Associate Krista Giannattasio co-authored this post.
A. Reform on the Horizon for the Uniform Unclaimed Property Act
The Uniform Unclaimed Property Act (UUPA) was promulgated with the intention of abolishing the common law on abandoned property. The UUPA provides a system for transferring intangible personal property and personal property in safety deposit accounts, held by an entity other than the rightful owner, to the state when it is deemed abandoned by the rightful owner. The act was originally promulgated in 1954 by the Uniform Law Commission (ULC) as the Uniform Disposition of Unclaimed Property Act. It was amended in 1966 and wholly revised in 1981 to become the UUPA. The UUPA was last revised in 1995 and is due for a revision. In anticipation of the revision, the Drafting Committee of the UUPA has noted 76 issues for consideration and has requested comments by April 22, 2014.
A statement of the issues can be found here.
B. PCAOB No Longer Pursuing Mandatory Audit Rotation in the United States
On February 6, James Doty, chairman of the Public Company Accounting Oversight Board (PCAOB), a non-profit corporation established by Congress to oversee the audits of public companies, reported to the SEC that the PCAOB was no longer contemplating the idea of requiring mandatory audit firm rotation. However, Chairman Doty did announce that the PCAOB was continuing to look at other ways of strengthening auditor independence and skepticism. As Europe continues to move forward with its concept of a mandatory 10-year rotation requirement, U.S. policymakers will likely monitor the effects of that initiative.
Although Europe’s mandatory auditor rotation rules are yet to be finalized, this initiative may impact multinational companies based in the United States. The rotation requirement is limited to statutory audits of “public interest entities” (PIEs) in the European Union (EU). This could include some EU operations of U.S. multinationals, with the biggest effect likely in financial services. Those affected may include:
(1) EU companies listed on EU regulated markets (NOT U.S. companies solely because they are dual listed)
(2) Credit institutions (banks) and insurance undertakings (whether or not listed)
(3) Other entities that an individual EU Member State may choose to designate as a PIE (scope is still unknown)
C. New York Stock Exchanges’ Annual Letter to Listed Companies
In mid-March, the New York Stock Exchange (NYSE) posted its annual letters to its domestic and foreign-listed companies on its website. The letter to domestic companies contains reminders of several key annual meeting deadlines and important regulations for U.S. companies such as:
(1) Broker search cards must be sent at least twenty business days before the record date for annual meetings (ten calendar days for special meetings);
(2) Notification to the NYSE at least ten calendar days in advance of all record dates set for any purpose (any changes will require another ten-day notice);
(3) Recommendation of a 30-day interval between the record date and meeting date;
(4) Three copies of proxy materials must be sent to the NYSE when they are first sent to shareholders; and
(5) Annual CEO affirmations are due thirty days after the annual meeting, and interim affirmations are required within five business days after the triggering event.
The letter also address the NYSE’s recent changes to the compensation committee independence standards, its timely alert policy, and transactions requiring supplemental listing applications and shareholder approval, especially those that may affect voting rights.
The letter to foreign-listed companies similarly contains helpful information including reminders with respect to record dates, submission of proxy materials, written affirmations, supplemental listing applications and the NYSE’s timely alert policy. Foreign-listed companies that do not distribute proxies in accordance with U.S. rules are also reminded of the requirement to post a prominent undertaking on its website to provide all holders the ability, upon request, to receive a hard copy of the complete audited financial statements free of charge and to issue a press release announcing the annual report filing, including the company’s website address and alerting shareholders how to receive a free copy of the audited financial statements.
D. Vestar Capital Partners to Acquire Institutional Shareholder Services
In a March 18, 2014 press release, Vestar Capital Partners, a private equity firm specializing in management buyouts, recapitalizations and growth equity investments, announced it will acquire Institutional Shareholder Services Inc. (ISS) for $364 million dollars from MSCI Inc. ISS is a leading provider of corporate governance solutions to the global financial community. The company will operate independently with the current ISS executive team once the transaction is completed (it is expected to close in the second quarter). ISS currently works with some 1,700 clients, including institutional investors who rely on ISS’s objective and impartial proxy research and data to vote portfolio holdings, as well as corporations focused on governance risk mitigation as a shareholder-value enhancing measure. In response to the acquisition, Gary Retelny, President of ISS, stated, “[w]ith Vestar’s support, the management team looks forward to advancing ISS’s long-standing mission of providing world-class corporate governance solutions in an independent and transparent manner. Clients will continue to see expanded product offerings, innovative solutions, and the same high level of service that ISS has delivered to institutional investors, corporations, and governance practitioners globally for nearly three decades.”
