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

Currently before the Third Circuit is Trinity Wall Street v. Wal-Mart Stores, Inc.  The case involves whether Wal-Mart can exclude a shareholder proposal under the “ordinary business exception” to Rule 14a-8.  See prior blogs here and here.

Trinity Wall Street has now filed its brief with the Third Circuit.  It is well written and sometimes entertaining.  Predictably, its views are diametrically opposed to Wal-Mart’s views.

It begins with a statement of facts setting forth Trinity’s perceived interpretation of Wal-Mart’s changing positions on gun sales.  According to Trinity it tried to work matters out with Wal-Mart unsuccessfully, and was left with no choice but to submit a shareholder proposal.  According to the brief, “In the course of discussions with Trinity prior to the filing of this lawsuit, Wal-Mart could not explain why it had decided not to sell handguns or high capacity magazines as a separate accessory but is willing to sell rifles equipped with such high capacity magazines. Based on these exchanges, Trinity concluded that, Wal-Mart does not appear to have any policies governing these decisions or providing for transparent board oversight of their implementation.”

According to Trinity, at bottom, there is a fundamental distinction between a proposal that addresses mundane matters such as production quality or employee benefits, and one that seeks to ensure that the Board of Directors does its job of providing oversight over a subject directly impacting Wal-Mart’s brand, reputation, and commitment to good corporate citizenship. While the former has been deemed to be impracticable for shareholder involvement, the latter is undeniably of sufficient breadth and import to warrant shareholder consideration and involvement.

Trinity also believes the proposal focuses on significant policy issues.  In the context of the sale of products especially dangerous to the corporate reputation or brand value, the Board’s effective oversight and concern is itself a matter of public concern. A company that is not attentive at the Board level as to how its brand is perceived by the public is a company at great risk of damaging the public and itself.

Trinity sates SEC no-action letters are not always entitled to deference.  In this case, the no-action letter provided no reasoning to which the court could defer, instead simply offering that there appeared to be “some basis” for exclusion of the proposal. Even were the court to conclude that reasoning is not required for a bald conclusion to be persuasive, Trinity believes there is the additional problem that the letter does not even give lip service to the governance nature of the proposal or the significant policy issues that are its focus.

In Trinity’s view, inclusion of the proposal will not open the floodgates to similar proposals.  Trinity tells the court that this prediction of “proxy apocalypse” has no basis in reality, and should readily be rejected. This is not a naked “stop selling” proposal, as it does not request that Wal-Mart stop selling anything. Thus, affirmance here need not lead to a plethora of stop selling proposals. This case raises an issue of corporate governance over an important policy issue and is substantially similar to the proposals that the Division staff has blessed related to the sale of products produced through sweatshop or forced labor of people or the inhumane treatment of animals. Trinity concludes “These denials of no-action relief have not caused the sky to fall.”

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 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and 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 denied a no-action request that was submitted by Jonathon Hendricks.  The no-action request inquired about a Wyoming based business  that would make available a  list of securities from a loan crowdfunding site that Mr. Hendricks’ proposed business perceived to be good investments.  No representation is made in the no-action request that  Mr. Hendricks is affiliated with the crowdfunding site.  In addition, from the no-action request, there is no indication that the crowdfunding site sanctioned the use of information on the crowdfunding site.

The SEC stated the no-action request did not provide adequate facts and legal analysis for it to determine whether Mr. Hendrick’s new website business meets the definition of “investment adviser” in section 202(a)(11) of the Advisers Act, and if so, whether it meets the elements of an exclusion from that definition as provided under section 202(a)(11)(D) of the Advisers Act as suggested by Mr. Hendricks. The exclusion referred to is available for a “publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation.” The United States Supreme Court has interpreted this “publisher’s exclusion” to include publications that offer impersonal investment advice to the general public on a regular basis.

The SEC staff response noted that it generally declines to express an opinion as to whether a person qualifies for the publisher exclusion because it is a factual and not a legal determination.  The SEC provided relevant guidance to help Mr. Hendricks to determine whether the exclusion was available.

The SEC further noted if Mr. Hendrick’s  new website business meets the definition of investment adviser but qualifies for the publisher’s exclusion, it would not be required to register with the Commission under Section 203(a) of the Advisers Act. If the new website business meets the definition of investment adviser but does not qualify for the publisher’s exclusion (or another exclusion) from the definition of investment adviser, it would appear that it would be required to register as an investment adviser with the Commission because the State of Wyoming — where Mr. Hendricks’ proposed business appears to have its principal office and place of business — does not regulate investment advisers.  Wyoming is the only state that does not regulate investment advisers, thus triggering potential registration with the SEC.

