Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The Minnesota Revised Uniform Limited Liability Company Act (the “Revised Act”) has been adopted in Minnesota and will replace Minnesota’s current limited liability company (“LLC”) statute set forth in Chapter 322B of the Minnesota Statutes (the “Existing Statute”).  The Revised Act, which will be found in Chapter 322C of the Minnesota Statutes provides increased flexibility and freedom to contract of members in an LLC through increased reliance on a single contractual arrangement among the members, termed an “operating agreement.”

We have set forth our thoughts on implementing the Revised Act here. We have also included a summary below.

The timing for the effectiveness of the Revised Act and its applicability to Minnesota LLC is as follows:

  • Beginning August 1, 2015, all newly formed LLCs will be governed by the Revised Act.
  • On and after August 1, 2015 and until January 1, 2018, Minnesota LLCs that were formed under the Existing Statute may elect to opt-in to the Revised Act and become governed by the Revised Act instead of the Existing Statute.
  • On and after January 1, 2018, the Revised Act will apply to all Minnesota LLCs, regardless of when they were formed and whether they have made an election to be governed by the Revised Act.

When forming new LLCs under the Existing Statute before the Revised Act becomes effective, practitioners should consider the following considerations relating to the Revised Act, which will ease the eventual transition to the Revised Act:

  • Exculpatory provisions relating to the liability of governors under the Existing Statute should be placed in the member control agreement and not the articles.
  • Exculpatory provisions tailored to the Revised Act can be included in the member control agreement with the proviso that they will become operational and will replace any other exculpatory provisions when the Revised Act becomes effective.
  • Include amendment procedures in the operating agreement to make it easy to adopt the early application of the Revised Statute after it becomes effective on August 1, 2015 and before it becomes mandatory on January 1, 2018.
  • Place minimal reliance on statutory defaults under the Existing Statute to prevent having to renegotiate these items when the entity becomes subject to the Revised Statute.

The extent to which documentation for Minnesota LLCs developed under the Existing Statute will need to be revised or re-drafted to operate under the Revised Statute will depend on the facts and circumstances on an entity-by-entity basis.  The governing documentation for some LLCs will require little or no modification, while the need for modification will be greater in other situations.  Items to consider include:

  • Simplifying the articles of organization.
  • Creating an operating agreement for purposes of the Revised Act by consolidating substantive provisions in the articles of organization, member control agreement, and by-laws.
  • Eliminating reliance on statutory defaults in the Existing Statute when drafting the operating agreement.
  • Eliminating terms which relate solely to the Existing Statute when drafting the operating agreement.
  • Identifying rights under the Existing Statute that the parties wish to preserve in the operating agreement.

The transition to the Revised Act should also be considered when investing in or acquiring a Minnesota LLC.

We have included our description of the Revised Act here.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Certain rules under the securities laws require certain communications be accompanied by legends.  The length of the legend meant that Twitter could not be used because the 140 character limit would be exceeded.  As has long been suspected, the SEC has now blessed the use of  Twitter by permitting a link to the required legend.  In the past we have noted use of this technique.

It’s not quite that simple, the SEC has issued a series of CDIs (one of which can be found here) which permit the use of Twitter if the following conditions are met:

  • The electronic communication is distributed through a platform that has technological limitations on the number of characters or amount of text that may be included in the communication;
  • Including the required legend in its entirety, together with the other information, would cause the communication to exceed the limit on the number of characters or amount of text; and
  • The communication contains an active hyperlink to the required legend and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.

Of course, the rub is in the last bullet, and what exactly must be done to prominently convey that important or required information is provided through the hyperlink?  Maybe “TIIIITH” (meaning “there is important information in the hyperlink”) will become a well-known acronym like “OMG” and the SEC will bless this via a subsequent CDI.

Just because the SEC permits it doesn’t mean it is a good idea to take to Twitter for any or all purposes.  It’s hard to give disclosure that complies with the securities laws in 140 character limits and the anti-fraud rules still apply.

And just as soon as an issuer tweets something it is bound to be followed by one, or a few thousand, retweets, and God only knows how many laws that could violate.  After all, the retweeter may modify the text or delete the link to the required legend.  The SEC has said that is not the issuer’s problem, but when reduced to regulatory speak (replace “retransmission” with “retweet”) the guidance says this:

“If the third party is neither an offering participant nor acting on behalf of the issuer or an offering participant and the issuer has no involvement in the third party’s re-transmission beyond having initially prepared and distributed the communication in compliance with either Rule 134 or Rule 433, the re-transmission would not be attributable to the issuer. As explained in Securities Act Release No. 33-8591 (July 19, 2005), “[W]hether information prepared and distributed by third parties that are not offering participants is attributable to an issuer or other offering participant depends upon whether the issuer or other offering participant has involved itself in the preparation of the information or explicitly or implicitly endorsed or approved the information.”

