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

As a result of the COVID-19 pandemic, the NYSE has proposed temporary relief:

Relief From Shareholder Approval

As a result of COVID-19, the NYSE believes that it is likely that many listed companies will have urgent liquidity needs in the coming months due to lost revenues and maturing debt obligations. In those circumstances, listed companies will need to access additional capital that may not be available in the public equity or credit markets. When similar conditions existed after the financial crisis of 2008-09, the NYSE observed that many companies sought capital by selling significant amounts of equity in private placement transactions to a single investor or small group of investors, in many cases limited to or including existing major shareholders in the company. The NYSE noted that companies raising capital in that manner at that time were often limited by the NYSE’s shareholder approval requirements with respect to the size and structure of the transactions they were able to undertake.

Related Parties

Section 312.03(b) of the Listed Company Manual requires, among other things, shareholder approval of any issuance to a director, officer or substantial security holder of the company, which are referred to as a related party, or to an affiliate of a related party, if the number of shares of common stock to be issued, or if the number of shares of common stock into which the securities may be convertible or exercisable, exceeds either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance. A limited exception permits cash sales to related parties and their affiliates that meet a market price test set forth in the rule, which is referred to as the Minimum Price, and that relate to no more than 5% of the company’s outstanding common stock.

Given the extraordinary nature of the current circumstances, the NYSE proposes a partial waiver of the application of Section 312.03(b) through June 30, 2020, with the waiver specifically limited to transactions that involve the sale of the company’s securities for cash at a price that meets the Minimum Price requirement as set forth in Section 312.04, subject to certain limitations.  In addition, to qualify for this waiver, a transaction must be reviewed and approved by the company’s audit committee or a comparable committee comprised solely of independent directors.

The effect of the proposed waiver discussed above is to allow companies to sell their securities to related parties and other persons subject to Section 312.03(b) without complying with the numerical limitations of that rule, as long as the sale is in a cash transaction that meets the Minimum Price requirement and also meets certain other requirements.

Private Placements

Section 312.03(c) of the Listed Company Manual also requires shareholder approval of any transaction relating to 20% or more of the company’s outstanding common stock or 20% of the voting power outstanding before such issuance other than a public offering for cash. Section 312.03(c) includes an exception for transactions involving a cash sale of the company’s securities that comply with the Minimum Price requirement and also meet the definition of a “bona fide private financing” as set forth in the rule.  A bona fide private financing does not permit the sale of more than five percent of the shares of the issuer’s common stock or more than five percent of the issuer’s voting power before the sale to one purchaser or group of related purchasers.

Many private placement transactions under the current market conditions may also exceed the 20% threshold established by Section 312.03(c). Therefore, given the extraordinary nature of the current circumstances, the NYSE also proposes to waive through and including June 30, 2020, for purposes of the bona fide financing exception to the 20% requirement, the 5% limitation for any sale to an individual investor in a bona fide private financing pursuant to Section 312.03(c) and to permit companies to undertake a bona fide private financing during that period in which there is only a single purchaser.  The change of control requirements of Section 312.03(d) are still applicable.

The effect of the foregoing proposed waiver is a listed company would be exempt from the shareholder approval requirement of Section 312.03(c) in relation to a private placement transaction regardless of its size or the number of participating investors or the amount of securities purchased by any single investor, provided that the transaction is a sale of the company’s securities for cash at a price that meets the Minimum Price requirement and complies with the change of control requirements of Section 312.03(d). If any purchaser in a transaction benefiting from this waiver is a related party or other person subject to Section 312.03(b), such transaction must be reviewed and approved by the company’s audit committee or a comparable committee comprised solely of independent directors.

Market Capitalization and Stock Price

The NYSE noted the U.S. and global equities markets have experienced unprecedented market wide declines as a result of the ongoing spread of COVID-19. As a consequence, since the commencement of the current market turbulence in the last week of February 2020, the NYSE has experienced an unusually high number (as compared to historical levels) of listed companies:

  • that may soon be designated as below compliance with continued listing standards, as set forth in Section 802.01B of the Listed Company Manual and be subject to a maximum 18-month cure period, as a consequence of having both stockholders’ equity of less than $50 million and an average global market capitalization over a consecutive 30 trading-day period of less than $50 million, which is referred to as the $50 Million Standard; or
  • that have stock prices that have fallen below the NYSE’s $1.00 price requirement for capital and common stock set forth in Section 802.01C of the Listed Company Manual (i.e., the average closing price of their stock has fallen below $1.00 over a consecutive 30 trading day period), which is referred to as the Dollar Price Standard, and that are consequently subject to a six month compliance plan period or that may imminently fall below compliance with that listing standard.

