Monthly Archives: September 2019

Did the Siebel Systems Case Limit the SEC’s Ability to Enforce Regulation Fair Disclosure?

Kristian Allee is Associate Professor and Garrison/Wilson Chair in Accounting at the University of Arkansas Sam M. Walton College of Business. This post is based on a recent paper authored by Professor Allee; Brian Bushee, Geoffrey T. Boisi Professor of Accounting at the Wharton School of the University of Pennsylvania; and Tyler Kleppe and Andrew Pierce, PhD candidates at the University of Arkansas.

The practice of firms selectively disclosing nonpublic information to analysts and preferred investors has been a longstanding concern for regulators. The Securities and Exchange Commission (SEC) promulgated Regulation Fair Disclosure (Reg FD) in October of 2000 with the goal of mitigating the practice of firms selectively disclosing material nonpublic information. Although the initial wave of post-Reg FD academic studies found that Reg FD was effective in “leveling the playing field” for all investors, more recent studies find that private meetings with managers provide investors with significant trading advantages and possibly undermine the intent of Reg FD. In our paper, Did the Siebel Systems Case Limit the SEC’s Ability to Enforce Regulation Fair Disclosure?, we posit that the mixed evidence in the Reg FD literature could stem from the failed 2005 SEC enforcement action in SEC v. Siebel Systems, Inc. (hereafter Siebel), which challenged the SEC’s ability to subsequently enforce Reg FD. After this ruling, managers likely perceived a lower probability of Reg FD enforcement and had incentives to return to some degree of selective disclosure.


SEC’s New Guidance on Proxy Voting Responsibilities

David A. Bell and Robert A. Freedman are partners at Fenwick & West LLP. This post is based on their Fenwick memorandum.

Possibly signaling the future direction of regulation of proxy advisers, the U.S. Securities and Exchange Commission (SEC) on Aug. 21 issued two sets of interpretive guidance, one regarding proxy advisory firms under the proxy solicitation rules, and one regarding investment advisers and their proxy voting responsibilities. Among other things, the SEC issued an interpretation that proxy voting advice provided by proxy advisory firms generally constitutes a “solicitation” under the federal proxy rules. The SEC did not seek public comment or propose or adopt any new rules—though it pointed to processes that are already underway pursuant to which comment may be provided and noted consideration of specific potential future rulemaking under which public comment would be a part of the normal part of the rulemaking process. The moves may be an indication of what the SEC staff and the commission are considering with regard to requirements on proxy advisers to improve transparency and to give an opportunity to issuers to respond.


Smaller Public Companies and ESG

Jurgita Ashley is a partner at Thompson Hine LLP. This post is based on her Thompson Hine memorandum. 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).

When State Street Global Advisors erected the “Fearless Girl” statute on Wall Street in March 2017, it ignited a dialogue regarding gender diversity on corporate boards and further fueled the focus on environmental, social and governance (“ESG”) issues. Securities laws provide a mechanism for shareholders to submit proposals for inclusion in a company’s proxy materials, for distribution to, and to be voted by, the company’s shareholders. Hundreds of proposals are submitted annually, and review of such proposals is informative as to issues which are significant to at least some investors, potentially contributing to their investment decisions. Over the past three years, the number of environmental and social proposals has significantly increased, surpassing more traditional corporate governance proposals and covering such themes as board and employee diversity, gender pay equity, political contributions, plastic waste, climate change, guns, medications and human rights issues. With the vast majority of shareholder proposals submitted to S&P 500 companies, to what extent, if at all, should smaller public companies take into account ESG issues?


Engineered Credit Default Swaps: Innovative or Manipulative?

Gina-Gail S. Fletcher is Associate Professor of Law at Indiana University Maurer School of Law. This post is based on her recent article, forthcoming in the New York University Law Review.

Credit default swaps (“CDS”) are, once again, making waves. Maligned for their role in the 2008 financial crisis and condemned by the Vatican, investors are once more utilizing CDS to achieve results of questionable market benefit—and, globally, financial regulators are starting to pay attention. In a joint statement issued in June 2019, the Securities Exchange Commissions (“SEC”), the Commodity Futures Trading Commission (“CFTC”), and the U.K. Financial Conduct Authority (“FCA”) condemned what they called “various opportunistic strategies in the credit derivatives market” because of the negative effect these transactions have on the integrity and reputation of the credit derivatives markets. Seven years after the first engineered CDS transaction, financial regulators are taking note and expressing disapproval of the strategies CDS counterparties employ to guarantee the profitability of their CDS positions. However, the narrowness of their focus and the limitations of applicable laws restrict regulators’ ability to effectively address opportunism in the CDS market.

