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

ISS has commenced its 2016 proxy voting policy survey. Some of the issues ISS seeks comment on include:

  • Is it appropriate to use non-GAAP or adjusted GAAP metrics for compensation programs?
  • What types of equity compensation are appropriate for non-executive directors?
  • When should a net operating loss poison pill be opposed?
  • What types of unilateral charter or by-law amendments warrant holding directors accountable on a long-term basis?
  • If a board adopts a proxy access by-law that has material restrictions not included in a successful shareholder proposal, what restrictions are problematic enough to warrant a “withhold” or “against” vote for directors?
  • When is a director considered “overboarded”?
  • What should be considered when determining whether a former executive, other than a CEO, is considered independent?
  • What metrics, if included in the ISS report, would be helpful in assessing capital allocation decisions, share buybacks and the efficacy of board stewardship?

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.

 

There has been a debate about whether a whistleblower must report information about a violation of securities laws to the SEC, as opposed to internal reporting, to qualify for protection under the anti-retaliation provisions of the Dodd-Frank Act.  The debate is demonstrated by the Fifth Circuit’s decision in Asadi v. G.E. Energy (USA), LLC.

As a result of the debate the SEC has issued interpretive guidance to add in its own two cents and to reign in further decisions tending in the direction of Asadi.  According to the SEC, the Dodd-Frank Act was ambiguous, and to clarify the ambiguity it included two separate definitions of a “whistleblower” in SEC rules.  One definition, which is set forth in Rule 21F-2(a), is meant to apply only to the award and confidentiality provisions of Section 21F of the Exchange Act.  This definition requires reporting to the SEC in under Rule 21F-9(a). The second definition, which is set forth in Rule 21F-2(b)(1), and which is designed to implement the anti-retaliation provisions, does not require reporting to the SEC.

The interpretive guidance states that for purposes of implementing the anti-retaliation provisions, an individual’s status as a whistleblower does not depend on adherence to the reporting procedures in Rule 21F-9(a) and is determined solely by Rule 21F-2(b)(1). The SEC offers the following reasoning as justification:

  • The fact that Rule 21F-2(b)(1) expressly and specifically applies in the employment retaliation context demonstrates that it should control over Rule 21F-9(a).
  • The contrast between Rule 21F-2(a) and Rule 21F-2(b)(1) further supports the interpretation that the availability of employment retaliation protection is not conditioned on an individual’s adherence to the Rule 21F-9(a) procedures.
  • The interpretation best comports with the overall goal in implementing the whistleblower program. Specifically, by providing employment retaliation protections for individuals who report internally first to a supervisor, compliance official, or other person working for the company that has authority to investigate, discover, or terminate misconduct, the interpretation avoids a two-tiered structure of employment retaliation protection that might discourage some individuals from first reporting internally in appropriate circumstances and, thus, jeopardize the investor-protection and law-enforcement benefits that can result from internal reporting.

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 Fox v. CDX Holdings, Inc., the Delaware Court of Chancery held that option holders could not be burdened by an escrow imposed on equity holders in a merger transaction when the terms of the option plan did not permit the escrow to be imposed.

The option conversion provision of the merger agreement purported to convert the options into the right to receive certain consideration, defined the consideration in terms of the Per Share Common Payment, and thereby incorporated the escrow provisions in the merger agreement. The Court noted that the option plan gave the board discretion as to whether to cancel the options in connection with the merger, but if it did, then the option holders were entitled to receive the difference between the fair market value and the exercise price for all shares of common stock subject to exercise.  However, the plan did not permit an escrow.

The Court examined Section 251(b) of the DGCL and noted that a merger agreement can convert shares into the right to receive consideration that incorporates the outcome of an indemnification mechanism.  The power to specify the package of consideration into which shares are converted and to make the consideration dependent upon facts outside the merger agreement enables deal planners to bind non-signatory stockholders to post-closing adjustments, including escrow arrangements, when those stockholders otherwise would not be bound under basic principles of contract and agency law.

