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

We noted earlier some key changes FINRA was proposing to the Corporate Financing Rule.  Here at Stinson Leonard Street we all gave each other the “high five” because the proposals made so much sense and made it easier for our clients to comply.  Now FINRA has proposed more changes to the Corporate Financing Rule.  In the latest proposal, FINRA proposes to amend the Rule’s provisions regarding unfair arrangements to:

  • expand the circumstances under which members and issuers may negotiate termination fees and rights of first refusal, or ROFR, with specified conditions;
  • exempt from the filing requirements exchange-traded funds formed as grantor or statutory trusts; and
  • codify the electronic filing requirement

FINRA has reevaluated its rules around termination fees and believes it is appropriate to update the Rule to provide members with a greater degree of flexibility and expand the circumstances under which participating members and issuers may negotiate termination fee arrangements. Specifically, FINRA is proposing to amend Rule 5110(f)(2) (Prohibited Arrangements) to generally permit termination fees where:

  • the agreement between the participating member and the issuer specifies that the issuer has a right of “termination for cause” (i.e., where a member fails materially to perform the underwriting services contemplated in the written agreement);
  • the agreement specifies that an issuer’s exercise of its right of “termination for cause” eliminates any obligations with respect to the payment of any termination fee;
  • the amount of any specified termination fee is reasonable in relation to the services contemplated in the written agreement; and
  • the agreement specifies that the issuer is not responsible for paying the termination fee unless an offering or other type of transaction is consummated by the issuer (without involvement of the member) within two years of the date the engagement is terminated with the member by the issuer.

Current Rule 5110(f)(2)(F) and (G) address ROFRs, which provide a member with the right to underwrite or participate in future public offerings, private placements or other financings of the issuer. FINRA also has reevaluated its rules around ROFRs and proposes amendments to permit ROFRs in the case of both successful as well as terminated offerings. FINRA proposes that ROFRs would be permissible where:

  • the agreement between the participating member and issuer specifies that the issuer has a right of termination for cause (i.e., where a member fails materially to perform the underwriting services contemplated in the written agreement);
  • an issuer’s exercise of its right of “termination for cause” eliminates any obligations with respect to the provision of any ROFR; and
  • any fees arising from services provided under a ROFR are customary for those types of services.

As is currently the case, the Rule would continue to  provide that the duration of any ROFR may not be for more than three years from the date of commencement of sales of the public offering (in the case of a successful offering). In the case of a terminated offering, the duration may not be for more than three years from the date the engagement is terminated by the issuer. In both cases, the agreement may not provide for more  than one opportunity to waive or terminate the ROFR in consideration of any payment or fee.

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.

Historically, the SEC has taken the position that in order for a person to receive transaction-based compensation in connection with the sale of securities – even when the sale of securities is in the context of an M&A transaction – the recipient would need to be a registered broker-dealer.  As a result, people whose business involved brokering strategic transactions (M&A brokers) were either barred from receiving transaction-based compensation or required to expend significant time and effort becoming a registered broker-dealer.  The SEC had previously issued two No-Action letters relating to the role of M&A brokers, but the letters had little real world impact due to their narrow construction.  For example, to fit within the exceptions carved out by the existing No-Action letters, M&A Brokers had to severely limit their activities and could not engage in negotiations, provide advice relating to whether to issue securities in a transaction, or value securities issued in the transaction.

In a January 31, 2014 No-Action letter, the SEC has now indicated that, under certain circumstances, an M&A broker can receive transaction-based compensation without having to register as a broker-dealer.  The January 31st No-Action letter defines “M&A Broker” to mean a person engaged in the business of effecting securities transactions solely in connection with the change in control of privately held companies to buyers that will actively operate the businesses after the transactions close.  Persons who satisfy this definition can receive transaction-based compensation without registering as broker-dealers provided that the transaction and their involvement in the transaction comply with a number of conditions set forth in the No-Action Letter.

Unlike the prior No-Action letters, the January 31st letter should have a real impact on the M&A brokerage business.

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 final municipal advisor rules and associated guidance provide what many consider to be workable relief for energy services and solar energy companies to structure their business in such a fashion that registration as a municipal advisor should not be required.  We believe that businesses that wish to avoid registration should perform a start-to-end review of their business processes to make sure their operations are in accordance with applicable guidance.  Our thoughts are set forth below.