In an article forthcoming in the New York University Law Review, Engineered Credit Default Swaps: Innovative or Manipulative?, I analyze the opportunistic strategies that counterparties employ to “engineer” the outcomes of their positions, thereby guaranteeing that their CDS transactions are profitable. CDS allow counterparties to take a position on whether a debt issuer, such as a company or sovereign, will default on its debt obligations. One party, the protection buyer, pays periodic premiums to another party, the protection seller and, in exchange, the protection seller agrees to compensate the protection buyer if the issuer defaults on its debts. However, rather than waiting to see if their positions pan out, some CDS counterparties collaborate with the debt issuer to guarantee their preferred outcomes. Currently, under the terms of the CDS contracts, these engineering schemes are not prohibited—but they have roiled the credit derivatives markets as market participants and regulators debate whether and how to address them.


A First Challenge to California’s Board Gender Diversity Law

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

It was only a matter of time. As reported here on Bloomberg, a conservative activist group has filed a lawsuit, Crest v. Alex Padilla, in California state court on behalf of three California taxpayers seeking to prevent implementation and enforcement of SB 826, California’s Board gender diversity legislation. This appears to be the first litigation filed to challenge the new law. Framed as a “taxpayer suit,” the litigation seeks to enjoin Alex Padilla, the California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, alleging that the law’s mandate is an unconstitutional gender-based quota and violates the California constitution. Even proponents of the law recognized the possibility of legal challenges. On signing the bill into law on September 30, 2018, former California Governor Jerry Brown issued a letter acknowledging that there

“have been numerous objections to this bill and serious legal concerns have been raised. I don’t minimize the potential flaws that indeed may prove fatal to its ultimate implementation. Nevertheless, recent events in Washington, D.C.—and beyond—make it crystal clear that many are not getting the message. As far back as 1886, and before women were even allowed to vote, corporations have been considered persons within the meaning of the Fourteenth Amendment….. Given all the special privileges that corporations have enjoyed for so long, it’s high time corporate boards include the people who constitute more than half the ‘persons’ in America.” (See this PubCo post.)


2019 Mid-Year Securities Litigation Update

Jefferson E. Bell, Brian M. Lutz, and Robert F. Serio are partners at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Mr. Bell, Mr. Lutz, Mr. Serio, Meryl L. Young, and Mark H. Mixon, Jr.

The rate of new securities class action filings appears to be stabilizing, but that does not mean 2019 has been lacking in important developments in securities law. This mid-year update highlights what you most need to know in securities litigation trends and developments for the first half of 2019:

  • The Supreme Court decided Lorenzo, holding that, even though Lorenzo did not “make” statements at issue and is thus not subject to enforcement under subsection (b) of Rule 10b-5, the ordinary and dictionary definitions of the words in Rules 10b-5(a) and (c) are sufficiently broad to encompass his conduct, namely disseminating false or misleading information to prospective investors with the intent to defraud.
  • Because the Supreme Court dismissed the writ of certiorari in Emulex as improvidently granted, there remains a circuit split as to whether Section 14(e) of the Exchange Act supports an implied private right of action based on negligent misrepresentations or omissions made in connection with a tender offer.
  • We explain important developments in Delaware courts, including the Court of Chancery’s application of C & J Energy, as well as the Delaware Supreme Court’s (1) application and extension of its recent precedents in appraisal litigation to damages claims, (2) elaboration of its recent holding on MFW’s “up front” requirement, and (3) rare conclusion that a Caremark claim—“possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment”—survived a motion to dismiss.
  • Finally, we continue to monitor significant cases interpreting and applying the Supreme Court’s decisions in Omnicare and Halliburton II.


Automatic Stay of Discovery—Securities Act Class Actions in State Courts

Andrew J. EhrlichJane B. O’Brien, and Richard A. Rosen are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss memorandum by Mr. Ehrlich, Ms. O’Brien, Mr. Rosen, William E. Freeland, and Naomi Jeehee Yang.

