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

The plaintiffs in In Re Volcano Corp. Stockholder Litigation were former public stockholders of a company that was acquired for $18 per share in an all-cash merger. Just five months prior, the target company had declined an offer of $24 per share from the same acquiror. After the companies announced the merger, the plaintiffs brought an action against the target company’s board of directors and others.  Among other things, the plaintiffs’ claimed that the board breached its fiduciary duties in approving the merger.

The transaction was structured as a two-step tender offer under Section 251(h) of the Delaware General Corporation Law, or DGCL. Section 251(h) permits a merger agreement to include a provision eliminating the requirement of a stockholder vote to approve certain mergers if the acquiror consummates a tender or exchange offer that results in the acquiror owning at least such percentage of the shares of stock of the target corporation that, absent Section 251(h), would be required to adopt the agreement of merger by the DGCL and by the certificate of incorporation of the target corporation.

Because Volcano’s stockholders received cash for their shares, the Revlon standard of review presumptively applied.  Defendants contended, however, and the Court agreed, that because Volcano’s fully informed, uncoerced, disinterested stockholders approved the merger by tendering a majority of the Company’s outstanding shares into the tender offer, the business judgment rule standard of review irrebuttably applied.

The Court noted that in Singh v. Attenborough, the Delaware Supreme Court held that upon a fully informed vote by a majority of a company’s disinterested, uncoerced stockholders, the business judgment rule irrebuttably applies to a court’s review of the approved transaction, even when that vote is statutorily required and the transaction otherwise would be subject to the Revlon standard of review.

The Court held the same reasoning in Attenborough applied to a two-step merger under Section 251(h) of the DGCL. The Court found that a target board’s role in negotiating a two-step merger subject to a first-step tender offer under Section 251(h) is substantially similar to its role in a merger subject to a stockholder vote under Section 251(c) of the DGCL.  A target corporation’s board must negotiate, agree to, and declare the advisability of the terms of both the first-step tender offer and the second-step merger in a Section 251(h) merger, just as a target corporation’s board must negotiate, agree to, and declare the advisability of a merger involving a stockholder vote under Section 251(c).  The Court also found that that there were no policy considerations that provided any basis for distinguishing between a stockholder vote and a tender offer.  According to the Court, a stockholder is no less exercising her “free and informed chance to decide on the economic merits of a transaction” simply by virtue of accepting a tender offer rather than casting a vote. And, judges are just as “poorly positioned to evaluate the wisdom of” stockholder-approved mergers under Section 251(h) as they are in the context of corporate transactions with statutorily required stockholder votes.

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 100 largest firms in the U.S., Stinson Leonard Street has 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.

As Broc Romanek noted on the TheCorporateCounsel.net, a number of SEC filings discussing Brexit have been made. I have noted some of the disclosures below, focusing on those that have been made since the vote result was announced.

Form 8-K

Many are updating their forward looking statements disclaimer to refer to Brexit in some fashion. Form 8-Ks filed since the Brexit vote have focused on immediate consequences to businesses, a sample is set forth below:

Cardtronics, Inc.

Steve Rathgaber, Cardtronics’ CEO, said, “We are pleased that Cardtronics stockholders have overwhelmingly voted in favor of our plan to redomicile in the United Kingdom. We plan to complete the steps necessary to effect the redomicile early in the third quarter.”

“Cardtronics carefully evaluated both potential outcomes of the Brexit vote in advance of announcing our plan to redomicile earlier this year. We believe our redomicile will better align Cardtronics’ corporate structure with our current and future business activities, including our substantial business presence in the U.K., where approximately 60 percent of our global workforce is based, and with the fastest-growing segments of Cardtronics today, which are in the U.K. and continental Europe,” Rathgaber added.

Enviva Partners, LP

Enviva Partners filed some slides used at an investor conference, one of which addresses Brexit. Amongst the factors pointed out are the company’s contracts are governed by UK law, and not EU regulations, the Company’s contracts are denominated in US dollars, and that while the effect of Brexit in the UK economy is uncertain, the UK government has independently pushed toward decarbonization, regardless of European Union membership.

PVH Corp.

In light of the results of the “Brexit” vote, with British voters choosing to leave the European Union and in anticipation of questions from investors, analysts and others, PVH Corp. is hereby disclosing that approximately 3% of its total net revenues are generated in the United Kingdom. This is consistent with previous disclosures regarding its businesses in key European markets.

Trinseo S.A.

