Sidley Perspectives | OCTOBER 2016 • 1 IN THIS ISSUE SidleyPerspectives ON M&A AND CORPORATE GOVERNANCE OCTOBER 2016 ANALYSIS The Commonsense Principles of Corporate Governance—A New Baseline for Best Practices�������������������������������������������������������������������������������������� 2 NEWS JUDICIAL DEVELOPMENTS Seventh Circuit Adopts Trulia Standard for Disclosure-Only Settlements ������� 7 Recent Delaware Rulings Illustrate Increased Scrutiny of Mootness Fee Requests������������������������������������������������������������������������������������������������������������ 7 Delaware Court of Chancery Addresses Timing of Disclosure Claims ������������� 8 Caremark Claims Remain Very Difficult to Pursue������������������������������������������������ 9 Delaware Court of Chancery Rejects Books and Records Demand for Documentation Regarding Repatriation Tax��������������������������������������������������� 9 Delaware Court of Chancery Addresses the Effect of Fully Informed, Uncoerced Stockholder Approval in Two Cases������������������������������������������������ 10 Delaware Uses DCF Analysis in Appraisal for Private Company Merger ���������11 Directors Can Be Sued for Using a Merger to Extinguish Threatened Derivative Lawsuits�������������������������������������������������������������������������������������������������11 Recent Cornerstone Research Study Highlights M&A Litigation Trends�������� 12 SEC DEVELOPMENTS SEC Staff Denies No-Action Relief to Companies Seeking to Exclude Shareholder Proposals Requesting Amendments to Existing Proxy Access Bylaws �������������������������������������������������������������������������������������������������������� 13 Financial Advisor in Rural/Metro Settles With SEC Over Disclosure Violations������������������������������������������������������������������������������������ 13 SEC Requests Comment on Corporate Governance and Executive Compensation Disclosures ����������������������������������������������������������������������������������� 14 SEC Proposes Rules That Would Mandate Hyperlinks to Exhibit Filings�������� 14 TAX DEVELOPMENTS IRS Changes Its No-Ruling Policy on Tax-Free Spinoffs ������������������������������������ 15 SIDLEY EVENTS����������������������������������������������������������������������������������������������������������� 15 SIDLEY SPEAKERS������������������������������������������������������������������������������������������������������ 15 SIDLEY RESOURCES��������������������������������������������������������������������������������������������������� 16 Visit sidley.com for more Sidley Perspectives on M&A and Corporate Governance. Sidley Perspectives | OCTOBER 2016 • 2 SidleyPerspectives ON M&A AND CORPORATE GOVERNANCE ANALYSIS THE COMMONSENSE PRINCIPLES OF CORPORATE GOVERNANCE—A NEW BASELINE FOR BEST PRACTICES by Holly J. Gregory1 In July 2016, a high-profile group of senior executives from major companies and institutional investors published a set of “Commonsense Principles of Corporate Governance” designed to establish “a basic framework for sound, long-term-oriented governance” while encouraging “further conversation.” The Principles join a growing list of prominent sources of corporate governance recommendations for U.S. public companies. U.S. public companies face pressures from investors, proxy advisors and others to adopt corporate governance practices that one group or another has determined to be a “best practice.” However, views on “best group practice” are not consistently held. Company circumstances and needs differ and the research suggests that what may be regarded as “best practice” may not, in fact, be “best.” While the Commonsense Principles recognize that no one set of governance practices will work for every public company, they describe a baseline set of guiding rules that large public companies and institutional investors generally agree on. They do not provide guidance on emerging or controversial topics such as proxy access, anti-takeover protections, sustainability reporting, gender and racial diversity on boards or board refreshment mechanisms. For the most part, the Principles reflect corporate governance practices that are widely accepted. Indeed, the vast majority of what is recommended is already practiced by most S&P 500 companies or required by SEC regulations or stock exchange listing rules. What is most important about the Principles is that they were issued by a high-profile and varied coalition that included both representatives of well-known public companies and institutional investors. Warren Buffett of Berkshire Hathaway and Jamie Dimon of J.P. Morgan Chase were joined by the CEOs of GE, General Motors and Verizon. The institutional investors represented were of varied stripes—mutual funds, an activist hedge fund and a public pension fund: BlackRock, the Canada Pension Plan Investment Board, Capital Group, J.P. Morgan Asset Management, State Street, T. Rowe Price, ValueAct Capital and Vanguard. Key Aspects of the Commonsense Principles of Corporate Governance The Commonsense Principles are organized around eight broad themes as described below. 1) Board of Directors—Composition and Internal Governance The Principles provide a standard discussion of board composition and internal governance practices. What is most notable in this section is what is not included, because it suggests that there is not yet widespread agreement among the members of the coalition on certain governance “hot topics,” such as the value of gender and racial diversity on boards or how best to refresh boards. ■ Independence: The Principles emphasize the basic corporate law adage that “[d]irectors’ loyalty should be to the shareholders and the company.” Similarly they state that the “board must not be beholden to the CEO or management.” They also repeat the widelyaccepted guidance that a “significant majority of the board should be independent under the New York Stock Exchange rules or similar standards.” In addition, directors should be “strong and steadfast, independent of mind and willing to challenge constructively but 1 Holly J. Gregory is a partner in Sidley’s New York office and a co-leader of the firm’s global Corporate Governance and Executive Compensation practice. The views expressed in this article are those of the author and do not necessarily reflect the views of the firm. This article is based on a column entitled Key Takeaways from the Commonsense Principles of Corporate Governance by Ms. Gregory, which was published in the October/November 2016 edition of Practical Law’s The Governance Counselor. Open Letter from the authors of the Commonsense Principles of Corporate Governance: “To ensure their continued strength– to maintain our global competitiveness and to provide opportunities for all Americans–we think it essential that our public companies take a long-term approach to the management and governance of their business (the sort of approach you’d take if you owned 100% of a company).” Sidley Perspectives | OCTOBER 2016 • 3 SidleyPerspectives ON M&A AND CORPORATE GOVERNANCE not be divisive or self-serving. Collaboration and collegiality also are critical for a healthy, functioning board.” (Section I(a)). ■ Industry experience: Directors should be persons of “high integrity and competence.” A “subset” of directors should “have professional experiences directly related to the company’s business” and the board should be “continually educated” on the company’s industry. “At the same time, however, it is important to recognize that some of the best ideas, insights and contributions can come from directors whose professional experiences are not directly related to the company’s business.” (Section I(a)). ■ Board diversity: “Directors should have complementary and diverse skill sets, backgrounds and experiences. Diversity along multiple dimensions