Monthly Archives: December 2019

Watching Insider Trading Law Wobble: Obus, Newman, Salman and Two Martomas

Donald C. Langevoort is the Thomas Aquinas Reynolds Professor of Law at Georgetown Law School. This post is based on his recent paper. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

The accretive process by which insider trading law evolves—for all the benefits of incrementalism—has many critics. When insider trading law wobbles visibly on some matter, there are enhanced concerns about notice, predictability and due process as well as the substantive merit of the specific principles being applied. Judge Jed Rakoff recently said in an opinion that “the crime of insider trading is a straightforward concept that some courts have somehow managed to complicate.”

No subject in insider trading law has wobbled more recently than the standards for tipper-tippee liability. In 1983, the Supreme Court ruled in Dirks v. SEC that tipper-tippee liability requires proof that the tipper be breaching a fiduciary-like duty in passing on the information to the tippee for the tipper’s own personal benefit, and that the tippee knows or should know of that breach. For two decades after Dirks, the law steadily evolved in a way that made the personal benefit aspect easy for enforcers to satisfy. Two kinds became standard: quid pro quos with some pecuniary pay-offs (e.g., kickbacks to the tipper), and “gifts” of information to family members and friends. That increasingly relaxed approach emboldened both criminal prosecutors and the SEC. In a 2012 civil case, SEC v. Obus, the Second Circuit offered a sweeping restatement of all the elements of tipper-tippee liability, some never previously so characterized. Among other things, the Obus framework allowed tippees to be held liable without awareness of the tipper’s alleged benefit.


Potential Rule 10b-5 Liability for Misleading Statements and Omissions

Israel David is partner at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on his Fried Frank memorandum.

In March 2019, the Supreme Court issued its decision in Lorenzo v. SEC, 139 S. Ct. 1094 (2019), in which the Court held that those who disseminate false or misleading statements with the intent to defraud—even if they are not the “maker” of the statement—can be found to have violated subsections (a) and (c) of Rule 10b-5 of the federal securities laws, often referred to as the “scheme liability” subsections of Rule 10b-5. In the wake of Lorenzo, we and other commentators cautioned that Lorenzo could be seen as expanding potential liability for third-party actors and non-speakers who were thought to be outside the ambit Rule 10b-5 under earlier Supreme Court decisions which held that there was no aiding and abetting liability under Rule 10b-5 (Central Bank) and that only the “maker” of a statement can be liable for violations of subsection (b) of Rule 10b-5 (Janus).


Your 20/20 Foresight on Canada’s Proxy Season 2020

Thierry Dorval is a partner and Petra Vrtkova and Charles-Étienne Borduas are associates at Norton Rose Fulbright Canada LLP. This post is based on a Norton Rose memorandum by Mr. Dorval, Ms. Vrtkova, Mr. Borduas, Audrey Bernasconi, and Olivier Moreau-Notebaert.

As we did last year, this post presents our predictions, based on the current governance environment, and our recommendations on issues that should be of importance when preparing for the upcoming proxy season. This post takes into account comments made by representatives of institutional investors and the Autorité des marchés financiers (Quebec’s securities regulator) at a conference held recently in our Montreal office.

Meeting disruption head on

Disruption comes from various sources. This upcoming proxy season, we anticipate issuer disclosure will respond more thoroughly to climate risks and cybersecurity concerns.


SEC Cracks Down on Earnings Management

Neil Whoriskey is partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Whoriskey.

The SEC is taking renewed aim at earnings management, and this time it’s not just improper revenue recognition.

Both in its recent enforcement order against Marvell Technology Group—imposing s $5.5 million fine and a cease-and-desist order—and in its on-going action against Under Armour, [1] the SEC has focused on what, anecdotally, is not a terribly uncommon practice—accelerating (or “pulling in”) sales from a future quarter to the present in order to “close the gap between actual and forecasted revenue.” [2] In both cases, the schemes consisted of offering various incentives, such as “price rebates, discounted prices, free products, and extended payment terms” [3] to entice customers to accept products in the current quarter that they would not need until the next. In an environment of declining sales, these inorganic efforts to meet earnings numbers allegedly misled the market about the direction of the business.


The Case for Individual Audit Partner Accountability

Colleen Honigsberg is an Associate Professor of Law at Stanford Law School. This post is based on her recent article, recently published in the Vanderbilt Law Review.

