Monthly Archives: October 2018

Tokens and the Extraterritorial Reach of US Securities Laws

David Felsenthal and Steven Gatti are partners and Jesse Overall is an associate at Clifford Chance US LLP. This post is based on a Clifford Chance memorandum by Mr. Felsenthal, Mr. Gatti, Mr. Overall, Robert Houck, Daniel Silver, and David Adams.

Token issuers often sell their securities offshore and consider such sales to be exempt from US securities regulation.  But this raises the question of location—are the token sales in fact outside the US for securities law purposes?  In In re Tezos Securities Litigation [1], a class action lawsuit brought by investors alleging that the tokens sold in the Tezos Initial Coin Offering were in fact securities, a federal court recently asked and answered the question: “where does an unregistered security [transaction], purchased on the internet, and recorded ‘on the blockchain,’ actually take place?” [2]

In the process, the court formulated a US federal securities law extraterritoriality analysis that—for what we believe is the first time ever—specifically takes the unique characteristics of blockchains into account. The court listed several factors that contributed to its determination that the sale of Tezos tokens had occurred in the United States, including that: US investors bought Tezos tokens; a website that sold the tokens was hosted in the US and run by a person located in the US; marketing efforts targeted US residents; and, most intriguingly, payments made in Ether for the Tezos tokens were validated by a network of Ethereum nodes clustered more densely in the US than in any other country.

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Open Letter: Commonsense Corporate Governance Principles 2.0

The Commonsense Principles of Corporate Governance were developed, and are posted on behalf of, a group of executives leading prominent public corporations and investors in the U.S. The Open Letter and the Principles 2.0 are also available here and here.

A little more than two years ago, we published the Commonsense Principles of Corporate Governance That work represented a collaborative effort—a search for common ground—by representatives of some of America’s largest corporations and institutional investors. We said then, and it is no less true today, that the long-term prosperity of millions of American workers, retirees and investors depends on the effective governance of our public companies. We hoped that our Principles would be part of a larger dialogue about the responsibilities and need for constructive engagement of those companies, their boards and their investors. We think that has been the case. Other groups have published their own works on the subject. Among them are an investor-led effort by the Investor Stewardship Group (ISG) called the Framework for U.S. Stewardship and Governance, a business-led effort by the Business Roundtable (BRT) called Principles of Corporate Governance, and a piece by the International Business Council of the World Economic Forum called The New Paradigm.

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Managing the Narrative: Investor Relations Officers and Corporate Disclosure

Andy Call is Professor of Accounting at Arizona State University W.P. Carey School of Business. This post is based on a recent article forthcoming in the Journal of Accounting & Economics authored by Prof. Call; Lawrence D. Brown, Seymour Wolfbein Professor of Accounting at Temple University Fox School of Business; Michael B. Clement, KPMG Centennial Professor of Accounting at University of Texas McCombs School of Business; and Nathan Y. Sharp, Associate Professor of Accounting at Texas A&M University Mays Business School.

Although investor relations officers (IROs) play an important role in managing corporate communications with important stakeholders and in helping their companies achieve an appropriate valuation, the academic literature on investor relations is only in its early stages. IROs are responsible for communicating with the investment community and shaping the company narrative. As a result, IROs interact regularly with sell-side analysts and institutional investors and are at the center of many disclosure-related activities, including quarterly earnings conference calls and press releases, among others. In fact, because they manage so many important corporate disclosure activities, IROs are frequently referred to as “chief disclosure officers.”

We survey 610 IROs of publicly traded U.S. companies and interview 14 IROs to better understand their roles in managing companies’ communications with sell-side analysts and institutional investors and in overseeing corporate disclosures. Our survey explores numerous topics for which IROs are uniquely qualified to provide valuable insights, including: the reasons, settings, timing, and value of IROs’ interactions with sell-side analysts and institutional investors; how IROs control outsiders’ access to senior management; how sell-side analysts help IROs convey their company’s message to institutional investors; the value of various types of disclosures for communicating the company narrative; the role of IROs (vis-à-vis the role of CFOs) in preparing various disclosures; planning for and managing public earnings conference calls; the size and composition of the conference call queue; private “call-backs” after public earnings calls; the determinants of IROs’ internal performance ratings; and IROs’ experiences with Regulation Fair Disclosure (Reg FD).