is critical to a highfunctioning board. Director candidates should be drawn from a rigorously diverse pool.” (Section I(a)). Note that no definition of diversity is provided, and no explicit reference to gender or racial diversity is made. ■ Board refreshment and tenure: The Principles emphasize that while considering board refreshment is important, so is tempering “fresh thinking and new perspectives” with “age and experience.” (Section I(f)). ■ Retirement age or term limits: If the board has a policy (and the Principles are silent with respect to whether a board should have age or term limits) and the board allows an exception to the policy, the board should explain the reasons for the exception. (Section I(f)). ■ Commitment: Board service requires “substantial time and energy.” Boards should assess director ability to “not be distracted by competing responsibilities.” While no specific guidelines are provided, boards are reminded to “carefully consider a director’s service on multiple boards and other commitments.” (Section I(a)). ■ Director evaluation and effectiveness: Boards “should have a robust process to evaluate themselves on a regular basis” and “the fortitude to replace ineffective directors.” (Section I(g)). No mention is made of conducting formal individual director evaluations. ■ Director nominations: “Long-term shareholders should recommend potential directors if they know the individuals well and believe they would be additive to the board.” (Section I(c)). ■ Rotation of leadership roles: “Boards should consider periodic rotation of board leadership roles (i.e., committee chairs and the lead independent director), balancing the benefits of rotation against the benefits of continuity, experience and expertise.” (Section I(e)). 2) Board of Directors’ Responsibilities The Principles also provide a relatively “plain vanilla” discussion of board responsibilities. ■ Engagement and third-party communications: “Robust communication of a board’s thinking to the company’s shareholders is important.” Companies may “designate certain directors —as and when appropriate and in coordination with management—to communicate directly with shareholders on governance and key shareholder issues, such as CEO compensation.” Directors should speak with the media about the company only if authorized by the board and in accordance with company policy. (Section II(a)). ■ Delegation and access to management: “A company is more likely to attract and retain strong directors if the board focuses on big-picture issues and can delegate other matters to management.” In addition, as authorized and coordinated by the board, directors should have unfettered access to management, including those below the CEO’s direct reports. (Section II(c)). ■ Board agenda: The full board should have input into setting the agenda. “The board should minimize the amount of time it spends on frivolous or non-essential matters, so that meeting time is reserved for providing perspective and making decisions to build real value…” (Section II(b)). Sidley Perspectives | OCTOBER 2016 • 4 SidleyPerspectives ON M&A AND CORPORATE GOVERNANCE ■ Executive sessions: As one would expect, the Principles advocate that the board should meet in executive session without the CEO or other members of management present at every board meeting to ensure the opportunity for free and open discussion, and sufficient time should be reserved to do so “properly.” (Section II(b)). ■ Director compensation: The Principles recommend that companies consider paying “a substantial portion” of director compensation in equity and requiring directors “to retain a significant portion of their equity compensation during their tenure.” (Section VII(d)). ■ Audit committee responsibilities: Among other things, the audit committee should focus on “whether the company’s financial statements would be prepared or disclosed in a materially different manner if the external auditor itself were solely responsible for their preparation.” (Section II(b)). Note that this borrows from Warren Buffett’s 2002 letter to the shareholders of Berkshire Hathaway in which he proposed questions for audit committees to ask auditors. 3) Shareholder Rights The Principles avoid taking a position on proxy access and are silent on other matters of shareholder concern that are often the focus of shareholder proposals, such as anti-takeover protections (e.g., classified boards, supermajority voting requirements and poison pills) and sustainability disclosure. However, they do address majority voting in director elections (which the vast majority of S&P 500 companies have adopted) and dual class voting structures, which is a more controversial topic. ■ Proxy access: The Principles describe common features of proxy access provisions but neither advocate for proxy access or come out against it. (Section III(a)). Note that in the span of about two years, more than 42% of S&P 500 companies have adopted proxy access and the trend shows little sign of abating. ■ Dual class voting: The Principles emphasize that “dual class voting is not a best practice,” and emphasize that companies that have it “should consider having specific sunset provisions based upon time or a triggering event.” “In addition, all shareholders should be treated equally in any corporate transaction.” (Section III(b)). ■ Ability to act by written consent/call special meetings: The ability of shareholders to act by written consent and call special meetings “can be important mechanisms for shareholder action” but, when adopted, should require “a reasonable minimum amount of outstanding shares…[to act] in order to prevent a small minority of shareholders from being able to abuse the rights or waste corporate time and resources.” (Section III(c)). ■ Majority vote standard in director elections: The Principles advocate that directors should be elected using majority voting. In one of the more specific provisions, the Principles call for directors to be elected “by a majority of the votes cast ‘for’ and ‘against/ withhold’ (i.e., abstentions and non-votes should not be counted for this purpose).” (Section I(b)). 4) Public Reporting The Principles generally advocate that company disclosures support a long-term view, and suggest caution with respect to the use of non-GAAP measures. ■ Quarterly reporting and earnings guidance: Companies should frame quarterly reporting in the context of their articulated strategy and provide an appropriate outlook for trends and metrics that reflect progress (or not) on long-term goals. Companies “should not feel obligated to provide earnings guidance—and should determine whether providing earnings guidance for the company’s shareholders does more harm than good.” If a company does provide earnings guidance, the company should be realistic and avoid inflated projections. Making short-term decisions to beat guidance or any other performance benchmark may destroy value in the long run. (Section IV(b)). Sidley Perspectives | OCTOBER 2016 • 5 SidleyPerspectives ON M&A AND CORPORATE GOVERNANCE ■ Non-GAAP measures: Companies are required to report their results in accordance with Generally Accepted Accounting Principles (GAAP). While it is acceptable in certain instances to use non-GAAP measures to explain and clarify results for shareholders, non-GAAP numbers “should be sensible and should not be used to obscure GAAP results.” In particular, “all compensation, including equity compensation…should be reflected in any non-GAAP measurement of earnings in precisely the same manner it is reflected in GAAP earnings.” (Section IV(f)). 