GENERAL UPDATES

1. CORPORATE SENSITIVITY TO ENVIRONMENTAL CONCERNS OF SHAREHOLDERS INCREASING

Recent studies indicate that over the past year companies have become more sensitive to environmental, social, and governance (ESG) concerns of shareholders. One article describes a study compiled by the Institutional Shareholder Services that relies on data from investor complaints lodged during recent proxy seasons and suggests that social responsibility investors (SRI) have been encouraged by company action.

Indeed, shareholder litigation after regulatory/enforcement action has increased and led to shareholder lawsuits in which directors have been named and claimants have sought damages for the environmental remediation costs the company incurred. Coupled with efforts this year by the United Nations Global Compact that encouraged investors to submit their sustainability desires to the World Federation of Exchanges, investors have been influencing companies’ attention to climate change and sustainability. Their actions may soon influence the ESG reporting standards required by the New York Stock Exchange.

2. SEC ISSUED PARTIAL STAY OF CONFLICT MINERALS RULES

On May 2nd 2014, the SEC issued an order staying the effective date for compliance with the portions of the Exchange Act Rule 13p-1 and Form SD that the Court of Appeals held would violate the First Amendment. However, with respect to portions not deemed to violate the First Amendment, companies were expected to file any report required under Rule 13p-1 on or before the due date.

The SEC order issuing stay can be found here.

The April 29th 2014 statement the order refers to can be found here.

3. SEC FILED EN BANC REHEARING OF THE CONFLICT MINERALS DECISION

On May 29th 2014, the SEC filed a petition seeking en banc rehearing of the conflict minerals decision. The original decision from April 14, 2014 found that the requirement that issuers report to the SEC and state on their website “that any of their products have not been found to be ‘DRC conflict free’” compelled speech and violated the First Amendment. Although en banc review is difficult to attain, the need for en banc review in the conflict minerals is heightened given that the appropriate level of scrutiny for deciding the First Amendment issue is already subject to en banc review in the American Meat Institute case.

The petition for the rehearing can be found here.

4. SEC ANNOUNCED LATEST CHARGES IN JOINT LAW ENFORCEMENT EFFORT UNCOVERING PENNY STOCK SCHEMES

On May 22nd 2014, the SEC announced the latest in a series of cases against microcap companies, officers, and promoters arising out of a joint law enforcement investigation to unearth penny stock schemes with roots in South Florida. The SEC charged five penny stock promoters with conducting various manipulation schemes involving undisclosed payments to induce purchases of a microcap stock to generate the false appearance of market interest

An article elaborating upon these charges can be found here.

5. COURT OF APPEALS HANDED DOWN LANDMARK FCPA RULING DEFINING THE TERM “INSTRUMENTALITY”

On May 16th 2014, in United States v. Joel Esquenazi and Carlos Rodriguez, the Eleventh Circuit Court of Appeals became the first court to address the definition of the term “instrumentality” (“entity controlled by the government of a foreign country that performs a function the controlling governments treats as its own”) as it appears in the Foreign Corrupt Practices Act (“FCPA”). The court, in addition to providing  a non-exhaustive list of factors to consider, also provided the following two-part test to determine whether an entity is an instrumentality of a foreign government: (1) whether a foreign government controls the entity in question and (2) whether an entity performs a function the foreign government treats as its own.

The DOJ and SEC view this decision as validating their broad interpretation of who qualifies as a “foreign official” under the FCPA. Esquenazi demonstrates that companies cannot rely on “public” or “private” labels to determine whether an entity is an instrumentality under the FCPA.

A more in-depth article on this topic can be found here.

6. SEC CHARGED NYSE, NYSE ARCA, AND NYSE MKT FOR REPEATED FAILURES TO OPERATE IN ACCORDANCE WITH EXCHANGE RULES

On May 1st 2014, the SEC announced an enforcement action against the NYSE and two affiliated exchanges for their failure to comply with the responsibilities of self-regulatory organizations (SROs) to conduct their business operations in accordance with SEC-approved exchange rules and the federal securities law.

While the NYSE operates under the auspices of its own laws and the securities laws, as SROs, the NYSE exchanges must file all proposed rules and rule changes with the SEC. The SEC then publishes them for public comment before they take effect. The violations occurred over the period from 2008 to 2012 and breached Section 19 (b) and 19 (g) of the Securities Exchange Act.

More on this topic can be found here.

7. CHAIR OF THE SEC DISCUSSED THREE KEY PRESSURE POINTS IN THE CURRENT ENFORCEMENT ENVIRONMENT

On May 19th 2014, at the NYC Bar Association’s Third Annual White Collar Crime Institute in New York, NY, Chair Mary Jo White presented a nuanced view of the following three key pressure points of some of the more significant issues in the current enforcement environment:

  1. the pressure of multiple regulators with overlapping mandates to pursue the same investigations and achieve coordination successes while avoiding unnecessary competition,
  2. the decision of whether to charge individuals, entities, or both in order to both emphasize regulatory scrutiny for individuals and effectively hold corporations accountable for negligent and intentional wrongdoing, and
  3. the range of remedies and ultimate resolutions, such as barring wrongdoers for periods of time, requiring admissions of wrongdoing in certain cases, and using monitors or independent compliance consultants to directly address root causes of misconduct.

