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

Recently, the CFTC issued a Proposed Order in response to a 2013 request by the Southwest Power Pool (SPP) for exemption of certain SPP electric energy products from CFTC regulation.

Scope of Exemption

The Proposed Order would exempt transactions in SPP products from CFTC regulation (with the exception of the CFTC’s general anti-fraud and anti-manipulation authority and scienter-based prohibitions), provided that the following conditions are satisfied:

1. Covered Products—The transaction is for “Transmission Congestion Rights,” “Energy Transactions,” and “Operating Reserve Transactions”;

2. Eligible Parties—Each party to the transaction is either: (a) an “appropriate person” as defined under sections 4(c)(3)(A) through (J) of the Commodity Exchange Act (CEA); (b) an “eligible contract participant” under Section 1a(18)(a) of the CEA and CFTC regulation 1.3(m); or (c) a “person who actively participates in the generation, transmission, or distribution of electric energy”;

3. Tariff Requirement—The transaction is offered or sold pursuant to SPP’s Tariff approved by the Federal Energy Regulatory Commission (FERC); and

4. Access to FERC Information—Acceptable CFTC-FERC information-sharing arrangements remain in place and SPP’s Tariff and other governing documents do not require that SPP notify its members prior to providing information to the CFTC in response to a subpoena or other request.

“Energy Transactions” are limited to transactions in a “Day-Ahead Market” or “Real-Time Balancing Market” (including virtual bids and offers) that meet certain other criteria. As such, “Energy Transactions” likely do not include bilateral transactions for the sale or purchase of electrical energy that are executed outside of such markets and are merely settled or scheduled through such markets—meaning that such transactions likely require additional analysis regarding whether they might constitute “swaps” or “trade options” subject to generally applicable CFTC regulations.

The scope of the proposed exemption is substantially similar to that provided in the CFTC’s No-Action Letter Nos. 14-18, 14-109, and 15-05 regarding SPP products and to the CFTC’s final exemption order (the “RTO/ISO Order”) regarding certain transactions in the MISO, CAISO, PJM, and ISO-NE markets–although, unlike the RTO/ISO Order, the Proposed Order does not cover forward capacity transactions (which currently are not a product offering in the SPP market).

Comment Period

Comments on the Propose Order must be received by the CFTC on or before June 22, 2015.

The CFTC accused Kraft Food Groups, Inc. and former parent Mondelez Global LLC with manipulation pursuant to Section 6(c)(1) of the Commodities Exchange Act and Regulation 180.1 promulgated thereunder.  Regulation 180.1 makes it unlawful to recklessly employ manipulative devices.  Kraft has moved to dismiss the claim.

Kraft’s story is straightforward.  Kraft says this case is about a snack-food company that made reasonable business decisions to maintain a steady wheat supply in the face of an uncertain market. For years, the price of wheat on the cash market has borne little relation to the price of wheat on the futures market.  Despite the CFTC’s stated intention to correct the difference, for years the market has been dysfunctional.

Kraft maintains, at its core, the CFTC’s complaint accuses Kraft of fraud and manipulation for seeking to purchase wheat at the best price it could in the face of difficult market conditions. In late 2011, facing a dwindling wheat supply and high prices in the cash market, Kraft made the rational decision to obtain the wheat it needed for its flour mills (for ultimate use in the production of cookies, crackers, and other snack foods) by purchasing and taking delivery of less-expensive wheat futures. The Company’s decision had several consequences. First, it began receiving wheat located in unfavorable locations. Second, prices in the cash wheat market began to fall after Kraft–which the CFTC acknowledges is one of the country’s largest purchasers of the variety of wheat at issue in this case–went elsewhere for its needs. As cash wheat prices began to come down, Kraft then made a second business decision: it resold its remaining shipping certificates, closed its open December futures position (two of several available options) and began purchasing cash wheat at lower prices.

Kraft argues these decisions and consequences do not transform Kraft’s conduct into a fraud or a manipulation. They are, instead, an example of a consumer of wheat “seeking the best price for [its] commodity,” an activity the CFTC recognizes as a “legitimate, indeed critical price-creating force in the futures market.”

Kraft believes the claim should be dismissed because allegations that prices changed as a result of bona fide transactions is insufficient to infer Kraft deceived or manipulated the market.  Rule 180.1 prohibits manipulative and deceptive activities, it does not prohibit failing to disclose trading strategies.

The motion draws strong parallels to Rule 10b-5.  No market manipulation occurs under that rule, according to Kraft, where the defendant makes no representations, true or false, actual or implicit, concerning the conduct at issue. Kraft makes the interesting observation that in the securities markets, market participants are perceived to have equal access to information.  The commodities markets are different, because numerous market participants may have  legitimate access to what some may perceive as superior information.