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 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and 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 a prior blog we discussed a Regulation D bad actor waiver granted to Oppenheimer & Co. that imposed conditions on the receipt of the waiver.  The waiver provided “Oppenheimer will comply with the conditions stated in its December 10, 2014 waiver request letter, including that it will retain a law firm to review its policies and procedures relating to Rule 506 offerings, and that it will adopt improvements or changes, both as private placement agent in its investment banking business and as issuer and as compensated solicitor in its wealth management business. Oppenheimer’s waiver is also conditioned upon its completing firm wide training for all registered persons on compliance with Rule 506 of Regulation D.”

The waiver request letter can be found here.  The commitments made in the waiver request letter do not appear to be toothless.  Among other things, it provides:

  • Within 30 days after the issuance of the Rule 506(d) waiver, Oppenheimer will engage a nationally recognized law firm with significant expertise in Rule 506 offerings (the “Law Firm”), not unacceptable to the Division of Corporation Finance, to review Oppenheimer’s policies and procedures relating to Rule 506 offerings with respect to both its activities as private placement agent in its investment banking business as well as its activities as issuer and as compensated solicitor in its wealth management business -the implementation of those policies and procedures, and compliance with those policies and procedures.
  • The report will not be privileged and will be provided to the Division of Corporation Finance.
  • Within 15 days after the conclusion of the discussion and evaluation by Oppenheimer and the Law Firm, Oppenheimer shall require that the Law Firm inform Oppenheimer and the Division in writing of the Law Firm’s final determination concerning any recommendation that Oppenheimer considers to be unduly burdensome, impractical, or inappropriate. Oppenheimer shall abide by the determinations of the Law Firm. Oppenheimer will adopt and implement all of the recommendations that the Law Firm deems appropriate within 12 months after the date of the report.
  • After the 12-month period (or 18 months after the issuance of the Rule 506(d) waiver), Oppenheimer will engage the Law Firm to review Oppenheimer’s compliance with the Law Firm’s recommendations to ensure that all changes in or improvements to Oppenheimer’s policies and procedures have been fully implemented. The Law Firm will have 6 months to complete its review and submit a written and dated report of its findings to Oppenheimer. Such report will not be privileged and will be provided to the Division of Corporation Finance.

Subsequently, Commissioners Luis A. Aguilar and Kara M. Stein issued a dissent to the grant of the waiver to Oppenheimer.  According to the Commissioners, the conditions in this bad actor waiver lack teeth because at least three critical components are missing:

  • First and foremost, there is no legally enforceable requirement that the law firm hired to review Oppenheimer’s policies and procedures for ensuring compliance with Rule 506 will be qualified and independent.
  • Second, there is no requirement for even the most cursory involvement in this compliance review process at the top levels of the firm. The firm’s senior management need not review the report prepared by the law firm, much less vouch for its accuracy.
  • And third, there is no requirement for the firm to return to the Commission at any point to demonstrate that it has complied with the federal securities laws and that continuing the waiver from disqualification is, in fact, warranted.

Then the politicians jumped into the ring.  Congresswoman Maxine Waters (D-CA), Ranking Member of the Financial Services Committee, issued a press release which said “It was my hope that the previous temporary, conditional waiver provided by the SEC  . . . marked a turning point in the Commission’s waiver process. However, today’s decision makes clear that the sanctions that Congress has provided for bad actors are meaningless. That is why I will be working with my Democratic colleagues to craft a legislative solution that sends a strong message to the markets that wrongdoers like Oppenheimer will be sufficiently held accountable for their misdeeds.”

In June of 2014, Waters authored an amendment that would have prohibited the SEC from granting certain waivers to firms that have, within the past three years, been convicted of certain felonies or misdemeanors or been determined to have violated anti-fraud provisions of the securities laws. Specifically, the amendment would have barred the SEC from granting waivers for companies enjoying “Well-Known Seasoned Issuer” (WKSI) status, another special benefit that allows companies to bring securities to market without first receiving the scrutiny of SEC staff.  The measure was defeated.

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 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The United States District Court For The Southern District Of Mississippi, Southern Division, recently found an agreement to arbitrate in a home mortgage was invalid in Richards v. Gibson.

The court cited 15 U.S.C. § 1639c(e) which was enacted by the Dodd-Frank Act.  That statute provides:

No residential mortgage loan . . . secured by the principal dwelling of the consumer may include terms which require arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction.