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Contracting Out of Appraisal Rights

Christopher B. Chuff is an Associate at Pepper Hamilton LLP. This post is based on a recent Pepper memorandum by Mr. Chuff, Matthew Greenberg, Joanna Cline, and Taylor Bartholomew. This post is part of the Delaware law series; links to other posts in the series are available here.

In a recent opinion, the Delaware Court of Chancery, for the first time, held that contractual provisions in stockholder agreements barring common stockholders from exercising their statutory appraisal rights are enforceable as a matter of law, so long as the stockholders voluntarily signed the stockholder agreement in return for consideration, such as investment in the company. The decision, Manti Holdings LLC v. Authentix Acquisition Co., C.A. No. 2017-0887-SG, holds that appraisal waivers do not violate section 151(a) of the Delaware General Corporation Law (DGCL) and, in so doing, brings additional certainty to private equity and venture capital investors whose investments include drag-along rights with appraisal waivers.

Background and Analysis

In 2008, Authentix Acquisition Co. and its stockholders entered into a stockholder agreement to facilitate the investment of a group of investors, collectively referred to in the opinion as the Carlyle Group. The stockholder agreement provided for drag-along rights, which required the stockholders to consent to a sale of Authentix (whether by merger or stock sale) if such a sale was approved by the holders of at least 50 percent of Authentix stock. The stockholder agreement also required the stockholders, including the plaintiffs, to refrain from exercising any appraisal rights in connection with such a sale.

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Lazard’s Review of Shareholder Activism—2018 3Q YTD

Jim Rossman is Managing Director and Head of Shareholder Advisory at Lazard. This post is based on a Lazard memorandum by Mr. Rossman. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here), and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Key Observations on the Activist Environment through 3Q 2018

Record Level of Companies Targeted

  • Activists targeted 174 companies in the first three quarters of 2018, surpassing 169 companies targeted in all of 2017
  • 26% more campaigns initiated YTD over 2017 YTD, representing capital deployment of $53.8bn, in-line with 2017 YTD levels
    • Nonetheless, 3Q witnessed a decline in new campaign activity and capital deployment relative to the recordsetting 1Q and 2Q 2018
  • A record 130 activists were responsible for YTD campaigns, exceeding the level for all of 2017
  • Elliott accounted for ~10% of all activity, with 19 campaigns launched YTD

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Insider Trading and the Integrity of Mandatory Disclosure

James J. Park is Professor of Law at UCLA School of Law. This post is based on his recent article, forthcoming in the Wisconsin Law Review. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

For decades, two theories have shaped insider trading regulation. The first argues that insider trading should be prohibited because unequal access to information corrupts the integrity of markets. The second views trading on inside information as misappropriating property belonging to the corporation. Neither approach is entirely satisfying. The market integrity theory does not address the reality that there will always be significant disparities in the ability and willingness of investors to access and analyze information. The property rights theory downplays the harm of insider trading by arguing that the corporation is the main victim of the offense. Despite their limitations, the Supreme Court cited both theories in one of its last major insider trading decisions, United States v. O’Hagan.

The dominance of the market integrity and property rights theories obscures an important reason to regulate insider trading—it can undermine the integrity of the disclosure mandated of public companies by the securities laws. Federal insider trading regulation is on its firmest footing when it addresses insider trading on mandatory disclosure information. As federal regulation of mandatory disclosure has increased, the case for preventing insider trading on such disclosure has grown stronger.

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A Watershed Development for “Material Adverse Effect” Clauses

Barbara Becker, Jeffrey Chapman, and Stephen Glover are partners at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Ms. Becker, Mr. Chapman, Mr. Glover, Mark Director, Andrew Herman, and Daniel AlterbaumThis post is part of the Delaware law series; links to other posts in the series are available here.

