Amended Definition of “Smaller Reporting Company”

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley publication by Ms. Posner.

The pressure has been coming from all directions—the Congress, the Treasury—indeed, there’s been nary an advisory committee that hasn’t weighed in on this topic: time for the SEC to change the definition of “smaller reporting company.” After all, the proposal has just celebrated its second birthday—has it aged like a fine wine or is it moldy and stinky like an old piece of cheese? The verdict: moldy cheese that made no one happy, but they all ate it anyway.

On Thursday June 28, 2018, the SEC voted unanimously to amend the definition of “smaller reporting company” to allow more companies to take advantage of the scaled disclosures permitted for companies that meet the definition. (Here is the press release.) The amendments raise the SRC cap from “less than $75 million” in public float to “less than $250 million” and also include as SRCs companies with less than $100 million in annual revenues if they also have either no public float or, in a change from the proposal, a public float that is less than $700 million. The change was intended to promote capital formation and to reduce compliance costs for small public companies, while maintaining “appropriate investor protections.” The amendments become effective 60 days after publication in the Federal Register. (The SEC also voted to mandate Inline XBRL and to propose a number of changes to the whistleblower program. See this PubCo post and this PubCo post.)

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The Board’s Role in Corporate Social Purpose

Amy Silverstein is a Senior Manager at the Monitor Institute by Deloitte; Debbie McCormack is Managing Director at the Center for Board Effectiveness; and Bob Lamm is Independent Senior Advisor at the Center for Board Effectiveness, all at Deloitte LLP. This post is based on their Deloitte memorandum.

Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

Why social purpose?

In a 1970 New York Times article, Milton Friedman proclaimed that the business of business was business, and corporations primarily need to focus on shareholder value. The corporate perspective has evolved significantly since then, though there is ongoing debate as to whether a commitment to social purpose activities detracts from profitability and growth.

The current state of play is reflected in a number of statements and policies issued in 2017 and 2018 by major institutional investors that both reinforce Friedman’s point—the business of business is business—and simultaneously reject the notion that social purpose must come at the expense of sustaining and growing a for-profit operation.

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Awaiting Supreme Court Clarification on Fraudulent Scheme Claims

Daphne Morduchowitz, Vincent A. Sama, and Veronica E. Callahan are partners at Arnold & Porter Kaye Scholer LLP. This post is based on a recent Arnold & Porter memorandum by Ms. Morduchowitz, Mr. Sama, Ms. Callahan, John P. Hunt, and Catherine B. Schumacher.

On June 18, 2018, the Supreme Court granted Francis V. Lorenzo’s petition for certiorari in Lorenzo v. S.E.C., No. 17-1077, to decide whether an action that does not meet the requirements for a misstatement claim “can be repackaged and pursued as a fraudulent scheme claim.” The Supreme Court’s decision to review this case implicates the scope and applicability of its decision in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) and its ruling may affect the ability of the US Securities and Exchange Commission (SEC) to enforce the antifraud provisions of the federal securities laws and could limit shareholders’ ability to pursue private claims against certain individuals.

Case Background

The case arises from emails sent by Lorenzo, who was the director of investment banking at Charles Vista, LLC, to two potential investors, which included “several key points” about then-client W2Energy Holdings, Inc.’s convertible debenture offering. The emails failed to mention recent material devaluation of W2Energy’s intangible assets. Lorenzo’s boss asked him “to send the emails, supplied the central content, and approved the messages for distribution.” [1] Lorenzo claimed that he “cut and pasted” his boss’s email into the emails that he sent. [2]

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Weekly Roundup: July 13-19, 2018


More from:

This roundup contains a collection of the posts published on the Forum during the week of July 13-19, 2018.


State Treasurers’ Opposition Against Forced Arbitration or Class Action Waivers in Shareholder Agreements



Delaware’s Voluntary Sustainability Certification Law


Are Institutional Investors with Multiple Blockholdings Effective Monitors?