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The Federal Deposit Insurance Corporation, or FDIC, has adopted a final rule to implement section 210(r) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under that section, individuals or entities that have, or may have, contributed to the failure of a “covered financial company” cannot buy a covered financial company’s assets from the FDIC. The final rule establishes a self-certification process that is a prerequisite to the purchase of assets of a covered financial company from the FDIC.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC Division of Corporation Finance has recently posted two Division Announcements:

  • As of April 9, 2014, in cases where the SEC staff has determined to grant a request for confidential treatment without providing comments, the staff will no longer separately notify the applicant in connection with issuing an order.  The SEC will continue to post the orders through EDGAR.  An applicant can determine if the staff has granted its application and issued an order without providing comments by reviewing the company’s filing history on EDGAR.
  • Regulation S-T allows companies to send glossy annual reports to the SEC in electronic format via EDGAR or in paper form.  Because of formatting difficulties, most companies choose to mail the seven paper copies to the SEC.  In recent years, the staff  has scanned paper copies of the glossy annual reports received by mail and posted them with the companies’ other filings via the EDGAR facilities on the SEC web site.  In an effort to reduce costs and simplify administrative processes, and in light of the availability of these annual reports on other web sites, the staff has determined to discontinue this practice.

You can find the announcements here and here.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC’s Office of Compliance Inspections and Examinations, or OCIE, previously announced that its 2014 Examination Priorities included a focus on technology, including cybersecurity preparedness.  OCIE has issued a Risk Alert to provide additional information concerning its initiative to assess cybersecurity preparedness in the securities industry.

As part of this initiative, OCIE will conduct examinations of more than 50 registered broker-dealers and registered investment advisers focused on the following: the entity’s cybersecurity governance, identification and assessment of cybersecurity risks, protection of networks and information, risks associated with remote customer access and funds transfer requests, risks associated with vendors and other third parties, detection of unauthorized activity, and experiences with certain cybersecurity threats.

As part of OCIE’s efforts to promote compliance and to share with the industry where it sees risk, OCIE has included, as an Appendix to the Risk Alert, a seven page sample request for information and documents to be used in this initiative.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

In a little known action, the Clerk of Court of the Unites States Court of Appeals for the District of Columbia issued an order in the conflicts minerals case to withhold issuance of a mandate until seven days after disposition of any timely petition for rehearing or petition for rehearing en banc.

You can see the one page order here.

According to Dave Lynn at TheCorporateCounsel.net, this means “the government’s petition for rehearing is not due until 45 days after the Court’s decision, which is May 29. So, unless there is further action by the Court, the earliest that the mandate would issue and the decision could have binding legal effect would be sometime in June, after the June 2, 2014 deadline by which Form SDs are required to be filed. The Court could of course change its mind and decide to issue the mandate earlier–the separate order issued today specifically contemplates that a party may ask for the mandate to be issued earlier for good cause.”

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

In the end, it’s pretty simple.  The court held the conflicts minerals rule and statute embodied in Dodd-Frank violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have “not been found to be ‘DRC conflict free.”

The core logic of the holding is found in this passage:

“At all events, it is far from clear that the description at issue—whether a product is “conflict free”—is factual and nonideological. Products and minerals do not fight conflicts. The label “conflict free” is a metaphor that conveys moral responsibility for the Congo war. It requires an issuer to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups. An issuer, including an issuer who condemns the atrocities of the Congo war in the strongest terms, may disagree with that assessment of its moral responsibility. And it may convey that “message” through “silence.” By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment” (citations omitted).

As is usual, the standard of review is determinative.  Among other things, the court found that a rational review basis is not appropriate because in First Amendment cases rational review “is the exception, not the rule” and is only applied where “disclosure requirements are reasonably related to  the State’s interest in preventing deception of consumers.”

So what’s next, other than a possible appeal? Alternatives may be:

  • The case is reheard en banc, and possibly consolidated with another pending case captioned “American Meat Institute v. United States Department of Agriculture.”  See footnote 9 and the opinion concurring in part.  The American Meat case apparently includes an identical question on the standard of review.
  • The SEC finds a work-around rule, that satisfies the court’s reasoning, and doesn’t call into question the constitutionality of the Dodd-Frank Act (See footnote 14 to the opinion).  Theoretically, this could be implemented fairly easily, by retaining all parts of the rule, other than the requirement to describe products as “having not been found to be DRC conflict free.”
  • The SEC believes the Dodd-Frank Act is fatally defective and waits for Congress to act.

So should issuers suspend all efforts on conflict minerals compliance? That decision should be made based on public relations in general and other policy considerations – many issuers will continue to strive for a conflict free supply chain.  Your good customers may expect you to continue to scrub your supply chain.  In fact, I believe issuers should now begin to think about how they are going to explain their next steps to investors, customers and other constituents.

As to the more granular question about suspending compliance with the SEC’s rules, it’s a little early to tell, but may be the only reason you are reading this blog.  Note that the SEC did not stay the rule, and as noted in the second bullet point above, a work-around might be fairly easy.