Understand the Exclusion From Advice:  If you are not giving “advice” you do not need to register as a municipal advisor.  Rule 15Ba1-1(d)(1)(ii) provides that advice excludes, among other things, the provision of general information that does not involve a recommendation regarding municipal financial products or the issuance of municipal securities, including with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues.

Review Generalized Information and Educational Materials.  The SEC believes that educational materials constitute general information, and not “advice”, if the content is limited to instructional or explanatory information, such as materials that describe the general nature of financial products or strategies, do not include past or projected performance figures, and do not include a recommendation to purchase or sell any product or utilize any particular strategy.  General market and financial information describing various types of debt financing structures (e.g., fixed rate debt, variable rate debt, general obligation debt, debt secured by various types of revenues, or insured debt), including a comparison of the general characteristics, risks, advantages, and disadvantages of these debt financing structures is acceptable.

It is best if information provided to customers is uniform, either as to all customers or specific customer segments.  In most circumstances the information should not be tailored.  In some circumstances the SEC believes that information can be particularized to a municipal entity provided that the information is factual in nature and does not contain or express subjective assumptions, opinions, or views, or constitute a recommendation.

Make sure you have appropriate processes in place to review any new material or revised material.

Review Contracts, RFPs and Advertising Materials.  Customer contracts, requests for proposals and advertising materials should be reviewed so that companies are not promising to provide advice related to the issuance of municipal securities.

Use Disclaimers Liberally.  Education and general materials, contracts, RFPs and advertising materials should disclaim that no materials or services provided constitute advice regarding municipal securities.  The SEC believes that disclosures and disclaimers regarding a person’s intentions in providing information to a municipal entity are factors that bear upon whether or not the person’s communications would be a recommendation that constitutes advice under the final rules.

Limit Scope of Feasibility Studies and Projections.  The Dodd-Frank Act includes an exception for engineering services.  Feasibility studies and projections should have narrow objectives to stay within that exception.  An engineer can provide funding schedules and cash flow models that anticipate the need for funding at certain junctures in a project and can also provide engineering feasibility studies based on analysis of engineering aspects of the project.  An engineer can advise a municipal entity about whether a project can be safely or reliably completed with the available funds and provide engineering advice about other alternative projects, cost estimates, or funding schedules without engaging in municipal advisory activity.

Monitor Introductions to Financing Sources.  Energy services and solar energy companies often provide introductions to financing sources.  According to the SEC,  if an introduction does not result in direct or indirect compensation to the engineer, the introduction will not constitute a solicitation and the engineer will not be required to register as a municipal advisor.  Appropriate policies should be prepared and implemented.

Train Staff.  Once you have evaluated your processes and identified appropriate modifications, train appropriate staff about the changed processes and limitations imposed by the municipal advisor rules. Training should not be a one-time event but should occur at appropriate intervals.

Assign Accountability.  Accountability for compliance with the rules should be assigned to designated individuals and performance should be monitored and evaluated where appropriate.

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 has published for public comment its Draft Strategic Plan that outlines the agency’s strategic goals for fiscal years 2014 to 2018. To comment on the 2014-2018 Draft Strategic Plan, send an e-mail to PerformancePlanning@sec.gov by March 10, 2014.

Some of the initiatives outlined in the stategic plan include:

  • Engage in rulemaking mandated by Congress: The SEC will continue to fulfill its obligations under the Dodd-Frank Act and the JOBS Act to develop and promulgate mandated rules and regulations with appropriate notice and comment and economic analysis.
  • Strengthen proxy infrastructure: The SEC will consider issues related to the mechanics of proxy voting and shareholder-company communications, including the role of proxy advisory firms.
  • Modernize beneficial ownership reporting: The SEC will consider how to modernize its beneficial ownership reporting requirements to, among other things, address the disclosure obligations relating to the use of equity swaps and other derivative instruments.
  • Strengthen oversight of municipal advisors: The SEC will continue to enhance the program for registration and oversight of municipal advisors, with a particular focus on registering municipal advisors under the permanent registration rules and reviewing rule filings by the Municipal Securities Rulemaking Board (MSRB) to implement the permanent municipal advisor registration rules.
  • Build upon the establishment and successes of the Office of the Whistleblower: The SEC will continue to encourage individuals and entities with timely, credible and specific information about potential securities law violations to provide information to the Commission to further investigations and promote more efficient use of the Commission’s limited resources.
  • Update disclosure and reporting requirements to reflect the informational needs of today’s investors: The SEC will continue its efforts to enhance disclosure requirements for the benefit of investors, including a reassessment of current core corporate disclosure requirements. In proposing changes for the Commission to consider, the staff will seek to modernize disclosure requirements and eliminate redundant reporting requirements. The staff’s efforts will continue to include a review of proxy voting and shareholder communications to identify ideas and proposals for potential improvement to those rules.

