduced the bipartisan “Cybersecurity Disclosure Act of 2015”, a bill to promote transparency in the oversight of cybersecurity risks at publicly traded companies. According to the press release, the bill is designed to ensure that public companies “provide a basic amount of information about the degree to which a firm is protecting the economic and financial interests of the firm from cyber attacks.” In addition, the bill “seeks to strengthen and prioritize cybersecurity at publicly traded companies by encouraging the disclosure of cybersecurity expertise, or lack thereof, on corporate boards at these companies.”
If ever enacted, this legislation would require companies to disclose – in their SEC filings – whether they have a director who is a “cybersecurity expert” – and if not, why having this expertise on the board isn’t necessary because of other cybersecurity steps taken by the company. The bill would require the SEC and the National Institute of Standards and Technology to provide guidance on the qualifications necessary to be a cybersecurity expert. This Jones Day piece by Mauricio Paez & Randi Lesnick criticize the bill…
It’s Here! “The Cybersecurity Act of 2015”
Congress & President Obama did enact a cybersecurity piece of legislation recently. One part of the omnibus appropriations bill is the “Cybersecurity Act of 2015.” As noted in the memos we are posting in our “Cybersecurity” Practice Area, the Act addresses the sharing of information between the public and private sectors about cyber threats (including privilege and confidentiality implications), liability protections for companies that monitor, how to share or receive cyber threat information and much more…
SEC Commissioner Aguilar Talks SEC’s Own Cybersecurity Risks
In this statement, SEC Commissioner Aguilar talks about the agency’s need to focus on its own cybersecurity profile. As I’ve blogged before, I think it’s just a matter of time before Edgar is hacked…if it hasn’t been already…
Recently, I blogged about the continued criticism of stock repurchase programs. In response, I received this note from Downey Brand’s Bruce Dravis:
Thanks for flagging new articles on the share buybacks. The main point of the Reuters piece tracks ground covered by a Harvard Business Review article last year on how the combined dividends and buybacks exceeded earnings over a given period. However, earnings, dividends and share buybacks are very different operational events for a company. While dividends and buybacks both involve expenditures of cash, they represent divergent strategies for providing returns to shareholders.
Conflating them in order to see if the combination exceeds company earnings generates an interesting number—but shouldn’t generate an automatic conclusion that shareholder payments are crowding out capital allocations for company development. It’s true that companies are under pressure from some activists to deliver short-term results. There is also a countervailing pressure from institutional investors to deliver sustainable results, which requires strategic investment.
Measured in absolute dollars, the amount spent on stock repurchases is a big number. A fairer picture, though, should include looking at how much the share repurchase expenditure is offset by the cash companies take in through equity compensation plans.
For example, I looked at Intel from 2006-13. Over those eight years, the company issued roughly 850m shares in equity compensation, taking in roughly $12.5b in cash and tax benefits. The issuances, by themselves, would have diluted shareholders by about 15% from the Jan. 1, 2006 starting point. In the same period, Intel repurchased 1.8b shares, for about $40b. Netting the equity plan issuances against the repurchases, you find about $27.5b in net cash expenditures to generate at net anti-dilutive impact of about 20% compared to the Jan. 1, 2006 starting point (in other words, the company bought back all the dilutive equity compensation shares, plus a lot more).
Since equity issuances and repurchases are both capital transactions, I think this comparison is more apt—or at least, adds to creating a more complete picture — than a comparison to earnings alone. If you also consider equity issued for acquisitions — arguably an investment in growing company revenues, albeit not made in R&D dollars — you get an even more complex picture than is suggested by the “Earnings=Dividends+Buybacks” formula.
Here’s a response that I got to Bruce’s note:
Perhaps Bruce should look at the whether the companies with buybacks are granting stock options instead of restricted stock! I gather that most stock based compensation is in the form of the latter. Besides, having buybacks that are tied to stock options means the company is buying shares when employees are selling, instead of making an independent capital allocation decision, and his comment has positive connotation – so just wanted to point this out.
