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
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
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.
Earlier this month, the Securities and Exchange Commission (SEC) issued a no-action letter indicating the staff of the Division of Trading and Markets would not recommend enforcement action if an “M&A broker” were to engage in the transfer of the ownership and control of a privately held company through the purchase, sale or transfer involving securities or assets of the company, to a buyer who will actively operate the company or the business conducted with the assets of the company, without registering as a broker-dealer.
An M&A broker may not:
- have the ability to bind a party to an M&A transaction described above;
- provide financing for the M&A transaction;
- have custody, control or possession or otherwise handle funds or securities issued or exchanged in the M&A transaction; or
- facilitate an M&A transaction with a group of buyers if the group was formed with the assistance of the M&A broker.
The buyer in the M&A transaction may not be a passive investor. The buyer must acquire control and actively operate the company or the business conducted with the assets of the company. Control may be acquired through the ownership of securities, by contact or otherwise. Control is presumed to exist if the buyer or group of buyers has the right to vote 25% or more of a class of voting securities or in the case of a partnership or limited liability company, has the right to receive upon dissolution or has contributed 25% or more of the capital.
For purposes of the no-action letter, a privately held company is a company that does not have any class of securities registered or required to be registered with the SEC under the Exchange Act or is required to file periodic information, documents or reports under the Exchange Act. There is no size limitation with respect to a privately held company under the no-action letter.
The no-action letter is limited to broker-dealer registration under the federal securities laws and does not preempt or otherwise override state laws. In addition, HR 2274 is under consideration by the U.S. Senate, after being unanimously passed by the U.S. House of Representatives, which would exempt M&A brokers from registration as a broker-dealer. Certain provisions of HR 2274 are contrary or inconsistent with the SEC no-action letter, and the SEC would be required to revise the conditions and prohibitions set forth in the no-action letter if HR 2274 were to be enacted into law.
The Federal Trade Commission (FTC) recently announced the annual changes to the notification thresholds for filings under the Hart-Scott-Rodino Antitrust Improvements Act (HSR) as well as certain other values under the HSR rules.
As background, the HSR Act requires that acquisitions of voting securities or assets that exceed certain thresholds be disclosed to U.S. antitrust authorities for review before they can be completed. The “size-of-transaction threshold” requires that the transaction exceeds a certain value. Under certain circumstances, the parties involved also have to exceed “size-of-person thresholds.” This year’s values, which are adjusted annually based on changes in the GNP, take effect in mid-to-late February 2014. The FTC also adjusted the safe harbor thresholds that govern interlocking directorates in competing companies.
The most important change is that the minimum size-of-transaction threshold will increase from the current $70.9 million to $75.9 million. The size-of-person thresholds will also increase as follows.
- For transactions valued between $75.9 million and $303.4 million, one party to the transaction must have $15.2 million in sales or assets and the other party must have $151.7 million in sales or assets, as reported on the last regularly prepared balance sheet or income statement.
- For transactions valued at greater than $303.4 million, no size-of-person threshold must be met to require an HSR filing.
The filing fee thresholds have similarly increased as follows.
|Filing Fee||Transaction Value
|$45,000||$75.9 to $151.7 million
|$125,000||$151.7 to $758.6 million
|$280,000||$758.6 million or greater
Section 8 of the Clayton Act generally prohibits one person from serving as a director or officer of two competing corporations if two thresholds are met – one relates to the companies’ profitability and one relates to the amount of competitive sales between the companies. The statute requires the FTC to revise these thresholds annually, also based on changes to the GNP.
Effective immediately, only companies with capital, surplus and undivided profits aggregating more than $29,945,000 are covered by Section 8, and a violation can be found only if the competitive sales of each company are $2,994,500 or greater.
I wanted to take a moment to share another interesting article from our litigation colleague, Brodie Butland. In late November, I shared Brodie’s article “The Case Influencing the Future of Arbitration,” which discusses BG Group PLC v. Republic of Argentina — an international arbitration case that has the potential to affect the practice of arbitration, international investment and the standing of the United States as a premier international forum for arbitration.
On Dec. 2, 2013, the U.S. Supreme Court heard oral arguments for the case. Though the decision will not be rendered until later this year, the oral argument revealed much about the justices’ views of the case. In a follow-up to his previous article, Brodie discusses what he believes to be the key takeaways from the oral argument.