The complaint must fail, says Kraft, because the CFTC must allege something suggesting that the market received a message from Kraft, in some particularly identified form, that was different from Kraft’s alleged true intent. The complaint offers nothing on this point. The mere fact that Kraft established a large long position in December 2011 wheat futures cannot, in and of itself, be the method by which Kraft allegedly misled the market

Kraft also argues the complaint fails to sufficiently allege scienter.

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.

During the week of May 24, 2015, 8-Ks were filed that disclosed three shareholder sponsored proxy access proposals passed and five failed.  All required three percent ownership for three years and all were opposed by the company.  Details are as follows (percentages are based on the total of votes cast for and against):

AvalonBay Communities, Inc. – 65% voted for (passed)

Expeditors International of Washington, Inc. – 65% voted against (failed)

Hasbro, Inc. – 69% voted for (passed)

McDonalds Corporation – 62% voted for (passed)

Pioneer Natural Resources Company – 51% voted against (failed)

SBA Communications Corporation – 54% voted against (failed)

Southern Company – 54% voted against (failed)

United-Guardian, Inc. – 88% voted against (failed)

Expeditors International also had a competing board sponsored advisory proxy access proposal on the ballot which passed.  The proposal required holding a “net long” position of at least 3% of Expeditors’ outstanding shares continuously for at least three years, to use the Company’s proxy statement to nominate director candidates constituting up to 20% of the Board of Directors, subject to and in accordance with such specific terms, conditions, qualifications and protections as the Board of Directors may in its business judgment determine to be in the best interests of Expeditors and the shareholders.

In addition, SBA Communications had a competing board sponsored advisory proxy access proposal on the ballot which passed.  The proposal required a three year holding period, a “net long” ownership threshold of 5% by a group not exceeding 10 persons, a 20% cap and disclosure of intent on continued ownership.

Since April 19, 30 shareholder proxy access proposals have passed and 20 have failed.  Included in these totals are:

  • Three shareholder proposals which passed that were either supported by the company or the company remained neutral.
  • Four shareholder meetings which had a board sponsored proxy access proposal as well, three of which passed with the shareholder proposal failing.

Results by week are set forth in the following table:

Week Proposals Passed Proposals Failed
April 19 2 4
April 26 2 2
May 3 6 3
May 10 11 1
May 19 6 5
May 24 3 5

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.

 

Molycorp, Inc. is a publically traded Delaware corporation engaged in a the production and sale of rare earth oxides.  Private equity investors held 44% of Molycorp’s stock, appointed certain directors and had demand registration rights.  As an earlier stage company, Molycorp had a need for substantial cash to fund its development budget.

In 2010, prices for rare earth elements shot up, and Molycorp’s stock price reacted accordingly.  Around this same time, Molycorp learned that a loan guarantee from the Department of Energy would not come through and other joint venture opportunities were in danger.  In May 2011, the  private equity investors exercised their demand registration rights and an offering was conducted in June 2011.  The sale allegedly saturated the market with Molycorp stock and caused media concern that insiders were abandoning the company.  In June 2011, Molycorp also conducted a private offering of convertible notes but was still short more than $100 million in cash to meet its operating budget.

Within a few months of the June offering, prices for rare earth elements, and Molycorp stock, fell significantly.  A derivative action followed.  The plaintiffs complained about the board’s failure to delay the June offering by the private equity investors and that the private equity investors closed Molycorp out of the equity markets at a time when Molycorp was in dire need of an equity infusion.

The Delaware Court of Chancery dismissed the derivative action for failure to state a claim.  According to the court, the plaintiffs’ basic argument was that, at a time when Molycorp needed funding, other sources were risky at best, and everyone knew that prices would fall eventually, defendants sold their own stock and shut Molycorp out of a sale.  The court noted it was not enough to observe that a controller had interests that conflicted with the minority shareholders’ interests—to state a claim, one must allege that the controller used her power in an unfair manner.  The law does not require a controller to sacrifice every benefit of her investment because she is interested in the result.

