Monthly Archives: December 2014

Shareholder Litigation Without Class Actions and The “Semi-Circularity Problem”

The following post comes to us from David H. Webber of Boston University Law School.

What would happen to shareholder litigation if the class action disappeared? In my article, Shareholder Litigation Without Class Actions, forthcoming in the Arizona Law Review as part of its symposium on Business Litigation and Regulatory Agency Review in the Era of the Roberts Court, I sketch out some possible futures of post-class action shareholder litigation. For now, such litigation persists despite recent existential challenges, most notably the Supreme Court’s decision earlier this year in Erica P. John Fund v. Halliburton. While these actions may continue in their current form, sustained criticism from sectors of the academy, and from business lobbies, suggest that existential threats to these suits will continue. Such threats have already re-emerged in the form of mandatory arbitration provisions and “loser pays” (more accurately, “plaintiff pays”) fee-shifting provisions in corporate bylaws or certificates of incorporation. While it is possible that such provisions will not spread widely—perhaps because of organized shareholder opposition—the rapid adoption of fee-shifting provisions suggests the possibility that mandatory arbitration or “plaintiff pays” or both could become ubiquitous. If so, either type of provision could eliminate the shareholder class action, or at least drastically reduce its prevalence. As I describe in greater detail in the article, mandatory arbitration provisions requiring bilateral arbitration of claims and barring consolidation of such claims would eliminate the class action in either litigation or arbitration form. (Importantly, even if Delaware were to try to curb arbitration provisions, such action could be preempted by federal law under the Supreme Court’s recent Federal Arbitration Act decisions). Similarly, fee-shifting provisions would greatly increase the risk to plaintiffs generally, and to entrepreneurial plaintiffs’ lawyers in particular, who bear the risks and costs of this litigation, potentially threatening the existence of the plaintiffs’ bar itself and restricting class actions to only a small handful of the most egregious cases. I discuss arbitration and fee shifting provisions in the article, and in the summary below, but I do not confine my analysis to these provisions. Rather, my focus is to assess what would happen to shareholder litigation if the class action disappeared, regardless of the particular mechanism of its demise.


The Importance to the Capital Markets of Updating the Rules Regarding Transfer Agents

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

1) Why should the public care about the regulation of transfer agents? Why are they important to the financial system?

Transfer agents play an important role in our capital markets. They act as registrars and keep track of changes in the record ownership of a company’s securities. They ensure that companies’ interest, dividends, and other distributions get paid to the right holders of stocks and bonds. Transfer agents also monitor the restrictive legends and “stop transfer” orders that distinguish restricted securities from freely-tradable securities. This responsibility puts transfer agents in a unique position to identify and potentially prevent unregistered securities from being unlawfully distributed. Indeed, the distribution of unregistered securities is often associated with microcap pump-and-dump schemes and other penny stock fraud. The investing public needs capable, honest, and reliable transfer agents to help the capital markets function properly and effectively.


Professor Grundfest’s Reply Demonstrates that He and Commissioner Gallagher Wrongfully Accused the SRP

Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance & Securities Law at Yale University. This post provides a detailed response to a post by Professor Joseph A. Grundfest, titled A Response to Professor Macey, and available on the Forum here. Professor Grundfest’s post responded to an earlier post by Professor Macey, titled SEC Commissioner, Law Professor Wrongfully Accuse SRP of Securities Fraud and available on the Forum here, which offered a critique of a paper by SEC Commissioner Daniel M. Gallagher and Stanford law School Professor Joseph A. Grundfest, described in a post by Professor Grundfest (available on the Forum here).

In a recent post, “SEC Commissioner, Law Professor Wrongfully Accuse SRP of Securities Fraud” (available on the Forum here), I analyzed the claims that SEC Commissioner Gallagher and Professor Joseph Grundfest made in a recent paper (hereinafter “the Paper,” described on the Forum here). In their paper, Gallagher /Grundfest allege that the SRP proposals submitted by investors working with the Shareholder Rights Project (SRP) violated the securities laws by citing only one study opposing annual elections. My analysis showed that Grundfest/Gallagher’s allegations were inconsistent with the law and with the current policy and practice of SEC staff, and I concluded that the authors had wrongfully accused the SRP.

In a subsequent post titled “A Response to Professor Macey” (hereinafter “the Reply,” available on the Forum here), Professor Grundfest attempts to offer a “point by point” detailed response to my analysis. As I explain below, the Reply reverses field and drastically modifies and weakens the authors’ allegations. Furthermore, in conceding some key points that I made and in failing to address some others, the Reply itself demonstrates that Gallagher/Grundfest wrongfully accused the SRP and should withdraw their allegations.