5) Board Leadership The Principles are agnostic on the preferred form of board leadership but favor maintaining flexibility for independent directors to make this decision based on the circumstances facing the company from time to time. ■ Leadership structure: The board should clearly explain why it has combined or separated the positions of chair and CEO. When the roles are combined, the board should have a “strong designated lead independent director and governance structure.” (Section V(a) and (b)). ■ Lead director duties: The duties of a lead director may include: – Serving as liaison between the chair and the independent directors – Presiding over meetings of the board at which the chair is not present, including executive sessions of the independent directors – Ensuring that the board has proper input into meeting agendas and information – Having the authority to call meetings of the independent directors – Engaging (or overseeing engagement) with shareholders – Guiding the annual board self-assessment – Guiding the board’s consideration of CEO compensation – Guiding the CEO succession planning process (Section V(c)) 6) Management Succession Planning This section is generally non-controversial other than one provision which suggests that shareholders perhaps should have greater involvement in assessing the strength of the management team. ■ Evaluating bench strength: The Principles note that the bench strength of management “can be evaluated by the board and shareholders through an assessment of key company employees” and “direct exposure to those employees is helpful in making that assessment.” (Section VI(a)). – Note that it is unclear, however, whether and to what degree the Principles intended to suggest that shareholders should have “direct exposure” to company employees. While providing shareholders with direct access to key employees for the purpose of evaluating succession bench strength may be a proper subject for shareholder engagement in certain circumstances, it is unclear that it rises to the level of a broadly recommended practice for a wide array of listed companies. ■ Disclosure: Shareholders should be informed of the board’s succession planning process. (Section VI(b)). ■ Emergency plan: Companies should have a plan for emergency succession. (Section VI(b)). Sidley Perspectives | OCTOBER 2016 • 6 SidleyPerspectives ON M&A AND CORPORATE GOVERNANCE 7) Compensation of Management The Principles call for alignment of executive compensation with long-term performance and emphasize equity as a substantial component of pay. They also encourage disclosure regarding benchmarks. ■ Long-term alignment: Executive compensation plans should “ensure alignment with long-term performance.” “Companies should consider paying a substantial portion (e.g., for some companies, as much as 50% or more) of compensation for senior management in the form of stock, performance stock units or similar equity-like instruments.” (Section VII(d)). ■ Disclosure of metrics: “Benchmarks and performance measurements ordinarily should be disclosed to enable shareholders to evaluate the rigor of the company’s goals and the goal-setting process.” (Section VII(c)). 8) Asset Managers’ Role in Corporate Governance The Principles direct their most pointed advice toward asset managers. ■ “Asset managers should exercise their voting rights thoughtfully and act in what they believe to be the long-term economic interests of their clients.” (Section VIII). ■ Asset managers “should give due consideration to the company’s rationale for its positions” and vote based on “independent application of their own voting guidelines and policies.” (Section VIII(a) and (f)). ■ Asset managers should evaluate the performance of the boards at the companies in which they invest. (Section VIII(c)). As one might expect given the focus of the Commonsense Principles on practices that for the most part are already widely adopted among S&P 500 companies, the reception from institutional investors has been mixed. For example, while the Council of Institutional Investors provided a statement that was largely supportive, it indicated that it would have preferred the Principles to go further regarding shareholder rights such as proxy access, and would also have liked the Principles to support a broad duty for boards to act on majoritysupported shareholder proposals. Recommended Actions Counsel to public company boards should review the Commonsense Principles and be prepared to advise on how the company’s practices measure up to this guidance and to other recommended governance practices, while at the same time bearing in mind that the needs and circumstances of each company are unique. Sidley has prepared a side-by-side comparison, which is available here, of the Commonsense Principles to the (i) Principles of Corporate Governance published by the Business Roundtable, (ii) the Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies published by the National Association of Corporate Directors and (iii) the Corporate Governance Policies published by the Council of Institutional Investors. For most large public company boards, there are likely to be only a few areas where current practices are not in line with the Commonsense Principles given that the Principles generally reflect what has become common practice in the S&P 500. If a company’s practices differ significantly from the baseline of well-accepted practices described in the Commonsense Principles, directors should understand where the company’s governance practices do not align and the rationale for following a different practice. In this instance, the company should consider providing robust disclosure of the board’s rationale for departing from common practice. Consideration also should be given to whether any of the institutional investors who signed the Commonsense Principles hold a significant percentage of the company’s stock. Sidley Perspectives | OCTOBER 2016 • 7 SidleyPerspectives ON M&A AND CORPORATE GOVERNANCE NEWS2 JUDICIAL DEVELOPMENTS Seventh Circuit Adopts Trulia Standard for Disclosure-Only Settlements In In re Walgreen Co. Stockholder Litig. (7th Cir. Aug. 10, 2016), the U.S. Court of Appeals for the Seventh Circuit recently rejected a proposed disclosure-only settlement arising from Walgreen Co.’s merger with Alliance Boots GmbH. The ruling is significant because the Seventh Circuit adopted the judicial framework for assessing disclosure-only settlements that the Delaware Court of Chancery announced earlier this year in In re Trulia, Inc. Stockholder Litig. (Del. Ch. Jan. 22, 2016). The Seventh Circuit’s ruling—the first by a federal appeals court adopting Trulia—represents a significant precedent outside Delaware regarding the treatment of disclosure-only settlements in deal litigation. Stockholder plaintiffs brought suit after Walgreens filed its preliminary merger proxy statement. Shortly thereafter, the parties agreed to settle the litigation with Walgreens providing several supplemental disclosures to stockholders pre-vote and plaintiffs providing a limited release. The parties subsequently agreed to an amount of fees to be paid to plaintiffs’ counsel. After conducting a hearing, the U.S. District Court for the Northern District of Illinois determined that certain of the additional disclosures “may have mattered to a reasonable investor” and approved the settlement and the fee application. A stockholder who had objected unsuccessfully to the settlement appealed the ruling to the Seventh Circuit. The Seventh Circuit, with Judge Posner writing for a divided court (2-1), reversed, holding that the district court should have reviewed the added disclosures using a higher standard of review. Judge Posner noted that a court must consider whether a proposed disclosureonly settlement benefits class members and whether the new information provided would be considered significant by a reasonable investor. Citing Trulia, he noted a court must evaluate “the reasonableness of the ‘give’ and the ‘get,’” or what class members will give away in exchange for ending litigation. Judge Posner determined the