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

Wal-Mart appealed the United States District of Delaware’s decision that denied Wal-Mart the right to exclude a shareholder proposal submitted by Trinity Wall Street.  The District Court held that the SEC was incorrect when it rendered a no-action letter permitting exclusion of a shareholder proposal submitted under Rule 18a-8 in Trinity Wall Street v Wal-Mart Stores, Inc.  Wal-Mart had argued to the SEC that the proposal was excludable under Rule 14a-8(i)(7) as a matter related to ordinary business operations.

Wal-Mart has now filed its brief with the Third Circuit.  In the brief Wal-Mart explains:

  • The District Court opined that “Trinity’s Proposal was not properly excluded from Wal-Mart’s 2014 proxy materials” because it does not “dictate to management,” but instead “seeks to have Wal-Mart’s Board oversee the development and effectuation of a Wal-Mart policy.”  Nearly 40 years ago, however, the SEC rejected a standard under which shareholder proposals involving “matters that would be handled by management personnel without referral to the board of directors generally would be excludable,” but proposals involving “matters that would require action by the board would not be.”
  • The District Court decided that “Trinity’s 2014 Proposal is best viewed as dealing with matters that are not related to Wal-Mart’s ordinary business operations,” even though the Proposal sought to have a board committee address policies regarding “whether or not the Company should sell” certain products.  More than 30 years ago, however, the SEC explained that a shareholder proposal is excludable under Rule 14a-8(i)(7) if the underlying “subject matter” that it seeks to have a committee review “involves a matter of ordinary business.”
  • The District Court determined that Trinity’s Proposal was not excludable under Rule 14a-8(i)(7) because it “implicates significant policy issues,” including the potential “impact” to “Wal-Mart’s reputation” from “sales of high capacity firearms.”  More than 15 years ago, however, the SEC made clear that a proposal must focus on, not merely “implicate,” a significant policy issue to avoid exclusion.  Where a proposal “implicates” a significant policy issue, but also addresses ordinary business matters, the proposal is excludable.

Of course, Wal-Mart argues the SEC’s guidance on Rule 14a-8(i)(7) “‘must be given controlling weight unless it is plainly erroneous or inconsistent with the regulation.’” According to Wal-Mart,  the District Court did not find that the SEC’s guidance was “plainly erroneous” or “inconsistent” with Rule 14a-8(i)(7). Instead, Wal-Mart says:

  • The District Court wholly ignored the SEC’s guidance from 1976 and 1983 making clear that it is the underlying subject matter of a shareholder proposal, not the form of requested action, that is dispositive in determining whether a proposal is excludable under Rule 14a-8(i)(7).
  • The District Court  recited, but misconstrued, the SEC’s guidance from 1998 on what it means for a proposal to “focus” on a significant policy issue.

Wal-Mart also claims the shareholder proposal is hopelessly vague and indefinite and excludable under Rule 14a-8(i)(3).

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 Bear Stearns Mortgage Funding Trust 2006-SL1 v. EMC Mortgage LLC et al, the Delaware Court of Chancery explained the operation of Section 8106(c) of the Delaware statutes for the first time.  The results are surprising to many, as the new statute can apply to M&A agreements executed years ago.

Section 8106(c), which became effective on August 1, 2014, provides as follows:

Notwithstanding anything to the contrary in this chapter (other than Section 8106(b)) or in § 2-725 of Title 6, an action based on a written contract, agreement or undertaking involving at least $100,000 may be brought within a period specified in such written contract, agreement or undertaking provided it is brought prior to the expiration of 20 years from the accruing of the cause of such action.

According to the court, Section 8106(c) was intended to allow parties to contract around Delaware’s otherwise applicable statute of limitations for certain actions based on a written contract, agreement or undertaking.  By stating that the written contract, agreement, or undertaking could refer to a “period specified,” Section 8106(c) created a flexible framework for defining the time in which suit can be brought. If the contract specified an indefinite period, then the action nevertheless must be brought “prior to the expiration of 20 years from the accruing of the cause of such action.”

