Monthly Archives: February 2018

Stockholder Agreements

Amy SimmermanCraig Sherman, and Todd Carpenter are partners at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR publication by Ms. Simmerman, Mr. Sherman, and Mr. Carpenter, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Court of Chancery recently issued two important decisions addressing the interpretation and effects of stockholders’ agreements. In Schroeder v. Buhannic[1] the Court of Chancery refused to interpret a stockholders’ agreement in a manner that would allow a corporation’s common stockholders to remove the chief executive officer. In Southpaw Credit Opportunity Master Fund, L.P. v. Roma Restaurant Holdings, Inc., [2] the Court of Chancery held that a corporation’s purported restricted stock issuances were invalid, where the corporation failed to comply with provisions governing stock issuances in a stockholders’ agreement to which the corporation was a party.

These two decisions are noteworthy statements of both the potential limitations and potency of stockholders’ agreements. As often occurs, these decisions also both arose in the context of disputes between factions of stockholders over control of the company—an important reminder about the implications of these issues.


New NYSE Rules For Non-IPO Listings

Andrew Brady and Phyllis Korff are Of Counsel and Michael Zeidel is Partner at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Brady, Ms. Korff, Mr. Zeidel, and Ryan Adams.

On February 2, 2018, the SEC approved the New York Stock Exchange’s proposal to permit qualifying private companies to use “direct listings” to list their shares on the NYSE and become publicly traded without conducting an initial public offering so long as the direct listing is accompanied by a concurrent Securities Act resale registration statement. Direct listings may provide an attractive alternative to a traditional IPO for private companies that do not need to raise public capital but desire to provide greater liquidity for existing shareholders and/or make their shares a more attractive currency for mergers and acquisitions activity.


Key Trends in Corporate Incidents

Doug Morrow is Director and Martin Vezér is Senior Associate of Thematic Research at Sustainalytics. This post is based on recently published reports by Mr Morrow, Dr Vezér and their colleagues Andrei Apostol, Kasey Vosburg, Rita Ferreira and Will Meister.

Corporate activities that generate undesirable social or environmental effects are a valuable source of information for investors. Environmental, social and governance (ESG) incidents can reflect gaps in a company’s management systems, vulnerabilities in corporate strategy and lapses in policy development, all of which are relevant to company analysis and evaluation. If policies and programmes are the talk of corporate ESG management, then incidents are the walk.

Incidents can also have direct financial effects. Many well-known examples of shareholder value destruction over the last few years, including product safety concerns at Samsung, the Dakota Access Pipeline controversy and the Volkswagen emissions scandal, constituent incidents.


Public Company Cybersecurity Disclosures

Kara M. Stein is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Stein’s recent public statement, available here. The views expressed in the post are those of Commissioner Stein and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Yesterday [February 20, 2018], the Commission attempted to tackle an increasingly important issue: How should a public company tell its investors about its cybersecurity risks and incidents? [1]

Undeniably, the high-profile data losses and security breaches that have occurred across the public and private sectors show that no company or organization is immune from cyberattack. Unfortunately, one only need look back to the past eight years to see example after example of these attacks. In 2010, a sophisticated cyberattack affected more than 75,000 computer systems at nearly 2,500 companies in the United States and around the world. [2] In 2014, hackers broke into the computer systems of a major Hollywood studio, stealing confidential documents and exposing these documents and other personal information to potential cybercriminals. [3] And last year, we learned that a major cybersecurity breach at a public company may have potentially affected half of the U.S. population. [4] When the magnitude of the breach was revealed publicly, the company’s stock price plummeted, losing over $5 billion in market value. [5]


The Supreme Court and the Scope of Whistleblowing Anti-retaliation Protections

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

Yesterday [February 21, 2018], SCOTUS handed down its decision in Digital Realty v. Somers, a case addressing the split in the circuits regarding the application of the Dodd-Frank whistleblower anti-retaliation protections: do the protections apply regardless of whether the whistleblower blows the whistle all the way to the SEC or just reports internally to the company? You might recall that during the oral argument, the Justices seemed to signal that the plain language of the statute was clear and controlling, thus suggesting that they were likely to decide for Digital, interpreting the definition of “whistleblower” in the Dodd-Frank anti-retaliation provision narrowly to require SEC reporting as a predicate. There were no surprises. As Justice Gorsuch remarked during oral argument, the Justices were largely “stuck on the plain language.” The result may have an ironic impact: while the win by Digital will limit the liability of companies under Dodd-Frank for retaliation against whistleblowers who do not report to the SEC, the holding that whistleblowers are not protected unless they report to the SEC may well drive all securities-law whistleblowers to the SEC to ensure their protection from retaliation under the statute—which just might not be a consequence that many companies would favor.