In addition, here’s a Bloomberg piece with a countervailing view about the pace of buybacks…
Nasdaq’s Proposal: Regain Compliance Before Delisting for Failure to Hold Annual Meeting
As noted in this blog by Steve Quinlivan, Nasdaq has proposed to have the discretion to grant listed companies an extension to regain compliance before delisting a company that fails to hold an annual meeting. In determining whether to grant a company an extension to comply with the annual meeting requirement, Nasdaq will consider the likelihood that the company would be able to hold an annual meeting within the exception period, the company’s past compliance history, the reasons for the failure to timely hold an annual meeting, corporate events that may occur within the exception period, the company’s general financial status, and the company’s disclosures to the market.
What is “Private Ordering”?
Here’s an excerpt from this blog by “The Activist Investor” to explain a concept that wasn’t familiar to securities lawyers a decade ago:
It refers to a long-standing legal concept in which individual parties agree on how to police an activity, instead of relying on government regulation. It can apply to all sorts of activities – for example, development of information technology and the Internet, and the rules for standardizing structures and processes in online affairs.
To activist investors, it refers to how shareholders agree, with each other and with company management, on how corp gov will work at a given portfolio company. They do so instead of relying on states, Congress, and the SEC to prescribe corp gov principles as law and regulation.
This is different than self-regulation. When an industry self-regulates, it promulgates its own standard rules that apply to all parties (companies, consumers). Private ordering defines specific rules for each individual situation, in this case each individual company.
In the corp gov world, private ordering can apply to just about any part of company bylaws. Most recently, bylaw provisions for forum selection and litigation costs have stoked the debate about whether state corporate law and regulation or agreement among shareholders and management should prevail.
It also applies to the debate over proxy access, among other areas that fall within Federal jurisdiction. Recall how proxy access started as a strict SEC regulation requiring access on specific terms, pursuant to the Dodd-Frank Act. The SEC also allowed shareholders to propose different proxy access terms, in a bylaw amendment or non-binding resolution. A friendly judge vacated the regulations, but let stand the part that allowed shareholders to propose some form of proxy access for that company.
We note that regulation and private ordering sit at the two ends of a continuum of choices, rather than as the only two choices. We (the investing public) can decide to regulate something that won’t work for private ordering. We can leave to private ordering something else that is too expensive or complicated to regulate. We can regulate lightly, and leave some elements of a subject to private ordering. The possibilities are endless.
On Monday, Corp Fin issued 4 more CDIs (#3-6) on the FAST Act, tripling the number issued so far…
SEC Rulemaking Petitions: Political Spending Rulemaking Not Happening (At Least Not Soon)
The recent omnibus spending bill from Congress (page 1982) contains a provision prohibiting the SEC from conducting rulemaking in the area of political contributions disclosures as I blogged last week on “The Mentor Blog.”
As noted in this blog by Steve Quinlivan, 28 Senators and 66 House reps then sent a letter to the SEC explaining that the agency is free to propose a rule to require disclosure of corporate political spending – so long as the SEC doesn’t finalize, issue or implement it. The letter is supported by an opinion from Professor John Coates. The upshot is that this means that the petition from Harvard’s Lucian Bebchuk – which has received over 1 million comments in support – is not going to be both proposed and adopted this year…
The prohibition is just for this budget year as this is a budget bill for the 2016 fiscal year. Section 707 of the bill provides: “[n]one of the funds made available by any division of this Act shall be used by the Securities and Exchange Commission to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.” So it seems that Congress would have to renew the prohibition next year (or do it differently) to make it permanent – as I read it. I think that’s why the letter talks about why the SEC is allowed to propose rules now and get the ball rolling. But I believe it could be done in the next fiscal year, so long as it doesn’t use FY 16 funds…
Once my boys were no longer toddlers, we became a “swim team” family. I’m not a good swimmer & didn’t grow up in an environment that facilitated that. But my wife did – and she brought that incredible experience into our lives. As my boys grew into men, they learned how to mentor kids of all ages – and both genders – from an early age. It was invaluable as a teaching tool – and a lot of fun. Swimming is a popular sport in the DC area – and a lot of our country’s top swimmers hail from here (egs. Michael Phelps & Katie Ledecky).