The court explained that Delaware precedent explains that a modification of a limitations period is a procedural matter affecting remedies rather than a change in substantive law. Ordinary presumptions against retroactivity do not apply, and the modification applies to ongoing suits absent a showing of manifest injustice. If the Delaware legislature chooses to alter the statute of limitations, then the change applies not only to future claims, but also presumptively governs existing claims.

A court  may limit the retroactive application of a change in the statute of limitations where retroactive application would cause injustice.  According to the court, there was no injustice here. The defendants did not assert a timeliness defense until two years after the dispute arose, including after the parties had engaged in a lengthy meet-and-confer process that contemplated resolving loan disputes on their merits. During the meet-and-confer process, the defendants never argued that the Trustee’s claims were untimely. In addition, the case was still pending when the Delaware legislature enacted Section 8106(c) and when the statute became effective, so the amendment addressed live claims. It did not have the effect of reviving extinguished claims.

Turning to the purchase agreement used in connection with the securitization, the court observed the agreement contained provisions designed to modify the statute of limitations for purposes of claims for breaches of representations and warranties. Under Section 8106(c), those provisions are valid and effective.  Analogizing to a real estate agreement, the court stated “Absent contract language providing to the contrary, pre-closing representations about the acquired property interest become ineffective post-closing.”

Once a transaction agreement provides for representations to survive closing, the next question is how long they can survive. Before the effectiveness of Section 8106(c), the maximum survival period was three years, because of certain Delaware decisions which held that parties could shorten but not lengthen a statute of limitations.  But with the effectiveness of Section 8106(c), parties can now extend the statute of limitations up to a maximum of twenty years.

The court interpreted this purchase agreement to provide the defendant had 20 years to discover the breach under the new Delaware statute. Because this structure of the purchase agreement did not specify an outside date for bringing claims, it is subject to the 20 year statutory maximum in Section 8106(c).

The upshot of the decision is most parties will likely want to specificy a time certain for brining claims.  Language such as “indefinite survival” should no longer be used if it can be avoided.  M&A agreements should also explicitly provide that representations and warranties survive closing.

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.

On January 6, 2015, FINRA released its 10th annual Regulatory and Examinations Priorities Letter in which it identified key areas of focus for FINRA investigations for 2015. Since the approval of FINRA Rule 5123 on June 7, 2012, firms have been required to file private placement materials for review by FINRA. As a result of FINRA’s review of filed private placement materials, FINRA has identified several shortcomings that it says will be a focus for its investigations in 2015:

Inadequate Due Diligence and Suitability Analysis: FINRA says that its review of private placement materials indicates that in some cases firms are engaging in due diligence that does not satisfy their established procedures and that is insufficient to allow the broker-dealer to perform a suitability analysis and make a recommendation to a customer.

Problems with Contingency Offerings and Escrow Procedures: According to FINRA, “In a number of instances, an offering’s terms were amended and a rescission offer was not properly conducted. In other instances, broker-dealers participating in an offering with a contingency failed to either establish escrow procedures or had deficient procedures such as not employing an independent bank as the escrow agent.”

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.

Some public companies have requested the SEC to permit exclusion of proxy access proposals by stating the shareholder proposal directly conflicts with the issuers own proposal that will be included in the proxy statement.  The practice began when Whole Foods was recently successful in obtaining SEC relief.

The Council of Institutional Investors, or CII, has now weighed in.

In a letter to Whole Foods, CII stated:

CII was deeply disappointed by Whole Foods’ initial move to thwart a shareholder’s non-binding proxy access proposal by countering with plans to propose an access bylaw amendment with an unworkable ownership threshold. The proposed threshold—requiring a nominating shareholder to have held a 9 percent stake for five years—would not have been viable for any current Whole Foods shareholder.

CII is not comforted by Whole Foods’ subsequent decision to instead ask shareholders to approve an access bylaw requiring a single nominating investor to have held a minimum of 5 percent of the stock for at least five years. That is also an unreasonably high bar and is wildly at odds with the approach to proxy access that U.S. shareholders broadly favor: requiring a nominating shareholder or group of shareholders to have owned at least 3 percent of voting shares for at least three years.

CII has sent a similar to other companies who have asked for no-action relief to exclude proposals.  CII has also sent a letter to the SEC asking the SEC to reconsider its approach.