In response to the conditions described above, the NYSE proposes to suspend, through and including June 30, 2020, the application of the $50 Million Standard and Dollar Price Standard. The NYSE notes that the waiver it proposes in relation to the Dollar Price Standard is identical to a waiver it implemented at the time of the financial crisis.

The NYSE’s proposed suspension of the continued listing standards is in addition to the ongoing temporary suspension of the $15 million market capitalization standard in Section 802.01B through and including June 30, 2020, for which the NYSE previously submitted an earlier rule filing.

The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, is a little bit over a week old and public companies have begun to make disclosures regarding its impact in SEC filings.

Perhaps the most frequent disclosures relate to the tax provisions of the CARES Act:

Frontier Communications Corporation 10-K:  On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is currently evaluating the impact of the CARES Act, but at present does not expect that the NOL carryback provision of the CARES Act would result in a material cash benefit to us.

Sequential Brands Group Inc.10-K: On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law. Certain provisions of the CARES Act impact the 2019 income tax provision computations of the Company and will be reflected in the first quarter of 2020, or the period of enactment. The CARES Act contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to Section 163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. This modification would significantly increase the allowable interest expense deduction of the Company and result in significantly less taxable income for the year-ended 2019, resulting in less utilization of net operating losses in that year. The change in the interest expense limitation pursuant to the CARES Act will not have an impact to the first quarter of 2020, other than an increase in the net operating loss deferred tax asset. As a result of the CARES Act, it is anticipated that the Company will fully utilize all interest expense that was deferred beginning in 2018 with no additional disallowed interest expense in 2020.

Some discuss the CARES Act in risk factors:

RH 10-K:  In recognition of the significant threat to the liquidity of financial markets posed by COVID-19, the Federal Reserve and Congress have taken dramatic actions to provide liquidity to businesses and the banking system in the U.S. For example, on March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), a sweeping stimulus bill intended to bolster the U.S. economy, among other things, and provide emergency assistance to qualifying businesses and individuals. There can be no assurance that these interventions by the government will be successful, and the financial markets may experience significant contractions in available liquidity. While the Company may receive financial, tax or other relief and other benefits under and as a result of the CARES Act, it is not possible to estimate at this time the availability, extent or impact of any such relief. In addition, store closures and other operational difficulties faced by the Company may negatively affect the Company’s financial condition and restrict the availability of liquidity for its operational needs, including due to, among other reasons, increased and unforeseeable liquidity needs and limited flexibility to control expenses in line with potential decreases in revenue. If the Company is not able to arrange financing to repay its debt obligations, or to extend the maturities of existing debt or otherwise refinance the Company’s obligations as needed, we may experience a material adverse effect on our business and operations . . .

Others discuss the executive compensation provisions of the CARES Act in the event the issuer decides to avail itself to applicable assistance in the CARES Act:

MGM Resorts International 8-K:  The Hornbuckle Employment Agreement provides that, to the extent required by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act), in connection with the Company becoming eligible for or entering into a loan, loan guarantee or other form of financial assistance from a governmental entity, Mr. Hornbuckle will agree to such limitations or reductions with respect to compensation and severance pay as may be required to comply with the CARES Act.

 

The Southern District of New York granted the SEC’s request for a preliminary injunction halting a coin offering in Securities and Exchange Commission v. Telegram Group Inc. et al.  Among other things, the Court found that the SEC has shown a substantial likelihood of success in proving that Telegram’s plan to distribute Grams was an offering of securities under the Howey test to which no exemption applies.

As an aside, this is post No. 2,000 on Dodd-Frank.com.