supplemental disclosures “contained no new information that a reasonable investor would have found significant.” Judge Posner endorsed the Delaware Court of Chancery’s Trulia standard for approving disclosure-only settlements, which disfavors such settlements unless the supplemental disclosures address a misrepresentation or omission that is “plainly material,” and the proposed release is narrowly tailored to the disclosure claims and fiduciary duty claims concerning the sale process. He concluded neither of those requirements had been satisfied here. Judge Yandle dissented; her dissent has not yet been issued. Walgreen Co. reinforces the Delaware Court of Chancery’s admonition in Trulia that practitioners should expect courts to be “increasingly vigilant” when assessing the reasonableness of disclosure-only settlements. The ruling also adds to an evolving body of case law assessing the utility of disclosure-only settlements, and provides significant authority that other non-Delaware courts may rely on in evaluating such settlements. Recent Delaware Rulings Illustrate Increased Scrutiny of Mootness Fee Requests As part of the continuing evolution of disclosure-only settlement-related litigation in Delaware post-Trulia, the Court of Chancery has highlighted in several recent rulings that it will carefully review mootness fee applications where the supplemental disclosure obtained has rendered the underlying litigation moot. In In re Xoom Corporation Stockholder Litig. (Del. Ch. Aug. 4, 2016), Vice Chancellor Glasscock clarified the standard by which supplemental disclosures will be assessed for 2 The following Sidley attorneys contributed to the research and writing of the pieces in this section: Steven M. Bierman, Claire H. Holland, John K. Hughes, Alex J. Kaplan, Daniel A. McLaughlin, Jon Muenz, Andrew W. Stern and Kathleen A. Zink. Judge Posner in Walgreen Co.:“‘May have’ is not good enough. Possibility is not actuality or even probability. The question the judge had to answer was not whether the disclosures may have mattered, but whether they would be likely to matter to a reasonable investor.” Sidley Perspectives | OCTOBER 2016 • 8 SidleyPerspectives ON M&A AND CORPORATE GOVERNANCE mootness fee application purposes. After the announcement of PayPal Holdings, Inc.’s 2015 merger with Xoom Corporation, stockholder plaintiffs brought disclosure and other claims. Xoom mooted four disclosure claims in its definitive merger proxy statement. Plaintiffs subsequently dismissed the litigation and sought a $275,000 mootness fee based on the added disclosures. Defendants argued no fee award was warranted because the disclosures were immaterial. While the Court acknowledged that Trulia requires disclosures to be “plainly material” to support a settlement and a class-wide release, it noted that, in the mootness context, there is no class-wide release and the dismissal is with prejudice to the named plaintiffs only. Therefore, there is no “give” by the class (i.e., a waiver of class rights) to balance against the disclosure “get.” Accordingly, “a fee can be awarded if the disclosure provides some benefit to stockholders, whether or not material to the vote.” The Court then found the supplemental disclosures represented a “modest benefit” to stockholders and approved a $50,000 fee award (implied hourly rate of $794) versus the $275,000 fee requested (implied hourly rate of $4,000). Xoom followed two other recent Delaware rulings addressing mootness fees. In In re Receptos, Inc. Stockholder Litig. (Del. Ch. Jul. 21, 2016), Chancellor Bouchard reduced a mootness fee award from $350,000 as requested to $100,000, noting there “is no right to cover one’s supposed time and expenses just because you sue on a deal, and plaintiffs should not expect to receive a fee in the neighborhood of $300,000 for supplemental disclosures in a post-Trulia world unless some of the supplemental information is material…”. In In re Keurig Green Mountain, Inc. Stockholders Litig. (Del. Ch. Jul. 22, 2016), Chancellor Bouchard denied a mootness fee award application of $300,000 after determining the supplemental disclosures obtained did not “confer any benefit on the corporation because they did not correct a materially misleading disclosure” in the original proxy materials. Xoom highlights that supplemental disclosures do not need to be material to support a mootness fee award, and that merely helpful disclosures may support a modest award. On the other hand, the significant reduction of fee requests in Xoom and Receptos, and the denial in Keurig, reinforce Trulia’s warning that the Court will carefully scrutinize mootness fee requests and reduce the fee amount requested if the disclosure obtained is of little or no value. Delaware Court of Chancery Addresses Timing of Disclosure Claims Against an evolving M&A litigation landscape in Delaware, the Court of Chancery continues to address various aspects of disclosure claims in merger transactions. In An Nguyen v. Michael Barrett, et al. (Del. Ch. Sep. 28, 2016), the Court recently held that, if a plaintiff wishes to raise claims challenging the sufficiency of disclosures contained in a merger proxy statement, those claims should be raised pre-stockholder vote—not after the deal closes. The litigation arose out of AOL, Inc.’s 2015 acquisition of Millennial Media, Inc. Postannouncement but pre-vote, plaintiff raised some 30 disclosure violations, but sought pre-closing injunctive relief on just one “serious” claim (failure to disclose purported management-generated unlevered, after-tax free cash flow projections used by Millennial’s financial advisor in its DCF analysis). After the Court concluded that plaintiff failed to demonstrate the merger proxy statement was materially incomplete or misleading and denied injunctive relief, plaintiff filed an amended complaint seeking post-closing damages for breach of duty on the part of directors with regard to two alleged disclosure violations (the alreadyrejected claim and another concerning the advisor’s contingent-fee arrangement). In granting defendants’ motion to dismiss, the Court highlighted the difference between a “pre-close disclosure claim, heard on a motion for preliminary injunctive relief,” and a “disclosure claim for damages against directors post-close.” The Court noted the former requires a showing of only “a reasonable likelihood…the alleged omission or misrepresentation is material,” whereas in the latter “a plaintiff must allege facts making it reasonably In Xoom, the Delaware Court of Chancery found that the four supplemental disclosures at issue were “mildly helpful,” “somewhat valuable at best,” “somewhat of value,” and of “minimal benefit,” which was sufficient to justify a modest mootness fee award. Sidley Perspectives | OCTOBER 2016 • 9 SidleyPerspectives ON M&A AND CORPORATE GOVERNANCE conceivable that there has been a non-exculpated breach of fiduciary duty by the board in failing to make a material disclosure.” The Court determined that here, because Millennial’s charter shielded directors from liability for breaches of the duty of care, the only recourse was for plaintiff to establish a breach of the duty of loyalty, and plaintiff had not pled allegations demonstrating such an “extreme set of facts” where directors violated their disclosure duties “consciously,” “intentionally,” or in “bad faith.” The Court also disagreed with plaintiff’s characterization that recent Delaware rulings and the new Delaware “regime” have indicated a disposition toward allowing plaintiffs to bring disclosure claims either pre- or post-close. The Court noted: “To be clear, where a plaintiff has a claim, pre-close, that a disclosure is either misleading or incomplete in a way that is material to stockholders, that claim should be brought pre-close, not post-close,” and the “preferred method for vindicating