Theory suggests that regulatory oversight, private enforcement, and reputational risk provide auditors with incentives to perform high-quality work. Yet 2018 provided evidence that accounting scandals remain all too common. From the United States, to the United Kingdom, to South Africa, the accounting profession saw a series of high-profile audit failures. Perhaps even more damaging to the integrity of the profession, it was revealed that KPMG cheated on its regulatory inspections by obtaining confidential information from its primary U.S. regulator, the Public Company Accounting Oversight Board (“PCAOB”), leading to a criminal investigation. And these are hardly isolated incidents: from 2005 to 2016, the PCAOB has found that anywhere from 14 to 33% of the audit opinions it inspected should not have been issued. It is time to ask: Despite the best efforts of Congress, regulators, corporate directors, and investors, why do significant audit failures persist?

In my article The Case for Individual Audit Partner Accountability, published in the Vanderbilt Law Review, I argue that the answer to this question lies in part in the lack of accountability the law currently provides for individual auditors. I explain that the current structure of regulatory oversight, private enforcement, and reputation risk are unlikely to induce socially optimal levels of audit quality, and I suggest that we reconsider the role of reputation. To date, the reputational incentives have focused almost exclusively on the audit firm, but recent disclosures make it possible for us to identify the name of the individual partner leading the audit. Using this information, along with additional information that I suggest regulators should make publicly available, we can establish a market for individual audit partners’ brands—a market that can hold individual auditors responsible for their mistakes. I argue that individual reputational sanctions are more likely to give audit partners optimal incentives for care. Thus, lawmakers, corporate fiduciaries, and investors seeking to improve audit quality should focus on developing a market in the reputational brands of individual audit partners.


Evolving Perspectives on Direct Listings After Spotify and Slack

Greg Rodgers, Marc D. Jaffe, and Benjamin J. Cohen are partners at Latham & Watkins LLP. This post is based on a Bloomberg Law article by Mr. Rodgers, Mr. Jaffe, Mr. Cohen, John Williams, and Michelle Lu.

In a direct listing, a company’s outstanding shares are listed on a stock exchange without a primary or secondary underwritten offering. Existing security holders become free to sell shares on the stock exchange at market-based prices. Since there is no underwritten offering, a direct listing does not require the participation of investment banks acting as underwriters. This means that certain features that are typical of a traditional initial public offering—such as lockup agreements and price stabilization activities—are not present in a direct listing. This article explores certain characteristics and roles involved in this approach to becoming a public company, and incorporates insights from the Spotify and Slack direct listings, which Latham & Watkins worked on and were completed in April of 2018 and June of 2019, respectively.

Why a Direct Listing?

A direct listing can allow companies to achieve several important objectives as part of becoming a public company. Importantly, unlike a traditional IPO, due to regulatory limitations, the direct listing process has not been used by companies to concurrently raise capital; however, as discussed below, companies in need of capital have alternative means of receiving debt or equity investments before or after listing, subject to certain limitations.


CEO Succession Practices: 2019 Edition

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to CEO Succession Practices: 2018 Edition, an annual benchmarking report authored by Dr. Tonello and Gary Larkin of The Conference Board with Professor Jason Schloetzer of the McDonough School of Business at Georgetown University, and made possible by a research grant from executive search firm Heidrick & Struggles.

The Conference Board, in collaboration with Heidrick & Struggles, recently released CEO Succession Practices: 2019 Edition. The report is designed to provide a comprehensive set of benchmarking data and analysis on CEO turnover that can support members of the board of directors and corporate governance professionals in the fulfillment of their succession planning and leadership development responsibilities. It reviews succession event announcements of chief executive officers made at S&P 500 companies in 2018 and the previous 17 years, and it is complemented by results from a 2019 survey of corporate secretaries, general counsel, and investor relations officers on the succession oversight practices of their boards. Drawn from such a review, the following are the key insights for what’s ahead in the field.