In 2018, the United States Supreme Court in Cyan, Inc. v. Beaver County Employees Retirement Fund held that class actions asserting claims under the Securities Act of 1933 (“Securities Act”) that are filed in state court are not removable under the Securities Litigation Uniform Standards Act (“SLUSA”). In addition to precipitating the increased filing of Securities Act class actions in state courts, Cyan left open several questions, including which procedural protections imposed by the Private Securities Litigation Reform Act of 1995 (“PSLRA”) are applicable in state court. In particular, lower courts are divided over whether discovery in Securities Act cases—automatically stayed in federal court while a motion to dismiss is pending—is likewise automatically stayed when brought in state court. State courts in California and Michigan have refused to stay discovery, while a Connecticut state court reached the opposite conclusion in City of Livonia Retiree Health and Disability Benefits Plan v. Pitney Bowes Inc., and now courts within the New York Supreme Court’s Commercial Division—a common forum for Securities Act class actions filed in state courts—are at odds over the answer to this question.


Information Litigation in Corporate Law

George S. Geis is the William S. Potter Professor of Law and the Thomas F. Bergin Teaching Professor of Law at the University of Virginia School of Law. This post is based on his recent article, forthcoming in the Alabama Law Review.

Corporate information is valuable and often worth guarding. Firms must protect business strategies, and there is legitimate justification for opacity in the boardroom. At the same time, however, some information access is necessary to support sound corporate governance. If shareholders are expected to elect and monitor corporate leaders—as well as make personal investment decisions—then they must be able to muster facts about what is happening at the firm.

One can imagine a regime where corporate lawmakers leave decisions about information exchange solely to the private parties. Equity investors might negotiate initial disclosures and ongoing promises of information transmission at the outset of a relationship, akin to the various obligations that are standard in debt contracts. Absent a contractual right, information would remain private unless a firm’s managers found it in the corporation’s self-interest to voluntarily share additional details.


Federal Forum Provisions and the Internal Affairs Doctrine

Dhruv Aggarwal is a J.D. Candidate at Yale Law School; Albert H. Choi is Professor of Law at the University of Michigan Law School; and Ofer Eldar is an Associate Professor of Law and Finance at the Duke University School of Law. This post is based on their recent paper. 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.

Should a company be allowed to dictate the forum in which its shareholders can bring suit? This has been one of the most vexing and controversial issues in corporate and securities laws in recent years. At least with respect to lawsuits based on corporate law and for corporations incorporated in Delaware, the issue seems fairly well settled by now. Since the seminal case of Boilermakers Local 154 Retirement Fund v. Chevron Corp., numerous corporations began including forum selection provisions in their charters or bylaws. A key element of the decision is that forum selection for claims under state corporate law is governed by the internal affairs doctrine. The doctrine states that only the state of incorporation has authority to regulate a corporation’s internal affairs, and these internal affairs include the forum for litigating claims under the state’s corporate laws.

Forum selection with respect to federal securities lawsuits, on the other hand, is more controversial, and an important debate has taken place over whether corporations can dictate the forum for lawsuits based on federal securities laws in their charters and bylaws. Since 2017, a growing number of firms have pushed the envelope by adopting exclusive federal forum provisions (“FFPs”) that seek to limit shareholders to bringing federal law claims under the Securities Act of 1933 in federal courts only. The 33 Act, which governs claims for material misstatements or omissions in initial public offerings, specifically commits jurisdiction over these claims to both state and federal courts. FFPs were adopted in high profile initial public offerings, such as that of Snap, Inc., with the specific goal of restricting lawsuits for material misstatements or omissions in the IPO documents to federal courts. Furthermore, as the paper shows, the rate of adoptions of the FFPs significantly accelerated following the 2018 Supreme Court decision in Cyan v. Beaver County Employees Retirement Fund, which expressly validated the plaintiffs’ right to bring 33 Act lawsuits in state courts.


Six Reasons We Don’t Trust the New “Stakeholder” Promise from the Business Roundtable

Nell Minow is Vice Chair of ValueEdge Advisors.

A new statement from the Business Roundtable commits to stakeholder interests instead of making the primary purpose of the company shareholder value. Long-term shareholders are increasingly committed to explicitly ESG investing, which values stakeholder interests as a way to minimize investment risk. But I am skeptical about what the CEO signatories to this statement have in mind for six reasons.

1. We’ve seen this before. The last time the BRT deployed stakeholder rhetoric it was during the 1980’s era of hostile takeovers, when a feint to the interests of anyone other than shareholders was the best way to entrench management. The CEOs who signed this statement know that accountability to everyone is accountability to no one. It’s like a shell game where the pea of any kind of obligation is always under the shell you didn’t pick. It’s shoot an arrow at the wall and then draw a bull’s-eye around it goal-setting.


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