Trinseo S.A. released a fact sheet on the composition of Trinseo’s European business in light of the United Kingdom’s recent referendum in favor of leaving the European Union (“Brexit”). The Company does not expect that Brexit will have a material impact on its business.

Form 10-K

Only one 10-K has been filed to date (June 29, 2016) after the Brexit vote.

Medtronic Public Limited Company

On June 23, 2016, the United Kingdom (U.K.) held a referendum in which voters approved an exit from the E.U., commonly referred to as “Brexit”. As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s future relationship with the E.U.  Although it is unknown what those terms will be, it is possible that there will be greater restrictions on imports and exports between the U.K. and E.U. countries and increased regulatory complexities. These changes may adversely affect our operations and financial results.

Form 10-Q:

Only one 10-Q has been filed to date after the Brexit vote by an operating company. Many will choose to add an additional risk factor, but disclosure in MD&A should be considered as well.  Prior to the Brexit vote, some disclosures were made, principally by funds or those in the commodity business, which focused on uncertainty in the prices of commodities and currencies.

Xura, Inc. (formerly known as Comverse, Inc.):

The announcement of the Referendum of the United Kingdom’s (or the U.K.) Membership of the European Union (E.U.) (referred to as Brexit), advising for the exit of the United Kingdom from the European Union, could cause disruptions to and create uncertainty surrounding our business, including affecting our relationships with our existing and future customers, suppliers and employees, which could have an adverse effect on our business, financial results and operations. The Referendum is non-binding; however if passed into law, negotiations would commence to determine the future terms of the U.K.’s relationship with the E.U., including the terms of trade between the U.K. and the E.U. The effects of Brexit will depend on any agreements the U.K. makes to retain access to E.U. markets either during a transitional period or more permanently. The measures could potentially disrupt the markets we serve and the tax jurisdictions in which we operate and adversely change tax benefits or liabilities in these or other jurisdictions, and may cause us to lose customers, suppliers, and employees. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate.

The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business. The strengthening of the U.S. dollar relative to other currencies may adversely affect our results of operations, in a number of ways, including:

–Our international sales are denominated in both the U.S. dollar and currencies other than U.S. dollars. A fluctuation of currency exchanges rates may expose us to gains and losses on non U.S. currency transactions and a potential devaluation of the local currencies of our customers relative to the U.S. dollar may impair the purchasing power of our customer and could cause customers to decrease or cancel orders or default on payment; and

–We translate sales and other results denominated in foreign currency into U.S. dollars for our financial statements. During periods of a strengthening dollar, our reported international sales and earnings could be reduced because foreign currencies may translate into fewer U.S. dollars.

The announcement of Brexit may also create global economic uncertainty, which may cause our customers to closely monitor their costs and reduce their spending budget on our products and services.

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 100 largest firms in the U.S., Stinson Leonard Street has 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 its third rulemaking in two days without holding a meeting, the SEC proposed a new rule that would require registered investment advisers to adopt and implement written business continuity and transition plans. The proposed rule is designed to ensure that investment advisers have plans in place to address operational and other risks related to a significant disruption in the adviser’s operations in order to minimize client and investor harm.

The proposed rule would require an adviser’s plan to be based upon the particular risks associated with the adviser’s operations and include policies and procedures addressing the following specified components: maintenance of systems and protection of data; pre-arranged alternative physical locations; communication plans; review of third-party service providers; and plan of transition in the event the adviser is winding down or is unable to continue providing advisory services. The plans would be required to address these elements that are critical to minimizing and preparing for material service disruptions, but would permit advisers to tailor the detail of their plans based upon the complexity of their business operations and the risks attendant to their particular business models and activities.

The proposed rule and rule amendments also would require advisers to review the adequacy and effectiveness of their plans at least annually and to retain certain related records.

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 100 largest firms in the U.S., Stinson Leonard Street has 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.

Section 802 of the Sarbanes-Oxley Act added the following provision to 18 U.S.C. § 1519:

“Sec. 1519. Destruction, alteration, or falsification of records in Federal investigations and bankruptcy

Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.”

It’s proven to be a difficult provision to interpret. First, the Supreme Court held a fish was not a tangible object under this provision (the Yates case), and a later court held a SAAB was not a tangible object either.

Next comes the Second Circuit decision in United States v. Rowland.  John G. Rowland, the former governor of Connecticut, resigned that post in 2004 amid a corruption scandal, and later pled guilty to a federal charge of conspiracy to commit honest-services and tax fraud. After serving his sentence, Rowland sought to use his political experience by doing political consulting work on behalf of Republican candidates seeking federal office in Connecticut.