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 Shareholder-Director Exchange, or SDX, is a working group of independent directors and

representatives from some of the largest and most influential long-term institutional investors. SDX participants came together to discuss shareholder-director engagement and to use their collective experience to develop the SDX Protocol, a set of guidelines to provide a framework for shareholder-director engagements.  According to SDX, the 10-point SDX Protocol offers guidance to public company boards and shareholders on when such engagement is appropriate, and how to make these engagements valuable and effective.

You can find a summary of the SDX Protocol here, and the full Protocol can be downloaded at the same web site.

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 Final Report of the Group of Experts on the Democratic Republic of the Congo includes information about the status of trade in conflict minerals, and other information about armed conflict and human rights abuses in the DRC region.

According to the report, with respect to gold, the Group notes that many mining sites are in post-conflict areas, but that production from these areas is blended with production from conflict areas, particularly in the larger trading towns in eastern Democratic Republic of the Congo and in the transit countries of Burundi, Uganda and the United Republic of Tanzania. The lack of transparency in the gold trade makes it difficult to distinguish conflict gold from conflict-free gold. The Group estimates that 98 per cent of the gold produced in the Democratic Republic of the Congo is smuggled out of the country and that nearly all  of the gold traded in Uganda — the main transit country for Congolese gold — is illegally exported from the Democratic Republic of the Congo.

According to the report, while initiatives by the Organization for Economic Cooperation and Development and the International Conference on the Great Lakes Region have advanced the validation of mining sites and improved adherence to conflict-free and child labor-free international standards, armed groups and others continue to control many mining sites and to profit from mining and the minerals trade.  The report states during 2013, minerals — particularly tin, tungsten and tantalum — continued to be smuggled from eastern Democratic Republic of the Congo through neighboring countries, which the authors believe undermines the credibility and progress of international certification and traceability mechanisms.

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.

On January 30, 2014, the SEC held a compliance outreach seminar for investment advisers.  Much of the SEC presentation focused on concerns related to advisers to hedge funds and private equity groups.  While many of the concerns are not new, the presentation is a useful summary of areas of SEC focus.

Key areas of focus in presence exams include the following:

  • Investment Conflicts of Interest
    • Personal and affiliates’ transactions (private equity)
    • Allocations of investment opportunities (private equity and hedge funds)
    • Fees to GPs/advisers and expenses to funds/portfolio companies
  • Marketing and Fund Raising
    • Placement agents (private equity and hedge funds)
    • Performance marketing (hedge funds)
    • Valuation
    • Custody

The materials reflect a concern about expense shifting– Moving expenses out of the  management company and into funds without proper disclosure and LP consent. Examples include:

  • Use of related party service providers which appear to be full members of a manager’s team (e.g. operating partners, senior advisers, captive consulting firms).
  • Automating standard processes with costs paid by funds (SAAS).
  • Outsourcing traditional back office functions to related parties (i.e. accounting, legal, risk).

Marketing concerns discussed include managers stretching for capital may overstate or

misstate material facts.  Examples include:

  • Improperly constructed interim valuations.
  •  Improper attribution disclosures, especially in cases of departing team members.
  • Key investment team departures, especially in cases of changes occurring immediately after closing.

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, has issued a Risk Alert on the due diligence processes that investment advisers use when they recommend or place clients’ assets in alternative investments such as hedge funds, private equity funds, or funds of private funds.

