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Federal Securities Law Blog

Information on federal securities laws, news and developments

First conflict mineral report filed on Form SD

Posted in Corporate Governance, SEC News

On April 24, 2014, Siliconware Precision Industries Co., Ltd. (Siliconware) earned the distinction of being the first registrant to file a conflict minerals report on Form SD. Here are links to Siliconware’s Form SD and its conflict minerals report. Although the filing deadline is not until June 2, 2014, this example gives registrants a glimpse of what conflict minerals disclosure might look like.

Siliconware reported that its due diligence efforts showed a portion of its products to be “DRC conflict undeterminable” and the remainder to be “DRC conflict free,” as those terms are defined in the Exchange Act. Siliconware chose to use these terms, which were prescribed in the conflict minerals rules, notwithstanding the fact that the requirement to use those specific terms was recently struck down by U.S. Court of Appeals on First Amendment grounds.

Registrants should continue to monitor conflict minerals reports of other registrants as they are filed in order to get a sense of market practice for the conflict minerals disclosure.

U.S. Appeals Court Strikes Down Part of SEC Conflict Minerals Rules, Upholds Key Parts

Posted in Corporate Governance, SEC News

On April 14, 2014, the United States Court of Appeals for the District of Columbia Circuit issued its ruling in the challenge to the SEC’s conflict minerals rules. The court struck down the requirement that an issuer describe its products as not “DRC conflict free” because it violates the First Amendment by compelling speech by the issuer. However, the Court upheld other key parts of the conflict minerals rules, including without limitation the lack of a de minimis exception, the country of origin due diligence requirement and the extension of the rules to issuers that “contract to manufacture” products.

The court concluded that compelling an issuer to describe their products as not “DRC conflict free,” is not narrowly tailored and, therefore, would not survive an immediate scrutiny review (although the court declined to state whether strict or immediate scrutiny would apply). However, the court did suggest that it would be permissible for the SEC to require an issuer to describe the conflict minerals status of its products using the issuer’s own language rather than the specific language required by the statute or the rules. Continue Reading

Substantial risk of forfeiture guidance clarifies when Section 16 short-swing profit liability can defer taxation of equity compensation awards

Posted in Compensation Matters, Corporate Governance

Legend had it at my law school that one day, a lost student walked into a torts class and asked the professor if this class was wills, trusts, and estates. The torts professor replied, “We haven’t gotten that far yet.” A dry sense of humor on the professor’s part? Perhaps. His point, however, was that the law can be a seamless web, with one area of law often having an impact on another. This point often is true with respect to the tax and securities laws.

We blogged previously that the IRS and Treasury issued final regulations under Code Section 83 to “clarify” the definition of “substantial risk of forfeiture” with respect to restricted stock (and other property) grants. One of the clarifications was that transfer restrictions, in and of themselves, do not constitute a substantial risk of forfeiture. For taxation to be deferred on restricted stock grants, the stock must be both non-transferrable and subject to a substantial risk of forfeiture. An example might help illustrate this point. Suppose that a company grants its CEO restricted stock that vests on the fifth anniversary of the date of grant, provided that the CEO has been continuously employed through that date. Also suppose that the CEO satisfies this vesting condition, but on the vesting date, the company’s insider trading policy prohibits the CEO from selling the shares for several months. The CEO would be taxed on the value of the shares on the vesting date, despite the fact that the CEO is unable to sell the shares.

The Code Section 83 regulations, both before and after the clarification, contain an important exception to the non-transferability rule. This exception arises mostly with stock option grants, rather than restricted stock grants, even though restricted stock grants are more often impacted by Code Section 83. That exception is the subject of this blog. Continue Reading

Corporate law must reads — excerpts from the Federal Securities Law Blog

Posted in Corporate Governance, Proxy Issues, SEC News, Whistleblower Issues

In the ever-changing world of corporate law, it’s important to have trusted resources that can keep an eye out for how the relentless evolution of regulation and legislation can affect business operations, governance, strategy and growth. Our goal is for the Federal Securities Law Blog, and the Porter Wright attorneys who contribute to it, to be one of those resources. We invite you to read our most recent e-book, which provides updates about recent federal rules changes that can have an impact on your business. Download the Corporate Must Reads e-book.

Recent Delaware case reminds of importance of litigation expense advancement provisions in organizational documents

Posted in Corporate Governance, Delaware News

Much to the chagrin of corporate lawyers, there are still some companies that do not have provisions in their articles of incorporation, bylaws or operating agreements that provide for advancement of litigation expenses to directors and officers. The recent case of White v. Kern, No. 7872-VCG (Del. Ch. Jan. 24, 2014) (Transcript) illustrates that courts may prohibit the advancement of expenses to defendant directors and officers in the absence of these provisions. Continue Reading

Porter Wright to hold roundtable about “friend of the court” briefs

Posted in Porter Wright News

From time to time we share news about educational opportunities that may be of interest to our subscribers. Members of Porter Wright’s Appellate and Supreme Court practice will hold a roundtable April 8 to discuss the benefits of amicus advocacy before the Ohio Supreme Court.

Too often, the Ohio Supreme Court decides issues that affect an industry statewide without first hearing from the industry itself. Trade associations and companies can address this issue by filing “friend of the court” briefs. To learn more about how your organization can be part of this process, join Kathleen Trafford, Brad Hughes and Dennis Hirsch for a breakfast briefing. Using a roundtable format, they plan to cover the benefits of amicus advocacy, strategies for effective amicus advocacy and the rules governing “friend of the court” briefs.