Yesterday, proxy advisory firm ISS released its 2014 proxy voting guidelines, effective for shareholder meetings held on or after Feb. 1, 2014. ISS positions on some topics continue to evolve. Below are some notable differences from the 2013 Guidelines:
When determining votes on director nominees, four fundamental principles continue to apply: (1) accountability; (2) responsiveness; (3) independence; and (4) composition (last year “composition” was referred to as “competence”). The description of “independence” is more robust than last year, including a statement that “the chair of the board should ideally be an independent director,” which is not surprising given that ISS has previously supported shareholder proposals requiring an independent chair.
In 2013, ISS recommended withholding votes for directors if the board failed to act on a shareholder proposal that received the support of a majority of the shares outstanding the previous year. For 2014, ISS will recommend voting case-by-case in that scenario and will consider various factors including the subject matter of the proposal and the rationale provided in the proxy statement for the level of implementation.
Finally, ISS has expanded on the factors it will consider in determining how to vote on proposals to recoup incentive cash or stock compensation made to senior executives when the calculations turn out to be based on erroneous figures. Such factors include consideration of the rigor of the policy and how and under what circumstances compensation is subject to the clawback.
The editors at the Corporate Governance & Social Responsibility blog brought our attention to a recent academic paper from The Ohio State University Moritz College of Law titled “Shareholder Activism as a Corrective Mechanism in Corporate Governance.” In the paper’s abstract, authors Paul Rose and Bernard Sharfman write:
Under an Arrowian framework, centralized authority and management provides for optimal decision making in large organizations. However, Arrow also recognized that other elements within the organization, outside the central authority, occasionally may have superior information or decision making skills. In such cases, such elements may act as a corrective mechanism within the organization. In the context of public companies, this article finds that such a corrective mechanism comes in the form of hedge fund activism, or more accurately, offensive shareholder activism.
Offensive shareholder activism exists in the market for corporate influence, not control. Consistent with a theoretical framework where the value of centralized authority must be protected and a legal framework in which fiduciary responsibility rests with the board, authority is not shifted to influential but unaccountable shareholders. Governance entrepreneurs in the market for corporate influence must first identify those instances in which authority-sharing may result in value-enhancing policy decisions, and then persuade the board and/or other shareholders of the wisdom of their policies so that they will be permitted to share the authority necessary for the policies to be implemented. Thus, boards often reward offensive shareholder activists that prove to have superior information and/or strategies by at least temporarily sharing authority with the activists by either providing them seats in the board or simply allowing them to directly influence corporate policy. This article thus reframes the ongoing debate on shareholder activism by showing how offensive shareholder activism can co-exist with — and indeed, is supported by — Arrow’s theory of management centralization which undergirds the traditional authority model of corporate law and governance. Continue Reading
Most equity incentive plans have a number of different shareholder-approved business criteria for setting performance goals and allow the compensation committee to select the criteria each year. This practice generally requires re-approval of the goals by the shareholders under Internal Revenue Code Section 162(m) whenever the committee makes a material change to the criteria. If the committee has not made any material changes to the performance criteria but retains discretion to select the performance targets from year-to-year, shareholders generally will need to reapprove the criteria every five years under Code Section 162(m).
If shareholder approval last occurred in 2009, then it is time to prepare for re-approval in 2014. This is also a good time to consider if an amendment is needed to increase the authorized share pool.
Our colleague and member of the firm’s Litigation Department, Brodie Butland, recently wrote an interesting article for the The Business Suit, published by DRI. Because the article concerns the international arbitration case BG Group PLC v. Republic of Argentina as well as its implications for anyone facing or considering arbitration (regardless of venue), I wanted to take a moment to share it with you. Certainly, the decision will have an impact on many industries.
Ostensibly, BG Group PLC v. Republic of Argentina is an international arbitration case based on a bilateral investment treaty between the United Kingdom and Argentina. But there is a significant chance that the U.S. Supreme Court will use the case to clarify several decades of precedents dealing with whether the issue of arbitrability is decided by a court or an arbitrator. Regardless, the court’s decision is likely to affect the practice of arbitration, international investment and the standing of the United States as a premier international forum for arbitration. Read the full article — “BG Group PLC v. Republic of Argentina: One of the Most Significant Business Cases that You Have Never Heard of”