While the alert noted some positive developments, staff observed certain deficiencies in several of the advisory firms examined, including:

  • Omitting alternative investment due diligence policies and procedures from their annual reviews, even though these investments comprised a large portion of certain advisers’ investments on behalf of clients
  • Providing potentially misleading information in marketing materials about the scope and depth of due diligence conducted
  • Having due diligence practices that differed from those described in the advisers’ disclosures to clients.

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 Great Hill Equity Partners IV v. SIG Growth Equity Fund I, Del. Ch., C.A. No. 7906-CS (Nov. 15, 2013), the Delaware Court of Chancery held that the target’s attorney-client privilege vested in the surviving corporation following the merger.  Provisions in merger agreements trying to work around the Great Hill holding are starting to appear in the EDGAR database.  We have highlighted three such provisions below.  For the most part, the provisions are similar, however, we have highlighted some of the more significant deviations.

In light of the Great Hill decision, counsel should consider the following issues when drafting these types of merger agreement provisions:

  • Specifying the asset that is being retained by the selling group (i.e., control of the attorney-client privilege);
  • Defining the scope of the communications that are being excluded and retained by the selling group (transaction related only vs. a broader set of communications);
  • Any circumstances in which it would be appropriate to allow buyer to use or control the privileged communications that are retained by the selling group vis-à-vis a third party; and
  • Any circumstances in which it would be appropriate to require the buyer to assert the attorney-client privilege against a third-party for communications that pass to the surviving corporation.

Given that buyers will often obtain access to attorney-client privileged communications of the target following the closing as a result of taking over the target’s servers, etc., below are a couple other provisions to consider adding to merger agreements when representing the selling group:

  • A covenant from the buyer and surviving corporation prohibiting them from asserting waiver of the attorney-client privilege by virtue of such disclosure of attorney-client communications; and
  • A covenant from the buyer and surviving corporation prohibiting them from using any attorney-client privileged communications in any litigation against the selling group.

Example 1

Section 9.13 Waiver of Conflicts. Recognizing that [Seller Law Firm] has acted as legal counsel to the Company, its Subsidiaries, certain of the direct and indirect holders of shares of Common Stock and certain of their respective Affiliates prior to date hereof, and that [Seller Law Firm] intends to act as legal counsel to certain of the direct and indirect holders of shares of Common Stock and their respective Affiliates (which will no longer include the Company and its Subsidiaries) after the Closing, each of Parent, Merger Sub and the Company hereby waives, on its own behalf and agrees to cause its Affiliates, the Surviving Corporation and its Subsidiaries to waive, any conflicts that may arise in connection with [Seller Law Firm] representing any direct or indirect holders of the shares of Common Stock or their Affiliates after the Closing as such representation may relate to Parent, Merger Sub, the Company, the Surviving Corporation and its Subsidiaries or the transactions contemplated by the Transaction Agreements. In addition, all communications involving attorney-client confidences between direct and indirect holders of shares of Common Stock, the Company and its Subsidiaries and their respective Affiliates, on the one hand, and [Seller Law Firm], on the other hand, relating to the negotiation, documentation and consummation of the transactions contemplated by the Transaction Agreements shall be deemed to be attorney-client confidences that belong solely to the direct and indirect holders of shares of Common Stock and their respective Affiliates (and not the Company, the Surviving Corporation or their respective Subsidiaries). Accordingly, the Surviving Corporation and its Subsidiaries shall not have access to any such communications or to the files of [Seller Law Firm] relating to such engagement from and after the Effective Time. Without limiting the generality of the foregoing, from and after the Effective Time, (a) the direct and indirect holders of shares of Common Stock and their respective Affiliates (and not the Surviving Corporation and its Subsidiaries) shall be the sole holders of the attorney-client privilege with respect to such engagement, and none of the Surviving Corporation or its Subsidiaries shall be a holder thereof, (b) to the extent that files of [Seller Law Firm] in respect of such engagement constitute property of the client, only the direct and indirect holders of shares of Common Stock and their respective Affiliates (and not the Surviving Corporation and its Subsidiaries) shall hold such property rights and (c) [Seller Law Firm] shall have no duty whatsoever to reveal or disclose any such attorney-client communications or files to the Surviving Corporation or any of its Subsidiaries by reason of any attorney-client relationship between [Seller Law Firm] and the Company or any of its Subsidiaries or otherwise. Notwithstanding the foregoing, none of the Surviving Corporation or any of its Subsidiaries is waiving any attorney-client privilege (including relating to the negotiation, documentation and consummation of the transactions contemplated by the Transaction Agreements) in connection with any third-party Litigation.