However, options are not shares, and option holders are not stockholders.  Options are rights granted pursuant to Section 157 of the DGCL. The rights and obligations of the parties to the option are governed by the terms of their contract.  Section 251(b)(5) of the DGCL does not authorize the conversion of options in a merger.  The option plan could have been drafted differently, such as by providing that holders of options cancelled in connection with the merger would receive the same consideration received by holders of stock, less the exercise price. But the option plan did not say that.

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 State National Bank of Big Spring v. Lew,  the United States Court of Appeals for the District of Columbia Circuit ruled that the plaintiff had standing to challenge the constitutionality of the CFPB.  The Court made quick work of the question, noting that the CFPB has imposed additional obligations on the plaintiff which created standing.  Separately, the Court ruled that the questions was ripe, and the plaintiff did not have to wait for an enforcement action.  The Court noted that it would make little sense to force a regulated entity to violate a law (and thereby trigger an enforcement action against it) simply so that the regulated entity can challenge the constitutionality of the regulating agency.

The plaintiff also contested the legality of President Obama’s recess appointment of the Bureau’s Director, Richard Cordray. Because of that allegedly illegal recess appointment, the plaintiff claims that the Bureau has operated in an unconstitutional manner. The Court ruled that, for the same reasons that the plaintiff has standing to challenge the constitutionality of the Bureau, the plaintiff has standing to challenge Director Cordray’s recess appointment.  Further, the Court said for the same reasons that the plaintiff’s challenge to the Bureau is ripe, the plaintiff’s challenge to Cordray’s recess appointment is likewise ripe.

The Court also ruled that the plaintiff did not have standing to challenge the constitutionality of the Financial Stability Oversight Council, or FSOC.  The plaintiff claimed FSOCs designation of GE Capital as “too big to fail” gave GE, a competitor of plaintiff, a funding advantage.  The Court said the problem with that novel theory is that the link between (i) the enhanced regulation of GE Capital, (ii) any alleged reputational benefit to GE Capital, and (iii) any harm to State National Bank is simply too attenuated and speculative to show the causation necessary to support standing.

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.

 

Tiny deals can bring large complications.  Mannix v. PlasmaNet, Inc. involved appraisal rights in a merger where the merger consideration, after adjustments, amounted to $114,000, to be split amongst 19,307,715 shares, or roughly six-tenths of a penny per share.

Under Section 262(e) of the DGCL, there need be only one appraisal petition—filed by the surviving corporation or by a former stockholder—to commence an appraisal proceeding and thereby entitle all former stockholders with perfected appraisal rights to receive what the Court determines to be the “fair value” of the corporation’s stock. In the interests of judicial economy. it does not make sense for each dissenting stockholder to file a separate petition.

Mannix was the petitioner in the appraisal action.  Certain non-appearing dissenters who did not file the appraisal petition entered into a settlement agreement to receive equity in the surviving corporation conditioned upon a dismissal with prejudice of the non-appearing dissenters’ appraisal demands.  These non-appearing dissenters had to certify their status as accredited investors because they were receiving restricted stock.  The Company made the same settlement offer to petitioner and others who demanded appraisal rights.

The Court stated the petitioner had not cited any authority that would preclude the non-appearing dissenters from accepting a settlement unless the petitioner and all other non-appearing dissenters also are offered—and are able to accept—a settlement on the same terms. The Court noted that assuming for the sake of argument that PlasmaNet’s settlement offer cannot be accepted by all non-appearing dissenters because they are not accredited investors, that factor is not a persuasive reason in the Court’s opinion to preclude the PlasmaNet from settling with the non-appearing dissenters.

The Court rejected the petitioner’s argument that the proposed settlement would undercut the economics of the appraisal proceeding (by reducing the number of shares in play and thus the potential aggregate recovery in this action).  The Court noted that when  petitioner filed his appraisal petition, he was the first former PlasmaNet stockholder to do so. Petitioner and his counsel thus voluntarily accepted the risk that this appraisal proceeding might be limited to a few PlasmaNet shares. Even if petitioner expected that other former PlasmaNet stockholders had demanded appraisal, no provision of the appraisal statute prevents the non-appearing dissenters from seeking to settle their appraisal demands, as was done here.