Political campaigns were understandably reluctant to use Mr. Rowland’s services because of the prior Federal charges. Not to be deterred, Mr. Rowland drafted contracts which stated he would provide services to entities other than a campaign, when in reality he intended to or did spend most of his time providing services to the campaign.  One contract was drafted, not signed and never implemented, while another contract was drafted, signed and implemented.

Rowland was convicted on two counts of falsification of records in a federal investigation in violation of 18 U.S.C. § 1519 based on the two contracts he drafted.

Rowland argued on appeal that the documents could not be “falsified” within the meaning of the statute because to “falsify” means only to tamper with a preexisting document, not to create a new document from whole cloth. The Second Circuit rejected the argument, and distinguished the Supreme Court precedent in Yates.  According to the Court, Yates was based on the notion that the title of the statute refers to “Destruction, alteration, or falsification of records in Federal investigations and bankruptcy,” and a fish was not covered because the caption contains no suggestion that the section prohibits spoliation of any and all physical evidence.  The Court found here, unlike in Yates, interpreting “falsify”—in accordance with its dictionary definition—to include the creation of a document fits comfortably within the general purview of the statute suggested by the title.

Rowland also argued, based on a court decision interpreting another statute, that the contracts were not falsified because “there are only two ways in which a contract can possibly be considered “false.” First, a contract is false if a person forges or alters it. . . . The only other way in which a contract can be “false” is if it contains factual misrepresentations.” The Court rejected this argument noting the jury was entitled to conclude that the contracts were “falsified” in the sense that they were created to misrepresent the true relationships among the parties.

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 100 largest firms in the U.S., Stinson Leonard Street has 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.

Responding to a court order, the SEC adopted rules to require resource extraction issuers to disclose payments made to governments for the commercial development of oil, natural gas or minerals. The rules, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, are intended to further the statutory objective to advance U.S. foreign policy interests by promoting greater transparency about payments related to resource extraction.

The final rules require an issuer to disclose payments made to the U.S. federal government or a foreign government if the issuer engages in the commercial development of oil, natural gas, or minerals and is required to file annual reports with the Commission under the Securities Exchange Act. The issuer must also disclose payments made by a subsidiary or entity controlled by the issuer.

Under the final rules, resource extraction issuers must disclose payments that are: made to further the commercial development of oil, natural gas, or minerals; “not de minimis”; and within the types of payments specified in the rules. The final rules define commercial development of oil, natural gas, or minerals as exploration, extraction, processing, and export, or the acquisition of a license for any such activity.

The rules define “not de minimis” as any payment, whether a single payment or a series of related payments, which equals or exceeds $100,000 during the same fiscal year. Payments that must be disclosed are:  taxes; royalties; fees (including license fees); production entitlements; bonuses; dividends; payments for infrastructure improvements; and, if required by law or contract, community and social responsibility payments.  The disclosure must be made at the project level, similar to the approach adopted in the European Union and Canada.

The final rules include two targeted exemptions to the reporting obligations. One exemption provides that a resource extraction issuer that has acquired a company not previously subject to the final rules will not be required to report payment information for the acquired company until the filing of a Form SD for the first fiscal year following the acquisition. Another exemption provides a one-year delay in reporting payments related to exploratory activities. The Commission also could exercise its existing Exchange Act authority to provide exemptive relief from the requirements of the rules on a case-by-case basis.

The required disclosure will be filed publicly with the Commission annually on Form SD no later than 150 days after the end of its fiscal year. The information must be included in an exhibit and electronically tagged using the eXtensible Business Reporting Language (XBRL) format.  Resource extraction issuers are required to comply with the rules starting with their fiscal year ending no earlier than September 30, 2018.

A resource extraction issuer may use a report prepared for other disclosure regimes to comply with the rules if the Commission determines that the requirements applicable to those reports are substantially similar. In a separate order, the Commission determined that the current reporting requirements of the European Union Accounting and Transparency Directives (as implemented in a European Union or European Economic Area member country), Canada’s Extractive Sector Transparency Measures Act, and the U.S. Extractive Industries Transparency Initiative (USEITI) are substantially similar to the Commission’s rules, subject to certain conditions specified in the order and in the final 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 100 largest firms in the U.S., Stinson Leonard Street has 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 proposed amendments that would increase the financial thresholds in the “smaller reporting company” definition. The proposal to update the definition would expand the number of companies that qualify as smaller reporting companies, thus qualifying for certain existing scaled disclosures provided in Regulation S-K and Regulation S-X.

