Monthly Archives: December 2018

Federal Exclusive Forum Provisions

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes The Market for Corporate Law by Michal Barzuza, Lucian A. Bebchuk, and Oren Bar-Gill and Federal Corporate Law: Lessons from History by Lucian Bebchuk and Assaf Hamdani.

In March 2018, in Cyan Inc. v. Beaver County Employees Retirement Fund, SCOTUS held that state courts continue to have concurrent jurisdiction over class actions alleging only ’33 Act violations by private plaintiffs and that defendants cannot remove actions filed in state court to federal court. (See this PubCo post.) Both before and especially after Cyan, to avoid state court litigation of ’33 Act claims (and forum shopping by plaintiffs for the most favorable state court forum), many companies adopted “exclusive forum” provisions in their charters or bylaws that designated the federal courts as the exclusive forum for litigation under the ’33 Act. Delaware law expressly permits the adoption of charter or bylaw provisions that designate Delaware as the exclusive forum for adjudicating “internal corporate claims,” i.e., claims, including derivative claims, that are based on a violation of a duty by a current or former director or officer or stockholder or as to which the corporation law confers jurisdiction on the Court of Chancery. However, federal securities class actions are not expressly included. (See this PubCo post.)


Winners of the Inaugural Global Stewardship Awards

George S. Dallas is Policy Director at International Corporate Governance Network (ICGN). This post is based on an ICGN memorandum by Mr. Dallas.

The winners of the first Global Stewardship Awards, recognising excellence and innovation in investor stewardship, were announced at a ceremony in London last night. The awards were presented by the International Corporate Governance Network (ICGN), an investor-led body with members representing assets under management in excess of US$34trillion.

The winners were:

  • ICGN Global Stewardship Disclosure Award for Asset Owners—CalSTRS
  • ICGN Global Stewardship Disclosure Award for Asset Managers—BlackRock
  • ICGN Global Stewardship Champion Award – Edward Mason (Church Commissioners for England), for leading the successful shareholder campaign to get ExxonMobil to disclose how its business model would be impacted by global efforts to address climate change.


Weekly Roundup: December 14–20, 2018

More from:

This roundup contains a collection of the posts published on the Forum during the week of December 14–20, 2018.

Remarks to the SEC Investor Advisory Committee

Second Corwin Denial Due to Restatement Process

Investment Returns and Distribution Policies of Non-Profit Endowment Funds

The Lifecycle Theory of Dual-Class Structures

ISS and Glass Lewis Policy Updates for the 2019 Proxy Season

Mutual Fund Board Connections and Proxy Voting

Roundup of Key Federal Securities Litigation Developments

Soft Shareholder Activism

SEC Enforcement Activity: Public Companies and Subsidiaries—Fiscal Year 2018 Update

When Are Tokens Securities? Some Questions from the Perplexed

James J. Park is Professor of Law at UCLA School of Law. This post is based on his recent paper.

Summary of Findings

  • Selling tokens through an ICO without SEC registration requires escaping what we call the “Hinman paradox.” A token can only be widely distributed to the public if the project it is associated with is functional. But a blockchain project can only be functional if its tokens are widely distributed.
  • Blockchain projects with simple, well-defined, and compelling objectives may be able to achieve the requisite degree of functionality and de-centralization so they can sell utility tokens without being subject to securities regulation.
  • The SEC’s incremental approach to regulating ICOs reflects the difficulty of balancing the policy goals of protecting investors and promoting entrepreneurship. As the risk of harm to retail investors increases, the SEC should enforce the securities laws more decisively.
  • The SEC’s November 16, 2018 enforcement settlements send the message that non-functional token sales without a clear path towards de-centralization will not be tolerated.

The sudden rise of Initial Coin Offerings (ICOs) has created unprecedented challenges for the Securities & Exchange Commission (SEC). Rather than selling stock, ICOs typically raise funds by selling tokens (a type of cryptocurrency) to investors, many of whom hope to profit as the value of such tokens increases. Hundreds of companies developing projects relating to blockchain technology have sold tokens through ICOs directly to public investors without filing a registration statement with the SEC. Such sales are unlawful if such tokens fall within the ambiguous definition of a security.


Clayton Q&A and ESG at the SEC’s Investor Advisory Committee Meeting

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. 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) and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

At last week’s meeting of the SEC’s Investor Advisory Committee, the Committee members held a Q&A session with SEC Chair Jay Clayton, followed by a discussion of environmental, social and governance disclosure, where the main question appeared to be whether to recommend that ESG disclosure be required through regulation, continued as voluntary disclosure but under a particular framework advocated by the SEC or continued only to the extent of private ordering as is currently the case.

Among the points addressed in the Q&A was a potential government shutdown. Clayton said that the SEC was planning for a possible shutdown, and that, as in previous shutdowns, he expected the SEC would be able to continue its operations for a number of days post-shutdown.


SEC Request for Comments on Quarterly Reporting and Earning Releases

Itai Fiegenbaum is a co-Editor of the Forum and Fellow at the Harvard Law School Program on Corporate Governance.