truly material disclosure claims is to bring them pre-close, at a time when the Court can insure an informed vote.” Caremark Claims Remain Very Difficult to Pursue In Melbourne Municipal Firefighters’ Pension Trust Fund v. Jacobs (Del. Ch. Aug. 1, 2016), the Delaware Court of Chancery dismissed claims for breaches of fiduciary duty by certain directors of Qualcomm Incorporated. Plaintiff had alleged that the directors were aware of the company’s violation of antitrust laws in the U.S. and abroad and had failed to take appropriate action to prevent these violations. These so-called Caremark claims were paraphrased by the Court as follows: “The claim is that the directors allowed a situation to develop and continue which exposed the corporation to enormous legal liability and that in doing so they violated a duty to be active monitors of corporate performance.” The stockholder plaintiff failed to make a pre-suit demand before initiating the lawsuit, arguing that demand was excused because a majority of the directors faced a substantial likelihood of liability for acting in bad faith by consciously disregarding their duty to oversee Qualcomm’s compliance with antitrust laws. Vice Chancellor Montgomery-Reeves concluded, however, that the complaint failed to sufficiently plead facts from which to infer that the directors’ response to alleged “red flags” constituted bad faith. The Court distinguished the facts of this case from well-known cases, Massey and Pyott, where plaintiffs had sufficiently pled bad faith inaction, noting that those cases involved far more egregious facts and admissions of wrongdoing. In granting the motion to dismiss, the Court emphasized that simply alleging that the board made a “wrong” decision in response to red flags is insufficient to plead bad faith. This case serves as a reminder that Caremark claims are among the most difficult corporate litigation claims to prove. The necessary inaction and the lack of good faith necessary for a Caremark claim requires “a sustained or systematic failure of the board to exercise oversight.” Simply alleging that a board incorrectly exercised its business judgment and made a “wrong” decision is insufficient. Delaware Court of Chancery Rejects Books and Records Demand for Documentation Regarding Repatriation Tax In Beatrice Corwin Living Irrevocable Trust v. Pfizer, Inc. (Del. Ch. Sep. 1, 2016), Judge Abigail LeGrow, sitting as a Vice Chancellor by designation, ruled against a stockholder’s demand for books and records concerning disclosures regarding Pfizer’s treatment and calculation of a repatriation tax. The stockholder contended that it was inappropriate for Pfizer to conclude that, pursuant to Accounting Standards Codification 740-30, it would be impracticable to compute its tax liability on approximately $69 billion of unremitted earnings from international subsidiaries; the stockholder insisted that Pfizer should have computed and then disclosed the amount. Accordingly, the stockholder demanded books and records to “investigate whether the board failed to assure Pfizer’s compliance with accounting rules,” demanding board-level documents, including minutes discussing the tax and any Caremark claims are among the most difficult corporate litigation claims to prove. Sidley Perspectives | OCTOBER 2016 • 10 SidleyPerspectives ON M&A AND CORPORATE GOVERNANCE calculations thereof, as well as financial documents reflecting calculations of Pfizer’s foreign earnings and the costs to repatriate such earnings. Pfizer rejected the demand, positing that the stockholder failed to articulate any credible basis from which any mismanagement or other wrongdoing could be inferred, and directed the stockholder to Pfizer’s public disclosures. The stockholder then commenced a proceeding in the Delaware Court of Chancery to compel production, contending that it required the requested books and records to bring a potential Caremark claim. Following a trial, the Court ruled in favor of Pfizer reasoning that a stockholder must “provide some evidence from which a Caremark claim could be inferred. That is, where a stockholder’s sole purpose for investigating mismanagement is to determine whether the board breached its duty of oversight…” the stockholder “must provide some evidence from which the Court may infer that the board utterly failed to implement a reporting system or ignored red flags.” The Court reasoned further that Pfizer’s independent auditor presented an audit opinion that the subject financial statements were consistent with GAAP, and noted that, at trial, the stockholder’s expert acknowledged that he could not disagree with that opinion; thus, the Court found that the stockholder could not infer a credible basis of “actionable corporate wrongdoing,” particularly because directors are entitled to rely on experts such as auditors under Section 141(e) of the Delaware General Corporation Law. Delaware Court of Chancery Addresses the Effect of Fully Informed, Uncoerced Stockholder Approval in Two Cases On August 24 and 25, 2016, the Delaware Court of Chancery dismissed stockholders’ post-closing claims in two public M&A cases: City of Miami Gen. Emps. and Sanitation Emps. Ret. Trust v. Comstock (C&J Energy) and Larkin v. Shah (Auspex). The lengthy opinions include expansive discussions of the standards of review applicable to various merger transactions. The decisions are notable in that each addresses—albeit in an arguably conflicting manner—the effect of a fully informed, uncoerced stockholder vote on the legal standard applicable to post-closing claims. By way of background, under the Delaware Supreme Court’s 2014 decision in Corwin v. KKR Fin. Holdings LLC, such an informed, uncoerced vote—coined “Corwin approval”—cleanses a transaction such that it is subject to the “business judgment rule,” a minimal level of scrutiny in which the court affords deference to board decisions. In May 2016, in Singh v. Attenborough, the Delaware Supreme Court implied that, where Corwin approval invokes the business judgment rule, a transaction may be attacked only on grounds of “waste,” and noted that “dismissal is typically the result” because “it has been understood that stockholders would be unlikely to approve a transaction that is wasteful.” C&J Energy and Auspex, however, appear to diverge in their interpretation and application of Corwin approval. In Auspex, Vice Chancellor Slights held that, in the absence of a “looming” controlling stockholder, Corwin approval triggers review under an “irrebuttable business judgment rule” that extinguishes all claims other than those for “waste,” including claims based on a breach of the duty of loyalty. In C&J Energy, however, although Chancellor Bouchard dismissed the plaintiff’s claims and recognized the holding in Singh, the Court appeared to imply that litigants may be able to rebut the business judgment rule and trigger a higher level of scrutiny (i.e., entire fairness review) by alleging duty of loyalty claims arising from board-level conflicts or certain types of deal process flaws. Although C&J Energy discusses how one may “rebut” the business judgment presumption that applies following Corwin approval, C&J Energy also may be read simply as holding that the benefits of Corwin approval have not taken effect where the board is conflicted and entire fairness review applies. In any event, until the Delaware Supreme Court rules explicitly as to the methods by which a Corwin-approved transaction may be challenged, we can expect continued uncertainty in the Court of Chancery. The Delaware Court of Chancery also found that C&J Energy was entitled to more than $542,000 in damages against the injunction bond, which serves as a reminder that plaintiffs should expect that their bond will be drawn upon in the rare event that the grant of a preliminary injunction is reversed on appeal. Sidley