FCPA Successor Liability

James Gatta and Derek Cohen are partners at Goodwin Procter LLP. This post is based on a Goodwin Procter memorandum by Mr. Gatta and Mr. Cohen.

In its continuing efforts to encourage companies to self-report Foreign Corrupt Practices Act (FCPA) violations, the Department of Justice (DOJ) announced [July 25, 2018] that it intends to apply the principles of its FCPA Corporate Enforcement Policy to successor companies that uncover wrongdoing in connection with mergers and acquisitions. Accordingly, successor companies that voluntarily disclose such wrongdoing to the DOJ, cooperate with a government investigation of the conduct, and enact effective remedial measures will be positioned to benefit from the principles of the policy, including being presumed eligible for a declination of prosecution. The announcement made clear that the FCPA Corporate Enforcement Policy will apply to companies that uncover corrupt conduct through due diligence in advance of an acquisition as well as to companies that learn of such conduct subsequent to an acquisition. This extension of the policy to mergers and acquisitions was announced on July 25, 2018, by Deputy Assistant Attorney General (DAAG) Matthew S. Miner of the Criminal Division of the Department of Justice, at the American Conference Institute’s Eighth Global Forum on Anti-Corruption Compliance in High-Risk Markets, held in Washington, D.C.


Director Skill Sets

Renée B. Adams is Professor of Finance at the University of Oxford’s Saïd Business School; Ali C. Akyol is Senior Lecturer at the University of Melbourne; and Patrick Verwijmeren is Professor of Corporate Finance at the Erasmus School of Economics and the University of Melbourne. This post is based on a recent paper by Professor Adams, Dr. Akyol, and Professor Verwijmeren.

Boards of directors are multi-dimensional and the optimal board combines monitoring and advisory roles to varying degrees. We examine how individual director skills map into these roles. Do directors specialize as “advisors” or “monitors,” or, like boards, do they combine roles? And how do directors’ skills aggregate to the board level—are individual skills independent of each other or do they complement/substitute each other? The answers to these questions are important for understanding what boards do, why they are structured the way they are, and how they can be improved.

In our paper, we answer these questions by exploiting an amendment to Regulation S-K in 2009, which requires public U.S. firms to describe their reasons for nominating directors. According to this rule, firms have to disclose the skills they believe each director brings to the table. A particular strength of these data is that the descriptions represent the firm’s perspective rather than a perspective chosen by researchers. The data allow us to document the skills that directors have and allow us to test how these skills cluster at the board level. We then examine whether some boards have skill sets that lead them to systematically outperform other boards.


Women in the C-Suite: The Next Frontier in Gender Diversity

Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an ISS Analytics publication by Kosmas Papadopoulos, Managing Editor at ISS Analytics.

Despite recent advances in female board participation globally, gender diversity among top executives remains disappointingly low across all markets, with some improvement discerned in the past few years. Moreover, there does not appear a correlation between board gender diversity and gender diversity in the C-Suite at the market level. Some of the markets that have implemented gender quotas on boards and have achieved the highest rates of female board participation, such as France, Sweden, and Germany, appear to have embarrassingly low rates of female top executives. In fact, many of the markets with progressive board diversity policies have lower gender diversity levels in executive positions compared to several emerging markets like South Africa, Singapore, and Thailand. Thus, achieving higher rates of gender diversity in the C-Suite will require deeper cultural shifts within organizations in order to overcome potential biases and hurdles to gender equality.


Proposed Amendments to SEC’s Whistleblower Program

Angela Burgess, Kyoko Takahashi Lin, and Linda Chatman Thomsen are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Ms. Burgess, Ms. Takahashi Lin, Ms. Chatman Thomsen, Michael Flynn, Katherine Swan, and Sidney Bashago.

On June 28, 2018, the Securities and Exchange Commission (“SEC”) voted to propose amendments to the rules governing its whistleblower program. These changes include expanding the types of resolutions covered by the program, giving the SEC discretion in modifying awards, eliminating potential double recovery, adjusting the claims review process, and barring individuals who submit false information or make repeated frivolous claims. [1] The proposed amendments would also expressly adopt the reporting requirements set forth in Digital Realty Trust, Inc. v. Somers, a recent Supreme Court decision which held that Dodd-Frank whistleblower protections apply only when a securities-law violation is reported to the SEC. [2] If adopted, these rules may increase reporting of potential securities-law violations to the SEC, though more data is needed to better understand the potential ramifications.


Circuit Split on Morrison Application

Jared Gerber, Roger Cooper, and Adam Fleisher are partners and Leslie Silverman is senior counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Gerber, Mr. Cooper, Mr. Fleisher, Mr. Silverman, and Alexandra McCown.