In the first round of sales, or the Round One Sales, Telegram sold approximately 2.25 billion coins called Grams to 81 purchasers, or the Initial Purchasers, for $850 million, which included $385.5 million from 34 U.S. purchasers. The Grams were to be delivered when, as, and if an application called the TON Blockchain launched. The price per Gram was approximately $0.38. The Gram Purchase Agreements for Round One Sales included a lockup provision, which barred resale of Grams after their delivery to the Initial Purchaser.  Three months after receiving the purchased and delivered Grams, the Round One Purchaser would be permitted to resell up to one quarter of its allotment of Grams. The remaining three quarters of the Grams would be free of restrictions in three equal tranches: 6, 12, and 18 months after the launch of the TON Blockchain. By February 2, 2018, the SEC had contacted Telegram regarding the Round One Sales.  On February 13, 2018, Telegram filed a Form D for the Round One Sales, claiming an exemption under Rule 506(c).

Telegram argued that there were two distinct sets of transactions at issue in this case, one subject to the securities laws and one that is not. In Telegram’s view, the first set of transactions was the offer and sale of the “interests in Grams,” as embodied in the Gram Purchase Agreements, to the Initial Purchasers. While Telegram conceded that the Initial Purchasers’ “interest in a Grams” are a security, it claimed an exemption from registration under Regulation D. Telegram argued that a second and distinct set of transactions was the delivery of the newly created Grams to the Initial Purchasers upon the launch of the TON Blockchain. Telegram stressed that, because, upon launch, Grams would have “functional consumptive uses” (i.e. could be used to store or transfer value), Grams would be a commodity and, therefore, not subject to the securities laws.

The Court found the scheme the scheme was “a disguised public distribution.” Telegram did not intend for the Grams to come to rest with the Initial Purchasers.  Telegram built economic incentives into the sales, including large discounts and differential lockups, to ensure that the Initial Purchasers resold Grams soon after launch.  One requirement of Rule 506(c) exemption is that the issuer “exercise reasonable care to assure that the purchasers of the securities are not underwriters within the meaning of section 2(a)(11) of the [Securities] Act,” which in turns requires a“[r]easonable inquiry to determine if the purchaser is acquiring the securities for himself or for other persons.”

Telegram argued that, even if Initial Purchasers are statutory underwriters, it complied with Rule 502(d) by taking reasonable care to ensure that the Initial Purchasers were purchasing for themselves and not to resell to their Grams to others. Specifically, Telegram pointed to a representation and warranty in each Gram Purchase Agreement that required the Initial Purchasers to warrant that they were “purchasing the Tokens for [their] own account and not with a view towards, or for resale in connection with, the sale or distribution.”  However, in evaluating economic reality of this scheme, legal disclaimers do not control. The representation and warranty that the Initial Purchasers purchased without a view towards resale rings hollow in the face of the economic realities of the 2018 Sales. From Telegram’s perspective, it was critical that the Initial Purchasers could flip their Grams in a post-launch secondary market because this feature would increase the amount of money it could raise.

The Court did not find that Telegram violated any laws but only granted the SEC’s motion for a preliminary injunction.

The FTC announced early terminations would once again be available for merger and acquisition filings under the HSR Act.  On Monday, March 13, as part of the FTC’s response to the COVID-19 coronavirus situation, and in partnership with the Antitrust Division of DOJ, the FTC announced that the FTC’s Premerger Notification Office would adopt a temporary e-filing program for notifications under the Hart-Scott-Rodino Act. The e-filing transition resulted in a suspension of requests for early termination.

In light of the success of the temporary e-filing program to date, requests for early termination will again be processed, but with some changes to the ordinary process. Effective Monday, March 30, the FTC and DOJ will resume the practice of granting early termination of the HSR Act’s waiting periods when both agencies have determined that no enforcement action will be taken during the waiting period.

In addition, in the announcement made by the FTC, the following topics were discussed:

  • Early termination is not a right.
  • Parties should not reach out to advocate for early termination.
  • Early termination will be granted but only as time and resources allow. Early termination will, for the duration of the COVID-19 pandemic crisis, be available on a more limited basis than has historically been the case. Specifically, it will be granted in fewer cases, and more slowly, than under normal circumstances.
  • Competitive concerns will be fully investigated in every case, and doubts will be resolved against granting early termination.
  • The FTC will continue to monitor its workflow and make adjustments at any time.