Perspectives | OCTOBER 2016 • 11 SidleyPerspectives ON M&A AND CORPORATE GOVERNANCE Delaware Uses DCF Analysis in Appraisal for Private Company Merger During the past two years, there have been significant developments in Delaware involving both fiduciary duty-based litigation and appraisal litigation. The Court of Chancery’s most recent appraisal ruling, In re ISN Software Appraisal Litig. (Del. Ch. Aug. 11, 2016), arose out of ISN’s 2013 squeeze-out merger with a wholly-owned subsidiary. ISN did not engage a financial advisor to assist on the merger or to provide a fairness opinion. Instead, ISN’s founder and majority stockholder used a 2011 third-party valuation and adjusted it based on his views of the company’s prospects, and arrived at merger consideration of $137 million ($38,317 per share). Two minority stockholders sought statutory appraisal. The Court found the parties’ respective experts used a variety of valuation methodologies in determining appraised fair value (e.g., discounted cash flow, guideline public companies, comparable transactions and direct capitalization of cash flow), but only gave the DCF analysis partial weight. The Court also noted that the experts reached widely divergent conclusions of fair value (a $714 million spread), with petitioners’ expert arriving at a valuation of $820 million ($230,000 per share) and ISN’s expert proposing a valuation of $106 million ($29,360 per share), which was below the aggregate merger price. The Court rejected all other valuation methodologies and relied exclusively on a DCF analysis as representing the best indicator of fair value, noting that ISN was privately held and had not yet reached steady growth, its stock was illiquid and there were no comparable company evaluations that served as reliable indicators of fair value. The Court used the DCF analysis provided by ISN’s expert as a baseline. After adjusting certain inputs on the DCF, the Court determined the appraised fair value of ISN was $357 million ($98,783 per share), resulting in an award of more than 2.5 times the merger price. ISN Software provides guidance for those involved in statutory appraisal proceedings involving a private company. The ruling suggests that, in determining appraised fair value of a company whose stock is not traded publicly and for which no comparable company evaluations exist, the court is likely to rely exclusively on a DCF valuation method and will question widely divergent expert reports. Directors Can Be Sued for Using a Merger to Extinguish Threatened Derivative Lawsuits When directors eliminate a threatened derivative lawsuit against them by agreeing to a merger that extinguishes the claims, can a second, direct suit challenge that agreement? In an opinion by Vice Chancellor Glasscock in In re Riverstone Nat’l, Inc. Stockholder Litig. (Del. Ch. Jul. 28, 2016), the Delaware Court of Chancery said yes—but cautioned that the path to such a claim is narrow. The plaintiffs in Riverstone were minority stockholders in a privately-held Delaware corporation, Riverstone National, Inc., that was 91% owned by its majority owner. Several of Riverstone’s directors and officers invested in a second company, but Riverstone did not. The minority stockholders sent Riverstone a demand to inspect its books and records on May 20, 2014, asserting that the investments were a corporate opportunity usurped by the directors and officers. After Riverstone rejected that demand, the stockholders followed with a related demand on May 29 and a Section 220 lawsuit on May 30. But before they could file a derivative suit, Riverstone was merged into a new company on May 30. The merger agreement allegedly included a release broad enough to extinguish the usurpation claims. The stockholders brought a direct claim challenging the merger for benefitting the directors (by releasing valuable claims Riverstone had against them) in exchange for no consideration to Riverstone. The Court cautioned that it was not reviving the released derivative claims, but evaluating their value as corporate assets. To do so, the Court focused on whether the plaintiffs had pleaded particularized facts sufficient to show that such claims could have survived a motion to dismiss and thus should have been valued as part of the merger consideration. Riverstone builds upon a 2013 decision from the same Court, In re Primedia, Inc. Shareholders Litig. (Del. Ch. 2013), but Primedia involved a previously filed derivative suit rather than threatened claims. Vice Chancellor Glasscock in ISN Software: “In a competition of experts to see which can generate the greatest judicial skepticism regarding valuation…this case, so far, takes the prize: one of the Petitioners’ experts opines that fair value is greater than eight times that implied by the DCF provided by the Respondent’s expert. Given such a divergence, the best scenario is that one expert, at the least, is wildly mistaken.” Sidley Perspectives | OCTOBER 2016 • 12 SidleyPerspectives ON M&A AND CORPORATE GOVERNANCE At the pleading stage, the Court valued the released claims by the size of the opportunities allegedly usurped, which it found to be 5-10% of the merger consideration and thus material both to the directors and the value of the merger. The Court concluded that, because the directors knew of the potential derivative claims when they approved the merger, they had a material conflict of interest requiring the merger to be evaluated under the entire fairness standard of review. At the pleading stage, the Court found it reasonably conceivable that the merger would fail that review. The Court warned, however, that “much ground for strike suits and other mischief would be possible” if courts allowed suits on this theory to proceed without particularized pleading of the viability of the released claims and the board’s knowledge of their existence. The lesson of Riverstone is that boards facing derivative claims—whether already filed or merely threatened—cannot always count on a merger to extinguish them. While challenges to a release may be difficult to plead, the risk of such a challenge should be evaluated if substantial derivative claims are pending or threatened at the time of a merger. Recent Cornerstone Research Study Highlights M&A Litigation Trends Cornerstone Research recently released one of its periodic studies reviewing trends in class action litigation challenging M&A transactions. See Ravi Sinha, Cornerstone Research, Shareholder Litigation Involving Acquisitions of Public Companies—Review of 2015 and 1H 2016 M&A Litigation (2016). The study indicates that, since the Delaware Court of Chancery’s January 2016 ruling in In re Trulia, Inc. Stockholder Litig. (Del. Ch. Jan. 22, 2016), the number of lawsuits filed involving public M&A transactions valued at more than $100 million has decreased from 90% in 2014 to 64% in the first half of 2016. The decrease appears to reflect the continuing fallout from the Court of Chancery’s disfavor (expressed in Trulia and elsewhere) of disclosure-only settlements—once the predominant means for resolving stockholder litigation challenging M&A transactions. Among other findings, the Cornerstone study notes that the number of stockholder class action suits filed outside of Delaware has increased, suggesting that plaintiffs may be seeking more sympathetic courts to pursue disclosure-only settlements post-Trulia. The study notes that, in 2015, more than 76% of litigated transactions involving a Delaware public target were filed in Delaware, whereas in the first half of 2016 only 36% of such litigation was filed in Delaware. A separate Cornerstone study also found that, during the first half of 2016, there was a 167% increase in the number of lawsuits filed in federal court challenging M&A transactions compared to the preceding six months, suggesting that plaintiffs may be seeking