Schedule
Tuesday, April 8, 2014
7:30 a.m. – 8 a.m. — Registration and breakfast
8 a.m. – 9 a.m. — Roundtable discussion

Location
Porter Wright
41 S. High St., 29th Floor
Columbus, OH 43215

Register online  for this complimentary event.

“Substantial risk of forfeiture” clarification impacts restricted property (stock) grants

Posted in Compensation Matters, Corporate Governance

As complex as the Internal Revenue Code is, many people still assume that the rules contain a great deal of specificity and precision, perhaps because of the mathematical nature of calculating taxes. They often are surprised to learn that the Code leaves a lot of room for discretion and subjectivity. A great example of this subjectivity is Code Section 83’s regulations governing the taxation of restricted stock (and other property). The underlying stock subject to these grants generally does not become taxable to the employee until the stock no longer is subject to a “substantial risk of forfeiture.” As you might guess, whether a risk is “substantial” can be quite a subjective determination.

In that backdrop, the IRS and Treasury recently issued final regulations that clarify the definition of substantial risk of forfeiture for purposes of Code Section 83. The final regulations will have the most direct impact on employers who have granted awards of restricted stock or other restricted property on or after Jan. 1, 2013. That is because the regulations stress the need for these agreements to contain a service or performance-based vesting condition that is not substantially certain to be satisfied. The retroactive effective date of may seem strange at first. It is the same effective date that the IRS provided in proposed regulations from May 2012. The good news is that the final regulations generally offer “clarifications” of the former regulations rather than new guidance. Still, it is important that affected employers review their restricted stock arrangements and determine whether they should take additional action. Continue Reading

FINRA invites comment on rules that will govern limited corporate financing brokers

Posted in FINRA, General Business News

FINRA (the Financial Industry Regulatory Authority) is soliciting public comment on a proposed rule set (LCFB Rule 14-09) for firms that meet the definition of “limited corporate financing broker” (LCFB). An LCFB is a firm that engages solely in any one or more of the following activities:

  • Advising an issuer, including a private fund, concerning its securities offering or other capital raising activities
  • Advising a company regarding its purchase or sale of a business or assets or regarding its corporate restructuring, including a going-private transaction, divestiture or merger;
  • Advising a company regarding its selection of an investment banker
  • Assisting in the preparation of offering materials on behalf of an issuer
  • Providing fairness opinions
  • Qualifying, identifying or soliciting potential institutional investors

The rationale behind LCFB Rule 14-09 is that while LCFB firms may receive transaction-based compensation as part of their services, they do not engage in many of the types of activities typically associated with traditional broker-dealers. An LCFB firm would be prohibited from maintaining customer accounts, handling customer funds or securities, exercising investment discretion on behalf of a customer, or engaging in proprietary trading of securities or market-making activities. Continue Reading

U.S. Supreme Court extends whistleblower protection to employees of a public company’s private contractors

Posted in Sarbanes-Oxley Act, Whistleblower Issues

In a 6-3 decision, the U.S. Supreme Court decided earlier this week that whistleblower protection under the Sarbanes-Oxley Act of 2002 includes employees of a public company’s private contractors and subcontractors. In Lawson v. FMR LLC, the court, in a majority opinion written by Justice Ginsburg, concluded that extending protection to employees of a contractor was consistent with the purpose and intent of Sarbanes-Oxley: to protect investors and restore trust in financial markets.

As background, plaintiffs Lawson and Zang separately initiated lawsuits against their former employer, a privately held company that provided advisory management services to the Fidelity family of mutual funds. The mutual funds were not parties to the action because, as is common in the mutual fund industry, the Fidelity funds had no employees. Instead, the funds contracted with investment advisors like FMR to handle the day-to-day operations of the funds. After they were terminated, Lawson and Zang alleged that they were fired in retaliation for raising concerns about cost accounting methodologies and inaccuracies in SEC registration statements for the funds. FMR sought to have the actions dismissed, but those motions were rejected by the trial court.

In a 2-1 decision, the U.S. First Circuit Court of Appeals reversed the trial court and found that the whistleblower protections of Sarbanes-Oxley were available only to employees of the public companies, and did not cover a contractor’s employees.

In deciding that whistleblower protection extended to contractors of public companies, the Supreme Court focused on a narrow provision of Section 1514A which provides that “no company … or any … contractor … of such company may [retaliate] against an employee … because of [whistleblowing].” In reaching its decision, the court focused on a plain reading of the statute and concluded that “A contractor may not retaliate against its own employees for engaging in protected whistleblowing activity.” Continue Reading

Appraisal actions in M&A transactions are increasing in frequency

Posted in Corporate Governance

Stephen M. Davidoff wrote an interesting article in the New York Times that notes the ten-fold increase in the value of appraisal rights actions over the last 10 years and describes the new trend of hedge funds purchasing shares in target companies following the announcement of an M&A transaction for the sole purpose of exercising appraisal rights with respect to the purchased shares.

The increase in frequency of appraisal rights actions and the presence of aggressive hedge funds as players in the appraisal process should serve as a reminder to both buyers and publicly traded target companies in M&A transactions that your transaction process and price are being watched carefully not only by your own shareholders, but also by other opportunistic investors looking to capitalize on a weak transaction process or price. This reinforces the importance for buyers and target companies to conduct a careful and conflict-free transaction process to deter the initiation of appraisal actions and to defend against any appraisal actions that may be brought by shareholders.