Tag: Disclosure


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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“Pay Versus Performance” Rule Proposed by SEC Under Dodd-Frank

Joseph E. Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on an article by Mr. Bachelder which first appeared in the New York Law Journal. Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of this column. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

 

“We are drowning in information, while starving for wisdom.” —E.O. Wilson [1]

On April 29, the Securities and Exchange Commission announced its proposal to add a new Item 402(v), captioned “Pay versus Performance,” to Regulation S-K. [2] The SEC announced the proposed rule pursuant to Dodd-Frank Section 953(a). [3] Section 953(a) directs the SEC to adopt rules requiring that proxy statements and certain “consent solicitation material” [4] provide “information that shows the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the registrant and any distributions.” This is in addition to information already provided under Item 402 of Regulation S-K.
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Chamber of Commerce Airs Grievances Related To Internal Controls Inspections

Jason M. Halper is a partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper and William J. Foley Jr.

In recent months, issues related to internal control systems and reporting have taken on an increased profile and significance. For example, as previously noted by the authors here and here, the SEC has sought to prioritize compliance with internal controls by initiating a growing number of investigations into companies based on allegations of inadequate internal controls.

By way of background, “internal controls” refers to the procedures and practices that companies use to manage risk, conduct business efficiently, and ensure compliance with the law and company policy. Public companies are required to maintain sufficient internal controls by the securities laws. In particular, Section 404 of the Sarbanes-Oxley Act (as amended by the Dodd-Frank Act) requires, among other things, that: (i) company management assess and report on the effectiveness of the company’s internal control over its financial reporting, and (ii) the company’s independent auditors verify management’s disclosures. Sarbanes-Oxley also created the Public Company Accounting Oversight Board (“PCAOB”) to oversee public company audits, including the audits of internal control reporting. The PCAOB, in turn, conducts regular inspections to ensure compliance with laws, rules and professional standards.

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SEC Seeks Input on Enhanced Disclosures for Audit Committees

Michael J. Scanlon is a partner and member of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn alert.

At an open meeting held on July 1, 2015, the Securities and Exchange Commission (“SEC”) issued a concept release addressing the prospect of enhanced disclosures for audit committees. The much-publicized concept release is available here and requests comment on a number of possible changes to existing SEC disclosure requirements about the work of audit committees, focusing in particular on audit committees’ selection and oversight of independent auditors. The SEC said that it has issued the release in response to views expressed by some that current disclosures may not provide investors with sufficient information about what audit committees do and how they perform their duties. The release seeks feedback on whether certain audit committee disclosures should be added, removed or modified to provide additional meaningful disclosures to investors.

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Basel III Liquidity Framework: Final Net Stable Funding Ratio Disclosure Standards

Andrew R. Gladin is a partner in the Financial Services and Corporate and Finance Groups at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication authored by Mr. Gladin, Mark J. Welshimer, Andrea R. Tokheim, and Christopher F. Nenno.

Last week, the Basel Committee on Banking Supervision (the “Basel Committee”) published final standards (the “Final Disclosure Standards”) for the disclosure of information relating to banks’ net stable funding ratio (the “NSFR”) calculations. [1] The Final Disclosure Standards were adopted substantially as proposed in December 2014. [2]

The NSFR, which the Basel Committee adopted in final form in October 2014, [3] is one of the key standards, along with the liquidity coverage ratio (the “LCR”), [4] introduced by the Basel Committee to strengthen liquidity risk management as part of the Basel III framework. The NSFR is designed to promote more medium- and long-term funding of the assets and activities of banks over a one-year time horizon. The Final Disclosure Standards, in turn, are part of the broader so-called Pillar 3 disclosure regime (along with disclosure requirements in capital rules as well as the LCR-related disclosure framework) and are designed to “improve the transparency of regulatory funding …, enhance market discipline, and reduce uncertainty in the markets as the NSFR is implemented.” [5]

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SEC Proposes More Frequent and Detailed Fund Holdings Disclosure

John M. Loder is partner and co-head of the Investment Management practice group at Ropes & Gray LLP. This post is based on a Ropes & Gray Alert.

