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The SEC has adopted a final “pay ratio” rule required by Section 953(b) of the Dodd-Frank Act.  In general, the “pay ratio” rule requires public companies to disclose the median of the annual total compensation of all employees of a registrant (excluding the chief executive officer), the annual total compensation of that registrant’s chief executive officer, and the ratio of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer.

The disclosure is required in any annual report, proxy or information statement, or registration statement that requires executive compensation disclosure pursuant to Item 402 of Regulation S-K.

The disclosure requirement does not apply to emerging growth companies, smaller reporting companies, or foreign private issuers.

Public companies must comply with the final rule for the first fiscal year beginning on or after January 1, 2017.

Pay Ratio Disclosure

Specifically, the final rule requires disclosure of:

  • the median of the annual total compensation of all employees of the registrant (except the registrant’s chief executive officer, which the rule refers to as the PEO) (A);
  • the annual total compensation of the registrant’s PEO (B); and
  • the ratio of the amount in (B) to the amount in (A), presented as a ratio in which the amount in (A) equals one, or, alternatively, expressed narratively in terms of the multiple that the amount in (B) bears to the amount in (A).

As noted, the final rule permits registrants to choose one of two options to express the ratio. Registrants may disclose the pay ratio with the median of the annual total compensation of all employees equal to one and the PEO’s compensation as the number compared to one.  For example, if a registrant’s median annual total compensation for employees is $50,000 and the annual total compensation of the PEO is $2,500,000, the PEO’s compensation is 50 times larger than the median employee’s compensation. The registrant may describe the pay ratio as 50 to 1 or 50:1. Alternatively, registrants may disclose the pay ratio narratively by stating how many times higher (or lower) the PEO’s annual total compensation is than that of the median employee. For example, the registrant may state that “the PEO’s annual total compensation is 50 times that of the median of the annual total compensation of all employees.”

“All Employees” Covered Under the Rule

Types of Employees

The final rule defines “employee” to include a registrant’s U.S. and non-U.S. employees, as well as its part-time, seasonal, and temporary employees.  Because the definition refers to workers “employed by the registrant,” workers who provide services to the registrant or its consolidated subsidiaries as independent contractors or “leased” workers are excluded from the definition as long as they are employed, and their compensation is determined, by an unaffiliated third party.

Employed on Any Date Within Three Months of the Last Completed Fiscal Year

The final rule defines “employee” as an individual employed on any date of the registrant’s choosing within the last three months of the registrant’s last completed fiscal year. The final rule also requires registrants to disclose the date used to identify the median employee.

The SEC believes permitting registrants to choose a date within the last three months of their last completed fiscal year is appropriate because it provides registrants with some flexibility and could permit them additional time to identify their median employee in advance of their fiscal year end.

Employees Located Outside the United States

The final rule’s definition of “employee” includes a registrant’s U.S. and non-U.S. employees.  However, the final rule includes two exemptions:

  • an exemption that applies when a foreign jurisdiction’s data privacy laws or regulations are such that, despite its reasonable efforts to obtain or process information necessary to comply with the rule, a registrant is unable to do so without violating those laws or regulations, and
  • a de minimis exemption.

Foreign Data Privacy Law Exemption

The final rule includes an exemption to the general requirement that non-U.S. employees be included in the pay ratio disclosure when a jurisdiction’s data privacy laws or regulations are such that, despite a registrant’s reasonable efforts to obtain or process information necessary to comply with the rule, it is unable to do so without violating those laws or regulations.

To prevent any potential manipulation, the rule requires the registrant to exercise reasonable efforts to obtain or process the information necessary for compliance with the final rule. As part of its reasonable efforts, the registrant must seek an exemption or other relief under the applicable jurisdiction’s governing data privacy laws or regulations and use the exemption if granted.

If a registrant excludes any non-U.S. employees in a particular jurisdiction under the data privacy exemption, it must exclude all non-U.S. employees in that jurisdiction. Additionally, the registrant must list the excluded jurisdictions, identify the specific data privacy law or regulation, explain how complying with the final rule violates the law or regulation (including the efforts made by the registrant to use or seek an exemption or other relief under such law or regulation), and provide the approximate number of employees exempted from each jurisdiction based on this exemption.

