Yearly Archives: 2024

SEC Enforcement – Top Four Developments from July 2024

Posted by Adam Aderton, Elizabeth Gray, and Kristina Littman, Willkie Farr & Gallagher LLP, on
Thursday, September 12, 2024
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Adam Aderton, Elizabeth P. Gray, and A. Kristina Littman are Partners at Willkie Farr & Gallagher LLP. This post is based on a Willkie memorandum by Mr. Aderton, Ms. Gray, Ms. Littman, Michael J. Passalacqua, and Erik Holmvik.

In the last days of June and in July, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) brought a number of new litigated actions across a broad swath of hot-button areas, including crypto and activist short selling. July also saw significant developments in the closely watched SolarWinds litigation, which has the potential to reshape the SEC’s approach to cybersecurity enforcement. In this alert, we briefly summarize the top four securities enforcement and litigation developments from the last month, including:

  • An action against an activist short seller related to his publishing of allegedly misleading research reports;
  • The dismissal of many of the SEC’s claims in the SolarWinds litigation;
  • The SEC’s first litigated action relating to the operation of a liquid staking protocol; and
  • A significant penalty imposed in an action brought against a bank and several of its senior officers for broad compliance and oversight failures.

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Trade Agencies’ New Corporate Governance Toolkit

Posted by Kathleen Claussen (Georgetown Law), on
Thursday, September 12, 2024
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Kathleen Claussen is a Professor of Law at Georgetown Law. This post is based on her recent article forthcoming in the Harvard International Law Journal.

A novel form of corporate regulation is on the rise. The “trade police,” as my article calls them, are the front-line bureaucrats who enforce the laws surrounding cross-border business.  Their efforts determine whether billions of dollars of goods and services enter or exit the United States, and, in the last five years, lawmakers have overhauled their functions dramatically. The new trade policing regime is a corporate accountability system unlike its predecessor government-to-government regime for which the World Trade Organization served as the core.  Private actors are increasingly under the microscope of a broad swath of innovative deployments of government action: detainment of goods, financial penalties, export constraints, extensive reporting requirements, and import bans.

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Delaware Decision Provides Guidance for Drafting Earnout Provisions

Posted by Gail Weinstein, Philip Richter, and Steven Epstein, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Thursday, September 12, 2024
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Gail Weinstein is a Senior Counsel, Philip Richter is a Partner, and Steven Epstein is a Managing Partner at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Epstein, Steven Steinman, Maxwell Yim, and Erica Jaffe, and is part of the Delaware law series; links to other posts in the series are available here.

In Medal v. Beckett Collectibles (Aug. 22, 2024), the Delaware Court of Chancery, at the pleading stage of litigation, declined to dismiss claims that Beckett Collectibles, LLC, by failing to make certain earnout payments, breached the Stock Purchase Agreement pursuant to which it had acquired Due Dilly Trilly, Inc. (“DDT”). While the decision focused on a number of procedural issues, the court’s brief discussion of the substantive earnout claims provides guidance for avoiding ambiguity in provisions relating to (i) the acceleration of earnout payments under specified circumstances and (ii) a requirement that the parties negotiate in good faith to resolve earnout disputes before bringing litigation.

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Proxy Season Global Briefing: Board of Directors

Posted by Brianna Castro, Chris Rushton, and Naoko Ueno, Glass, Lewis & Co, on
Wednesday, September 11, 2024
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Brianna Castro and Naoko Ueno are Vice Presidents of Research and Chris Rushton is a Senior Director at Glass, Lewis & Co. This post is based on a Glass Lewis memorandum by Ms. Castro, Mr. Rushton, Ms. Ueno, and Dimitri Zagoroff.

The board of directors is at the heart of corporate governance – and as the responsibilities associated with the board expand to cover topics like ESG and cybersecurity risk oversight, as well as destabilizing market conditions and changing regulatory requirements, so do investor expectations. While average support for director elections remained high in most markets, the 2024 proxy season saw the board’s composition and performance subject to a wider scope of scrutiny than ever.

In the third installment of our Proxy Season Global Briefing, we provide a rundown of headlines and key trends relating to director elections and board composition from around the globe. You can also access the full Briefing here, or via the content libraries on Viewpoint and Governance Hub.

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Partisan bias in securities enforcement

Posted by Reilly S. Steel (Columbia Law School), on
Wednesday, September 11, 2024
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Reilly Steel is an Academic Fellow and Lecturer in Law at Columbia Law School. This post is based on his article in the Journal of Law, Economics, and Organization.

Accusations that some federal agency has acted with partisan bias in enforcing the law—treating partisan allies more favorably than enemies, or enemies more harshly than allies—are commonplace in American politics today. Critics have leveled such charges at the Department of Justice, the Federal Bureau of Investigation, the Internal Revenue Service, and even the independent agency that regulates the nation’s securities markets, the Securities and Exchange Commission or SEC. Moreover, these accusations have landed on officials from both sides of the aisle. When Donald Trump was President, critics accused the Department of Justice of going easy on President Trump’s political allies, as reflected by the dropping of charges against Michael Flynn and weakening of the sentencing recommendation for Roger Stone. After Joe Biden became President and Republicans took the majority in the House, congressional Republicans formed a “Select Subcommittee on the Weaponization of the Federal Government” to investigate alleged partisan bias against Republicans.