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 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and 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 effective date of the Minnesota Revised Uniform Limited Liability Company Act, August 1, 2015, is rapidly approaching.  The following materials are available to implement the 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 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

A standard part of every financial statement audit is providing the auditor a representation letter reaffirming certain assertions that are implicit in preparation of financial statements in accordance with GAAP. The AICPA has now provided guidance on what should be included in a representation letter for an independent private sector audit, or IPSA, which is sometimes required with a conflict minerals report.

The topics of the representation letter aren’t very surprising and include:

  • The company confirming it is responsible for:
    • The preparation, fair presentation, and overall accuracy of the Form SD, including the Conflict Minerals Report (CMR), in accordance with Rule 13p-1 of the Securities and Exchange Act of 1934 (the “Rule”).
    • The relevancy and accuracy of the information included in the Form SD and the conflict minerals report, or CMR, including the company’s determination of the source or chain of custody of its conflict minerals, and determination of those products subject to due diligence.
  • The design of the company’s due diligence framework is in conformity with the criteria set forth in the OECD framework, and the company’s description of the due diligence measures it performed is consistent with the due diligence process that the company undertook for the reporting period from January 1, 201X to December 31, 201X (the “Reporting Period”).
  • The CMR and the related disclosures in the Form SD comply with the requirements of the Rule for the Reporting Period.
  • The company is not aware of any matters contradicting its assertion about the design of the company’s due diligence framework or the description of the company’s due diligence measures performed for the Reporting Period, as set forth in the CMR, nor has the company received any communications from regulatory agencies, reporting agencies, or others affecting the company’s assertion(s) and disclosures.

Those planning on an IPSA under AICPA standards should review the guidance to make sure they are comfortable with the assertions.

Note that for IPSAs issuers have a choice between an audit by a certified public accountant under AICPA standards or a performance audit by another qualified professional.

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 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and 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 Fortis Advisors LLC, as the equity representative v. Dialog Semiconductor PLC, the Delaware Court of Chancery examined the implied covenant of good faith in the context of an earn-out provision included in a merger agreement.

The merger agreement included the following provision: “From the Closing Date through the end of the Second Earn-out Period, Parent shall, and shall cause its Affiliates . . . to, use commercially reasonable best efforts, in the context of successfully managing the business of the Surviving Corporation, to achieve and pay the Earn-Out Payments in full . . .”

As one might surmise, no payments became due under the earn-out. We typically advise clients “don’t agree to an earn-out unless the up-front payments are sufficient.”

The court noted that under Delaware law, the implied covenant of good faith and fair dealing attaches to every contract by operation of law and requires a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the bargain. The implied covenant only applies where a contract lacks specific language governing the issue and the obligation the court is asked to imply advances, rather than contradicts, the purposes reflected in the express language of the contract.

The court found the allegations of the complaint failed to state a claim for breach of the implied covenant of good faith and fair dealing because Fortis had not identified, as it must, a gap in the merger agreement to be filled by implying terms through the implied covenant. The Merger Agreement expressly imposed on Dialog the obligation to use “commercially reasonable best efforts to . . . achieve and pay the Earn-Out Payments in full.” Thus, the merger agreement set a contractual standard by which to evaluate whether Dialog’s failure to achieve and pay the earn-out payments in its operation of the business was improper. Accordingly, there was no gap in the merger agreement for the court to fill.

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 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

A coalition of investors submitted a shareholder resolution to Royal Dutch Shell plc.  The resolutions titled ‘Strategic Resilience for 2035 and Beyond’ call for company disclosures on:

  • ongoing operational emissions management;
  • asset portfolio resilience to the International Energy Agency’s (Idea’s) scenarios;
  • low-carbon energy research and development (R&D) and investment strategies;
  • relevant strategic key performance indicators (KPIs) and executive incentives; and
  • public policy positions relating to climate change.

Shell issued a statement recommending that shareholders support the resolution at the annual general meeting.

In securities lawyer parlance, Shell is a “foreign private issuer.” That means it is exempt from the SEC’s proxy rules.  As such, Shell’s position likely isn’t an immediate trend in the making for U.S. companies subject to the proxy rules.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and 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 CFPB issued a compliance bulletin setting forth its views that, with limited exceptions, persons in possession of confidential information, including confidential supervisory information, or CSI, may not disclose such information to third parties. The bulletin:

  • sets forth the definition of CSI;
  • provides examples of CSI;
  • highlights certain legal restrictions on the disclosure of CSI; and
  • explains that private confidentiality and non-disclosure agreements neither alter the legal restrictions on the disclosure of CSI nor impact the CFPB’s authority to obtain information from covered persons and service providers in the exercise of its supervisory authority.

