Tag: Disclosure


Fiduciary Duty Proposal

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Adam Gilbert, Genevieve Gimbert, and Armen Meyer.

With fewer than 18 months left in office, President Obama has asserted that the Department of Labor’s (“DOL”) proposed fiduciary standard for retirement account advisors is a major priority. The DOL completed public hearings last week on this proposal, and we believe that the rule will be finalized early next year with the proposal’s core framework intact.

The DOL’s final rule is set to transform the competitive landscape and disrupt current business models, particularly for financial institutions that are reliant on traditional broker-dealer activities which are currently not covered by the existing Employee Retirement Income Security Act (“ERISA”) fiduciary standard.

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FTC Charges Activist Hedge Fund

Sabastian V. Niles is counsel in the Corporate Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Niles, Nelson O. Fitts, and Franco Castelli.

Yesterday [August 24, 2015], the Federal Trade Commission announced that Dan Loeb’s Third Point had settled a complaint charging violations of the notification and waiting period requirements of the Hart-Scott-Rodino Act in connection with purchases of Yahoo! stock in 2011.

The HSR Act requires that acquirors notify the federal antitrust agencies of transactions that meet applicable thresholds and observe a pre-acquisition waiting period. Acquisitions of up to 10% of a company’s voting stock are exempt if made solely for the purpose of investment, and the acquirer “has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” Buyers who intend to be involved in the management of the target company or to seek representation on its board of directors are not eligible for the exemption. HSR requirements have historically been enforced strictly and narrowly against public companies, officers, directors, and investors, without deference or favor to any particular class of violator.

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Court Strikes NYC’s “Responsible Banking Act”

Robert J. Giuffra, Jr. is a partner in the Litigation Group at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication by Mr. Giuffra, H. Rodgin Cohen, Matthew A. Schwartz, and Marc Trevino.

On August 7, 2015, in a 71-page opinion, Judge Katherine Polk Failla of the United States District Court for the Southern District of New York struck down New York City Local Law 38 of 2012, entitled the “Responsible Banking Act” (“RBA”), as preempted by federal and state banking law. The RBA—enacted by the City Council on June 28, 2012, over Mayor Bloomberg’s veto—established an eight-member Community Investment Advisory Board (“CIAB”), charged with collecting data at the census-tract level from the 21 banks eligible to receive some of the City’s $150 billion in annual deposits. This data, which went beyond data required by federal and state banking regulators and would be disclosed publicly, covered a variety of categories ranging from the maintenance of foreclosed properties, to investment in affordable housing, to product and service offerings. Based on the data collected and feedback from public hearings, the CIAB was to develop “benchmarks and best practices” against which the deposit banks were to be evaluated, including against each other, in a publicly filed annual report. The report was to identify deposit banks that refused to provide the requested data. Finally, the RBA provided that the City’s Banking Commission—responsible for designating eligible deposit banks—“may” consider the CIAB’s annual report in making its designation decisions.

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SEC and PCAOB on Audit Committees

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. The following post is based on a Sidley update by Ms. Gregory, Jack B. Jacobs and Thomas J. Kim.

Public company counsel and audit committee members should be aware of recent activity at the U.S. Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) that could lead to additional regulation of audit committee disclosure and to federal normative expectations for how audit committees and their members behave.

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Scrutiny of Private Equity Firms

Veronica Rendón Callahan is a partner at Arnold & Porter LLP and co-chair of the firm’s Securities Enforcement and Litigation practice. This post is a based on an Arnold & Porter memorandum.

On June 29, 2015, the U.S. Securities and Exchange Commission charged Kohlberg Kravis Roberts & Co. with misallocating more than $17 million in broken deal expenses to its flagship private equity funds in breach of its fiduciary duty as an SEC-registered investment adviser. KKR agreed to pay nearly $30 million to settle the charges. This action represents a continuing and robust focus by the SEC on fee and expense allocation practices and disclosure by private equity fund advisers, many of which are relatively newly registered with the SEC following passage of the Dodd-Frank Act. It serves as a reminder of the need for private equity firms and other advisers to private investment funds to consider bolstering their compliance and disclosure policies and procedures related to the allocation of fees and expenses.
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D.C. Circuit Upholds Privilege For Internal Investigation Documents

John F. Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savarese, Peter C. Hein, and David B. Anders.

Earlier this week, the D.C. Circuit Court of Appeals for the second time granted a writ of mandamus and vacated district court orders that would have provided for the disclosure of privileged documents created in the course of a company’s internal investigation. In Re Kellogg Brown & Root, Inc., No. 14-5319 (Aug. 11, 2015).