Example 2

SECTION 9.15. Waiver of Conflicts. Recognizing that [Seller Law Firm] has acted as legal counsel to the Company, the Subsidiaries, certain of the direct and indirect holders of Company Shares and certain of their respective Affiliates prior to date hereof, and that [Seller Law Firm] intends to act as legal counsel to certain of the direct and indirect holders of Company Shares and their respective Affiliates (which will no longer include the Company and the Subsidiaries) after the Closing, each of Purchaser, Merger Sub and the Company hereby waives, on its own behalf and agrees to cause its Affiliates, the Surviving Corporation and the Subsidiaries to waive, any conflicts that may arise in connection with [Seller Law Firm] representing any direct or indirect holders of the Company Shares or their Affiliates after the Closing as such representation may relate to Purchaser, Merger Sub, the Company, the Surviving Corporation or the Subsidiaries or the transactions contemplated hereby. In addition, all communications involving attorney-client confidences between direct and indirect holders of Company Shares, the Company and the Subsidiaries and their respective Affiliates, on the one hand, and [Seller Law Firm], on the other hand, in the course of the negotiation, documentation and consummation of the transactions contemplated hereby shall be deemed to be attorney-client confidences that belong solely to the direct and indirect holders of Company Shares and their respective Affiliates (and not the Company, the Surviving Corporation or the Subsidiaries). Accordingly, the Surviving Corporation and the Subsidiaries shall not have access to any such communications or to the files of [Seller Law Firm] relating to such engagement from and after the Effective Time. Without limiting the generality of the foregoing, from and after the Effective Time, (a) the direct and indirect holders of Company Shares and their respective Affiliates (and not the Surviving Corporation and the Subsidiaries) shall be the sole holders of the attorney-client privilege with respect to such engagement, and none of the Surviving Corporation or the Subsidiaries shall be a holder thereof, (b) to the extent that files of [Seller Law Firm] in respect of such engagement constitute property of the client, only the direct and indirect holders of Company Shares and their respective Affiliates (and not the Surviving Corporation and the Subsidiaries) shall hold such property rights and (c) [Seller Law Firm] shall have no duty whatsoever to reveal or disclose any such attorney-client communications or files to the Surviving Corporation or any of the Subsidiaries by reason of any attorney-client relationship between [Seller Law Firm] and the Company or any of the Subsidiaries or otherwise. This Section 9.15 will be irrevocable, and no term of this Section 9.15 may be amended, waived or modified, without the prior written consent of [Seller Law Firm].

Example 3

12.20 Waiver of Conflicts. Recognizing that _____________ (“[Seller Law Firm]”) has acted as legal counsel to certain of the Securityholders (including _________ and its Affiliates) and the Company, its Affiliates and the Group Companies prior to the Closing, and that [Seller Law Firm] intends to act as legal counsel to certain of the Securityholders (including ________ and its Affiliates) after the Closing, each of the Parent and the Surviving Company (including on behalf of the Group Companies) hereby waives, on its own behalf and agrees to cause its Affiliates to waive, any conflicts that may arise in connection with [Seller Law Firm] representing any of the Securityholders (including ________ and its Affiliates) and/or its Affiliates after the Closing as such representation may relate to the Parent, any Group Company or the transactions contemplated herein. In addition, all communications involving attorney-client confidences between any Securityholders (including ________ and its Affiliates) and its Affiliates in the course of the negotiation, documentation and consummation of the transactions contemplated hereby shall be deemed to be attorney-client confidences that belong solely to such Securityholders and their Affiliates (and not the Group Companies or the Surviving Company). Accordingly, the Group Companies and the Surviving Company shall not have access to any such communications, or to the files of [Seller Law Firm] relating to engagement, whether or not the Closing shall have occurred. Without limiting the generality of the foregoing, upon and after the Closing, (i) the applicable Securityholders and their Affiliates (and not the Group Companies or the Surviving Company) shall be the sole holders of the attorney-client privilege with respect to such engagement, and none of the Group Companies or the Surviving Company shall be a holder thereof, (ii) to the extent that files of [Seller Law Firm] in respect of such engagement constitute property of the client, only the applicable Securityholders and their Affiliates (and not the Group Companies or the Surviving Company) shall hold such property rights and (iii) [Seller Law Firm] shall have no duty whatsoever to reveal or disclose any such attorney-client communications or files to any of the Group Companies or the Surviving Company by reason of any attorney-client relationship between [Seller Law Firm] and any of the Group Companies or otherwise. Notwithstanding the foregoing, in the event that a dispute arises between the Parent, the Surviving Company or any of the Group Companies and a third party (other than a party to this Agreement or any of their respective Affiliates) after the Closing, the Surviving Company (including on behalf of the Group Companies) may asset [Sic] the attorney-client privilege to prevent disclosure of confidential communications by [Seller Law Firm] to such third party; provided, however, that neither the Surviving Company nor any of the Group Companies may waive such privilege without the prior written consent of the Representative, on behalf of the Securityholders.

