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

The SEC has denied no-action relief to exclude the following shareholder proposal submitted to several companies by Jonathan Kalodimos:

Resolved: Shareholders of ITT Corporation ask the board of directors to adopt and issue a general payout policy that gives preference to share repurchases (relative to cash dividends) as a method to return capital to shareholders. If a general payout policy currently exists, we ask that it be amended appropriately.

Unsuccessful arguments to exclude the proposal included:

  • Exclusion under 14a-8(i)(7) because the Proposal relates to the ordinary business operations of the Company.
  • Exclusion under Rule 14a-8(i)(13) because the proposal relates to the specific amount of a dividend.
  • Exclusion under Rule 14a-8(i)(1) because it is on a matter which is not a proper subject for action by shareholders.
  • Exclusion under Rule 14a-8(i)(3) because the proposal contains misleading statements such that inclusion of the proposal would violate Rule 14a-9.

According to Jim Hamilton’s World of Securities Regulation, the SEC has denied no-action relief to six companies.

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.

 

A recent case decided by the Delaware Court of Chancery, In Re Ebix, Inc., held settlement with an activist investor, Barrington Capital Group, L.P. was not a defensive measure subject to scrutiny under Unocal.  Ebix entered into a Director Nomination Agreement with Barrington that contemplated expanding Ebix’s six-member board to eight, filling the two new seats with Barrington designees, and renominating all six incumbents. It further obligated the Board to support the two Barrington designees and pay Barrington $140,000, and required Barrington to withdraw its prior nominees and vote its shares in favor of Ebix’s six renominated incumbents. Further, Barrington relinquished the ability to engage in certain forms of dissenting conduct during an extendable “standstill period.” During this period, Barrington must vote all of its stock for the Board’s nominees and in harmony with Board recommendations on matters that include advisory executive compensation votes, as well as refrain from soliciting proxies, presenting proposals, or initiating litigation. The standstill period lasted until the earlier of ninety days before Ebix’s 2015 annual meeting and ten days before any advance notice deadline for making director nominations.  Ebix could extend this period to an equivalent time frame surrounding the 2016 annual meeting, however, by recommending or committing to recommend re-election of Barrington’s designees.

On a motion to dismiss, the Court held the Director Nomination Agreement was not subject to enhanced scrutiny under Unocal.  The Court noted enhanced scrutiny under Unocal applies “whenever the record reflects that a board of directors took defensive measures in response to a perceived threat to corporate policy and effectiveness which touches on issues of control.” Unocal may also apply in contexts aside from a board’s adoption of a defensive measure in response to a hostile takeover attempt; Unocal has also “applied to a preemptive measure where the corporation was not under immediate ‘attack’” but nonetheless enacted a measure “in contemplation of an ephemeral threat that could somehow materialize in the future.”

The Court found the Director Nomination Agreement was not a defensive measure. According to the Court, the Director Nomination Agreement reflected mutual concessions presumably in line with each contracting party’s intent: Barrington principally received two board seats and thereby a say in managing the affairs of Ebix, and Ebix received a guarantee that Barrington would abate dissenting behavior during the standstill period. Applying Unocal to the Board’s agreement to give up board seats, though conceivable as entrenching insofar as that concession was part of a quid pro quo earning Ebix the extinction of Barrington’s not-yet-launched proxy contest, is counterintuitive. A corporate action with collateral effects including a tendency to preserve incumbent control is not per se subject to Unocal scrutiny; and applying Unocal under the specific facts of this case would sponsor the enigmatic idea that the Board’s decision to dilute its own control of the corporation by surrendering board seats to insurgents is best viewed as a defensive action.

However, the Court found a series of bylaw amendments were defensive measures subject to enhanced scrutiny under Unocal.  The Court said the complaint established a factual chronology that, viewed in a light most favorable to plaintiffs, supported plaintiffs’ contention that the Board adopted the new bylaws to stave off Barrington. Three facts in particular support this inference. First, the bylaw amendments were prepared on November 17, 2014, six days after Barrington conveyed an intent to launch a proxy contest. The record before the Court provided no facts exposing this temporal proximity as coincidental—for example, nothing indicated the Board had been considering the bylaw amendments for some time before Barrington entered the picture. And although the Board did not adopt the bylaw amendments until December 19, 2014, by which time Barrington was contractually barred from running a slate, that sequence did not end the inquiry given the second fact: the Director Nomination Agreement’s standstill provision lasted, at most, roughly two years. Third and finally, although most of the bylaw amendments achieved little more than making shareholder action more cumbersome, one reform in particular had clear defensive value: the special meeting bylaw’s series of clauses that allow the Board, at the very least, to delay stockholder-initiated special meetings for 120 days and, at most, prevent elections from occurring at special meetings indefinitely. The Court noted bylaw amendments enacting shorter special meeting delay periods have received Unocal scrutiny in past cases.