There are many flaws in the Reply. I will discuss certain of them to show that the Gallagher/Grundfest’s accusations are spurious and no longer tenable:

(1) In a major retreat, Gallagher/Grundfest dramatically modify their allegations by:

(a) Dropping their allegations against the overwhelming majority of SRP proposals, reducing the number of challenged proposals from 129 to seven,
(b) Completely relinquishing the claim that companies can use the alleged deficiencies to invalidate declassifications that took place in approximately 100 companies, and
(c) Conceding that even the seven challenged proposals were not deficient when submitted and could at most be allegedly faulted for not being withdrawn prior to the vote;
(2) The Reply admits that Gallagher/Grundfest’s real quarrel is with the SEC, not with the SRP proposals, and that the SRP proposals would have not been viewed by SEC staff as “false and misleading” under the SEC’s current, long-held policy;
(3) The Reply concedes that the type of enforcement action or private suit the authors urge against the SRP is without a single past precedent;
(4) The Reply conspicuously fails to explain why not a single company raised a claim of material omission against SRP proposals;
(5) The Reply inconsistently endorses the non-inclusion of references to contrary studies by issuers such as Netflix while simultaneously claiming that it is impermissible for shareholders to do so; and
(6) The Reply wrongly states that I share the Paper’s “undisputed” view of the current state of the empirical evidence.

1. In a major retreat, the authors dramatically modify their allegations


SEC Allows Exclusion of Conflicting Proxy Access Shareholder Proposal

The following post comes to us from Yafit Cohn, Associate at Simpson Thacher & Bartlett LLP, and is based on a Simpson Thacher memorandum.

On December 1, 2014, the Securities and Exchange Commission (“SEC”) issued a no-action letter, much awaited by the corporate community, to Whole Foods Market, Inc., concurring with the company that it may omit a proxy access shareholder proposal from its 2015 proxy materials. [1] The shareholder proposal, submitted by James McRitchie pursuant to Rule 14a-8, asked the Whole Foods board to amend the company’s governing documents to allow any shareholder or group of shareholders collectively holding at least three percent of the company’s shares for at least three years to nominate directors, which the company would then be required to list on its proxy statement. The proposal added that parties nominating directors “may collectively make nominations numbering up to 20% of the Company’s board of directors, or no less than two if the board reduces the number of board members from its current size.”


The First Annual Conflict Minerals Filings: Observations and Next Steps

Amy Goodman is a partner and co-chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. The following post is based on a Gibson Dunn alert.

As companies prepare for the second year of filings under the Securities and Exchange Commission’s (“SEC”) new conflict minerals rule, many companies are looking for guidance from the first annual filings, which were due June 2, 2014. As expected, the inaugural Form SD and conflict minerals report filings reflect diverse approaches to the new compliance and disclosure requirements. We offer below some observations based on the first round of conflict minerals filings for companies to consider as they address their compliance programs and disclosures for the 2014 calendar year. It is important to note, however, that the shape of future compliance and reporting obligations will be impacted by the outcome of the pending litigation challenging the conflict minerals rule, which also is discussed below, and any subsequent action by the SEC.


A Response to Professor Macey

Joseph A. Grundfest is the W. A. Franke Professor of Law and Business at Stanford University Law School. This post responds to a post, titled SEC Commissioner, Law Professor Wrongfully Accuse SRP of Securities Fraud, by Yale Law School Professor Jonathan R. Macey (available on the Forum here). The post by Professor Macey offered a critique of a paper by SEC Commissioner Daniel M. Gallagher and Stanford law School Professor Joseph A. Grundfest, described in a post by Professor Joseph Grundfest (available on the Forum here).

In a December 15, 2014, post to this Harvard Corporate Governance blog, (here) Professor Jonathan R. Macey suggests that the article I co-authored with Dan Gallagher, “Did Harvard Violate Federal Securities Laws? The Campaign Against Classified Boards of Directors,” (here) wrongfully accuses Harvard’s Shareholder Rights Project of fraud. Professor Macey’s post presents a detailed critique, and I greatly appreciate Harvard’s courtesy in providing this opportunity for response.