The proposed rules would enable a company with less than $250 million of public float to provide scaled disclosures as a smaller reporting company, as compared to the $75 million threshold under the current definition.  In addition, if a company does not have a public float, it would be permitted to provide scaled disclosures if its annual revenues are less than $100 million, as compared to the current threshold of less than $50 million in annual revenues.

In addition, as in the current rules, once a company exceeds either of the thresholds, it will not qualify as a smaller reporting company again until public float or revenues decrease below a lower threshold. Under the proposal, a company would qualify only if its public float is less than $200 million or, if it has no public float, its annual revenues are less than $80 million.

The SEC is not proposing to increase the $75 million threshold in the “accelerated filer” definition. As a result, companies with $75 million or more of public float that would qualify as smaller reporting companies would be subject to the requirements that apply currently to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal controls over reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002.

The SEC gave a variety of reasons for the proposed rule change. According to the SEC the proposal addresses several recommendations made to us multiple times by our Advisory Committee on Small and Emerging Companies (ACSEC) and the SEC Government-Business Forum on Small Business Capital Formation (Small Business Forum), as well as comments from small registrants, Congress and others. The SEC also noted the FAST Act requires the Commission to revise Regulation S–K to further scale or eliminate disclosure requirements to reduce the burden on a variety of smaller registrants, including smaller reporting companies, while still providing all material information to investors.  Because a number of Regulation S-K items already provide scaled disclosure requirements for smaller reporting companies, raising the financial thresholds in the smaller reporting company definition would be responsive to the FAST Act because it would reduce the burden on smaller registrants by increasing the number of registrants eligible for scaled disclosure.

Generally smaller reporting companies can pick and choose which of the scaled disclosure provisions they want to apply. There is one instance where that is not the case.  Item 404 of Regulation S-K provides for expanded disclosure requirements applicable to smaller reporting companies for related party transactions.  Smaller reporting companies must comply with this more stringent standard.

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 100 largest firms in the U.S., Stinson Leonard Street has 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.

Tesla, in an offer to acquire SolarCity, appears to be the first to announce a major proposed acquisition by a blog post. Since an 8-K was also filed, it can’t be sole proof that social media is a recognized distribution channel for Regulation FD.  But dissemination was nonetheless rapid, with the first news apparently appearing on Twitter at about 4.11 pm, the 8-K being filed at 4.13 pm, and the first Wall Street Journal e-mail alert being received at 4.58 pm (all times Central).

There had to be some advance coordination between the parties, because SolarCity filed an 8-K almost simultaneously.  The exhibit includes an email from SolarCity’s CEO, in which he wisely advises employees not to comment on social media.

The Tesla 8-K also discloses that Tesla adopted an exclusive forum by-law the day before the acquisition was announced.

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 100 largest firms in the U.S., Stinson Leonard Street has 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 June 16, 2016, the House Financial Services Committee approved the Investment Advisers Modernization Act of 2016 (H.R. 5424) as part of a package of several economic growth bills. The bill passed with a vote of 47-12 and is sponsored by Representative Robert Hurt (R-VA).

Among other things the bill would require the SEC to revise:

  • Rule 204-2 under the Investment Advisers Act to provide that an investment adviser is not required to maintain due diligence materials used for a prospective investment if it is subject to a confidentiality agreement or internal written communications sent and received only by supervised persons of the investment adviser.
  • Rule 206(4)-1, which governs advertisements by investment advisers, to provide that the rule does not apply to advertisements published solely to qualified clients, knowledgeable employees of private funds, qualified purchasers and accredited investors.
  • Rule 204-3(c) to provide that delivery of a brochure to certain clients is not required if each investor in the client received, prior to the time of purchase, a private placement memorandum containing substantially the same information required by Part 2A or 2B of Form ADV.
  • Rule 204(b)-1 to provide than an investment adviser to a private fund (other than certain large hedge fund and liquidity fund advisers) is not required to report any information beyond that required by sections 1a and 1b of Form PF.
  • Require the SEC to revise Rule 204A-1 to provide that access persons of investment advisers who solely advise one or more clients that hold non-public securities need only submit transaction reports at a frequency specified in the investment adviser’s code of ethics, but not less frequently than annually.