to recast state law disclosure claims as possible disclosure claims under the federal proxy or tender offer rules. See Cornerstone Research, Securities Class Action Filings—2016 Midyear Assessment (2016). In Trulia, the Court of Chancery indicated that it hoped other sister courts might follow its reasoning when evaluating disclosure-only settlements. While certain jurisdictions outside Delaware have begun to follow Trulia, some have not. As noted above, the Seventh Circuit’s recent ruling in In re Walgreen Co., where the Court relied heavily on Trulia in overturning a district court judge’s approval of a disclosure-only settlement, provides significant authority that other non-Delaware courts may rely on in assessing such settlements. But it remains to be seen what further impact such rulings may have on future trends in class action litigation challenging M&A transactions. The number of lawsuits filed involving public M&A transactions valued at more than $100 million has decreased from 90% in 2014 to 64% in the first half of 2016. Sidley Perspectives | OCTOBER 2016 • 13 SidleyPerspectives ON M&A AND CORPORATE GOVERNANCE SEC DEVELOPMENTS SEC Staff Denies No-Action Relief to Companies Seeking to Exclude Shareholder Proposals Requesting Amendments to Existing Proxy Access Bylaws To date in 2016, the SEC Staff has granted no-action relief under Exchange Act Rule 14a-8(i)(10) to approximately 40 companies that sought to exclude shareholder proposals asking them to adopt proxy access with specified parameters by adopting “a proxy access bylaw that addresses the proposal’s essential objective.” Each of the companies adopted a proxy access bylaw with a 3% for 3 years ownership threshold mirroring the threshold requested by the proponent, even though the company-adopted bylaw deviated from the specific terms of the proposal in various other respects. In February 2016, the SEC Staff denied no-action relief to three companies that implemented proxy access with a different ownership threshold (5%) than that sought by the proponent (3%). Based on the SEC Staff determinations, no-action relief will be available in this context even if the company’s newly-implemented proxy access bylaw (i) includes a limit on the number of shareholders that may aggregate to form a nominating group (e.g., 20 versus an unlimited number per the terms of the proposal) or (ii) includes a lower percentage or number of board seats available to proxy access nominees than specified in the proposal (e.g., 20% (rounding down) versus “the greater of 25% of the board or two” per the terms of the proposal). See our previous Sidley Update for more information. In July and September 2016, the SEC Staff denied no-action relief to two companies—H&R Block, Inc. and Microsoft Corporation—seeking to exclude shareholder proxy access proposals in a different context. In those cases the shareholder proposal requested that the board make specific revisions to the company’s existing 3%/3 years/20%/20 proxy access bylaw. Specifically, the proposals requested, among other things, that (i) there be no limit on the size of the nominating group, (ii) the number of proxy access nominees would be the greater of 25% of the board or two and (iii) there be no restriction on the re-nomination of a proxy access nominee based on the number or percentage of votes received in a prior election. The SEC Staff’s recent activity in this context suggests that it will not concur in exclusion of shareholder proposals seeking specific revisions to proxy access bylaws on the basis of substantial implementation under Rule 14a-8(i)(10). In light of the SEC Staff’s determinations, shareholders will likely submit proposals seeking revisions to existing proxy access bylaws, including removal of the nominating group size limit and other modifications. Even if such proposals are not able to be excluded from annual meeting ballots, they are unlikely to be approved by shareholders at companies where the existing proxy access bylaw has standard terms (e.g., 3% for 3 years). For example, the proposal to amend H&R Block’s proxy access bylaw received less than 30% support at the company’s annual meeting in September 2016 despite a favorable recommendation from ISS. For more information, see our Corporate Governance Report dated September 22, 2016 entitled Proxy Access Update: Momentum Continues to Build in 2016. As a follow-up to our previous reports on proxy access, it provides an update on ISS negative vote recommendations against certain directors for failure to adequately respond to majoritysupported shareholder proxy access proposals and other recent developments in the area. It also includes an Appendix which highlights, on a company-by-company basis, the various detailed terms of proxy access provisions adopted by 263 companies since the beginning of 2015. Financial Advisor in Rural/Metro Settles With SEC Over Disclosure Violations The SEC recently announced that it had entered into a settlement agreement with the lead financial advisor for Rural/Metro Corporation in that company’s 2011 sale. In the settlement, the advisor agreed to pay $2.5 million (plus interest) for having provided banker presentation materials containing what the SEC alleged were materially false and misleading statements More than 42% of companies in the S&P 500 have now adopted proxy access and we expect proxy access to become a majority practice among large public companies within the next six months. Sidley Perspectives | OCTOBER 2016 • 14 SidleyPerspectives ON M&A AND CORPORATE GOVERNANCE that were designed to make the acquirer’s bid look more attractive than it actually was, and for causing that information to be included in the merger proxy statement Rural/Metro filed with the SEC in May 2011 to solicit stockholder approval for the sale. The SEC determined those actions caused Rural/Metro to violate Exchange Act Section 14(a) and Exchange Act Rule 14a-9. In particular, the SEC found the advisor’s presentation materials concerning its precedent transaction analysis, and Rural/Metro’s subsequent definitive merger proxy statement summarizing that analysis, indicated that the advisor had used Wall Street research analyst “consensus projections” in arriving at Rural/Metro’s 2010 adjusted EBITDA and when assessing precedent transaction multiples. The SEC determined, however, that the advisor’s materials did not reflect analysts’ research or a “consensus” view, but instead reflected Rural/Metro’s actual 2010 adjusted EBITDA. The SEC order draws heavily from the litigation record developed as part of the Delaware Court of Chancery’s broader March 2014 ruling finding the advisor liable for having aided and abetted breaches of fiduciary duty on the part of Rural/Metro’s directors in approving the transaction. There, the Court first noted the “consensus projections” were neither analyst projections nor did they represent a Wall Street consensus, but were actually Rural/ Metro‘s reported results, and that the advisor had also used the reported figures without adjusting for one-time expenses, which was contrary to the Wall Street consensus. In its order, the SEC also found the advisor had caused Rural/Metro’s merger proxy statement to include a separate misleading disclosure suggesting that the advisor had relied on another valuation analysis (comparable company) in its fairness presentation to Rural/ Metro’s board when, in fact, the advisor had not relied on that analysis for valuation purposes or in providing its opinion. SEC Requests Comment on Corporate Governance and Executive Compensation Disclosures On August 25, 2016, the SEC issued a request for comment soliciting public input on the disclosure requirements in Subpart 400 of Regulation S-K relating to management, executive compensation, certain security holders and corporate governance matters. The SEC is seeking comment