As noted in our prior memo, in a 2014 decision in this same case the D.C. Circuit granted a writ of mandamus and made clear that a proper application of privilege principles would protect documents created in the course of a company’s internal investigation—even if the investigation was conducted by in-house counsel without outside lawyers, even if non-attorneys (serving as agents of attorneys) conducted many of the interviews, and even if the internal investigation was conducted pursuant to a company compliance program required by a statute or government regulation (and thus arguably had in part a business purpose in addition to the purpose of obtaining or providing legal advice).

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Prices and Informed Trading

Vyacheslav Fos is Assistant Professor of Finance at Boston College. This post is based on an article by Professor Fos and Pierre Collin-Dufresne, Professor of Finance at the Swiss Finance Institute. Related research from the Program on Corporate Governance includes Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang; and The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here).

In our paper, Do Prices Reveal the Presence of Informed Trading?, forthcoming in the Journal of Finance, we study how empirical measures of stock illiquidity and of adverse selection respond to informed trading by activist shareholders.

An extensive body of theory suggests that stock illiquidity, as measured by the bid-ask spread and by the price impact of trades, should be increasing in the information asymmetry between market participants. An extensive empirical literature employing these illiquidity measures thus assumes that they capture information asymmetry. But, do these empirical measures of adverse selection actually increase with information asymmetry? To test this question one would ideally separate informed from uninformed trades ex-ante and measure their relative impact on price changes. However, since we generally do not know the traders’ information sets, this is hard to do in practice.

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Delaware Court of Chancery Rejects M&A Litigation Settlement

Ariel J. Deckelbaum is a partner and deputy chair of the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In Acevedo v. Aeroflex Holding Corporation, in connection with a stockholder suit that challenged the sale of a company with a controlling stockholder to a third party, the Delaware Court of Chancery rejected a settlement which provided a global release of claims in exchange for a reduced termination fee and a shortening of the matching-rights period by one day, holding that these deal protections were not impediments to competing bidders and therefore were insufficient to support a global release.

In 2014, Aeroflex agreed to sell itself to a third-party and a class-action challenging the transaction was subsequently commenced. After engaging in discovery and consulting with third-party experts, the plaintiff concluded that the consideration offered to the Aeroflex stockholders fell within a range of reasonable value for Aeroflex’s shares, but that the proxy omitted certain material facts. The parties agreed to a settlement where the plaintiff granted the defendants a global release of all possible claims in exchange for modifying the deal protections by (i) reducing the termination fee by over 40% from $32 million to $18 million, and (ii) shortening the matching rights period from four business days to three business days. Additionally, the defendants agreed to make certain supplemental disclosures in the proxy.

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SEC Charges Computer Sciences Corporation & Former Executives With Accounting Fraud

Nicholas S. Goldin is a partner and Yafit Cohn is an associate at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher publication.

On June 5, 2015, the Securities and Exchange Commission (“SEC”) entered into settled administrative cease-and-desist proceedings with Computer Sciences Corporation (“CSC”) and some of its former executives due to the company’s alleged manipulation of financial results and concealment of problems with the company’s largest contract. [1] Among other things, CSC agreed to pay a $190 million penalty to settle the charges, and two of CSC’s former executives agreed to return a portion of their compensation to CSC pursuant to the clawback provision of the Sarbanes-Oxley Act of 2002. The SEC also charged former CSC finance executives for ignoring accounting standards to increase reported profits.

Factual Background and SEC Findings

CSC entered into a contract with the United Kingdom’s National Health Service (“NHS”) to build and deploy an electronic patient record system. The contract had the potential to earn CSC $5.4 billion in revenue if the company satisfied the timeframes outlined in the contract. The contract also included penalties of up to $160,000 per day for missed deadlines. CSC had trouble developing the software. CSC and NHS amended the contract, NHS agreeing to waive the penalties in exchange for certainty of deployment of the electronic record system on an agreed upon date. It later became clear that CSC would not be able to meet its commitments under the amended contract either.

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Are Public Companies Required to Disclose Government Investigations?

Jon N. Eisenberg is partner in the Government Enforcement practice at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Eisenberg.

For many public companies, the first issue they have to confront after they receive a government subpoena or Civil Investigative Demand (“CID”) is whether to disclose publicly that they are under investigation. Curiously, the standards for disclosure of investigations are more muddled than one would expect. As a result, disclosure practices vary—investigations are sometimes disclosed upon receipt of a subpoena or CID, sometimes when the staff advises a company that it has tentatively decided to recommend an enforcement action, sometimes not until the end of the process, and sometimes at other intermediate stages along the way. In many cases, differences in the timing of disclosure may reflect different approaches to disclosure. We discuss below the standards that govern the disclosure decision and practical considerations. We then provide five representative examples of language that companies used when they disclosed investigations at an early stage.

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