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 100 largest firms in the U.S., Stinson Leonard Street has 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 CFTC has published a proposed supplement to its December 2013 proposed rule on position limits* that would, among other things, authorize designated contract markets and swap execution facilities (“exchanges”) to administer a more flexible approach to the bona fide hedge (“BFH”) exemption from position limits, allowing such exchanges to extend BFH recognition to hedges that do not fall within the CFTC’s list of “enumerated” hedges. Under the supplemental proposal, a qualified exchange could establish a process whereby it would, in accordance with rules submitted to the CFTC, accept applications from a person seeking a BFH exemption for a “non-enumerated” hedge. The following summarizes some of the more salient aspects of what such a process would look like under the supplemental proposal:

– Any person intending to exceed one of the CFTC’s position limits based on a non-enumerated BFH exemption would have to apply and receive notice of recognition of such exemption from an exchange in advance of the date such person’s position would exceed the applicable limit.

– The exchange would be required to determine whether to grant such a non-enumerated BFH exemption “in a timely manner” (but evidently not subject to any firm deadline).

– The CFTC could review the person’s application for the non-enumerated BFH exemption at any time (including after it is granted).

– Both the exchange and the CFTC could revoke a granted exemption at any time (in the case of revocation by the CFTC, at least, applicants must be given a commercially reasonable amount of time to liquidate their derivative position or otherwise come into compliance).

– The person making use of the exemption would be required to file a report with the exchange whenever it owned or controlled a position recognized as a non-enumerated BFH, report its offsetting cash positions, and update and maintain the accuracy of any such report.

– The person would have to reapply on at least an annual basis to continue using the same BFH exemption.

In addition, the supplemental proposal would authorize exchanges to recognize enumerated “anticipatory” BFH positions—via a pre-trade application process that: (1) is similar to the process for recognition of non-enumerated BFH positions and (2) appears to function as an alternative to the pre-trade filing process administered by the CFTC under the December 2013 proposed rule. The supplemental proposal also authorizes exchanges to exempt certain “spread positions” from position limits, including calendar spreads, quality differential spreads, processing spreads, and product or by-product differential spreads. Finally, the supplemental proposal would make certain changes to the base definition of a BFH position (removing the so-called “incidental” risk and “orderly manner” liquidation requirements) and would delay application of the “core principle” requiring an exchange to administer its own position limits on swaps (until such time as the exchange has access to “sufficient swap position information”).

In an accompanying statement, CFTC Chairman Timothy Massad stated that the proposed supplement is a “significant step toward finalizing [the] rules on position limits this year.”

Comments on the supplemental proposal must be submitted to the CFTC on or before July 13, 2016.

*The December 2013 proposed rule would establish position limits on 28 core referenced futures contracts in energy, agricultural, and metals commodities and certain swaps and other derivative contracts linked to such core referenced futures contracts.

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 100 largest firms in the U.S., Stinson Leonard Street has 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 States of Montana and Massachusetts had previously challenged Regulation A+’s preemption of state securities registration and qualification requirements in Tier-2 offerings. The United States Court of Appeals for the District of Columbia rejected the States’ challenge.

The dispute largely centered on the grant of authority to the SEC under the JOBS Act to define the term “qualified purchaser.” Applying Step 1 of the so-called Chevron analysis, the Court found the JOBS Act gave the SEC an explicit grant of definitional authority to decide who may purchase securities without the encumbrance of state registration and qualification requirements.  The clear grant of authority easily overcame the States’ hyper-technical arguments to the contrary.

In Step 2 of the Chevron analysis, a court will defer to the SEC as long as its definition is based on a permissible construction of the statute. Where there is an express delegation of authority, as there was here, the Court will give the regulation controlling weight unless it is arbitrary, capricious, or manifestly contrary to the statute.

In Step 2, the states largely reiterated the arguments the Court rejected in Step 1. The Court found that Congress clearly exempted qualified purchasers from state requirements. Further the SEC offered a reasoned explanation for the choice of its interpretation.  The fact that the SEC had proposed other definitions in the past bore little weight because an initial agency interpretation is not instantly carved in stone.

Finally, the States challenged Regulation A+ as arbitrary and capricious in violation of the Administrative Procedure Act. According to the States, a single paragraph was not enough to explain why the Regulation might minimize the adverse effects of blue sky preemption. The Court disagreed, stating the SEC provided a reasoned analysis of how the qualified purchaser definition strikes the appropriate balance between mitigating cost and time demands on issuers and providing investor protection.  According to the Court, the Tier-2 requirements reduced the need for, and expected benefits of, state review.

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 100 largest firms in the U.S., Stinson Leonard Street has 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.