The Court distinguished a case where the Court rejected a settlement amongst the petitioners in another action and the surviving company.  That case was different, according to the Court, because settlement by the petitioners would have terminated the appraisal for all of the non-appearing dissenters, leaving them without a remedy.

The Court did not decide the question as to whether the non-appearing dissenters that settle are responsible for a pro-rata portion of the petitioner’s attorney’s fees because the question was not yet ripe.

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 Federal Reserve Board approved a final rule requiring the largest, most systemically important U.S. bank holding companies to further strengthen their capital positions. Under the rule, a firm that is identified as a global systemically important bank holding company, or GSIB, will have to hold additional capital to increase its resiliency in light of the greater threat it poses to the financial stability of the United States.  The rule was adopted pursuant to section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The final rule establishes the criteria for identifying a GSIB and the methods that those firms will use to calculate a risk-based capital surcharge, which is calibrated to each firm’s overall systemic risk. Eight U.S. firms are currently expected to be identified as GSIBs under the final rule.

The final rule requires GSIBs to calculate their surcharges under two methods and use the higher of the two surcharges. The first method is based on the framework agreed to by the Basel Committee on Banking Supervision and considers a GSIB’s size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity.

The second method uses similar inputs, but is calibrated to result in significantly higher surcharges and replaces substitutability with a measure of the firm’s reliance on short-term wholesale funding. The Fed believes that during the financial crisis reliance on this type of funding left firms vulnerable to runs and fire sales, which may impose additional costs on the broader financial system and economy.

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 staffs of the agencies responsible for administering the Volcker Rule have again updated the Volcker Rule FAQs.  A new FAQ notes that the rule implementing the Volcker Rule and the accompanying preamble make clear that a registered investment company, or RIC, and a foreign public fund, or FPF, are not covered funds for purposes of the statute or implementing rules.  The FAQ goes on to note that staff of the agencies would not advise the agencies to treat a RIC or FPF as a banking entity under the implementing rules solely on the basis that the RIC or FPF is established with a limited seeding period, absent other evidence that the RIC or FPF was being used to evade the Volcker Rule. The FAQ notes staffs of the agencies understand that the seeding period for an entity that is a RIC or FPF may take some time, for example, three years, the maximum period of time expressly permitted for seeding a covered fund under the implementing rules. The seeding period generally would be measured from the date on which the investment adviser or similar entity begins making investments pursuant to the written investment strategy of the fund. Accordingly, staff of the agencies would not advise the agencies to treat a RIC or FPF as a banking entity solely on the basis of the level of ownership of the RIC or FPF by a banking entity during a seeding period or expect an application to be submitted to the Federal Reserve Board to determine the length of the seeding period.

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 Court of Appeals for the District of Columbia has entered a briefing schedule in Montana’s and Massachusetts’ challenge to Regulation A+.  The states’ briefs are due August 26, the SEC’s brief is due September 25 and final briefs are due November 17.

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 announced a whistleblower award of more than $3 million to a company insider whose information helped the SEC crack a complex fraud.  The multi-million dollar payout is the third highest award to date under the SEC’s whistleblower program.

In the award the SEC noted due consideration was given to the claimant’s unreasonable delay in reporting the illegal conduct to the Commission, although the SEC did  not apply this factor as severely as it otherwise might have done had the delay occurred entirely after the whistleblower award program was established by the Dodd-Frank Wall Street Reform and Consumer Protection.

The award also noted the SEC denied granting another award to a separate claimant because the claimant did not provide information that led to the successful enforcement of the action.

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 granted Crescent Capital Group LP no-action relief if it does  not retain an eligible risk retention interest under Section 15G of the Securities and Exchange Act of 1934 in connection with a refinancing of CLOs that were issued in a CLO transaction priced prior to the December 24, 2014 publication of the Credit Risk Retention Final Rules in the Federal Register.  The no-action relief is subject to several requirements set forth in the request for no-action relief.

Crescent argued no-action relief was  warranted to protect investor expectations that would be frustrated by application of risk retention requirements to the refinancing of a CLO transaction that was priced prior to the publication of the joint rules implementing Section 15G of the Exchange Act.

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.