The registrant must also obtain a legal opinion that opines on the inability of the registrant to obtain or process the information necessary for compliance with the final rule without violating that jurisdiction’s laws or regulations governing data privacy, including the registrant’s inability to obtain an exemption or other relief under any governing laws or regulations. The legal opinion must be filed as an exhibit with the filing in which the pay ratio disclosure is included.

De Minimis Exemption

Under the de minimis exemption, registrants whose non-U.S. employees make up 5% or less of their total U.S. and non-U.S. employees may exclude all of them when identifying their median employee. If such a registrant chooses to exclude any non-U.S. employees under this exemption, it must exclude all of them. A registrant with more than 5% non-U.S. employees may also exclude non-U.S. employees up to the 5% threshold; provided that, if such a registrant excludes any non-U.S. employees in a particular foreign jurisdiction, it must exclude all the employees in that jurisdiction. The registrant may not pick and choose which employees to exclude in any one jurisdiction.

The final rule also requires a registrant using the de minimis exemption to provide certain disclosures. If the registrant excludes any non-U.S. employees under the de minimis exemption, it must disclose the jurisdiction or jurisdictions from which employees are being excluded, the approximate number of employees excluded from each jurisdiction under the de minimis exemption, the total number of its U.S. and non-U.S. employees irrespective of any exemption (data privacy or de minimis) and the total number of its U.S. and non-U.S. employees used for its de minimis calculation.

Cost-of-Living Adjustment

The final rule allows registrants the option to make cost-of-living adjustments to the compensation of their employees in jurisdictions other than the jurisdiction in which the PEO resides when identifying the median employee (whether using annual total compensation or any other consistently applied compensation measure), provided that the adjustment is applied to all such employees included in the calculation.  If the registrant chooses this option, the compensation of such employees will have to be adjusted to the cost of living in the jurisdiction in which the PEO resides. Further, if the registrant uses a cost-of-living adjustment to identify the median employee, and the median employee identified is an employee in a jurisdiction other than the one in which the PEO resides, the registrant must use the same cost-of-living adjustment in calculating the median employee’s annual total compensation and disclose the median employee’s jurisdiction. If a registrant does not make cost-of-living-adjustments to its employees when identifying the median employee, the registrant is not permitted to make cost-of-living adjustments to the median employee’s annual total compensation if the median employee is an employee in a jurisdiction other than the jurisdiction in which the PEO resides.

The final rule requires registrants to briefly describe any cost-of-living adjustments they used to identify the median employee or to calculate annual total compensation, including the measure used as the basis for the cost-of-living adjustment, and disclose the country in which the median employee is located. Additionally, the final rule requires that any registrant electing to present the pay ratio using a cost-of-living adjustment must also disclose the median employee’s annual total compensation and pay ratio without the cost-of-living adjustments. To calculate this pay ratio, the registrant will need to identify the median employee without using any cost-of-living adjustments.

Employees of Consolidated Subsidiaries

The final rule defines “employee” to include only the employees of the registrant and its consolidated subsidiaries.  The proposed rule had used a more expansive definition.

Acquisitions

The final rule also permits registrants that engage in business combinations and/or acquisitions to omit the employees of a newly-acquired entity from their pay ratio calculation for the fiscal year in which the business combination or acquisition occurs. In these cases, a registrant does not have to include these individual employees in its median employee calculation until the first full fiscal year following the acquisition. Registrants that exclude employees as a result of a business combination must disclose the relevant acquired business and the approximate number of employees that are excluded from the pay ratio calculation.

Any PEO Compensation in the Last Full Fiscal Year

The proposed rule did not discuss the compensation information that would be required if one or more of a registrant’s PEOs served only part of a fiscal year.  The final rule allows a registrant a choice of two options in calculating the annual total compensation for its PEO in situations in which the registrant replaces its PEO with another PEO during its fiscal year. In these situations, the registrant must disclose which option it chose and how it calculated its PEO’s annual total compensation. First, a registrant may take the total compensation calculated pursuant to Item 402(c)(2)(x) of Regulation S-K, and reflected in the Summary Compensation Table, provided to each person who served as PEO during the year and combine those figures. This figure would constitute the registrant’s annual total PEO compensation.