Under the CFPB’s regulations, “confidential supervisory information” means:

  • reports of examination, inspection and visitation, non-public operating, condition, and compliance reports, and any information contained in, derived from, or related to such reports;
  • any documents, including reports of examination, prepared by, or on behalf of, or for the use of the CFPB or any other Federal, State, or foreign government agency in the exercise of supervisory authority over a financial institution, and any supervision information derived from such documents;
  • any communications between the CFPB and a supervised financial institution or a Federal, State, or foreign government agency related to the CFPB’s supervision of the institution;
  • any information provided to the CFPB by a financial institution to enable the CFPB to monitor for risks to consumers in the offering or provision of consumer financial products or services, or to assess whether an institution should be considered a covered person, as that term is defined by 12 § U.S.C. 5481, or is subject to the CFPB’s supervisory authority; and/or
  • information that is exempt from disclosure pursuant to 5 U.S.C. § 552(b)(8).11

CSI does not include documents prepared by a financial institution for its own business purposes and that the CFPB does not possess.

Examples of CSI include, but are not limited to:

  • CFPB examination reports and supervisory letters;
  • all information contained in, derived from, or related to those documents, including an institution’s supervisory compliance rating;
  • communications between the CFPB and the supervised financial institution related to the CFPB’s examination of the institution or other supervisory activities;
  • other information created by the CFPB in the exercise of its supervisory authority; and
  • any workpapers or other documentation that CFPB examiners have prepared in the course of an examination.

A supervised financial institution may disclose CSI of the CFPB lawfully in its possession to:

  • its affiliates;
  • its directors, officers, trustees, members, general partners, or employees, to the extent that the disclosure of such CSI is relevant to the performance of such individuals’ assigned duties;
  • the directors, officers, trustees, members, general partners, or employees of its affiliates, to the extent that the disclosure of such CSI is relevant to the performance of such individuals’ assigned duties; and
  • its certified public accountant, legal counsel, contractor, consultant, or service provider.

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 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and 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.

 

CFTC Commissioner J. Christopher Giancarlo recently delivered remarks where he stated “Unfortunately, caught up in some of the collateral damage surrounding the Dodd-Frank reforms were the traditional commodity and energy markets and the end-users who depend on them for a variety of uses. Yet, end-users were not the source of the financial crisis. That is why Congress undertook to exempt end-users from the reach of swap trading regulation. It is our job at the CFTC to make sure that our rules do not treat them like they were the cause of the crisis.”

Some of the ideas Commissioner Giancarlo discussed in support of the statement were:

  • We should not be further squeezing American Agriculture and manufacturing with increased costs of complying with rules such as 1.35, if we can avoid it. The stated purpose of the Dodd-Frank Act was to reform “Wall Street.” Instead, we are burdening “Main Street” by adding new compliance costs onto our farmers, grain elevators, and small FCMs. Those costs will surely work their way into the everyday costs of groceries and winter heating fuel for American families, dragging down the U.S. economy.
  • Another example is the Dodd-Frank definition of “financial entity.” It concerns the inadvertent capture of many energy firms as “financial entities.” As we have seen, imposing banking law concepts onto market participants that are not banks and that did not contribute to the financial crisis is not only confusing, but adds more risk to the system. It has the practical effect of preventing these firms from taking advantage of the end-user exemption for clearing or from mitigating certain types of commercial risk. Again, let’s not punish market participants who played no role in the financial crisis.
  • Unquestionably, an arbitrary 60% decline in the swap dealer registration threshold from $8 billion to $3 billion creates significant uncertainty for non-financial companies that engage in relatively small levels of swap dealing to manage business risk for themselves and their customers. It will have the effect of causing many non-financial companies to curtail or terminate risk hedging activities with their customers, limiting risk management options for end-users, and ultimately consolidating marketplace risk in only a few large swap dealers. Such risk consolidation runs counter to the goals of Dodd-Frank to reduce systemic risk in the marketplace. The CFTC must not arbitrarily change the swap dealer registration de minimis level without a formal rulemaking process.
  • I am very concerned that the effect of the CFTC’s bona fide hedging framework is to impose a federal regulatory edict in place of business judgment in the course of risk hedging activity by America’s commercial enterprises. The CFTC must allow greater flexibility. It must encourage – not discourage – commercial enterprises to adapt to developments and advances in hedging practices.
  • The CFTC is a markets regulator, not a prudential regulator. The CFTC has neither the authority nor the competence to substitute its regulatory dictates for the commercial judgment of America’s business owners and executives when it comes to basic risk management.

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 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and 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.