The Court held those three facts, considered in concert, permitted the inference that the bylaw amendments were, in the aggregate, a forward-looking prophylactic designed with Barrington in mind, but holstered until the period of Barrington’s guaranteed complacency expired. The Court said Delaware law supports the imposition of Unocal scrutiny in this sort of scenario—that is, one where a board implements defensive measures in response to a threat to corporate control that is not immediate, but rather perceived as a future possibility.

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.

Matthew D. Cain, of the SEC, and Professor Steven Davidoff Solomon of the University of California, Berkeley – School of Law, published a report analyzing preliminary statistics for takeover litigation in 2015. According to the report, takeover litigation was substantially disrupted in 2015 by the Delaware courts’ willingness to challenge “disclosure only” settlements. For the full year, lawsuits were brought in 87.7% of completed takeovers versus 94.9% in 2014. However, the lawsuit rate dropped precipitously in the fourth quarter of 2015 to 21.4% of all transactions in the wake of Delaware’s challenge. There were also substantial delays in the approval of litigation settlements and attorneys’ fee awards. Multi-jurisdictional litigation continued its sharp decline, falling approximately 50% from its 2012 high. Despite the higher rates of dismissals, large awards and settlements were given in litigation arising from the Rural/Metro, Dole and Freeport-McMoRan transactions, among others.

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 Office of Compliance Inspections and Examinations, or OCIE, has published its list of 2016 examination priorities. Matters of interest for private equity and hedge fund sponsors include:

  • OCIE will continue conducting focused, risk-based examinations of selected registered investment advisers that it has not yet examined.
  • OCIE will examine private fund advisers, maintaining a focus on fees and expenses and evaluating, among other things, the controls and disclosure associated with side-by-side management of performance-based and purely asset-based fee accounts.

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.

 

We previously noted that the SEC had qualified Elio Motors Regulation A+ offering – the largest to date. Now, StartEngine, the platform on which the offering is being conducted, has announced that Elio Motors has raised nearly $16 million to date from this offering.  The offering is expected to close on February 1, 2016.

We caution, as does the press release, that the securities offered are “highly speculative.”

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 approved interim final rules implementing two provisions of the Fixing America’s Surface Transportation (FAST) Act, adopted by Congress in December, that revise financial reporting forms for emerging growth companies and smaller reporting companies.

The Congressionally mandated rules revise Forms S-1 and F-1 to provide that as long as emerging growth companies’ registration statements include all required financial information at the time of the offering, they will be allowed to omit certain historical period financial information prior to the offering.

In addition, the rules revise Form S-1 to allow smaller reporting companies to use incorporation by reference for future filings the companies make under the federal securities laws after the registration statement becomes effective.

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.

Some things are as certain as death, taxes and Adobe updates.  There will always be a proxy season, and maybe 15 years ago we started to think about ISS.  Now the list has grown to include Scott Stringer, Comptroller of the City of New York and James McRitchie.

While Mr. McRitchie announced some of his 2016 proxy access plans a while back, Scott Stringer has just announced his 72 proxy access proposals for 2016.   You can find the target list here.  For 2016, Comptroller Stringer and the New York City Pension Funds continued to focus on climate risk, board diversity and excessive CEO pay to select target companies, in addition to filing at some of their largest holdings.

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 Yang v. Navigators Group, Inc., the Southern District of New York granted summary judgment for the defendant on a dual pronged complaint claiming unlawful retaliation under the Sarbanes-Oxley Act and the Dodd-Frank Act.  While the Court analyzed the SOX claims in detail, it stated that while the elements of a whistleblower retaliation claim brought under the Dodd-Frank Act are slightly different from a whistleblower retaliation claim brought under SOX, the facts of this case required the Court to reach the same result on both claims.

