David H. Kistenbroker, Joni S. Jacobsen, and Angela M. Liu are partners at Dechert LLP. This post is based on their Dechert memorandum.
Introduction
As companies rapidly expand globally and securities markets become increasingly interconnected, multinational companies must prepare for a new era of global securities litigation. As explained in “Developments in Global Securities Litigation,” a white paper prepared by Dechert last year (“White Paper”)1, this sea change is at the forefront of potential risks for multinational companies. The U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank Ltd. set the stage for the current legal landscape. Morrison extinguished access to U.S. courts for “F-cubed” cases (foreign investors, suing a foreign issuer, trading on foreign exchanges). But since its publication, lower courts have grappled with the scope of its holding and its effects on international law have been far reaching and substantial.
This post serves as an update to the above-mentioned White Paper addressing recent developments. In Part I, we describe recent developments in U.S. actions in a post-Morrison world, where courts continue to struggle with the application of Morrison. Part II reviews the more significant updates to shareholder rights’ litigation in the European Union, Netherlands, Germany, Italy, Spain, Canada, Australia, and Japan. Finally, Part III summarizes key findings, observations, and trends of which issuers should be aware to understand and to best position themselves to actively defend against these developments around the world.
Amendments to the Accelerated Filer and Large Filer Definitions
More from: Daniel Taylor, Joseph Schroeder, Mary Barth, Wayne Landsman
Daniel Taylor is Associate Professor of Accounting at The Wharton School at the University of Pennsylvania. This post is based on a comment letter to the SEC’s Amendments to the SOX 404(b) Accelerated Filer Definition from Professor Taylor; Mary Barth, the Joan E. Horngren Professor of Accounting, Emerita at the Stanford University Graduate School of Business; Wayne Landsman, the KPMG Distinguished Professor of Accounting at the Kenan-Flagler Intranet at the University of North Carolina; and Joe Schroeder, Associate Professor at the Indiana University Kelley School of Business.
We appreciate the opportunity to comment on the Securities and Exchange Commission’s (the “Commission”) proposed Amendments to the Accelerated Filer and Large Accelerated Filer Definitions. Herein we provide comments and analysis relating primarily to the Request for Comments in Sections II.E and III.D of the proposed Amendments (“Proposal”). Our comments relate to the provisions of the Proposal that would eliminate internal control audits required under Section 404(b) of the Sarbanes-Oxley Act for companies with annual revenue less than $100 million.
Part I of this letter provides comment on the central premise of the Proposal. The Commission’s total estimated benefit to companies—$210,000 in cost savings from foregoing internal control audits—is economically small and amounts to less than 0.1% of the average affected company’s equity market value. In contrast, we interpret the evidence in the Proposal as suggesting that the elimination of internal control audits is likely to result in significantly weaker internal controls over the financial reporting system and significantly greater levels of accounting restatements (i.e., poorer financial reporting quality). Thus, the $210,000 cost savings needs to be weighed against the potentially large social costs created by weaker internal controls and elevated levels of accounting restatements.
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