In a release issued December 18, 2019, the SEC requested comments on the hotly debated subject of quarterly reporting. The Release summarizes the request as follows:

The Commission is requesting public comment on how we can enhance, or at a minimum maintain, the investor protection attributes of periodic disclosures while reducing administrative and other burdens on reporting companies associated with quarterly reporting. We are specifically requesting public comment on the nature and timing of the disclosures that reporting companies are required to provide in their quarterly reports filed on Form 10-Q, including when the disclosure requirements overlap with disclosures these companies voluntarily provide to the public in the form of an earnings release furnished on Form 8-K. We are interested in exploring ways to promote efficiency in periodic reporting by reducing unnecessary duplication in the information that reporting companies disclose and how such changes could affect capital formation, while enhancing, or at a minimum maintaining, appropriate investor protection. We also are requesting public comment on whether our rules should provide reporting companies, or certain classes of reporting companies, with flexibility as to the frequency of their periodic reporting. In addition, we are seeking comment on how the existing periodic reporting system, earnings releases, and earnings guidance, standing alone or in combination with other factors, may affect corporate decision making and strategic thinking—positively or negatively—including whether these factors foster an inefficient outlook among registrants and market participants by focusing on short-term results, sometimes referred to as “short-termism.”


SEC Enforcement Activity: Public Companies and Subsidiaries—Fiscal Year 2018 Update

Stephen Choi is Murray and Kathleen Bring Professor of Law at the New York University School of Law; Sara E. Gilley is Vice President at Cornerstone Research; and David Marcus is Senior Vice President at Cornerstone Research. This post is based on joint report published by Cornerstone and the NYU Pollack Center for Law & Business and authored by Professor Choi, Ms. Gilley, Mr. Marcus, Heather B. Lazur, and Lindsay V. Schick.

After a decline in new enforcement actions that began in the second half of FY 2017 and continued into the first half of FY 2018, SEC activity rebounded in 2H FY 2018. The SEC filed a record-setting 55 new actions against public companies and subsidiaries in 2H FY 2018, resulting in a total of 71 new actions for the fiscal year.

Findings on public company and subsidiary defendants are based on data from the Securities Enforcement Empirical Database (SEED), a collaboration between the NYU Pollack Center for Law & Business and Cornerstone Research. SEED data cover FY 2010 through the present. [1]

SEC enforcement actions against public companies and subsidiaries more than tripled in the second half of the fiscal year. While it is common to see an uptick towards the end of the year, this year’s increase was particularly pronounced, with 23 actions in the last month of FY 2018.
Stephen Choi, Murray and Kathleen Bring Professor of Law, Director of the Pollack Center for Law & Business, New York University


Soft Shareholder Activism

Doron Levit is Assistant Professor of Finance at The Wharton School of the University of Pennsylvania. This post is based on a recent article by Professor Levit, forthcoming in the Review of Financial Studies. Related research from the Program on Corporate Governance includes Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).

The modus operandi of a typical activist investor is to target a public company and propose major changes to its strategy, financial policy, operations, and personal. To defend themselves against these proposals, companies use poison pills, staggered boards, dual-class structures, and other measures. Securities regulation and disclosure requirements also limit the power of activists. In practice, activists rarely own a controlling stake. Without control, activist investors cannot force their ideas on their target companies; they must persuade its board of directors or the majority of shareholders that adopting their proposals is in the best interests of the firm. Simply put, shareholder activism requires communication and persuasion.

Consistent with this idea, recent evidence suggests that behind-the-scenes communications between investors and firms is an important corporate governance mechanism, perhaps more important than previously thought (e.g., McCahery et al. 2016). This evidence raises two fundamental questions that have been overlooked by the existing literature. First, what factors contribute to successful dialogues between investors and firms? Second, under what circumstances will investors resort to more aggressive tactics, and when will they choose to exit?


Roundup of Key Federal Securities Litigation Developments

Samuel P. GronerIsrael David, and Peter L. Simmons are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Mr. Groner, Mr. David, Mr. Simmons, Andrew B. CashmoreJustin J. Santolli, and Scott B. Luftglass.

The Scope of “Scheme Liability”: Supreme Court Grants Cert to Determine the Extent of Rule 10b-5

On June 18, 2018, the Supreme Court granted certiorari in Lorenzo v. Securities and Exchange Commission (Docket No. 17-1077), a case that considers the potential liability for a false statement that is not “made” by a person under the now-familiar standard articulated in the Supreme Court’s 2011 decision in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). In Janus, the Court held that only the “maker” of a statement—one who has “ultimate authority” over the statement’s content and whether to communicate it—can be liable for violations of Rule 10b-5(b). Id. at 142. The issue before the Court in Lorenzo is whether a defendant who is not the “maker” of a statement can nonetheless be held liable under other subsections of Rule 10b-5 if he or she is part of a “scheme” to disseminate the challenged statement.


Audit: Radical Change on the Horizon?

Stephen Davis is a Senior Fellow at the Harvard Law School Program on Corporate Governance. This post is based on an article by Dr. Davis published in the Hawkamah Journal.

Audit committee chairs may find resonance in the phrase “tragedy of the horizon”, an expression coined in 2015 by Bank of England governor Mark Carney, which refers to the paradox that arises when market actors must take urgent action to address a long-term risk—but have no observable short-term incentive to do so. Carney was talking about climate change. But his warning can be read as a routine job description for board directors. Of course they have to monitor a company’s current business operations. But they also need to keep a weather eye on changes on the horizon that may not be obvious to executives in charge of day-to-day management and who, as a result, may resist such insights. Perhaps no area is in more need of such dual attention from directors than the outside audit. Board members—especially those in audit committees—have a clear responsibility to oversee compliance with current rules. But radical changes in the external audit appear to be coming: in what is being assessed, how, by whom, and for whom. So now may be an appropriate time to scan the horizon so that companies can be prepared.


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