Supreme Court Ruling on SEC-Appointed Judges



Do Foreign Investors Improve Market Efficiency?


The UK Corporate Governance Code


Smaller Reporting Companies and XBRL



M&A Litigation Developments: Where Do We Go From Here?


FOIA Disclosure of Federal Compliance Documents?


The Preclusive Effect of Demand Futility


Shareholder Litigation Involving Acquisition of Public Companies: Review of 2017 M&A Litigation

John Gould is Senior Vice President of Cornerstone Research. This post is based on a Cornerstone Research memorandum authored by Ravi Sinha.

This post examines litigation challenging M&A deals valued over $100 million announced from 2008 through 2017, filed on behalf of shareholders of publicly traded target companies.

These lawsuits usually take the form of class actions filed in either federal or state court. Plaintiffs typically allege that the target’s board of directors violated its fiduciary duties by conducting a flawed sales process that failed to maximize shareholder value.

Common allegations include:

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The Preclusive Effect of Demand Futility

Sarah Runnells Martin is counsel and Bonnie David and Juliana van Hoeven are associates at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Ms. Runnells Martin, Ms. David, and Ms. van Hoeven. This post is part of the Delaware law series; links to other posts in the series are available here.

In the recent opinion California State Teachers’ Retirement System v. Alvarez (Walmart), the Delaware Supreme Court addressed the preclusive effect of demand futility decisions rendered by one court on derivative litigation pending in another forum. After careful consideration of applicable Arkansas and federal law, the court determined that the Arkansas district court’s ruling—which failed to find that demand had been excused—would preclude plaintiffs in the Delaware Court of Chancery from relitigating demand futility, and dismissed the suit.

Issue Preclusion in Derivative Actions

Issue preclusion prohibits a party that litigated an issue in one forum from later relitigating the same issue in another forum. While the law governing issue preclusion differs somewhat by jurisdiction, the factors are similar, and a key inquiry is usually whether the prior action was between the same parties or others in “privity” with those parties.

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FOIA Disclosure of Federal Compliance Documents?

Abena Mainoo, Elizabeth (Lisa) Vicens, and Jonathan S. Kolodner are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Ms. Mainoo, Ms. Vicens, Mr. Kolodner, and Charity E. Lee.

On June 13, 2018, in its latest decision in a long-running litigation, the U.S. District Court for the District of Columbia considered the applicability of certain exemptions under the Freedom of Information Act (“FOIA”) to documents sought by journalists relating to the actions of the independent compliance monitor that Siemens AG was required to retain under the terms of its 2008 plea agreement for violations of the Foreign Corrupt Practices Act (the “FCPA”). Broadly speaking, although the court concluded that portions of the documents that related to Siemens’ business operations and the DOJ’s analysis of the monitor’s activities were exempted from disclosure, the court also required the DOJ to produce other portions of those materials and to reevaluate, based on the court’s decision, whether additional materials had to be disclosed. The decision, and the lengthy litigation over the application of FOIA to these materials, highlight the complexity of identifying the boundaries of the FOIA protection applicable to the typically sensitive and confidential information companies provide to compliance monitors and the risk that such information later will have to be disclosed once it is in the hands of the government.

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M&A Litigation Developments: Where Do We Go From Here?

Edward Micheletti is partner, Jenness Parker is counsel, and Bonnie David is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Micheletti, Ms. Parker, and Ms. David and is part of the Delaware law series; links to other posts in the series are available here.