E. Director Keith Higgins Speaks on Regulation D
On March 28, 2014, Keith Higgins, the director of the SEC’s Division of Corporation Finance, delivered a speech on Regulation D of the Securities Act of 1933. Under the 1933 Act, any offer to sell securities must either be registered with the SEC or meet certain qualifications set out in Regulation D to exempt them from such registration. Regulation D standards were relaxed six months ago in connection with the Jumpstart Our Business Startups Act (JOBS Act), enacted in 2012. Notably, Section 201(a) of the JOBS Act requires the SEC to eliminate the prohibition on using general solicitation under Rule 506 where all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors. Since general solicitation became effective, almost 900 new offerings have been conducted in reliance on the exemption, raising more than $10 billion in new capital. However, these 900 offerings pale in comparison to the old “private” Rule 506 exemption (now called Rule 506(b)) which, during the same time period, was relied upon in over 9,200 new offerings that resulted in the sale of over $233 billion in securities. Mr. Higgins gave three explanation as to why the new Rule 506(c) exemption has not caught on more widely with issuers:
(1) Reasonable Steps to Verify. Some believe that the reluctance of issuers to use the new Rule 506(c) exemption is due to the rule requiring the issuer take “reasonable steps to verify” the accredited investor status of a purchaser.
(2) Definition of “General Solicitation.” Many have criticized the “general solicitation” as too vague and creating uncertainty about whether a particular communication or activity is a form of general solicitation.
(3) “Overhang” of the 2013 Regulation D Proposal. Some have expressed concern that the proposed requirements and penalties under the 2013 Regulation D proposal may be applied retroactively to offerings conducted before the adoption of the proposal.
A. Andy Bouchard: Delaware’s New Chancellor
On March 20, 2014, Delaware Governor Markell announced the nomination of Andre G. Bouchard to serve as the 21st Chancellor of the Court of Chancery. If confirmed by the Delaware Senate, Mr. Bouchard will succeed the Honorable Leo E. Strine, Jr., who was sworn in as Chief Justice of the Delaware Supreme Court in February. Mr. Bouchard is widely recognized as one of the country’s premier corporate law practitioners. More information about Mr. Bouchard can be found here.
B. Supreme Court Allows State-Law Securities Class Actions to Proceed
On February 26, 2014, in the case of Chadbourne & Parke LLP v. Troice, the Supreme Court held that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) does not bar state-law securities class actions in which the plaintiffs allege that they purchased uncovered securities that the defendants misrepresented were backed by covered securities. This case arose from a multibillion-dollar Ponzi scheme run by Allen Stanford and several of his companies. Stanford and his associates sold the plaintiffs certificates of deposit (CDs) issued by his bank and then used the money for their personal gain. Although these CDs were not covered securities under SLUSA, the defendants misrepresented that they were backed by highly marketable securities that were covered by the Act. After the plaintiffs learned of the fraud, they brought state-law class actions against alleged participants. In a 7-2 decision, the Supreme Court held that in order to satisfy SLUSA’s “connection” requirement, a misrepresentation must be “material to a decision by one or more individuals (other than the fraudster) to buy or sell a ‘covered security.” Because the plaintiffs had alleged only “fraudulent assurances that [Stanford's] Bank owned, would own, or would use the victims’ money to buy for itself shares of covered securities,” there was not a “connection” between a material misstatement and the “purchase or sale of a covered security.” Notably, this decision marks the first time the Court has held that a state-law suit pertaining to securities fraud is not precluded by SLUSA, suggesting some limits to the broad interpretation of SLUSA’s preclusion provision that the Court has recognized in previous cases.
C. Supreme Court Hears Oral Arguments in Halliburton: Critical Issues for Securities Fraud Class Actions
On March 5, 2014, the Supreme Court heard oral arguments in the case of Halliburton Co. v. Erica O. John Fund, Inc. The Supreme Court will consider whether to overrule or limit plaintiff’s ability to rely on the legal presumption that each would-be class member in a securities fraud class action relied on the statements challenged as fraudulent in the lawsuit, or the “fraud-on-the-market” theory adopted by the Court twenty-five years ago in Basic Inc. v. Levinson. Without this presumption, putative class action plaintiffs would face substantial barriers in bringing securities fraud class action lawsuits. While the Court is not expected to rule on Halliburton until June of 2014, the questions posed by the justices hint at changes that may make it more difficult for the plaintiffs’ securities bar to get investor classes certified. The transcript is available here.