On July 17, 2018 the Ninth Circuit, in Stoyas v. Toshiba Corporation, held that the Supreme Court’s ruling in Morrison v. National Australia Bank Ltd. did not preclude the assertion of claims under the U.S. federal securities laws against foreign issuers with respect to domestic transactions in unsponsored American Depository Receipts (“ADRs”). The court, however, further held that even though a domestic transaction in unsponsored ADRs is necessary for the federal securities law to apply under Morrison, it is not sufficient under the Exchange Act. In order to state a claim against a foreign issuer, a plaintiff must also allege sufficient facts to demonstrate that the defendant’s actions were committed “in connection with” the domestic transaction at issue. In short, the plaintiff must allege facts showing that the foreign issuer committed the fraud to induce the domestic transaction. In issuing this decision, the Ninth Circuit explicitly parted ways with the Second Circuit’s decision in Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings, which held that a domestic transaction may not satisfy Morrison if the nature of the transaction and allegations of fraud were predominantly foreign. The Ninth Circuit’s decision has important consequences for determining the extraterritorial scope of the federal securities laws, particularly with respect to unsponsored ADRs and other transactions in which the named foreign entity may not have been involved.


Shedding the Status of Bank Holding Company

V. Gerard Comizio is partner and Nathan S. Brownback is associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Mr. Comizio and Mr. Brownback.

On July 17, 2018, the Financial Stability Oversight Council (“FSOC”) issued a proposed decision that would, if finalized, approve a transaction (the “Transaction”) through which Zions Bancorporation, a bank holding company (“BHC”), would be eliminated through a merger into its national bank subsidiary, Zions Bank, N.A. (“ZB,” and, collectively with Zions Bancorporation, “Zions”), such that ZB would be the surviving entity.

Currently, Zions is a $66 billion banking organization, headquartered in Utah. It operates 433 branches in the western United States under eight brand names, and 99.7% of Zions Bancorporation’s assets and revenues come from ZB.


SEC Concept Release on Compensatory Offerings

Laura D. Richman is counsel and Robert F. Gray, Jr. and Michael L. Hermsen are partners at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Ms. Richman, Mr. Gray and Mr. Hermsen.

On July 18, 2018, the US Securities and Exchange Commission (SEC) issued a concept release [1] soliciting public comment on potential ways to modernize compensatory offerings and sales of securities, consistent with investor protection. Specifically, the concept release requests comment on aspects of Rule 701 under the Securities Act of 1933 (Securities Act), an exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements, and on Form S-8, a registration statement used by SEC-reporting companies for compensatory offerings. This post highlights key questions raised by the concept release. The comment period is scheduled to remain open through September 24, 2018.


Weekly Roundup: August 3-9, 2018

More from:

This roundup contains a collection of the posts published on the Forum during the week of August 3-9, 2018.

SEC Liability for Social Media Violations

Private Equity Liability Under European Law

Structuring Discretion for Clawbacks

JOBS Act 3.0

The Rise of the Net-Short Debt Activist

2018 Proxy Season Review

What Directors Need to Include in Effective Appraisal Notices

Cash America and the Structure of Bondholder Remedies

Should a Board Have a Reputation?

Should a Board Have a Reputation?

Lex Suvanto is Global Managing Director at Edelman Financial Communications & Capital Markets. This post is based on an Edelman memorandum by Mr. Suvanto.

Boards of directors have historically operated behind closed doors, unseen and unknown to the outside world. If you asked a director whether they think their board should have a public reputation— one that is distinct from the company—most would respond with a resounding no.

However, proprietary research conducted by Edelman concludes that a board of directors does indeed possess its own reputation, which must be actively considered and managed. The research surveyed institutional investors with assets under management of over $1 trillion. Two thirds of respondents said they “must trust a company’s board of directors” before making or recommending an investment. Two thirds of respondents also agreed “an engaged and effective board is important when considering a company in which to invest”.


Cash America and the Structure of Bondholder Remedies

Marcel Kahan is George T. Lowy Professor of Law at NYU Law School and Mitu Gulati is Professor of Law at Duke Law School. This post is based on their recent article, forthcoming in the Capital Markets Law Journal.

On September 19, 2016, the Southern District of New York released its opinion in Wilmington Savings Fund FSB v. Cash America International Inc. At issue was a claim by Wilmington Savings, the trustee on a $300 million bond issued by Cash America some years prior, that Cash America had breached one of its covenants by spinning off a major subsidiary and that this breach had resulting in a covenant default. The court ruled in favor of the investors on the question of the breach. What got the attention of the market observers, however, was not the ruling on the breach but the remedy that the bondholders obtained.

The standard remedy for garden variety covenant violations that result in a default is acceleration—the payment of the obligations at par. But because the covenant breach was voluntary, the court awarded the creditors the amount that Cash America would have owed them had it chosen to redeem the bond early—par plus a sizeable contractually pre-specified “make-whole” premium. The Cash America court, following an earlier Second Circuit opinion, reasoned that the redemption provision set the effective price for a company that choses to violate a covenant and ordered the payment of the redemption price as specific performance of the redemption clause. In a “make-whole” redemption provision, the company has to pay as redemption price the higher of par and the discounted value of the future principal and interest payments.


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