The court found the pleadings did not support the main conclusions the court was asked to draw.  The plaintiffs did not allege the registration rights agreement was invalid.  That fact, combined with a lack of  reason to believe that the private equity investors knew when the rare earth element bubble would burst, defeats the fiduciary duty claims against the private equity investors. The private equity investors were major investors in Molycorp and bargained for certain rights before its IPO.  Contending that the private equity investors exercised rights that benefited themselves but were fairly extracted and disclosed in public filings does not itself state a claim that the private equity investors took advantage of Molycorp and its minority shareholders.  According to the court, a finding otherwise could discourage would-be investors from funding start-ups for fear that their investment value will not be preserved despite disclosed, carefully negotiated agreements. Even assuming that the private equity investors controlled their board appointees, the plaintiffs would need to plead that the private equity investors had done something wrong to state a breach of fiduciary duties.

As to the director defendants, the court found no reason to infer the directors had a duty to conduct an offering on behalf of Molycorp or interfere with the private equity investors’ registration rights.  There was no reason to infer that as of May 2011 Molycorp could not make another successful offering.  All developing companies have budget issues, according to the court, and it is not reasonable to infer fault for every decision not to raise money.  The court said the strongest argument for not finding fault by the directors was that there were no allegations that the director defendants knew that the market would rise and fall as dramatically as it did, when it did.  According to the court, a director is not liable for failing to predict the movement of stock prices, and a stockholder is generally allowed to sell her shares.

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.

Montana has joined Massachusetts in a challenge to Regulation A+ adopted pursuant to the JOBS Act.  You can see the scheduling order here.  The Montana and Massachusetts cases have been consolidated.

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.

Recently, the CFTC published a final interpretation clarifying its seven-element test regarding forward contracts with embedded volumetric optionality (EVO). The final interpretation provides that a contract for deferred delivery of a physical commodity (i.e., a forward contract) that contains EVO will fall within the forward contract exclusion, and thus not be regulated as an option, when:

1. The embedded optionality does not undermine the overall nature of the agreement, contract, or transaction as a forward contract;

2. The predominant feature of the agreement, contract, or transaction is actual delivery;

3. The embedded optionality cannot be severed and marketed separately from the overall agreement, contract, or transaction in which it is embedded;

4. The seller of a nonfinancial commodity underlying the agreement, contract, or transaction with embedded volumetric optionality intends, at the time it enters into the agreement, contract, or transaction to deliver the underlying nonfinancial commodity if the embedded volumetric optionality is exercised;

5. The buyer of a nonfinancial commodity underlying the agreement, contract or transaction with embedded volumetric optionality intends, at the time it enters into the agreement, contract, or transaction, to take delivery of the underlying nonfinancial commodity if the embedded volumetric optionality is exercised;

6. Both parties are commercial parties; and

7. The embedded volumetric optionality is primarily intended, at the time that the parties enter into the agreement, contract, or transaction, to address physical factors or regulatory requirements that reasonably influence demand for, or supply of, the nonfinancial commodity.

Fix to the Problematic Seventh Element

The final interpretation replaces the former seven-element test that was issued in the CFTC’s 2012 rulemaking setting forth a definition of the term “swap.” The seventh element in that test was criticized by numerous industry groups and market participants (particularly in the energy industry) as unworkable–largely because of its explicit focus on the “exercise or non-exercise” of the EVO in a contract. Many considered that focus to require analysis of contracting parties’ intent at the time of exercise or non-exercise of the EVO (as opposed to the time of execution of the underlying contract)—a task considered fraught with uncertainty and unpredictability to the point that many considered reliance on counterparty representations to be untenable.

The final interpretation seems to largely fix that issue by removing the reference to the “exercise or non-exercise” of EVO from the seventh element and instead focusing on “the intent of the party with the right to exercise the embedded volumetric optionality at the time of contract initiation.” Thus, as long as the primary intended purpose for including EVO at the time of contract execution is to address physical factors or regulatory requirements influencing the demand for or supply of the commodity, the ultimate reason for exercise or non-exercise of the EVO (even if it ultimately turns out to be price) should be irrelevant. The CFTC also further advises that commercial parties “may rely on counterparty representations with respect to the intended purpose for embedding volumetric optionality in the contract provided they do not have information that would cause a reasonable person to question the accuracy of the representation.”

The final interpretation clarifies that parties having some influence over factors affecting their demand for or supply of the nonfinancial commodity (e.g., the scheduling of plant maintenance, plans for business expansion) should not be considered inconsistent with the seventh element, provided that the EVO is included in the contract at initiation “primarily to address potential variability in a party’s supply of or demand for the nonfinancial commodity.” It also clarifies that the term ‘‘physical factors’’ should be construed broadly to include any fact or circumstance that could reasonably influence supply of or demand for the nonfinancial commodity under the contract—including not only environmental factors, such as weather or location, but relevant ‘‘operational considerations’’ (e.g., the availability of reliable transportation or technology) and broader social forces, such as changes in demographics or geopolitics. The CFTC reiterated, however, that if EVO is primarily intended, at contract initiation, to address concerns about price risk (e.g., to protect against increases or decreases in the cash market price), the seventh element would not be satisfied “absent an applicable regulatory requirement, including guidance, whether formal or informal, received from a public utility commission or other similar governing body, to obtain or provide the lowest price (e.g., the buyer is an energy company regulated on a cost-of-service basis).”