I suspect we’ll hear from the SEC shortly on the path forward.  But absent that, the court did say the SEC and Congress cannot compel an issuer to confess blood on its hands, as that interferes with that exercise of the freedom of speech under the First Amendment.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Keith F. Higgins, Director, SEC Division of Corporation Finance, recently laid out the SEC staff’s approach to the much discussed disclosure reform initiative.  Highlights are as follows:

  • Mr. Higgins stated there are many investors who have expressed an appetite for more information, not less. If the staff identifies potential gaps in disclosure or opportunities to increase the transparency of information, the staff may very well recommend new disclosure requirements.
  • The SEC is launching a spotlight page on sec.gov, and is asking companies, investors and other market participants to give the staff their views on how the SEC can make disclosure more effective.  The SEC is particularly interested in learning what information investors find most useful. As a few examples, the SEC is considering questions such as whether there is information that the SEC requires companies to include in their filings that investors routinely get elsewhere. Is there information that investors routinely ignore? What information do investors think is missing? And in the age of smartphones and tablets, how can information be easier to access and use?
  • The staff will start its review of disclosure requirements by focusing on the business and financial disclosures that flow into periodic and current reports, namely Forms 10-K, 10-Q and 8-K, and, in one way or another, make their way into transactional filings.
  • Corp Fin is forming teams to review specific requirements in Regulation S-K and the Industry Guides. Among the things these teams will do is identify potentially outdated disclosure requirements, such as the ratio of earnings to fixed charges — which is a requirement whose “one-size-fits-all” approach may result in disclosure that investors don’t find useful and companies wouldn’t otherwise calculate — or information that investors routinely find using other sources, such as historical stock prices.
  • The teams also will identify where SEC disclosure requirements result in redundancy or duplicative disclosures. For instance, a comment letter submitted in advance of the recent Regulation S-K report suggested that some disclosure requirements are no longer necessary because they were created to address voids in U.S. GAAP requirements, which have since evolved.
  • In reviewing parts of Regulation S-X, the staff will seek input to help it determine how investors use these separate financial statements  (for acquired businesses, equity method investees and guarantors) in their decision-making, how costly it is for companies to obtain them and whether the benefits justify the challenges of presenting them.
  • The staff also will consider whether to recommend a “company disclosure” or “core disclosure” system. Under this approach, certain information that does not change as frequently — such as the description of the business and certain other company information ­— would be disclosed in a “core” document and then supplemented by periodic and current reports. 

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

This week the SEC released three new Compliance and Disclosure Interpretations (C&DIs) relating to Rule 147, which applies to securities exempt from registration pursuant to Section 3(a)(11) of the Securities Act because they were offered and sold only to residents of a single state, and were issued by a company transacting business in that state.  If a particular state were to adopt intrastate rules that allowed crowdfunded offerings, it could be possible for an issuer to engage in a crowdfunded offering that was exempt from federal registration as an intrastate offering pursuant to Section 3(a)(11) and permissible pursuant to the applicable state laws and regulations where the offering was conducted.  The new C&DIs provide some clarification regarding the interaction between the requirement that a Section 3(a)(11) security be offered and sold only to residents within a single state and the character of a crowdfunded offering as a widely advertised opportunity:

  • Section 3(a)(11) does not prohibit general advertising and solicitation, but any advertising and solicitation must be conducted in a manner consistent with the requirement that the security be offered and sold only to persons within a single state.
  • Similarly, the use of a crowdfunding website or portal does not preclude reliance on Rule 147, as long as the portal implements “adequate measures” to ensure that offers and sales are made only to residents of the target state.  The SEC indicates that adequate measures would include, at a minimum, informing prospective investors that the offering is available only to residents of the target state and limiting access to information to persons who confirm through a representation or by providing address information that they are residents of the target state.
  • An issuer will likely be unable to use its existing social media presence or website to advertise an intra-state crowdfunded offering.  Although the SEC will evaluate each instance in light of all of the relevant facts and circumstances, as a general matter issuer websites and social media presence are used to provide indiscriminate communications to a broad audience, which would be inconsistent with the requirements of Rule 147 and Section 3(a)(11).

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

A bill has been signed into law that brings public benefit corporations to Minnesota.  The public benefit corporation is a relatively recent legal innovation that occupies a hybrid position between a traditional corporation and a non-profit corporation.  A public benefit corporation requires directors to consider the impacts of corporate action on either all stakeholders in general or on a specific group of stakeholders, in addition to merely considering the impact on shareholders.  At the same time, a public benefit corporation operates for profit and can confer pecuniary gain upon its shareholders (something not possible in a non-profit corporation).  While these effects can be achieved through contractual modifications under current law, the proposed legislation provides a formal and standard model for such enterprises and allows them to be easily distinguished by consumers and commercial partners from traditional for-profit corporations.

You can find more information here.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.