We previously noted that as a result of COVID-19 the SEC, pursuant to an order, provided publicly traded companies with an additional 45 days to file certain disclosure reports if designated conditions were met. One of the conditions was that an Form 8-K be filed disclosing certain information.  We have noted a number of Form 8-Ks being filed disclosing additional time was needed to file in accordance with the SEC order. Three recent filings are noted below.

Global Seed Corporation: The company discloses the current outbreak of COVID-19 “has posed a significant impact on the Company to file on a timely basis its Annual Report on Form 10-K for the year ended December 31, 2019 (the “Annual Report”) that is due March 30, 2020 (the “Original Due Date”), and therefore the Company elected to rely on the conditional filing relief provided under the SEC Order. In response to the government’s call to contain COVID-19 and to protect our employees’ health, our offices had been closed since January 2020 and we did not restart our operations until the beginning of March 2020. Our accounting team and independent auditors have not been able to conduct on-site accounting and auditing work. Considering the lack of time for the compilation, dissemination and review of the information required to be presented and the importance of markets and investors receiving materially accurate information in the Annual Report, we have decided to rely on the SEC Order and endeavor to file the Annual Report no later than May 14, 2020, or within 45 days after the Original Due Date.”

Kandi Technologies Group, Inc.:  The company discloses the current outbreak of COVID-19 “has posed a significant impact on the Company to file on a timely basis its Annual Report on Form 10-K for the year ended December 31, 2019 (the “Annual Report”) that is due March 16, 2020 (the “Original Due Date”), and therefore the Company elected to rely on the conditional filing relief provided under the SEC Order. In response to the Chinese government’s call to contain COVID-19 and to protect our employees’ health, our offices at Zhejiang province, China had been closed since January 2020 and we did not restart our operations until late February. Our accounting team and independent auditors were not able to conduct on-site accounting and auditing work until March. Considering the lack of time for the compilation, dissemination and review of the information required to be presented and the importance of markets and investors receiving materially accurate information in the Annual Report, we have decided to rely on the SEC Order and endeavor to file the Annual Report no later than April 30, 2020, or within 45 days after the Original Due Date.”

Theron Resource Group:  The company discloses the current outbreak of COVID-19 “has posed a significant impact on the Company to file on a timely basis its Annual Report on Form 10-K for the year ended December 31, 2019 (the “Annual Report”) that is due March 30, 2020 (the “Original Due Date”). Considering the lack of time for the compilation, dissemination and review of the information required to be presented and the importance of markets and investors receiving materially accurate information in the Annual Report, we have decided to rely on the SEC Order and endeavor to file the Annual Report no later than May 14, 2020, or within 45 days after the Original Due Date.”

We do not endorse any of the above as being compliant with the SEC order or being adequate.

We also note that on March 25, 2020, the Commission extended the order referenced above to cover filings due on or before July 1, 2020.

The SEC’s Division of Corporation Finance published formal disclosure guidance and other views of securities law compliance for public companies with respect to COVID-19.

  • On disclosure matters, the guidance recognizes that it may be difficult to assess or predict with precision the broad effects of COVID-19 on industries or individual companies. The guidance also acknowledges that the actual impact will depend on many factors beyond a company’s control and knowledge.
  • Even though the SEC recognizes the uncertainty and difficulty in assessing the impact of COVID-19 on a company’s business, the SEC reminds companies of the existing requirements under the federal securities laws to disclose known trends and uncertainties, including the known or reasonably likely effects of and the types of risks presented by COVID-19.  As a result, disclosure of these risks and COVID-19-related effects may be necessary or appropriate in management’s discussion and analysis, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements.
  • The guidance also` reminds public companies and related persons to comply with insider trading laws.
  • The SEC also addresses earnings releases and offers some limited relief with respect to the use of non-GAAP financial measures.

