Federal Securities Law Blog : Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

On May 7, 2013, Timken Co. announced that its shareholders approved a nonbinding proposal from activist shareholders (Relational Investors and Calstrs—California State Teachers' Retirement System, who together own 7.28% of the Company) to spin-off the Company's steel business into a separate entity. The Company's Board had opposed the proposal.

The Company said that 47% of outstanding shares (53% of the shares voted) were voted in favor of the plan to create a separate company, while 41% of outstanding shares (47% of the shares voted) voted against the proposal.

In a joint statement released on May 7, 2013, Relational and Calstrs stated that Timken's Board "must now acquiesce to the will of the shareholders consistent with their fiduciary duties."  On the same date, Chairman Tim Timken Jr. stated, "We appreciate the thoughtful feedback we've received from our shareholders on the spin-off proposal as well as their broader input on corporate governance and capital allocation. The board will carefully evaluate the views of our shareholders and announce next steps within 45 days."

The real work for the Timken Board now begins.  The Board will need to work through their fiduciary duties to act in the best interests of all their shareholders and determine an appropriate course of action.  Merely acquiescing to shareholders' favoring the nonbinding proposal will not necessarily fulfill their fiduciary obligations.  Prior to the vote, as part of their fiduciary obligations, the Board determined that the proposal and subsequent spin-off were not in the best interests of the shareholders.  The real question for them now is, other than the vote which was by no means overwhelming, what has changed?  It is these types of situations that test the true mettle of a director.  Timken's Board is between a rock and a hard place and there are no easy answers. 

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The real estate website company Zillow, Inc. announced it would use Twitter and Facebook to field questions on its first quarter earnings call.  The company claims that it is the first to take questions in this manner, but will continue to take questions in the traditional way - from those dialed into the call. This announcement comes in the wake of the SEC relaxing the rules related to the use of social media to comply with Regulation FD. 

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As discussed in a post on April 2, 2013, the SEC issued a report on that date that contained guidance on the use of social media to publicly disclose material information under Regulation FD.

The report centered on the SEC investigation of Netflix and Netflix CEO, Reed Hastings, and whether Regulation FD was violated when Mr. Hastings disclosed on his Facebook page favorable news about the number of hours that Netflix streamed in a month. The SEC decided not to bring enforcement action against Netflix or Mr. Hastings, making recognition that there has been market uncertainty about the application of Regulation FD to social media.

Regulation FD provides that a public company, or anyone acting on its behalf, may not disclose material, nonpublic information to market professionals or securityholders when it is reasonably foreseeable that someone may trade on the basis of the information, unless such information is simultaneously disclosed to the public in a method reasonably designed to provide broad, non-exclusionary distribution of information to the public.

It is important to remember that whether disclosures comply with Regulation FD must be evaluated on a case-by-case basis. The SEC stated in the report that the disclosure of material nonpublic information on the personal social media site of a corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to satisfy Regulation FD. The SEC explained that this is true regardless of the number of subscribers. The report focused on the fact that a company must notify the market about which forms of communication, including the social media channels, it intends to use for the dissemination of material nonpublic information.

The SEC expects issuers to rigorously examine the factors outlined in its 2008 website guidance that are taken into account when determining whether a particular channel is a recognized channel of distribution for communicating with investors. A company should ask itself several questions. Is the proposed channel of distribution one that is practical for investors to monitor? Do investors need “lead time” to register to use the channel of distribution? Is the company comfortable using only that channel of distribution for communications to investors? In any event, the company must be confident that the channel of distribution will provide for broad, non-exclusionary distribution of information to the public and it must provide adequate advance notice of the use of such channel to its investors. As best practices continue to evolve, companies should strongly consider continuing to use press releases, conference calls, and current reports on Form 8-K in addition to any social media channels to distribute material nonpublic information.

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The SEC issued a report today that clarifies that companies may use social media outlets to make key announcements in compliance with Regulation FD (Fair Disclosure) so long as investors have previously been alerted about which social media outlet(s) will be used to disseminate such information.

Regulation FD requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-selectively.  Companies should review the SEC guidance issued in 2008 regarding the dissemination of information via websites, as that guidance also applies to questions relating to communication through social media.

The SEC report relates to an inquiry by the Division of Enforcement into a post made by Netflix CEO, Reed Hastings, on his personal Facebook page that Netflix's monthly online viewing had exceeded one billion hours for the first time.  The SEC did not initiate enforcement action or allege wrongdoing by Hastings or Netflix, recognizing that there has been market uncertainty about the application of Regulation FD to social media.

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Last week, the SEC reached a settlement with CR Intrinsic Investors, LLC, which tore up the record books on insider trading cases.  CR Intrinsic, an affiliate of SAC Capital, agreed to pay over $600 million to settle charges of using nonpublic information about clinical pharmaceutical trials to earn profits of over $274 million.  

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State of Illinois Charged With Misleading Muni Bond Investors

The SEC charged the state of Illinois with failing to inform municipal bond investors of potential issues with its pension funding plan. The state failed to disclose that its pension obligations were at risk of “structural underfunding” issues associated with the state’s statutory funding plan, and misrepresented the overall risk associated with the pension’s financial condition.  Illinois offered $2.2 billion in bonds during 2005 to 2009.