D. Supreme Court Rules in Private Company Whistleblower Case
On March 4, 2014, the Supreme Court decided Lawson v. FMR LLC. In a 6-3 ruling that reversed a Fifth Circuit decision, the Court held that the anti-retaliation protection that the Sarbanes-Oxley Act of 2002 provides to whistleblowers applies to employees of a public company’s private contractors and subcontractors. The Sarbanes-Oxley Act was enacted in response to the collapse of the Enron Corporation to protect investors in public companies. One function of Sarbanes-Oxley is to protect “whistleblowers,” providing that: “No [public] company…or any…contractor [or] subcontractor…of such company, may discharge, demote…[or] discriminate against an employee in the terms and conditions of employment because of [whistleblowing activity]” (18 U.S.C. § 1514A (a)). In Lawson, the plaintiffs were former employees of a private company that contracted with publicly-traded mutual funds alleging that their employer, FMR LLC, retaliated against them for reporting putative fraud. The Court’s holding extends far beyond the mutual-fund industry to cover other contractors, including law and accounting firms.
E. Supreme Court to Review Omnicare: A Circuit Split
The Supreme Court has granted certiorari and will review Omnicare v. Laborers District Council Construction Industry Pension Fund next term. The issue under consideration is whether, for purposes of a claim under Section 11 of the Securities Act of 1933, a plaintiff may plead that a statement of opinion was “untrue” merely by alleging that the opinion itself was objectively wrong, as the Sixth Circuit has concluded, or must the plaintiff also allege that the statement was subjectively false – requiring allegations that the speaker’s actual opinion was different from the one expressed – as the Second, Third, and Ninth Circuits have held.
F. Kahn v. M&F Worldwide Corp.: Delaware Supreme Court Affirms In re MFW Shareholders Litigation
In Kahn, et al. v. M&F Worldwide Corp., et al., the Delaware Supreme Court affirmed the Court of Chancery’s decision in In re MFW Shareholders Litigation. In re MFW Shareholders Litigation granted summary judgment in favor of a board accused of breaching its fiduciary duties by approving a buyout by a 43.4% controlling stockholder, where the controlling stockholder committed in its initial proposal not to move forward with a transaction unless approved by a special committee, and further committed that any transaction would be subject to a non-waivable condition requiring the approval of the holders of a majority of the shares not owned by the controlling stockholder and its affiliates. On appeal, the Delaware Supreme Court affirmed, holding that controlling stockholder buyouts can receive business judgment review if conditioned ab initio on dual procedural protections. The Delaware Supreme Court adopted the Court of Chancery’s formulation of the standard, ruling that the business judgment standard of review will be applied in controlling stockholder buyouts if and only if: (i) the controlling stockholder conditions completion of the transaction on the approval of both a special committee and a majority of the minority stockholders, (ii) the special committee is independent, (iii) the special committee is empowered to freely select its own advisors and to say no definitively, (iv) the special committee meets its duty of care in negotiating a fair price, (v) the minority vote is informed, and (vi) there is no coercion of the minority. The Delaware Supreme Court further held, however, that if “after discovery triable issues of fact remain about whether either or both of the dual procedural protections were established, or if established were effective, the case will proceed to a trial in which the court will conduct an entire fairness review.”
G. In re Rural Metro Corporation Stockholders Litigation: Court of Chancery Holds Financial Advisor Liable for Aiding and Abetting Breaches of Fiduciary Duty
Regarding the case In re Rural Metro Corporation Stockholders Litigation, on March 7, 2014, the Delaware Court of Chancery held RBC Capital Markets, LLC liable for aiding and abetting breaches of fiduciary duty by the board of directors of Rural/Metro Corporation in connection with Rural’s acquisition by Warburg Pincus LLC. In its ruling, the Court of Chancery found that RBC, in negotiating the transaction on behalf of Rural, had engaged in multiple conflicts of interest. According to the Court of Chancery, RBC was motivated by its contingent fee and its undisclosed desire and efforts to secure the lucrative buy-side financing work in preparing valuation materials for Rural. Because those valuation materials were included in Rural’s proxy statement, the Court found that RBC was also liable for aiding and abetting the board’s breach of its duty of disclosure. The Court of Chancery also noted that RBC had failed to provide interim valuation materials to Rural’s board or its special committee, and that the directors failed in their duty to be sufficiently informed to allow them to make a decision that the sale of the company. Notably, the Court of Chancery highlighted that directors must maintain an “active and direct role” in the sale process “from beginning to end.” The Court of Chancery saw Rural’s special committee as failing to discharge its duty by failing to provide “guidance about when staple financing discussions should start or cease,” failing to make “inquiries on that subject,” and failing to impose a “practical check on [the investment bank’s] interest in maximizing its fees.” Finally, the Court of Chancery found that the potential for aiding and abetting liability for investment banks, which it characterized as “gatekeepers,” would “create a powerful financial reason for the banks to provide meaningful fairness opinions and to advise boards in a manner that helps ensure that the directors carry out their fiduciary duties when exploring strategic alternatives and conducting a sale process, rather than in a manner that falls short of established fiduciary norms.”