Assessing and Disclosing the Evolving Impact of COVID-19

The guidance encourages companies to consider a broad range of questions, when evaluating disclosures to allow investors to evaluate management’s view of the current and expected impact of COVID-19, including:

  • How has COVID-19 impacted your financial condition and results of operations? In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition?
  • How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources, such as revolving credit facilities or other sources changed, or is it reasonably likely to change?  Have your sources or uses of cash otherwise been materially impacted?  Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements?
  • How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets? For example, will there be significant changes in judgments in determining the fair-value of assets measured in accordance with U.S. GAAP or IFRS?
  • Do you anticipate any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on your financial statements?
  • Have COVID-19-related circumstances such as remote work arrangements adversely affected your ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures? If so, what changes in your controls have occurred during the current period that materially affect or are reasonably likely to materially affect your internal control over financial reporting?
  • Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so? Do you face any material resource constraints in implementing these plans?
  • Do you expect COVID-19 to materially affect the demand for your products or services?
  • Do you anticipate a material adverse impact of COVID-19 on your supply chain or the methods used to distribute your products or services? Do you expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues?
  • Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?
  • Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?

The guidance also notes the SEC’s view that companies are obligated to proactively revise and update disclosures as facts and circumstances change and highlights that the safe harbors for forward looking information in Section 27A of the Securities Act and Section 21E of the Exchange Act continue to be available to facilitate companies’ efforts to provide timely information to investors.

Need to Refrain from Trading Prior to Dissemination of Material Non-Public Information

According to the SEC, companies and other related persons need to consider their market activities, including the issuance or purchase of securities, in light of their obligations under the federal securities laws.  For example, where COVID-19 has affected a company in a way that would be material to investors or where a company has become aware of a risk related to COVID-19 that would be material to investors, the company, its directors and officers, and other corporate insiders who are aware of these matters should refrain from trading in the company’s securities until such information is disclosed to the public.

The SEC also stated when companies disclose material information related to the impacts of COVID-19, they are reminded to take the necessary steps to avoid selective disclosures by disseminating such information broadly to the public.  Depending on a company’s particular circumstances, it should consider whether it may need to revisit, refresh, or update a previous disclosure to the extent that the information becomes materially inaccurate.

Reporting Earnings and Financial Results

The SEC notes the ongoing and evolving COVID-19 impact will likely make it more difficult for companies and their auditors to complete the work required to maintain timely filings and encourages companies to proactively address financial reporting matters earlier than usual.  For example, to the extent a company or its auditors will need to consult with experts to determine how the evolving COVID-19 situation may impact its assets, including impairment of goodwill or other assets, it should consider engaging with those experts promptly so that its reporting remains as timely as possible, as well as complete and accurate.

The SEC also reminded companies of their obligations under Item 10 of Regulation S-K and Regulation G with respect to the presentation of non-GAAP financial measures, as well as the Commission’s recent guidance with respect to performance metrics disclosure.  According to the SEC, to the extent a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, it would be appropriate to highlight why management finds the measure or metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations.

The SEC understands that there may be instances where a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments that may require additional information and analysis to complete.  In these situations, the Division will not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results.  The provisional amount or range should reflect a reasonable estimate of COVID-19 related charges not yet finalized, such as impairment charges.

In addition, if a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures in reliance on the above position, the SEC stated it should limit the measures in its presentation to those non-GAAP financial measures it is using to report financial results to the Board of Directors.  The SEC reminded companies that it does not believe it is appropriate for a company to present non-GAAP financial measures or metrics for the sole purpose of presenting a more favorable view of the company.  Rather the SEC believes companies should use non-GAAP financial measures and performance metrics for the purpose of sharing with investors how management and the Board are analyzing the current and potential impact of COVID-19 on the company’s financial condition and operating results.  If a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, it should explain, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting.

SEC staff published an announcement regarding signature page maintenance as a result of the COVID-19 pandemic substantially as follows:

The staff of the Division of Corporation Finance, the Division of Investment Management, and the Division of Trading and Markets has received inquiries from persons and entities subject to Regulation S-T regarding the authentication document retention requirements under Rule 302(b) in light of health, transportation, and other logistical issues raised by the spread of coronavirus disease 2019 (COVID-19).  Given the public health and safety concerns related to COVID-19, the staff is providing the following statement to those affected by COVID-19 regarding Rule 302(b) of Regulation S-T.