On May 20, 2015, the SEC proposed new and amended rules and forms (the “Proposals”) that, if adopted, will significantly broaden the type and scope of information reported by registered investment companies. The Proposals, which are summarized below, fall into five categories:

  • New Form N-PORT, which would require registered investment companies to report detailed information about their monthly portfolio holdings and risk metrics to the SEC using a prescribed XML data format.
  • New Rule 30e-3, which would permit registered investment companies to transmit periodic reports to their shareholders by making the reports and quarterly portfolio information accessible online.
  • New Form N-CEN, which would require registered investment companies to report census-type information to the SEC annually, using a prescribed XML data format.
  • Elimination of Forms N-Q and N-SAR, as well as amendments of certain other rules and forms.
  • Amendments to Regulation S-X, which would require standardized, enhanced disclosure about derivatives in investment company financial statements consistent with Form N-PORT.

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Congress Should Let the SEC Do its Job

Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Professor of Law at Columbia Law School. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition requesting that the SEC require all public companies to disclose their political spending. Bebchuk and Jackson are also co-authors of Shining Light on Corporate Political Spending, published in the Georgetown Law Journal. A series of posts in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending is available here. All posts related to the SEC rulemaking petition on disclosure of political spending are available here.

Last week, the House Appropriations Committee included in its 2016 appropriations bill for financial services agencies a provision that would prevent the SEC from developing rules that would require public companies to disclose their political spending. Although this provision is unlikely to become law, its adoption is regrettable. In our view, Congress should let the SEC do its job and use its expert judgment—free of political pressures in any direction—to determine what information should be disclosed to public-company investors.

In July 2011, we co-chaired a committee of ten corporate and securities law academics that petitioned the SEC to develop rules requiring public companies to disclose their political spending. The SEC has now received over 1.2 million comments on the proposal—more than any rulemaking petition in the SEC’s history. As we have explained in previous posts on the Forum, the case for rules requiring disclosure of corporate spending is compelling. Unfortunately, Chairman Mary Jo White has faced significant political pressure not to develop such rules, and the Commission has so far chosen to delay consideration of rules in this area.

As we explained in earlier posts on the Forum (see, for example, posts here and here), we view this delay as regrettable in light of the compelling arguments in favor of disclosure and the breadth of support that the petition has received. Furthermore, as we explain in detail in our article Shining Light on Corporate Political Spending, an analysis of the full range of objections that opponents of transparency have raised makes clear that these opponents have failed to provide a convincing basis for keeping corporate political spending below investors’ radar screen.

We agree with the bipartisan group of three former SEC Commissioners who just last month referred to the SEC’s inaction on the petition as “inexplicable.” At a minimum, the broad support and compelling arguments in favor of disclosure of corporate spending on politics make clear that the Commission should move promptly to consider the petition on the merits. Unfortunately, last week’s move by the Appropriations Committee reflects another attempt to avoid consideration of the rulemaking petition on its merits. Members of Congress should not try to prevent the SEC from even considering the substantive merits of the petition.

While corporate political spending is an issue that politicians are naturally interested in, our petition focuses on whether investors should receive information regarding political spending at the companies they own. That is an issue that falls squarely within the SEC’s mandate and expertise. Regardless of their views on corporate political spending, Congressmen of all stripes should avoid interfering with the Commission’s rulemaking processes. We urge them to allow the SEC to do its job.

Regulation A+ Takes Effect

Thomas J. Kim is a partner at Sidley Austin LLP. This post is based on a Sidley Austin publication authored by Mr. Kim, Craig E. Chapman, and John J. Sabl.

On June 19, 2015, the Securities and Exchange Commission’s (SEC) recently adopted rule amendments to Regulation A under the Securities Act of 1933 (the Securities Act)—colloquially known as “Regulation A+”—took effect. Regulation A is intended to ease the burden of Securities Act registration for small public offerings. These rule amendments, among other things, increase the amount of capital that can be raised in Regulation A offerings from $5 million to $50 million over a 12-month period.

The extent to which Regulation A+ will result in issuers and other market participants actually using Regulation A to raise capital will depend on a number of factors—including how it compares to other methods for raising capital, how the SEC Staff will administer the offering process and the market’s acceptance of Regulation A-compliant offering materials.
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