Good Faith Reliance on Past Characterizations of Transactions

Although the final interpretation could change the way counterparties previously characterized transactions, the CFTC stated in the final interpretation that “commercial parties may choose to either rely on their good faith characterization of an existing contract (e.g., as an excluded forward contract with embedded volumetric optionality or an exempt trade option) and or recharacterize it in accordance with this final interpretation.”

Significance

The revised seventh element will likely have the practical effect of extending the forward contract exclusion to many widely used forms of forward contracts in physical commodities that contain EVO to address supply and demand related uncertainties in those commodities. As such, the final interpretation is a welcome result to market participants in affected industries like energy and agriculture.

The Secretary of the Commonwealth of Massachusetts has filed a petition for review of Regulation A+.  The Secretary is asking that the rule be vacated because it is arbitrary, capricious and not in accordance with the Administrative Procedures Act.  Hopefully this gets tossed out of court.  You can see the scheduling order here.

Press reports of s similar law suit by the State of Montana could not be immediately verified.

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 updated its EDGAR Filer Manual to document changes being made to accommodate Regulation A+ under the JOBS Act.

EDGAR will be updated to add Regulation A submission form types DOS, DOS/A, DOSLTR, 1-A, 1-A/A, 1-A POS, 1-A-W, 1-A-W/A, 253G1, 253G2, 253G3, 253G4, 1-K, 1-K/A, 1-SA, 1-SA/A, 1-U, 1-U/A, 1-Z, 1-Z/A, 1-Z-W, and 1-Z-W/A.

“DOS” stands for “draft offering statement.”  Issuers who qualify to submit draft offering statements under Regulation A must prepare and submit their draft offering statements using submission form types DOS and DOS/A. Issuers must submit correspondences related to draft offering statements using the submission type, “Draft Offering Statement Letter.”

New filers will now be able to select the “Regulation A” option on the Form ID application to indicate that they are submitting an application for EDGAR access to file draft offering statements. If filers have an assigned Central Index Key (CIK), they must use the existing CIK to file draft offering statements.

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.

During the week of May 17, 2015, 8-Ks were filed that disclosed six shareholder sponsored proxy access proposals passed and five failed.  All required three percent ownership for three years and all were opposed by the company (except for Apache Corporation where the board supported the proposal).  Details are as follows (percentages are based on the total of votes cast for and against):

Alpha Natural Resources, Inc. –67% voted for (passed)

Apache Corporation  – 93% voted for (passed)

Boston Properties, Inc. – 54% voted against  (failed)

Chipotle Mexican Grill, Inc. – 65% voted against (failed)

Cloud Peak Energy Inc. – 71% voted for (passed)

Community Health Systems, Inc. – 50.2% voted against (failed)

FirstEnergy Corp. – 71% voted for (passed)

Kohl’s Corporation – 73% voted for (passed)

Level 3 Communications, Inc. – 56% voted against (failed)

Range Resources Corporation – 61% voted for (passed)

Westmoreland Coal Company – 64% voted against (failed)

Cloud Peak Energy Inc. also had a competing management proxy access proposal on the ballot which failed.  The proposal required ownership of 5% of the outstanding stock for three years.

Since April 19, 27 shareholder proxy access proposals have passed and 15 have failed.

Results by week are set forth in the following table:

Week Proposals Passed Proposals Failed
April 19 2 4
April 26 2 2
May 3 6 3
May 10 11 1
May 19 6 5

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 Securities Act (Section 27A(b)) and the Exchange Act (Section 21E(b)) exclude reliance on the safe harbor for forward-looking statements if, among other things, the statement is made with respect to an issuer that has, within the past three years, been convicted of any felony or misdemeanor described in paragraphs (i) through (iv) of Section 15(b)(4)(B) of the Securities Exchange Act of 1934.  The Securites Act and the Exhange Act each provide the disqualifications may be waived “to the extent otherwise specifically provided by rule, regulation, or order of the Commission.”

The SEC granted this waiver to Barclays PLC to continue be able to continue to rely on the safe harbor for forward looking statements as a result of a guilty plea for a violation of the Sherman Antitrust 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.