Rule 302(b) of Regulation S-T requires that each signatory to documents electronically filed with the Commission under the federal securities laws “manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in typed form within the electronic filing.”  Such documents must be executed before or at the time the electronic filing is made.  Further, electronic filers must retain such documents for a period of five years and furnish copies to the Commission or its staff upon request.  The Commission has stated that the requirement to retain the paper original of authentication documents was “established to provide a satisfactory means by which signatories could authenticate and adopt their typed signatures appearing on filed documents for evidentiary purposes.”

The staff expects all persons and entities subject to Regulation S-T to comply with the requirements of Rule 302(b) to the fullest extent practicable based on their particular facts and circumstances.  The staff understands that some persons and entities subject to Regulation S-T may experience difficulties satisfying these requirements due to circumstances arising from COVID-19.  In light of these difficulties, the staff will not recommend the Commission take enforcement action with respect to the requirements of Rule 302(b) if:

  • a signatory retains a manually signed signature page or other document authenticating, acknowledging, or otherwise adopting his or her signature that appears in typed form within the electronic filing and provides such document, as promptly as reasonably practicable, to the filer for retention in the ordinary course pursuant to Rule 302(b);
  • such document indicates the date and time when the signature was executed; and
  • the filer establishes and maintains policies and procedures governing this process.

The signatory may also provide to the filer an electronic record (such as a photograph or pdf) of such document when it is signed.

The staff reminded issuers and signatories of the presumption within Section 6 of the Securities Act that a signature is validly authorized, and the staff expects filers subject to Regulation S-T to maintain procedures to ensure that any typed signature in an electronic filing is affixed with the authority of the signatory.  The staff also reminded signatories of the penalties under, among other things, 15 U.S.C. 78ff(a).

The Delaware Supreme Court held federal-forum provisions, or FFPs, in charters of Delaware corporations are facially valid in Salzberg et al v. Sciabacucchi.  The FFPs at issue generally provided that the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint arising under the Securities Act of 1933.  The Court of Chancery held that the FFPs at issue were invalid because the “constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law.”

The Court noted this was a facial challenge.  Accordingly, the plaintiff must show that the charter provisions “cannot operate lawfully or equitably under any circumstances.” Plaintiff must demonstrate that the charter provisions “do not address proper subject matters” as defined by statute, “and can never operate consistently with law.”

The FFPs are Valid Under Section 102(b)(1) of the DGCL

The Court noted Section 102(b)(1) of the Delaware General Corporation Law, or DGCL, authorizes two broad types of provisions:

  • any provision for the management of the business and for the conduct of the affairs of the corporation, and
  • any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders, . . . if such provisions are not contrary to the laws of this State.

The Court found an FFP could easily fall within either of these broad categories, and thus, is facially valid. FFPs involve securities claim related to the management of litigation arising out of the Board’s disclosures to current and prospective stockholders in connection with an IPO or secondary offering. Therefore, a bylaw that seeks to regulate the forum in regards to the filing of a registration statements and in the disclosure area, is a provision that addresses the “management of the business” and the “conduct of the affairs of the corporation.”

The Court also noted FFPs can provide a corporation with certain efficiencies in managing the procedural aspects of securities litigation following the United States Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund.

According to the Court:

In Cyan, the United States Supreme Court unanimously held that federal and state courts have concurrent jurisdiction over class actions based on claims brought under the 1933 Act, and that such claims are not removable to federal court.  When parallel state and federal actions are filed, no procedural mechanism is available to consolidate or coordinate multiple suits in state and federal court. The costs and inefficiencies of multiple cases being litigated simultaneously in both state and federal courts are obvious. The possibility of inconsistent judgments and rulings on other matters, such as stays of discovery, also exists. By directing 1933 Act claims to federal courts when coordination and consolidation are possible, FFPs classically fit the definition of a provision “for the management of the business and for the conduct of the affairs of the corporation.”

The FFPs Do Not Violate Federal Law or Policy

The Court held FFPs do not violate federal law or policy. Citing precedent, the Court noted the United States Supreme Court held that federal law has no objection to provisions that preclude state litigation of Securities Act claims. Specifically, the Supreme Court has upheld an arbitration provision in a brokerage firm’s standard customer agreement that precluded state court litigation of Securities Act claims. In enforcing the provision, the United States Supreme Court described it as “in effect, a specialized kind of forum selection clause” that “should not be prohibited under the Securities Act.”

