Monthly Archives: September 2012

Private Investment Funds Perspective on Permitting General Solicitation and Advertising

The following post comes to us from Alan Klein, partner in the Corporate Department at Simpson Thacher & Bartlett LLP, and is based on a Simpson Thacher memorandum.

On April 5, 2012, the U.S. Congress enacted The Jumpstart Our Business Startups Act (the “JOBS Act”), a package of capital access reforms intended, among other things, to facilitate the ability of companies to raise capital in private offerings without registration with the Securities and Exchange Commission (the “SEC”). The JOBS Act directed the SEC to amend its rules to permit general solicitation or general advertising in connection with private offerings of securities under Rule 506 of Regulation D (“Rule 506”) [1] under the Securities Act of 1933 (the “Securities Act”) provided that that all purchasers of the securities are accredited investors (because either they fall within one of the categories of persons who are accredited investors or the issuer reasonably believes that they meet one of the categories at the time of sale) and the issuer had taken reasonable steps to verify that all purchasers of the securities are accredited investors. [2]

On August 29, 2012, the SEC proposed rules (the “Proposed Rules”) to implement these provisions of the JOBS Act. [3] The SEC seeks public comments on the Proposed Rules for 30 days following the date of their publication in the Federal Register. Following the review of comments by the SEC, the final rules will be issued. Since private investment funds typically rely on Rule 506 in connection with their fundraisings in the United States, we anticipate that the final rules, assuming that they are substantially similar to the Proposed Rules, will allow for greater flexibility in the United States fundraising process by relaxing existing regulatory requirements on publicity. This memorandum focuses on the aspects of the proposed changes to Rule 506 that are relevant for private investment funds.


Evidence from SEC Enforcement Against Broker-Dealers

This post comes to us from Stavros Gadinis, an Assistant Professor of Law at University of California, Berkeley.

My recent article “The SEC and the Financial Industry: Evidence from Enforcement Against Broker-Dealers,” just published at the Business Lawyer (Vol. 67, p. 679, May 2012), provides an empirical account of the agency’s enforcement record against investment banks and brokerage houses in the period right before the 2007-2008 crisis. At the time, the SEC was the target of severe criticism from diverse quarters, ranging from scholarly commentators to the popular press and Congress. This article provides a systematic examination of the SEC enforcement record up to April 2007 and finds that defendants associated with big firms fared better in SEC enforcement actions, as compared to defendants associated smaller firms.

As this data suggests, the SEC faces three key decisions when formulating an enforcement action. One decision concerns whether to focus on the violations of individual employees of financial institutions, pursue the corporate entity that employs them, or charge them both. In two well-publicized rulings, Judge Rakoff chastised the SEC’s decision to direct its action exclusively against the firm and avoid individual liability. The article reveals that actions against big broker-dealers were more likely to target solely the corporate entity, without any further action against either frontline employees or high-level supervisors. More specifically, 40 percent of all actions against broker-dealers involved exclusively corporate liability, compared to just 10 percent for smaller firms.


Breakup Fees — Picking Your Number

David Fox is a partner at Kirkland & Ellis LLP, focusing on complex mergers and acquisitions as a member of the firm’s Corporate Group. This post is based on a Kirkland & Ellis M&A Update by Mr. Fox, Daniel E. Wolf, David B. Feirstein, and Joshua M. Zachariah.

During the course of negotiations of every public company deal, inevitably the conversation will turn to the amount of the breakup fee payable by a target company to a buyer if the deal is terminated under certain circumstances. Because U.S. corporate law generally requires a target company to retain the ability to consider post-signing superior proposals, a breakup fee is an important element of the suite of deal protection devices (including “no-shop” restrictions, matching rights, etc.) that an initial buyer implements to seek to protect its position as the favored suitor. Speaking broadly, a breakup fee will increase the cost to a topping bidder as it will also need to cover the expense of the fee payable to the first buyer. However, with respect to deal protection terms in general, as well as the amount of breakup fees in particular, courts have indicated that they cannot be so tight or so large as to be preclusive of a true superior proposal. Starting from this somewhat ambiguous principle, the negotiations therefore turn to the appropriate amount for the breakup fee given the particular circumstances of the deal at hand.


SEC Requirements under the Iran Threat Reduction and Syria Human Rights Act

The following post comes to us from Larry Sonsini, chairman of Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR alert.


On August 10, 2012, President Obama signed the Iran Threat Reduction and Syria Human Rights Act into law. The act is available at

The purpose of the act is to expand U.S. sanctions against Iran in order to compel Iran to stop pursuing a nuclear weapons program and other controversial initiatives.

Public companies, however, may have new disclosure obligations as a consequence of the act. Among other things, the act requires that companies subject to the reporting requirements of the Securities Exchange Act of 1934 (Exchange Act) make certain disclosures relating to activities that they and their worldwide affiliates knowingly engage in involving Iran in their quarterly and annual reports filed with the Securities and Exchange Commission (SEC). This provision of the act does not require additional rulemaking by the SEC in order to be effective. As a consequence, public reporting companies must comply with the new reporting obligations under the act by February 6, 2013.


Ownership Dispersion and the London Stock Exchange’s “Two-Thirds Rule”

The following post comes to us from David Chambers of Cambridge Judge Business School at University of Cambridge; Brian Cheffins, Professor of Corporate Law at the University of Cambridge; and Dmitri K Koustas of University of California, Berkeley.