Here the plaintiff failed to report any alleged violations concerning defendant’s investment risk models to the SEC or internally to defendant’s management, and therefore the Dodd-Frank claims failed. Among other things, the Court noted that with the exception of the plaintiff’s own self-serving testimony, there is not a single piece of evidence that corroborates her allegation that she complained to her superiors about misrepresentations of defendant’s “market risk without proper disclosure,” which was “illegal and constituted shareholder[] fraud.”

According to the Court, the plaintiff failed to show that a rational fact finder could determine that her complaint concerning defendant’s SEC proxy statements contributed, at least in part, to her termination. Thus, Plaintiff cannot establish another element of her second Dodd-Frank claim – that she was retaliated against for reporting the alleged violation. The Court stated the evidence presented by the defendant made clear that the plaintiff was fired for her performance following a presentation to the defendant’s senior executive team. One executive testified that “the meeting was an absolute disaster,” and that there was consensus among the senior executive team that the plaintiff should be fired. The defendant’s CEO testified to the same.

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 United States District Court for the District of Columbia has dismissed a two-count complaint asking the Court to mandate the SEC be required to adopt rules regarding disclosure of political contributions. The plaintiff had submitted a request for rulemaking to the SEC, and the SEC never took action on the request.

In the one count the plaintiff claimed that the SEC’s inaction constituted an “effective denial” of the rulemaking petition that was arbitrary, capricious, and contrary to law. The Court dismissed the claim noting that a claim under § 706(1) of the Administrative Procedures Act can proceed only where a plaintiff asserts that an agency failed to take a discrete agency action that it is required to take. The SEC did not deny the petition; it merely failed to respond to it. Since the SEC did not deny the petition and the plaintiff did not assert that the SEC “failed to act in response to a clear legal duty,” it followed that the plaintiff failed to state a valid APA claim upon which relief can be granted.

In the other count the plaintiff claimed that SEC’s failure to respond to the rulemaking petition was arbitrary, capricious, and contrary to law. The plaintiff claimed Section 25(b)(1) of the Exchange Act granted the Court jurisdiction to hear the claim.  The Court found otherwise noting that portion of the statute involves challenges to final rules promulgated pursuant to specific enumerated provisions of the Exchange Act, and here there were no final rules.  The Exchange Act makes clear in Section 25(a)(1) that review of all “final order[s]” lies in the circuit courts of appeals –– not in the district courts. When the discrete agency action sought –– a final SEC order on a petition for rulemaking –– is itself reviewable exclusively by a circuit court, then an APA unreasonable delay claim is also reviewable exclusively by a circuit.  Therefore this count was dismissed for lack of jurisdiction.

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 approved the NYSE proposal to exempt early stage companies from having to obtain shareholder approval before issuing shares for cash to related parties. Under the revised rules, Sections 312.03(b) and 312.04 of the Listed Company Manual are amended to provide an exemption to an “early stage company” listed on the NYSE from having to obtain shareholder approval, under certain circumstances, before issuing shares of common stock, or securities convertible into or exercisable for common stock, to the following “exempted parties”:

  • director, officer or substantial security holder of the company, referred to as related parties,
  • subsidiary, affiliate or closely-related person of a related party, or
  • a company or entity in which a related party has a substantial direct or indirect interest.

In particular, shareholder approval will no longer be required under Section 312.03(b) for an “early stage company,” before the issuance of shares for cash to an exempted party, provided that the company’s audit committee or a comparable committee comprised solely of independent directors reviews and approves of all such transactions prior to their completion.

An early stage company is defined as a company that has not reported revenues greater than $20 million in any two consecutive fiscal years since its incorporation.

In its first formal recommendation to the Commission, the SEC Office of the Investor Advocate recommended that the Commission not approve the proposed rule change. Nonetheless, the Commission approved the rule change noting that that the proposal was consistent with the Exchange Act.

The Commission acknowledged however “the important contributions that are being made by its Investor Advocate on a range of important policy matters, including those raised by individual proposed rule changes filed by the exchanges, such as the proposal that is the subject of this Order. While the Commission today determined that the NYSE’s proposed rule change is consistent with the Act, the Commission encourages the Investor Advocate to continue bringing important matters to our attention, including identifying circumstances where incremental changes, while consistent with the Act, may be contributing to cumulative impacts that harm investors or impede fair and orderly markets. In this instance, the comments of the Investor Advocate prompted the Exchange to bolster the justification for its proposal, including through the provision of additional data, and to clarify its limited scope. As a result, the extent and quality of information available to the Commission in considering the proposed rule change was substantially enhanced, to the benefit of investors and all market participants.”

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.