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Recent Trends in Parallel Derivative Action Settlement Outcomes

Posted by Tijana Brien, Anne Bigler, and Sarah Topol, Cooley LLP, on
Wednesday, September 11, 2024
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Tijana Brien is a Partner and Anne Bigler and Sarah Topol are Associates at Cooley LLP. This post is based on their Cooley memorandum.

A new report by Cornerstone Research, a top consulting and expert testimony firm, highlights recent trends in settlements of derivative lawsuits brought in parallel to securities class actions.

Derivative lawsuits refer to lawsuits brought by shareholders on behalf of a company. Often, derivative actions take the form of “follow-on” lawsuits to securities class actions – meaning they are based on the same underlying allegations in the securities class actions concerning the same purported false or misleading statements, but allege resulting injury to the corporation or related breaches of fiduciary duty arising out of the conduct alleged in the class action.

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Recap of the 2024 Say on Pay Season

Posted by Linda Pappas, Perla Cuevas, and Jose Lawani, Pay Governance LLC, on
Tuesday, September 10, 2024
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Linda Pappas is a Principal, and Perla Cuevas and Jose Lawani are Consultants at Pay Governance LLC. This post is based on their Pay Governance memorandum.

Key Takeaways

  • The number of failed S&P 500 SOP proposals (n=4) is tied with an all-time low previously observed in 2015
  • Improvement in 1- and 3-year TSR performance ending in FY2023 compared to the prior period TSR performance may be a contributing factor to the increase in shareholder approval rates of executive pay
  • 2024 ISS opposition to SOP proposals is also at an unprecedented low, while Glass Lewis SOP “against” rates have returned to historical norms after a rise in 2023

Pay Governance has compiled information on Say on Pay (SOP) outcomes and related total shareholder returns (TSR) for S&P 500 companies since the dawn of the SOP era, which dates to the 2011 proxy season. Based on our analysis of these data, this article places into context the recent results of the 2024 SOP season compared to historical trends. We find that companies have had greater success in the current SOP season, with ISS opposition to SOP proposals and the number of companies failing SOP at record lows.

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Firm Performance Pay as Insurance against Promotion Risk

Posted by Alvin Chen (Stockholm School of Economics), on
Tuesday, September 10, 2024
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Alvin Chen is an Assistant Professor of Finance at the Stockholm School of Economics. This post is based on his article published in The Journal of Finance.

Conventional wisdom suggests that workers should neither be rewarded nor punished for outcomes beyond their individual control. Yet, non-executive workers routinely receive performance-based pay linked to uncertain firm outcomes, such as the firm’s stock price or total revenue (e.g., Kruse, Blasi, and Park (2010)). Standard economic theory argues that such pay cannot provide meaningful incentives due to the free-rider problem—after all, it is unlikely that an individual non-executive worker believes their personal effort significantly alters the overall firm outcome. From this perspective, performance pay tied to uncertain firm outcomes seems counterintuitive, as it imposes risk on workers for little apparent benefit. In a recent article, I argue that when workers compete for promotions, such pay actually serves as a form of insurance.

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SEC Continues Focus on Off-Channel Communications

Posted by Tami Stark, Claudette Druehl and Robert DeNault, White & Case LLP, on
Tuesday, September 10, 2024
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Tami Stark is a Partner, Claudette Druehl is a Counsel, and Robert DeNault is an Associate at White & Case LLP. This post is based on their White & Case memorandum.

On August 14, the U.S. Securities and Exchange Commission (“SEC”) announced yet another wave of enforcement actions related to widespread “off-channel communications,” charging an additional 26 firms with failing to maintain employee communications on personal devices which related to the firms’ business. [1] The new settlements add nearly $400 million to the billions in civil penalties that the SEC has collected from more than 50 firms over the last few years for recordkeeping failures related to off-channel communications. [2]

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Rewriting the Rules for Corporate Elections

Posted by Ben Bates (Harvard Law School), on
Monday, September 9, 2024
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Ben Bates is a Research Fellow at the Harvard Law School Program on Corporate Governance. This post is based on his recent paper.

For the last decade and a half, boards of directors have been gradually rewriting their companies’ election bylaws. Specifically, boards have gradually added more and more disclosure requirements that shareholders must meet in order to nominate alternative board candidates. These changes have made it more costly for shareholders, such as activist hedge funds, to launch election contests. Boards have also reserved to themselves the power to unilaterally reject nominations made by shareholders who do not meet these requirements. If a board improperly rejects a shareholder’s nomination, the shareholder’s only recourse is to challenge the board’s decision in court.

This large-scale rewriting of election bylaws—which are commonly referred to as “advance notice bylaws” (ANBs)—began with a largely unnoticed wave of amendments around the time of the Financial Crisis, and it continued without fanfare for more than a decade. That changed in 2022 when the health-tech company Masimo Corporation adopted ANB amendments in the face of an activist threat that were so onerous that they were all but impossible to comply with. Masimo’s bold amendments elicited the praise and scorn of various academics and pages upon pages of law firm memos. It also earned Masimo a lawsuit in Delaware, filed by hedge fund activist Politan Capital. The lawsuit was ultimately resolved when Masimo agreed to walk back its controversial amendments.

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