In contrast to most other countries, in both Britain and the United States, a hallmark of corporate governance is a separation of ownership and control in major business enterprises. Various theories that have been advanced to account for why patterns of ownership and control differ across borders, with the most influential being that the “law matters” in the sense that ownership dispersion is unlikely to become commonplace in public companies unless company law provides substantial protection to outside investors. As one of us has argued elsewhere, these theories do not explain effectively why a separation of ownership and control became the norm in the UK. In our paper “Ownership Dispersion and the London Stock Exchange’s ‘Two-Thirds Rule’: An Empirical Test”, recently published on SSRN we analyze a different law-related hypothesis concerning the evolution of ownership patterns and show that it similarly lacks substantial explanatory power.


The Relationship between Corporate Social Responsibility, Reputation, and Activist Targeting

The following post comes to us from Brayden King of the Kellogg School of Management at Northwestern University and Mary-Hunter McDonnell of the Northwestern University School of Law.

The global market has created a complex political environment for corporations. On the one hand, they seem less beholden to state control, but on the other hand they have become more concerned with brand, image, and reputation as assets used to gain customer loyalty, stakeholder support, and regulatory freedom (Klein 1999). Their reliance on reputation as an asset has meant that they have become more committed to impression management tactics, like philanthropic activity and improving firm environmental standards, in order gain the approval of the stakeholders that matter most.

Having a good reputation has numerous positive consequences for firms. In our study, Good Firms, Good Targets: The Relationship between Corporate Social Responsibility, Reputation, and Activist Targeting, which was recently made publicly available on SSRN, we suggest that it also creates certain liabilities. Belonging to the top tier of most reputable firms and engaging in reputation-building actions, like announcing prosocial activities, exposes a firm to activist attention, making them more likely targets of boycotts. Activists, ever eager for media coverage and the agenda-setting influence attached to it, use firms’ reputation-seeking as a weapon against the firm. By targeting firms that are already committed to reputation-building, they put those firms in a position where they must react by conceding or by doing more CSR activities if they wish to maintain their lofty status in the field. Our findings suggest that scholars who have asserted that CSR and other reputation-building activities have insurance-like properties that protect a firm from future activist challenges may be wrong. Rather than serving as a form of insurance against future criticism, CSR may in fact just make firms more attractive targets. Insofar as activists are eager to target companies that the media and other stakeholders will notice, companies that built reputations for being socially conscious are certainly on their radar. Such companies offer a visible stage for activists.


New Personal Use of Corporate Aircraft Tax Rules

Arthur Kohn is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Kohn, Sheldon Alster, Mary Alcock, Jeffrey Penn, Caroline Hayday and Corey Goodman.

On August 1, 2012, the Internal Revenue Service (the “IRS”) published final regulations concerning the tax deductibility of corporate expenses associated with the personal use by employees of corporate aircraft. [1] As noted below, these rules may have implications for those involved with public-company executive compensation disclosure, as well as of course for tax practitioners who must apply the rules to prepare federal income tax returns. [2] Generally, the principal takeaways are as follows:


Delaware Supreme Court Affirms $2 Billion Damages Award

Stephen Lamb is a partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP focusing on Delaware corporate law and governance issues. This post is based on a Paul Weiss client memorandum by Mr. Lamb and Jospeh Christensen. 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 Americas Mining Corporation the Delaware Supreme Court affirmed the Court of Chancery’s decision in the Southern Peru Copper litigation in which the Court of Chancery awarded damages of $2 billion and $300 million in attorneys’ fees.

While the damage and fee levels were unprecedented, the Delaware Supreme Court found that the Court of Chancery followed existing precedent and exercised its discretion appropriately in awarding such amounts after the plaintiffs had prevailed in showing that Southern Peru Copper had overpaid to acquire an asset owned by its controlling stockholder. The Delaware Supreme Court affirmed the Court of Chancery’s calculation of the damages award based on the difference between the fair value of the asset and the amount paid. Further, the Delaware Supreme Court found that the Court of Chancery properly used its discretion in awarding the attorneys’ fee as a percentage of the damages award.


Libor for Detection and Deterrence of Cartel Wrongdoing

The following post comes to us from Rosa M. Abrantes-Metz, Principal at Global Economics Group, LLC and Adjunct Associate Professor at New York University Stern School of Business, and D. Daniel Sokol, Associate Professor at the University of Florida Levin College of Law and Visiting Professor for the 2012-13 academic year at the University of Minnesota Law School.

Our paper, The Lessons from Libor for Detection and Deterrence of Cartel Wrongdoing (forthcoming Harvard Business Law Review), examines the antitrust implications of Libor. We are cautious to draw overly broad conclusions until more facts come out in the public domain. What we note at this time, based on public information, is that the alleged Libor conspiracy and manipulation seems not to be the work of a rogue trader. Rather it seems to have been organized across firms and apparently required the active knowledge of a number of individuals at relatively high levels of seniority among certain Libor setting banks.


Proposed Rule Regarding General Solicitation and Advertising

Editor’s Note: Mary Schapiro is Chairman of the U.S. Securities and Exchange Commission. This post is based on a statement from Chairman Schapiro, available here. The views expressed in this post are those of Chairman Schapiro and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.


The Commission considered a proposed rule mandated by the JOBS Act to eliminate the current prohibition against general solicitation and general advertising in certain securities offerings — particularly offerings conducted under Rule 506 of Regulation D.

Rule 506 is one of the exemptions that has been widely used by U.S. and foreign issuers to raise capital without registering their securities offerings.

In 2011, the estimated amount of capital raised in these types of exempt offerings was just over $1 trillion, which is comparable to the amount of capital raised in registered offerings during this same period.

These figures underscore the importance of these exemptions for companies seeking capital in the United States.

When the Commission adopted Rule 506 more than three decades ago, it said the issuer, or any person acting on its behalf, could use the exemption only if they were not offering or selling securities through general solicitation or general advertising.


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