On October 1, 2018, in Akorn, Inc. v. Fresenius Kabi AG, [1] the Delaware Court of Chancery determined conclusively for the first time that a buyer had validly terminated a merger agreement due to the occurrence of a “material adverse effect” (MAE). Though the decision represents a seminal development in M&A litigation generally, Vice Chancellor Laster grounded his decision in a framework that comports largely with the ordinary practice of practitioners. In addition, the Court went to extraordinary lengths to explicate the history between the parties before concluding that the buyer had validly terminated the merger agreement, and so sets the goalposts for a similar determination in the future to require a correspondingly egregious set of facts. As such, the ripple effects of Fresenius in future M&A negotiations may not be as acute as suggested in the media. [2]

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Cybersecurity Disclosure Benchmarking

Steve W. Klemash is Americas Leader at the EY Center for Board Matters, Les Brorsen is Americas Vice Chair for Public Policy at EY, and Charles W. Seets Jr. is Americas Assurance Cybersecurity Leader at EY. This post is based on their recent EY Center for Board Matters memorandum.

Boards, executives, investors, regulators and other governance stakeholders have expressed growing interest in understanding how companies guard against, plan for and respond to cybersecurity incidents.

As cybersecurity threats evolve and risks become more complex and widespread, focus on corporate disclosures in public filings on the subject likely will intensify.

Cybersecurity crime is an increasing threat with unique challenges resulting from the complexity of an interconnected business ecosystem and the rapid evolution in technology. While the U.S. Securities and Exchange Commission (SEC) has required registrants to disclose information about business risks and material developments in their annual reports for decades, companies face particular challenges in publicly reporting cybersecurity threats. This is due in part to the need to disclose material information while keeping potentially sensitive information out of the hands of attackers.

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Reforming Director’s Long-Term Duties in the EU

Claire Jeffwitz is a solicitor based in the UK and Filip Gregor is Head of Responsible Companies at Frank Bold. This post is based on a Frank Bold paper by Ms. Jeffwitz and Mr. Gregor. 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).

The European Commission has taken up the debate on the obligations of company directors and will be analysing if they should be clarified at an EU level. This commitment is included in their Action Plan on Sustainable Finance [1] aimed at transforming Europe’s economy and financial system into a sustainable one. The Commission seeks to attenuate short-term pressure from capital markets on corporations that force directors to disregard opportunities and risks stemming from long-term sustainability considerations.

Although it is universally agreed that directors’ obligations are to act in the interests of the company, there exists a lack of clarity over what these “interests” are in practice or who they are owed to. In this context, Frank Bold has published the paper entitled Redefining directors’ duties in the EU to promote long-termism and sustainability, which outlines recommendations to clarify directors duties, integrate sustainability in these duties and recognise legally corporate governance arrangements that protect company’s social mission.

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Proxy Access Proposals

Stephen T. Giove is partner and Arielle L. Katzman and Daniel Yao are associates at Shearman & Sterling LLP. This post is based on their Shearman memorandum. Related research from the Program on Corporate Governance includes Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

In our fourth annual review of proxy access practices, we explore recent developments relating to adopt” and “fix-it” shareholder proposals, headline and key second-tier terms and amendments to adopted by-laws.

Proxy Access—The March Forward Continues but at a Slower Pace

The proxy access adoption trend continued in 2018, although at a more modest pace. An additional 53 companies adopted proxy access by-laws in the first six months of 2018 compared to 87 in the first six months of 2017. In total, well over 500 companies, and over two-thirds of the S&P 500, have adopted proxy access by-laws. While the New York City Comptroller and other prolific shareholder proponents, including John Chevedden and James McRitchie, submitted fewer proxy access shareholder proposals in 2018 than in 2017, the volume of proxy access proposals was still substantial as compared to other corporate governance proposals. After three extremely active years, it appears that proxy access no longer leads the list of governance topics of shareholder

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