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.

Exchange Act Rule 14a-4(a)(3) concerns the “unbundling” of separate matters that are submitted to a shareholder vote by a company or any other person soliciting proxy authority.  The SEC staff has issued guidance on the unbundling of proxy proposals.  The guidance takes the form of three frequently asked questions, or FAQs.  In each of the three different scenarios posed in the FAQs, the SEC staff states the proxy proposals need not be unbundled.

Preferred Stock Proposal

One FAQ discusses whether a proposal must be unbundled when management of a registrant has negotiated concessions from holders of a series of its preferred stock to reduce the dividend rate on the preferred stock in exchange for an extension of the maturity date.

The SEC stated the proposal need not be unbundled because it involves multiple matters that are so “inextricably intertwined” as to effectively constitute a single matter.  The staff, in this particular case, would view the matters relating to the terms of the preferred stock as being inextricably intertwined, because each of the proposed provisions relates to a basic financial term of the same series of capital stock and was the sole consideration for the countervailing provision.

The staff noted it would not view two arguably separate matters as being inextricably intertwined merely because the matters were negotiated as part of a transaction with a third party, nor because the matters represent terms of a contract that one or the other of the parties considers essential to the overall bargain.

Amendment and Restatement of Charter

Another FAQ discusses the appropriate analysis when management of a registrant intends to present an amended and restated charter to shareholders for approval at an annual meeting.  The proposed amendments would change the par value of the common stock, eliminate provisions relating to a series of preferred stock that is no longer outstanding and is not subject to further issuance, and declassify the board of directors.

The staff stated the proposals need not be unbundled.  The FAQ states the staff would not ordinarily object to the bundling of any number of immaterial matters with a single material matter.  While there is no bright-line test for determining materiality in the context of Rule 14a‑4(a)(3), registrants should consider whether a given matter substantively affects shareholder rights.  While the declassification amendment would be material under this analysis, the amendments relating to par value and preferred stock do not substantively affect shareholder rights, and therefore both of these amendments ordinarily could be included in a single restatement proposal together with the declassification amendment.  However, if management knows or has reason to believe that a particular amendment that does not substantively affect shareholder rights nevertheless is one on which shareholders could reasonably be expected to wish to express a view separate from their views on the other amendments that are part of the restatement, the amendment should be unbundled.

Omnibus Amendment to Equity Incentive Plan

The final FAQ discusses an omnibus amendment to an equity incentive plan that  makes the following changes to the terms of the plan:

  • increases the total number of shares reserved for issuance under the plan;
  • increases the maximum amount of compensation payable to an employee during a specified period for purposes of meeting the requirements for qualified performance-based compensation under Section 162(m) of the Internal Revenue Code;
  • adds restricted stock to the types of awards that can be granted under the plan; and
  • extends the term of the plan.

Again the staff stated the proposal need not be unbundled.  While the staff generally will object to the bundling of multiple, material matters into a single proposal – provided that the individual matters would require shareholder approval under state law, the rules of a national securities exchange, or the registrant’s organizational documents if presented on a standalone basis – the staff will not object to the presentation of multiple changes to an equity incentive plan in a single proposal.  This is the case even if the changes can be characterized as material in the context of the plan and the rules of a national securities exchange would require shareholder approval of each of the changes if presented on a standalone basis.

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