Over the last few years, three notable Delaware cases—C&J Energy, Corwin and Trulia—have paved the way for a dramatic shift in the deal litigation landscape. In C&J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust (2014), the Delaware Supreme Court indicated (and the Court of Chancery has generally construed the decision to hold) that an injunction should not be issued where there is no alternative bidder and stockholders therefore risk losing the current deal if enjoined. In Corwin v. KKR Financial Holdings LLC (2015), the Delaware Supreme Court clarified that, absent a conflicted controller, a fully informed vote of disinterested, uncoerced stockholders will extinguish breach of fiduciary duty claims, leaving only claims for waste. And finally, in In re Trulia, Inc. Stockholder Litigation (2016), the Court of Chancery decided that it will no longer approve disclosure-based settle­ments unless the disclosures are “plainly material,” the release is narrowly tailored to the claims brought in the litigation and the claims are sufficiently investigated.

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The Effect of Institutional Ownership Types On Innovation and Competition

Paul Borochin is Assistant Professor at the University of Connecticut School of Business. This post is based on a recent paper, authored by Professor Borochin; Jie Yang, Senior Economist at the Board of Governors of the Federal Reserve System; and Rongrong Zhang, Associate Professor at Georgia Southern University College of Business.

Related research from the Program on Corporate Governance includes New Evidence, Proofs, and Legal Theories on Horizontal Shareholding by Einer Elhauge (discussed on the Forum here). The views in the post are solely those of the authors and do not necessarily reflect those of the Federal Reserve System.

In common ownership, the type of the common owner institution matters. Institutional ownership of firms has seen a marked rise in the past few decades, with average institutional ownership share of a firm rising from 20% to 30% in the 1980s to over 65% of the total by the 2010s, with residual retail ownership correspondingly falling from 80% to less than 35% of the firm. (See Borochin, Paul, and Jie Yang (2017). The Effects of Institutional Investor Objectives on Firm Valuation and Governance, Journal of Financial Economics 126.) Over the same period, the fraction of the average firm held by institutions holding blocks of same-industry rivals has risen from 4.5% to 28%. (See He, Jie, J. Huang, 2017, Product Market Competition in a World of Cross Ownership: Evidence from Institutional Blockholdings, The Review of Financial Studies 30.) This not only changes the portfolio properties of the institutional investors, but also has the potential to change the corporate strategies of held firms. Recent studies find opposing effects of common institutional ownership on the competitive behavior of firms:

On the one hand, Elhauge (2016) and Azar, Schmalz, and Tecu (2018) propose an alternative benefit stemming from changes in firm competitive behavior: common ownership of same-industry firms incentivizes both investors and managers to maximize portfolio rather than firm profits leading to anti-competitive outcomes. (See Elhauge, E., 2016, Horizontal Shareholding, Harvard Law Review 129 discussed on the Forum here, and Azar, J., M. Schmalz, I. Tecu, 2018, Anti-competitive Effects of Common Ownership, Journal of Finance 74.) On the other, He and Huang (2017) argue that common institutional ownership can facilitate collaboration between firms by resolving incomplete contracting issues, and directly or indirectly facilitate information sharing between same-industry rivals. (He, Jie, J. Huang, 2017, Product Market Competition in a World of Cross Ownership: Evidence from Institutional Blockholdings, The Review of Financial Studies 30, discussed on the Forum here) In our paper, we seek to reconcile these findings by documenting countervailing effects of common ownership by institutional type.

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Smaller Reporting Companies and XBRL

Steve Quinlivan and Cate Heaven Young are partners and Bryan Pitko is of counsel at Stinson Leonard Street LLP. This post is based on their Stinson Leonard memorandum.

The SEC has long recognized that smaller issuers should be subject to somewhat less stringent disclosure standards than larger companies. The SEC has referred to this as “scaled disclosure” and has embodied the idea in a series of rules for smaller reporting companies, or SRCs. The SEC has adopted final rules to expand the availability of scaled disclosure requirements for a company qualifying as an SRC by allowing companies with a public float of less than $250 million to qualify as an SRC, as compared to the $75 million threshold under the prior definition. In addition, companies that do not have a public float are now permitted to provide scaled disclosures if annual revenues are less than $100 million, as compared to the prior threshold of less than $50 million in annual revenues.

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