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.

Since our last update, the following public companies have submitted no-action letters to exclude shareholder proposals submitted by the New York City Pension Funds because the proposal will “directly conflict” with the issuer’s own proxy access proposal:

  • Exelon Corporation – 5% for 5 years
  • Apache Corporation – 5% for 3 years
  • Chipotle Mexican Grill, Inc. – 8% for 5 years
  • Noble Energy, Inc. – 5% for 5 years
  • SBA Communications, Inc. – 5% for 5 years
  • Peabody Energy Corporation – 7% for 5 years
  • Arch Coal, Inc. – 5% for 5 years

Domino’s Pizza, Inc. also filed to exclude a shareholder proposal for proxy access submitted by the Marco Consulting Group Trust I using the Whole Foods precedent.

AES Corporation also submitted a no-action letter claiming the Pension Funds’ proposal was deficient for technical reasons.

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 House and Senate have passed legislation which provides that swap end-users do not have to provide initial and variation margin for uncleared swaps as previously required by the Dodd-Frank Act.

The provision is included in the Terrorism Risk Insurance Program Reauthorization Act of 2015.

Senators defeated an amendment by Sen. Elizabeth Warren, D-Mass., to remove the margin exemption provision. The amendment failed by a vote of 31-66.

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 political gamesmanship has begun.  According to Maxine Walters “Republicans attempted to move a package of 11 bills that contained controversial changes to provisions relating to derivatives and Volcker rule. The legislation was voted on under suspension of the rules, which provides no opportunity for transparency, robust debate or amendments. Needing the support of two-thirds of the House to pass, Democrats joined to defeat it by a vote of 276-146.”

Ms. Walters also said “Most harmful was a provision delaying an important portion of the so-called ‘Volcker Rule,’ which prevents deposit-taking banks from making bets using taxpayer-insured funds. This measure would have given mega-banks . . . like Citigroup and JP Morgan another two years to sell off some of their most risky investments. And it comes on top of the Federal Reserve’s recent announcement of a three-year delay.“

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.

Wal-Mart has appealed the United States District of Delaware’s decision which denied Wal-Mart the right to exclude a shareholder proposal submitted by Trinity Wall Street.  The District Court held that the SEC was incorrect when it rendered a no-action letter permitting exclusion of a shareholder proposal submitted under Rule 18a-8 in Trinity Wall Street v Wal-Mart Stores, Inc.  Wal-Mart had argued to the SEC that the proposal was excludable under Rule 14a-8(i)(7) as a matter related to ordinary business operations.

The Third Circuit has granted Wal-Mart’s unopposed motion for an expedited appeal with briefing to be completed by February 13, 2015.  Last year Wall-Mart filed its proxy statement on April 23.

Stay tuned.

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.

Derivatives end users are concerned about the impact of new margin requirements for non-cleared derivatives, with a large number unsure whether they will even have to comply with the rules, according to a survey published by the International Swaps and Derivatives Association, Inc., or ISDA.

The new proposed rules, which will require many derivatives users to post initial and variation margin on non-cleared derivatives transactions, are planned to be phased in from December 2015. But a third of survey respondents said they were unsure whether they would be subject to the rules. And of the 36% that knew they would have to comply, nearly two thirds (65%) said they were concerned or somewhat concerned about their ability to meet the requirements.

It’s easy to see why people are confused.  See our discussion of the proposed CFTC rule here and the proposed banking regulators’ rule here.  And those links do not include proposals from regulators in Europe and Japan.

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 U.S. Department of the Treasury’s Federal Insurance Office, or FIO,  released its report on the Breadth and Scope of the Global Reinsurance Market and the Critical Role Such Market Plays in Supporting Insurance in the United States.  The report is required under Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The report summarizes the history of reinsurance as a product and an industry, and outlines the various functions of reinsurance.  The report emphasizes that global reinsurers are vital to U.S. insurers and thus important for the general economic prosperity of the United States, including through enhanced availability and affordability of insurance.  As the report indicates, the important role of global reinsurers may be most apparent following natural disasters and other catastrophes.

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.