Revisiting the “Accredited Investor” Definition to Better Protect Investors

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent meeting of the SEC Advisory Committee on Small and Emerging Companies; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Thank you and good morning. I want to start by welcoming the members of the Advisory Committee on Small and Emerging Companies to today’s meeting. I appreciate your efforts and look forward to today’s discussions. I would also like to thank the staff of the Division of Corporation Finance’s Office of Small Business Policy for organizing this meeting.

Since its formation in 2011, this Committee has provided the Commission with advice related to privately-held small businesses and the smaller publicly traded companies. It is well-known that these businesses have an outsized impact on the growth of our country’s economy and on job creation for all Americans.

As you know, today’s meeting will focus on the definition of “accredited investor.” This definition is critical to the Commission’s Regulation D exemption from the registration requirements of the Securities Act of 1933. Regulation D may be the Commission’s most widely used exempted offering. It is regularly used by small businesses to raise funds in the capital markets.


The Importance of a Battle-Tested Cyber Incident Response Plan

The following post comes to us from Paul A. Ferrillo, counsel at Weil, Gotshal & Manges LLP specializing in complex securities and business litigation, and is based on a Weil Alert authored by Mr. Ferrillo.

“The scope of [the Sony Pictures Entertainment (SPE)] attack differs from any we have responded to in the past, as its purpose was to both destroy property and release confidential information to the public…. The bottom line is that this was an unparalleled and well planned crime, carried out by an organized group, for which neither SPE nor other companies could have been fully prepared.”

— Remarks by Kevin Mandia, “Sony Investigator Says Cyber Attack ‘Unparalleled’ Crime,” Reuters, December 7, 2014. [1]

“The days of the IT guy sitting alone in a dark corner are long gone. Cybersecurity has become an obvious priority for C-Suites and boardrooms, as reputations, intellectual property and ultimately lots of money are on the line.”

— Priya Ananda, “One Year After Target’s Breach: What Have We Learned?” November 1, 2014. [2]

“Resiliency is the ability to sustain damage but ultimately succeed. Resiliency is all about accepting that I will sustain a certain amount of damage.”

— NSA Director and Commander of U.S. Cyber Command Admiral Mike Rogers, September 16, 2014. [3]

We have definitively learned from the past few months’ worth of catastrophic cyber security breaches that throwing tens of millions of dollars at “preventive” measures is simply not enough. The bad guys are too far ahead of the malware curve for that. [4] We have also learned that there are no such things as quick fixes in the cyber security world. Instead, the best approach is a holistic approach: basic blocking and tackling such as password protection, encryption, employee training, and strong, multi-faceted intrusion detection systems [5] really trump reliance on a “50 foot high firewall” alone. But there are also two more things that are critical to a holistic cyber security approach: a strong, well-practiced Incident Response Plan (IRP), and, as Admiral Rogers noted above, the concept of cyber-resiliency, i.e., the ability to take your lumps, but continue your business operations unabated.

In this post, we tackle two questions: (1) What are the essential elements of a Cyber IRP? and (2) Why are IRPs so important to your organization?


Shareholder Proposals on Social and Environmental Issues

Matteo Tonello is managing director of corporate leadership at The Conference Board. This post relates to an issue of The Conference Board’s Director Notes series authored by Melissa Aguilar and Thomas Singer. The complete publication, including footnotes, is available here.

Political spending and climate change, key topics during the 2014 proxy season, are expected to feature heavily again in 2015 shareholder proposals. This post reviews the content of the social and environmental proposals voted on most frequently by shareholders of Russell 3000 companies during the 2014 season, including the topics that received the highest average shareholder support. The complete publication provides examples of proposal text and sponsor supporting statements, as well as board responses and related corporate disclosure.

Nearly 40 percent of all shareholder proposals submitted at Russell 3000 companies that held meetings during the first half of 2014 were related to social and environmental policy issues, up from 29.2 percent in 2010, as documented in Proxy Voting Analytics (2010-2014). Social and environmental policy proposals now represent the second-largest category of the subjects in terms of both the number submitted and the number voted, narrowly behind corporate governance.


Capital Allocation and Delegation of Decision-Making Authority within Firms

The following post comes to us from John GrahamCampbell Harvey, and Manju Puri, all of the Finance Area at Duke University.

In our paper, Capital Allocation and Delegation of Decision-Making Authority within Firms, forthcoming in the Journal of Financial Economics, we use a unique data set that contains information on more than 1,000 Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) around the world to investigate the degree to which executives delegate financial decisions and the circumstances that drive variation in delegation. Our results can be grouped into four themes.


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