The full transcript of Chair Mary Jo White’s speech can be found here.

FINRA UPDATES

 1. FINRA RULE CHANGE TO LIMIT SELF-TRADING APPROVED

On May 1st 2014, the SEC approved changes to FINRA’s rules to limit self-trading. FINRA Rule 5210 now requires firms to have policies and procedures in place that are reasonably designed to review their trading activity and prevent a pattern or practice of self-trades resulting from orders originating from a single algorithm or trading desk, as well as those related algorithms or trading desks.

FINRA stated that it will announce an effective date to reflect this change to FINRA Rule 5210 in a regulatory notice in the near future.

2. SEC APPROVED SIGNIFICANT AMENDMENTS TO FINRA RULES 5110 & 5121

The SEC recently approved FINRA’s amendment to Rule 5110, commonly referred to as the “Corporate Financing Rule,” which addresses commercial fairness in underwriting and other arrangements for the distribution of securities. The amendment expands the circumstances in which termination fees and rights of first refusal are permissible, eliminates obligations of the issuer with respect to the payment of any termination fee, and eliminates the requirement to file offerings of certain types of ETF’s.

The SEC also approved FINRA’s amendment to Rule 5121, the Conflict of Interest Rule. The new amendment narrows the scope of the definition of “control.” Whereas “control” historically included being a holder of 10% or more of the debt of the issuer, the new rules narrows the scope of the definition to exclude holders of subordinated debt.

DELAWARE UPDATES

 1. PROPOSED AMENDMENTS TO THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE

The 2014 proposed amendments to the General Corporation Law of the State of Delaware

(“DGCL”) would give corporations and their counsel increased flexibility in structuring transactions and in effecting various corporate acts.

These sections would provide the following changes:

  1. Section 251(h) will clarify the requirements for accomplishing two-step takeovers without a back-end vote on the merger,
  2. Section 141(f) will provide a means of enabling board and stockholder consents to be delivered in escrow,
  3. Section 141(f) along with Section 228(c) will clarify the time frame that a person executing stockholder consent may provide consent,
  4. Section 242 will simplify the process of implementing certain amendments to the certificate of incorporation,
  5. Section 218 will relax the filing requirements in respect of voting trusts, and
  6. Section 103(a)(1) will provide corporations a means of dealing with issues that arise when their incorporator has not duly completed the incorporation process and cannot be located to assist with any necessary corrective measures.

An in-depth discussion of the proposed amendments from Insights can be found here.

2. THIRD POINT LLC v. RUPRECHT: COURT OF CHANCERY DENIES PRELIMINARY INJUNCTION AGAINST ANNUAL MEETING OF SOTHEBY’S STOCKHOLDERS & APPLIES UNOCAL STANDARD OF REVIEW

On May 2nd 2014, in Third Point LLC v. Ruprecht, et al. the Delaware Court of Chancery denied preliminary injunctive relief against Sotheby’s annual meeting, scheduled for May 6, 2014.

Plaintiffs claimed that the board had violated its fiduciary duties by (1) adopting a stockholder rights plan with a two-tiered trigger, capping stockholders who file Schedule 13Ds at 10% of the outstanding stock, but permitting passive investors who file Schedule 13Gs to acquire up to 20% of the outstanding stock; and (2) refusing to grant Third Point, the company’s largest stockholder, a waiver enabling it to acquire up to 20% of the outstanding stock.

On a preliminary basis, the Court held that Unocal, rather than Blasius, provides the appropriate framework of analysis. Under Unocal, the Court held that the majority-independent board showed that it acted reasonably in interpreting Third Point as a legally cognizable threat and responded reasonably

To read the full opinion, click here.

SEC ADMINISTRATIVE UPDATES

 1. CHIEF ECONOMIST AND DIVISION OF ECONOMIC RISK ANALYSIS DIRECTOR CRAIG LEWIS TO LEAVE SEC

On May 2nd, 2014, the SEC announced that Chief Economist and Division of Economic Risk Analysis (DERA) Director Craig M. Lewis will leave the agency to return to his position as the Madison S. Wigginton Professor of Finance at Vanderbilt University’s Own Graduate School of Management.

2. CHIEF ACCOUNTANT PAUL BESWICK TO LEAVE SEC

On May 15th, 2014, the SEC announced that after a six-year tenure at the SEC, Chief Accountant Paul A. Beswick is leaving the agency to return to the private sector. During the transitional period, he will remain to help ensure continuity in the agency’s Office of the Chief Accountant (OCA).

3. SEC NAMES STEPHANIE AVAKIAN AS DEPUTY DIRECTOR OF ENFORCEMENT

On May 29th, 2014, the SEC announced that Stephanie Avakian has been named Deputy Director of its Division of Enforcement. She comes to the SEC from the law firm of Wilmer Cutler Pickering Hale and Dorr LLP, where she is a partner in the New York office and a vice chair of the firm’s securities practice.