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Mark Cuban Insider Trading Case Set For Trial

Mark Cuban, the charismatic owner of the NBA’s Dallas Mavericks, lost his attempt to dismiss the SEC’s insider trading case against him, sending it to trial. The district court judge in Dallas said the ruling was “in some respects a close one.” Mr. Cuban is charged in connection with a 2004 sale of his stock in Mamma.com, allegedly after learning non-public information about an upcoming equity offering.  Read the original complaint here.

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Last weekend, voters in Switzerland strongly backed a plan giving shareholders unprecedented authority over executive pay.  The Minder Initiative, named after the Swiss businessman who created it, was supported by approximately 68% of Swiss voters.  The measure gives shareholders of Swiss companies the power to approve or block proposed compensation for executives and directors.

Novartis AG and UBS AG are two of the multinational companies listed in Switzerland that will be affected by the Minder proposals.  The proposals now go to the government for legislative drafting.  Implementation is not expected until 2014 at the earliest.

Switzerland has provided a supportive environment for Mr. Minder's ideas.  In 2008, the Swiss government was forced to bail out UBS, the country's largest bank.  Also lending support to the success of the Minder Initiative was Daniel Vasella, the departing chairman of Novartis.  He was to receive 72 million Swiss francs ($76 million) over six years as part of his exit.  Novartis went back to the drawing board on Mr. Vasella's package after it created backlash among the Swiss people.

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This month the SEC released a handbook for foreign companies interested in registering and issuing securities on U.S. exchanges. The handbook, titled “Accessing the U.S. Capital Markets – A Brief Overview for Foreign Private Issuers,” explains the eligibility requirements for “foreign private issuer” status and the unique registration and reporting rules that apply to foreign companies.

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Second Circuit Hears Oral Argument on SEC-Citigroup Settlement

Last November, a federal judge in New York rejected a proposed settlement between the SEC and Citigroup in connection with charges of misleading investors at the beginning of the financial crisis. This week the Second Circuit Court of Appeals heard oral arguments in the case, which saw the SEC and Citigroup join forces against the District Court. Jim Hamilton has a good analysis of the proceedings here. 

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On February 15, 2013, the Securities and Exchange Commission ("SEC") issued a press release announcing that it had obtained an emergency court order to freeze assets in a Swiss-based trading account that was used to gain more than $1.7 million from insider trading activities in connection with yesterday's announced acquisition of H.J. Heinz Company.

In a complaint filed in Federal Court in Manhattan, the SEC alleges that, prior to any public disclosure of Berkshire Hathaway's and 3G Capital's agreement to acquire Heinz for approximately $28 billion, unknown traders purchased call options on the day prior to the announcement of the merger.  The announcement of the merger caused Heinz’s stock to increase nearly 20 percent on substantially increased trading volume from the prior day, allowing the traders to realize substantial gains from their trades.  The SEC further alleges that the traders were in possession of material nonpublic information about the Heinz acquisition when they purchased out-of-the-money Heinz call options prior to the announcement. Additionally, these trades were made through an account that had no history of trading Heinz securities during the last six months, and on in a period where there was minimal trading in activity in Heinz call options.

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The Securities and Exchange Commission could propose rules requiring public company disclosure of spending on political activities as early as April 2013, according to the Unified Agenda of Federal Regulatory and Deregulatory Actions. The Unified Agenda is the official list of proposed regulatory activities throughout the Federal Government. The proposal listed in the Unified Agenda states only that the Division of Corporation Finance is considering whether to recommend that the SEC issue a proposed rule to require that public companies provide disclosure to shareholders regarding the use of corporate resources for political activities.

Investor activism on corporate political spending has increased significantly since the Supreme Court’s 2010 ruling in Citizens United v. FEC allowed corporations to make unlimited independent campaign expenditures for political candidates. In 2011, a group of corporate and securities professors referred to as the Committee on Disclosure of Corporate Political Spending filed a petition with the SEC in support of a rule requiring public company disclosure of political spending.

Political spending proposals offered by shareholders range from proposals that simply require disclosure to more restrictive proposals that prohibit spending (“stop spending”) or require shareholder approval of spending (“say-on-spending”).  Many companies have voluntarily adopted policies requiring disclosure of political spending, including over half of the S&P 100 (although the policies vary significantly).

If the SEC does offer a proposed rule, it will likely be opposed by business trade associations that spend money to influence political campaigns, such as the U.S. Chamber of Commerce.
 

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On January 18, 2013, the SEC Division of Corporation Finance issued an updated Financial Reporting Manual.  The Manual was updated for issues related to significance testing for related businesses, auditor responsibility for cumulative period from inception amounts, PCAOB requirements for auditors of non-issuer financial statements, and other changes.  A full summary of the changes in the updated Manual can be found here.

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SEC Settles with Pond Securities In Market Manipulation Case

Four defendants - Andreas Badian, Jeffrey Graham, Pond Securities, and Ezra Birnbaum - agreed to settle charges of market manipulation, the SEC announced this week. In a complaint filed in April 2006, the SEC alleged that the defendants manipulated the stock of Sedona Corporation and violated record-keeping rules by falsely creating trade tickets. Without admitting or denying the allegations, the defendants agreed to disgorgement of profits and civil penalties of over $700,000. 

Read the SEC release here.

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