One of the major swim family benefits was meeting a slew of swimmers who are simply amazing. They put in endless work to achieve their goals (often getting up at 4:30 am to swim before school) – and don’t have the egos that you sometimes see in other sports. They are humble, funny and smart. And the best of them all is Chuck Katis. Chuck was on our swim team and broke a national breaststroke record (& a number of state records. He went on to swim for Harvard – and then transferred to Cal-Berkeley, helping to lead that team to win the NCAAs in his senior year (including setting an American relay record in the process). It was a joy to watch Chuck grow and see his hard work pay off.
Chuck graduated last year and is spending this year training in the hopes of making the Olympic team next year. Not an easy task as only two swimmers in each event earn the right to go to Rio. To help support himself, he’s getting creative with funding by putting on a series of magic shows in the San Fran area – half of the money raised will go to the homeless (a status that he flirted with growing up). Or you can just donate without going to a show. Please help Chuck – learn more.
As Chuck says: “Think these shows are a unique way to allow myself to give back and change some lives in the process of accomplishing my own goals. Will make me that much stronger in the water.”
Anyways, this short video of our local team gives you an idea of the swim family experience:
E-Holiday Cards: Do You Look At Them?
I’ll admit I didn’t open any of the numerous holiday cards I received by email – until I tweeted a question on Friday asking if anybody does. Then I happened to look and I’m glad I did. My favorite was one from Falls Communications that asked you to submit a note of gratitude to display on this wall. Display your own gratitude now!
All of them looked good, but they all do different things. Some firms sent animated cards that display in HD. For example, check out this groovy 1-minute one from FTI Consulting. They are all quite distinct – Dix & Eaton’s & Pearl Meyers are simple (which I like), Davis Polk has one that is like a puzzle (sort of), Morris Nichols has a pretty winter scene of Wilmington, and Haynes and Boone has a very elaborate flight through a traditional winter wonderland…thanks to WilmerHale’s Tom White & BrooksPierce’s David Smyth for the inspiration to follow-through on this blog…
On Friday, Corp Fin (& Risk Fin) issued this 118-page Staff Report on the “Accredited Investor” definition, as noted in this press release. Dodd-Frank requires the SEC to study the definition every four years – and this is the first study. Comments are invited on the Staff recommendations contained in the report. See this Cooley blog…
Crowdfunding: SEC Now Allowing “Form C” Test Filings
As noted in this Corp Fin announcement, companies may immediately begin test filings of the form to be used when conducting Regulation Crowdfunding offerings. The tests can be run til February 29th (yeah, a leap year).
During this test period, filers should identify their Form Cs as “test” filings. Live filings aren’t permitted until the rules are effective on May 16th. Test filings will not be reviewed by SEC staff or available to the public. As is the case with any document submitted on EDGAR, test filers should not submit confidential or personally identifiable information in the tests.
Board Diversity: Examples of Companies With More Women
Perhaps one way to encourage companies to better diversify their boards is to highlight those companies that have already done so. This Pay Governance memo does just that…
Today, ISS issued 78 FAQs on its US proxy voting policies – there are two FAQs on proxy access that are literally highlighted in the document. FAQ #30 describes the policy regarding a board’s implementation of proxy access in response to a proxy access shareholder proposal that received majority support and FAQ #60 sets forth the analytical framework for evaluating proxy access director nominees.
ISS also posted 69 compensation-related FAQs – note it’s hard to discern the year-over-year changes from last year’s comp FAQs since the 2015 FAQs are formatted differently from the 2016 FAQs.