FFPs and Inter-State Policy

The Court noted perhaps the most difficult aspect of this dispute is not with the facial validity of FFPs, but rather, with the “down the road” question of whether they will be respected and enforced by Delaware’s sister states. The Court noted the question of enforceability is a separate, subsequent analysis that should not drive the initial facial validity inquiry. However, the Court recognized that it is a powerful concern that infused much of the briefing in the case. The fear expressed was that Delaware’s sister states might react negatively to what could be viewed as an out-of-our-lane power grab.

The Court, however, stated there are persuasive arguments that could also be made that a provision in a Delaware corporation’s certificate of incorporation requiring Section 11 claims to be brought in a federal court does not offend principles of horizontal sovereignty—just as it does not offend federal policy. For instance, the Court stated that an FFP is analogous to forum selection clause in a contract which is often enforceable.  Also, given that many Section 11 claims closely parallel state law breach of fiduciary duty claims, many of the same reasons requiring application of the internal affairs doctrine would support the enforcement of FFPs. For these reasons, the Delaware Supreme Court found that forum selection provisions are facially valid.

The CFTC announced the Division of Swap Dealer and Intermediary Oversight (DSIO) has issued a number of no-action letters providing temporary, targeted relief to futures commission merchants, introducing brokers, swap dealers, retail foreign exchange dealers, floor brokers, and other market participants in response to the COVID-19 (coronavirus) pandemic. The spread of coronavirus has caused compliance with certain CFTC requirements to be particularly challenging or impossible because of displacement of registrant personnel from their normal business sites due to social distancing and other measures.

Subject to the conditions stated in the letters, the relief provided is as follows:

  • Relief for Futures Commission Merchants and Introducing Brokers. DSIO has granted temporary, targeted no-action relief to futures commission merchants and introducing brokers from CFTC regulations requiring recording of oral communications related to voice trading and other telephonic communications as well as time-stamping requirements when located in remote, socially-distanced locations.  DSIO has also granted 30 days of no-action relief to futures commission merchants from the requirement to furnish annual compliance reports to the CFTC.
  • Relief for Swap Dealers. DSIO has granted temporary, targeted no-action relief to swap dealers from CFTC regulations requiring recording of oral communications related to voice trading and other telephonic communications as well as time-stamping requirements when located in remote, socially-distanced locations.  DSIO has also granted 30 days of no-action relief to swap dealers from the requirement to furnish annual compliance reports to the CFTC.
  • Relief for Retail Foreign Exchange Dealers.  DSIO has granted temporary, targeted no-action relief to retail foreign exchange dealers from CFTC regulations requiring recording of oral communications related to voice trading and other telephonic communications as well as time-stamping requirements when located in remote, socially-distanced locations.
  • Relief for Floor Brokers.  DSIO has granted temporary, targeted no-action relief to floor brokers from CFTC regulations requiring recording of oral communications related to voice trading and other telephonic communications as well as time-stamping requirements when located in remote, socially-distanced locations.  DSIO has also granted relief from the requirement to be located on the premises of a designated contract market and to register as introducing brokers, which might otherwise have been triggered in connection with trading activities undertaken at remote, socially-distanced locations.
  • Relief for Members of Designated Contract Markets and Swap Execution Facilities.  DSIO has granted temporary, targeted no-action relief to members of designated contract markets and swap execution facilities from time-stamping requirements when located in remote, socially-distanced locations.

The Board of Governors of the Federal Reserve System, FDIC, and Office of the Comptroller of the Currency (agencies) are encouraging banking organizations to use their capital and liquidity buffers as they respond to the challenges presented by the effects of the coronavirus

According to the agencies, capital and liquidity buffers were designed to provide banking organizations with the means to support the economy in adverse situations and allow banking organization to continue to serve households and businesses. The agencies support banking organizations that choose to use their capital and liquidity buffers to lend and undertake other supportive actions in a safe and sound manner. The agencies expect banking organizations to continue to manage their capital actions and liquidity risk prudently.