CEO Succession Trends (2001–2018)

#MeToo-related departures were a key factor in the 2018 increase of the S&P 500 CEO succession rate. At least five out of 59 registered events of succession (or about 8 percent of the total) were due to misconduct unrelated to financial malfeasance—whether sexual harassment, instances of workplace intimidation or other behaviors the company deemed inconsistent with its core values. They are the dismissals of Martin Anstice at Lam Research, Les Moonves at CBS Corporation, Brian Krzanich at Intel, Brian Crutcher at Texas Instruments, and Steve Wynn at Wynn Resorts. In 2018, those five CEO dismissals related to a #MeToo event represented more than 40 percent of the total number of nonvoluntary departures for that year (12 cases). In comparison, of all CEO successions announced at S&P 500 companies in the 2013-2017 period, only one was attributable to personal conduct unrelated to the company’s operating performance or financial condition (Manuel Rivero of F5 Networks, who resigned in 2015 only after five months on the job).


Corporate Oversight and Disobedience

Elizabeth Pollman is Professor of Law at Loyola Law School. This post is based on a paper by Professor Pollman, forthcoming in the Vanderbilt Law Review. This post is part of the Delaware law series; links to other posts in the series are available here.

Over a decade has passed since landmark Delaware decisions on corporate oversight obligations and with virtually no cases going to trial and resulting in liability, scholars have puzzled over what it means to have the potential for corporate accountability in the fiduciary duty of good faith. Recent decisions in Marchand v. Barnhill and In re Clovis Oncology have raised this question anew, adding to the small number of Delaware cases that have survived motions to dismiss with Caremark claims. In Vanderbilt Law Review’s forthcoming symposium, I offer a two-fold answer to this question—a descriptive theory of the purpose of the obedience and oversight duties in corporate law, and a functional account of how they are applied in practice.

First, state corporate law expresses fidelity to legal compliance through dual requirements of obedience and oversight that are lodged within the duty of good faith and cannot be exculpated. Each can be traced through statutory and doctrinal developments. The obligation of obedience concerns the corporation itself, which under the Delaware General Corporation Law section 101(b) must serve a “lawful purpose,” and its directors, who have fiduciary duties that prohibit them from acting with the intention of violating the law, per the Delaware Supreme Court’s Disney opinion. The obligation of oversight concerns the monitoring function of the board of directors to ensure the legal compliance of actors within the corporation, as the Court of Chancery suggested in Caremark and the Delaware Supreme Court validated in Stone v. Ritter.


Preparing Your 2019 Form F-20

Leo Borchardt and Nicholas A. Kronfeld are partners, and Connie I. Milonakis is counsel at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum.

This post highlights some considerations for the preparation of your 2019 annual report on Form 20-F. As in previous years, we discuss both disclosure developments and continued areas of focus for the U.S. Securities and Exchange Commission (SEC). In addition, we highlight certain U.S.-related enforcement matters and other developments of interest to Foreign Private Issuers (FPIs).

Disclosure Developments for 2019 Form 20-F

There have been a few updates to the Form 20-F requirements this year, including those stemming from the SEC’s mandate under the FAST Act of 2015.

Fast Act Rules

On March 20, 2019, the SEC voted to adopt rules under its FAST Act mandate intended to modernize and simplify public company disclosure, and reduce costs and burdens on public companies while continuing to provide all material information to investors. Please also see our Client Memorandum on this topic. The changes became effective earlier this year and will apply to the 2019 Form 20-F. Among other things, the new rules implement the following changes:


Together but Separate: Private Equity Funds Liability for Portfolio Company Pension Obligations

Rick Giovannelli and Ali U. Nardali are partners at K&L Gates LLP. This post is based on their K&L Gates memorandum.

Private equity sponsors recently won a significant court victory that may result in increased appetite for transactions involving companies with unionized workforces. On November 22, 2019, the United States Court of Appeals for the First Circuit held [1] that the ownership stakes of related but separate private equity (“PE”) funds in a portfolio company will not be aggregated for purposes of determining whether those funds themselves are part of the portfolio company’s “controlled group” and therefore subject to the portfolio company’s union pension liabilities under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).


In a leveraged buyout in early 2007, multiple funds sponsored by Sun Capital Advisers, Inc. (“Sun Capital Funds”) acquired 100% of Scott Brass, Inc. (“SBI”), which had approximately $4.5 million in union pension liabilities. As is increasingly typical in buyout transactions, Sun Capital acquired SBI through multiple funds, which in the aggregate held all of SBI’s ownership interests, although none of the Sun Capital Funds individually owned 80% of SBI. When SBI filed for bankruptcy in late 2008, the union pension fund demanded $4.5 million from the Sun Capital Funds, arguing that the Sun Capital Funds themselves were part of SBI’s “controlled group” under ERISA.


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