Weekly Roundup: February 16–22, 2018

More from:

This roundup contains a collection of the posts published on the Forum during the week of February 16–22, 2018.

How are Shareholder Votes and Trades Related?

Overseeing Cyber Risk

Sustainability and Liability Risk

Activism and Takeovers

SEC Year-in-Review and a Look Ahead

Statement on Cybersecurity Interpretive Guidance

Statement on Cybersecurity Interpretive Guidance

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks concerning the SEC Cybersecurity Interpretive Guidance, available here. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Yesterday [Feb. 20, 2018], the Commission approved the issuance of an interpretive release to provide guidance to public companies when preparing disclosures about cybersecurity risks and incidents. The release also communicates the Commission’s views on the importance of maintaining comprehensive policies and procedures related to cybersecurity risks and incidents.

In today’s environment, cybersecurity is critical to the operations of companies and our markets. Companies increasingly rely on and are exposed to digital technology as they conduct their business operations and engage with their customers, business partners, and other constituencies. This reliance on and exposure to our digitally-connected world presents ongoing risks and threats of cybersecurity incidents for all companies, including public companies regulated by the Commission. Public companies must stay focused on these issues and take all required action to inform investors about material cybersecurity risks and incidents in a timely fashion.


Why Dual-Class Stock: A Brief Response to Commissioners Jackson and Stein

David Berger is a partner at Wilson Sonsini Goodrich & Rosati. This post is based on a publication by Mr. Berger. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here).

Two SEC Commissioners—Robert Jackson and Kara Stein—separately visited Silicon Valley last week, and both used the opportunity to sharply criticize the practice among some companies—most notably but not exclusively technology companies—to adopt so-called “perpetual” dual-class stock. [1] In typical dual-class structures, one group of stockholders (typically the founders and other insiders) receive stock with multiple votes per share, while shares purchased by investors in the company’s initial public offering (“IPO”) or thereafter on the open market have just one vote per share. [2]


The SEC and Mandatory Shareholder Arbitration

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

Depending on your point of view, you may have experienced either heart palpitations or increased serotonin levels when you heard, back in July 2017, that SEC Commissioner Michael Piwowar had, in a speech before the Heritage Foundation, advised that the SEC was open to the idea of allowing companies contemplating IPOs to include mandatory shareholder arbitration provisions in corporate charters. As reported, Piwowar “encouraged” companies undertaking IPOs to “come to us to ask for relief to put in mandatory arbitration into their charters.” (See our earlier post on the Forum.) As discussed in this PubCo post, at the same time, in Senate testimony, SEC Chair Jay Clayton, asked by Senator Sherrod Brown about Piwowar’s comments, responded that, while he recognized the importance of the ability of shareholders to go to court, he would not “prejudge” the issue. According to some commentators at the time, to the extent that these views appeared to indicate a significant shift in SEC policy on mandatory arbitration, they could portend “the beginning of the end of securities fraud class actions.” Then, in January of this year, the rumors about mandatory arbitration resurfaced in a Bloomberg article, which cited “three people familiar with the matter” for the proposition that the SEC is “laying the groundwork” for this “possible policy shift.” But in recent Senate testimony, Clayton reportedly put the kibosh on these signals.


Delaware Court Ruling on Trading Price and Fair Value Appraisal

David Berger and Brad Sorrels are partners and Phillip Sumpter is an associate at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR publication by Mr. Berger, Mr. Sorrells, and Mr. Sumpter, and is part of the Delaware law series; links to other posts in the series are available here.

On February 15, 2018, the Delaware Court of Chancery issued its post-trial decision in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc.[1] a statutory appraisal proceeding arising from Hewlett-Packard’s 2015 acquisition of Aruba Networks. [2] The court concluded that the “most persuasive evidence” of Aruba Networks’ fair value was its 30-day average unaffected market price of $17.13 per share—significantly lower than the merger price of $24.67 per share. This decision comes in the wake of the Delaware Supreme Court’s recent decisions in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd. [3] and DFC Global Corporation v. Muirfield Value Partners, L.P.[4] which endorsed the use of the merger price as evidence of fair value in appraisals involving publicly traded companies sold in arm’s-length transactions. Heeding the Delaware Supreme Court’s admonition in those cases that market indicators should be given significant weight over “exercises of human judgment” such as the Delaware courts’ historical reliance on discounted cash flow analyses, Vice Chancellor Laster—who was the trial court judge in Dell—concluded that, under the circumstances presented, Aruba Networks’ unaffected stock price was the most persuasive evidence of fair value over even the merger price.


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