on the existing disclosure requirements as well as other disclosure items that commenters believe the rules should address. The comment period will end on October 31, 2016. The request for comment is part of a comprehensive “Disclosure Effectiveness Initiative” led by the SEC’s Division of Corporation Finance to review and improve the effectiveness of public company disclosure requirements. It follows (i) rule amendments proposed by the SEC in July 2016 to streamline its disclosure requirements, (ii) a concept release issued by the SEC in April 2016 requesting comment on modernizing certain disclosure requirements in Regulation S-K relating to a public company’s business and financial information as discussed in a previous Sidley Update and (iii) a request for comment issued by the SEC in September 2015 seeking public input on the form and content of financial statements required under Regulation S-X. SEC Proposes Rules That Would Mandate Hyperlinks to Exhibit Filings On August 31, 2016, in furtherance of its Disclosure Effectiveness Initiative, the SEC published rule proposals that would require registrants to provide hyperlinks to the exhibits to their SEC filings—including registration statements and periodic and current reports— that are governed by the exhibit requirements of Item 601 of Regulation S-K. Comments on the rule proposals are due by October 27, 2016. We believe the proposed rules may become effective as early as next year. As proposed, registrants would be required to provide a hyperlink from the exhibit index in the SEC form to the exhibit itself, whether included with the form or incorporated by Director of the SEC's Enforcement Division: “Accurate disclosures about financial advisers’ fairness opinions are important to shareholders in the sale of a corporation… This enforcement action holds [the advisor] accountable for causing its client to distribute material misstatements about its financial analysis to shareholders.” Sidley Perspectives | OCTOBER 2016 • 15 SidleyPerspectives ON M&A AND CORPORATE GOVERNANCE reference from another SEC filing. Inclusion of hyperlinks to the exhibits themselves, the SEC believes, “would facilitate easier access to these exhibits for investors and other users of the information” and improve the “time consuming and cumbersome” current process which requires users to search a registrant’s EDGAR filings to locate a referenced exhibit’s original submission. The proposed rules would also require registrants to file the forms that would be subject to the proposed rules in HTML format rather than the text-based ASCII format which does not support active hyperlinks. The SEC estimates that more than 99% of all covered SEC filings already are submitted in HTML format. TAX DEVELOPMENTS IRS Changes Its No-Ruling Policy on Tax-Free Spinoffs On August 26, 2016, the Internal Revenue Service (IRS) issued Revenue Procedure 2016-45, stating that it is willing to provide private letter rulings to taxpayers pertaining to the corporate business purpose and device tests that are required for a spinoff to be tax-free. The IRS will consider providing such guidance only with respect to a significant legal issue that is not inherently factual in nature. Under the device requirement, to be tax-free, a distribution must not be used as a device for the distribution of profits to the stockholders. Prior to the issuance of this Revenue Procedure, the IRS declined to issue private letter rulings on these two issues, believing them to be inherently factual. The IRS, however, has recently determined that there are a number of unresolved legal issues pertaining to these two tests. The IRS continues to maintain its no-ruling policy on whether a transaction qualifies for tax-free treatment as a whole (as opposed to meeting the business purpose and device tests, which are only part of the analysis), whether various tax consequences (such as nonrecognition and basis) result from the transaction and certain other matters. See our previous Sidley Update for more information about this development. SIDLEY EVENTS Sidley Chicago Life Sciences College November 15 | Chicago, IL Sidley will host a Chicago Life Sciences College on November 15. Pran Jha, a partner in our Chicago office, will moderate a panel entitled Healthcare M&A: What’s on the Horizon for 2017. Anyone interested in attending should contact Nick LoVallo at email@example.com or (312) 456-4314. SIDLEY SPEAKERS Andy Stern, a partner in our New York office, will present on the State of the M&A Litigation Landscape at the ACI Conference on M&A Liability in New York on October 26. Click here for more information. John K. Hughes, a partner in our Washington, D.C. office, will moderate a panel on Recent Developments in Delaware Law as part of the Boston Bar Association’s 3rd Annual Mergers & Acquisitions Conference in Boston on November 1. The panel will include members of the Delaware judiciary and other practitioners. Click here for more information. Sidley Perspectives | OCTOBER 2016 • 16 SidleyPerspectives ON M&A AND CORPORATE GOVERNANCE sidley.com Sidley Austin provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Attorney Advertising - Sidley Austin LLP, One South Dearborn, Chicago, IL 60603. 312 853 7000. Sidley and Sidley Austin refer to Sidley Austin LLP and affiliated partnerships as explained at sidley.com/disclaimer. AMERICA • ASIA PACIFIC • EUROPE Jennifer Fitchen, a partner in our Palo Alto office, is on the faculty for the 21st Annual National M&A Institute in New Orleans on November 3-4. On November 3, she will present on panels entitled The Basics: Acquiring a Privately Held Business for Cash, The Basics: Acquiring a Privately Held Business for Stock, and Special Issues in Asset Acquisitions. On November 4, she will present on panels entitled Acquiring a Public Company and Ethical Issues in M&A Transactions. Click here for more information. SIDLEY RESOURCES An article entitled DFC Global and Appraisal of a Fully-Shopped Company Above the Merger Price: The Evolving Framework for Assessing Merger Price in the Search for Fair Value by John K. Hughes, a partner in our Washington, D.C. office who serves as the Vice Chair of the ABA Business Law Section’s M&A Committee, was published in Deal Points—The Newsletter of the ABA Mergers and Acquisitions Committee, Volume XXI, Issue 3 (Fall 2016). Sidley published a Practice Note on August 24 entitled Not-So-Current Reports: What Form S-3 Companies Need to Know About Late Form 8-K Filings. The note addresses the requirements of Form 8-K, the related requirements of Form S-3 and the consequences of a Form S-3 issuer’s failure to make timely Form 8-K filings. Sidley published a client update on August 22 entitled SEC Brings Additional Enforcement Actions Against Companies with Employee Agreements That Impede Whistleblowing. The update summarizes SEC enforcement actions recently brought against two companies for using severance agreements that required departing employees to waive their ability to obtain monetary awards should they report possible securities laws violations to the SEC. In light of the actions, companies should review their existing and form agreements with employees to ensure that they do not include language of the sort that the SEC found objectionable. An article entitled Recent SEC Guidance on Non-GAAP Financial Measures May Impact Federal Securities Lawsuits by Alex J. Kaplan, James Heyworth and Elise Young of our New York office was published in Bloomberg BNA’s Corporate Law & Accountability Report on August 18. The article addresses the heightened scrutiny surrounding non-GAAP measures and considers how courts may weigh the SEC’s recent guidance concerning the use of non-GAAP measures in the event of claims that non-GAAP measures present material misstatements or misrepresentations in violation of securities laws.