Alternatively, a registrant may look to the PEO serving in that position on the date it selects to identify the median employee and annualize that PEO’s compensation. For example, if the registrant chooses October 15 as the date to determine its median employee, the registrant would calculate the compensation of the person serving as PEO on that date and annualize that PEO’s compensation. If the person was PEO for six months and received $100,000 of total compensation, the registrant would use $200,000 as the annual total compensation of its PEO.

Additional Information is Permissible

An instruction to the final rule states that registrants may present additional ratios or other information to supplement the required ratio, but are not required to do so. The instruction states also that, if a registrant includes any additional ratios, the ratios must be clearly identified, not be misleading, and not be presented with greater prominence than the required ratio. Additional pay ratios are not limited to any particular information, such as pay ratios covering U.S. and non-U.S. employees.

Annualizing Permanent Employees is Permissible, but Other Compensation Adjustments are Prohibited

Annualization involves taking the compensation of an employee who worked for only part of the registrant’s fiscal year and projecting that compensation as if the employee worked the full fiscal year at the schedule that the employee worked for the portion of the year the employee worked. Annualization is allowed under the rule for full-time and part-time employees who did not work for the registrant’s full fiscal year for some reason, such as they were employees who were newly hired, on leave under the Family and Medical Leave Act of 1993, called for active military duty, or took an unpaid leave of absence during the period. Annualization is only allowed for permanent employees; it is not allowed under the final rule for seasonal or temporary employees.

A full-time equivalent adjustment involves taking the compensation of a part-time employee and projecting what the employee would have made if the employee were employed on a full-time basis. Full-time equivalent adjustments are prohibited under the final rule under all circumstances.

Identifying the Median Employee

Once Every Three Years

The final rule allows a registrant to identify the median employee whose compensation will be used for the annual total compensation calculation once every three years unless there has been a change in its employee population or employee compensation arrangements that it reasonably believes would result in a significant change in the pay ratio disclosure. If there have been no changes that the registrant reasonably believes would significantly affect its pay ratio disclosure, the registrant must disclose that it is using the same median employee in its pay ratio calculation and describe briefly the basis for its reasonable belief.

If the registrant is using the same median employee, it must calculate that median employee’s annual total compensation each year and use that figure to update its pay ratio disclosure each year.

Using Annual Total Compensation, Another Consistently Applied Compensation Measure, Statistical Sampling, Reasonable Estimates, or Other Reasonable Methods

The final rule does not specify any required methodology for registrants to use in identifying the median employee. Instead, the final rule permits registrants the flexibility to choose a method to identify the median employee based on their own facts and circumstances. To identify the median employee, registrants may use a methodology that uses reasonable estimates. The median employee may be identified using annual total compensation or any other compensation measure that is consistently applied to all employees included in the calculation, such as information derived from tax and/or payroll records. Also, in determining the employees from which the median is identified, a registrant is permitted to use its employee population or statistical sampling and/or other reasonable methods. In any event, the final rule requires a registrant to briefly describe the methodology it used to identify the median employee and any material assumptions, adjustments (including any cost-of-living adjustments), or estimates it used to identify the median employee or to determine total compensation or any elements of total compensation, which shall be consistently applied. The registrant also must clearly identify any estimates used.

The final rule permits registrants to use a consistently applied compensation measure, such as information derived from tax and/or payroll records, in determining the employees from which the median is identified as long as the registrant discloses the compensation measure used. For purposes of calculating the annual total compensation amounts when using a consistently applied compensation measure, the final rule permits registrants to use a measure that is defined differently across jurisdictions and may include different annual periods as long as within each jurisdiction, the measure is consistently applied. A registrant, however, would not be permitted to use an entirely different type of measure across jurisdictions that would not be consistently applied. The final rule does not require registrants to use any specific compensation measure when identifying the median employee.  After the median employee is identified, registrants must calculate that median employee’s annual total compensation in accordance with Item 402(c)(2)(x) of Regulation S-K.

The final rule requires that registrants provide their pay ratio disclosure using the compensation of their median employee.  According to the SEC, “median” is “the middle number in a sequence, or the average of the two middle numbers when the sequence has an even number of numbers.”  The final rule permits a registrant to select another employee as the median if that employee is within a 1% variance of the median and the original employee has anomalous compensation characteristics that would result in a pay ratio that did not accurately reflect the relationship between the compensation practices for a typical employee and the compensation of the PEO.

Calculating Annual Total Compensation

The final rule requires that “total compensation” for both the median employee and PEO be calculated using the requirements of Item 402(c)(2)(x) of Regulation S-K, which is the “total” column in the Summary Compensation Table.  The final rule permits registrants to use reasonable estimates in calculating the annual total compensation of their median employee, including any elements of the total compensation, under Item 402(c)(2)(x) of Regulation S-K.

Under the final rule, registrants must clearly identify any estimates used. Additionally, registrants must have a reasonable basis to conclude that their estimates approximate the actual amounts of Item 402(c)(2)(x) compensation, or a particular element of compensation under Item 402(c)(2)(iv)-(ix), that are awarded to, earned by, or paid to the median employee.

The application of the definition of total compensation under Item 402(c)(2)(x) to employees who are not executive officers could understate the overall compensation paid to such employees. Item 402 captures all of the various compensation components received by a named executive officer, excluding certain limited items like benefits under non-discriminatory plans and perquisites and personal benefits that aggregate less than $10,000. By excluding certain benefit plans and perquisites that do not exceed the $10,000 threshold, however, the rules may understate the median employee’s actual total compensation. To address this, the final rule permits registrants, at their discretion, to include personal benefits that aggregate less than $10,000 and compensation under non-discriminatory benefit plans in calculating the annual total compensation of the median employee. To be consistent, however, the PEO’s total compensation used in the related pay ratio disclosure must also reflect the same approach to these items used for the median employee. The registrant must also explain any difference between the PEO total compensation used in the pay ratio disclosure and the total compensation amounts reflected in the Summary Compensation Table, if material.

Disclosure of Methodology, Assumptions, and Estimates

The final rule, consistent with the proposal, requires registrants to briefly describe and consistently apply any methodology used to identify the median and any material assumptions, adjustments (including any cost-of-living adjustments), or estimates used to identify the median or to determine total compensation or any elements of total compensation. The final rule also requires a registrant to clearly identify any estimates used. For example, when statistical sampling is used, registrants must describe the size of both the sample and the estimated whole population, any material assumptions used in determining the sample size and the sampling method (or methods) is used. Additionally, although the required descriptions must provide sufficient information for readers to evaluate the appropriateness of the methodologies used, registrants are not required to include any technical analyses, formulas, confidence levels, or the steps used in data analysis.  Registrants must also disclose if they changed from using the cost-of-living adjustment to not using that adjustment and if they changed from not using the cost-of-living adjustment to using it.

Meaning of “Annual”

The final rule defines “annual total compensation” to mean “total compensation” for the registrant’s last completed fiscal year.  The SEC is not permitting registrants to select any annual period or the year prior to the last completed fiscal year to calculate total compensation.

As discussed above, registrants may use compensation amounts derived from the information derived from their tax and/or payroll records for the same annual period used in those records to identify their median employee. Registrants using the information derived from tax and/or payroll records to identify the median employee are still required to calculate the Item 402(c)(2)(x) total compensation for that median employee for the registrant’s last completed fiscal year, rather than the annual period used in the payroll and/or tax records because identifying the median is a separate process from calculating total compensation.

“Filed” not “Furnished”

The final rule treats the pay ratio disclosure, as with other Item 402 information, as “filed” for purposes of the Securities Act and Exchange Act, and, therefore, subject to potential liabilities under those statutes, including Exchange Act Section 18 liability.

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.

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.