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Wednesday
Aug232017

No-Action Letter for Apple, Inc. Denied Exclusion of Request for Apple to Retain Additional Compensation Consultants

In Apple Inc., 2016 BL 360609 (Oct. 26, 2016), Apple Inc. (“Apple”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission of a proposal submitted by Jing Zhao (“Shareholder”) requesting that Apple retain additional independent compensation consultants to reform its executive compensation policies. The SEC declined to issue a no action letter, concluding Apple could not exclude the proposal under Rules 14a-8(i)(3), 14a-8(i)(6), or 14a-8(i)(7).

Shareholder submitted a proposal providing that:

RESOLVED, shareholders recommend that Apple Inc. engage multiple outside independent experts or resources from the general public to reform its executive compensation principles and practices.

Apple sought exclusion under subsections (i)(3), (i)(6), or (i)(7) of Rule 14a-8.

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC (2016).

Rule 14a-8(i)(3) permits a company to exclude a shareholder proposal from its proxy materials if the proposal or supporting statement is contrary to any of the SEC’s proxy rules, including 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials. The SEC staff has taken the position that a shareholder proposal is excludable under Rule 14a-8(i)(3) if it is so vague and indefinite that “neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted) would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.”

Rule 14a-8(i)(6) permits a company to exclude a shareholder proposal from its proxy materials if the company lacks the power or authority to implement it.

Rule 14a-8(i)(7) permits a company to exclude a shareholder proposal from its proxy materials if the proposal relates to the company’s “ordinary business operations.” This section understands that certain tasks are “so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight.” The staff considers “the degree to which the proposal seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” For additional explanation of this exclusion, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, and Adrien Anderson, The Policy of Determining Significant Policy Under Rule 14a-8(i)(7).

Apple argued for exclusion under Rule 14a-8(i)(3) because the proposal failed to define “Outside Independent Experts,” “Resources,” and “General Public.” Absent definitions, these terms subjected the proposal to multiple interpretations regarding the manner of implementation.  Apple also asserted that the proposal was ambiguous to whom it applied – the company or the board of directors.

Apple also sought exclusion under Rule 14a-8(i)(6) because the company lacked the power to implement the proposal. Specifically, the implementation would cause the company to violate SEC rules relating to compensation committees, as well as the listing standards of the NASDAQ stock market, the principal exchange for Apple’s shares.

Apple further argued for exclusion under Rule 14a-8(i)(7) because the proposal urged the company to change the process for making compensation decisions.  Therefore, the proposal sought to mandate a hiring decision, which the staff consistently allowed exclusion of under subsection (i)(7).

In response, Shareholder argued that the key terms were defined or commonly used words.  Moreover, any lack of specific definitions gave the company flexibility in implementing the proposal. In addition, Shareholder argued the company had the power and authority to implement the proposal without violating applicable laws and rules. Finally, Shareholder urged the proposal dealing with compensation policies was not related to the company’s hiring decisions, and thus was not an ordinary business matter.

The SEC disagreed with Apple’s arguments, and concluded Apple may not omit the proposal from its proxy materials in reliance on Rule 14a-8(i)(3), (i)(6), or (i)(7). The staff noted the proposal was not “so inherently vague or indefinite” that the shareholders or the company would not be able to determine exactly what actions or measures the proposal requires. In addition, the staff did not agree with Apple that the company lacked the power or authority to implement the proposal. While the proposal focused on senior executive compensation, the staff determined it could not be excluded as ordinary business matters.

The primary materials for this no action letter can be found on the SEC Website

Tuesday
Aug222017

No-Action Letter for Walgreens Boots Alliance, Inc. Allowed Exclusion of Report Assessing the Risks of Continued Tobacco Sales

In Walgreens Boots Alliance, Inc., 2016 BL 376203 (Nov. 7, 2016), Walgreens Boots Alliance (“Walgreens”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission of a proposal submitted by the Sisters of the Humility of Mary (“Shareholders”) requesting that the board of directors issue a report about the risks of the continued sales of tobacco products in Walgreens’ stores. The SEC issued the requested no action letter, and concluded Walgreens could omit the proposal from its annual proxy statement under Rule 14a-8(i)(7).

Shareholders submitted a proposal providing that:

RESOLVED, Shareholders request the Board of Directors issue a report within six months of the 2017 annual meeting, at reasonable expense and excluding proprietary information, assessing the financial risk, including long-term legal and reputational risk, of continued sales of tobacco products in our stores.

Walgreens sought exclusion under Rule 14a-8(i)(7).

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. Additionally, companies may exclude proposals that fall under thirteen substantive grounds provided in Rule 14a-8(i). For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.

Subsection (i)(7) permits the exclusion of proposals that relate to the company’s “ordinary business operations.” This section understands “ordinary business” to mean the issues that are fundamental to a company’s management abilities on a daily basis. Thus, proposals relating to ordinary business are not subjected to shareholder oversight. For additional explanation of this exclusion, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, and Adrien Anderson, The Policy of Determining Significant Policy Under Rule 14a-8(i)(7)

Walgreens argued the proposal related to ordinary business operations because the underlying subject matter concerned the sale of particular products and services. Specifically, Walgreens argued the Commission has consistently permitted the exclusion of proposals that relate to the sale of a particular product as a component of “ordinary business.” Walgreens further asserted the proposal sought to impose an obligation for the company to re-examine its decision to sell a particular product, and therefore the proposal was excludable as its subject matter involved “ordinary business.”

In response, the Shareholders argued that the sales of tobacco products by pharmaceutical companies constituted an exception to this general rule as implicating a significant policy issues. Shareholders asserted there was a sufficient nexus between the sales of tobacco products and the death of customers to create a significant policy issue for the company.

The Commission agreed with Walgreens reasoning, and concluded it would not recommend enforcement action if Walgreens omitted the proposal from its proxy materials under subsection (i)(7). The staff noted the proposal related to ordinary business operations.

The primary materials for this post can be found on the SEC website

Monday
Aug212017

Cease-and-Desist: In re Citigroup Global Markets, Inc.; In re Morgan Stanley Smith Barney LLC.

In In the Matter of Citigroup Global Markets, Inc., SEC Admin. Proc. File no. 3-17808 (Jan. 24, 2017), and In the Matter of Morgan Stanley Smith Barney LLC, SEC, Admin. Proc. File No. 3-17809 (Jan. 24, 2017), the Securities and Exchange Commission (“Commission”) found, in actions where the respondents neither admitted nor denied the findings, that Citigroup Global Markets Inc., (“CGMI”), and Morgan Stanley Smith Barney LLC (“MSSB”) violated Section 17(a)(2) of the Securities Act of 1933 (“Securities Act”).  CGMI and MSSB consented to the order of a cease-and-desist order based on the alleged violations and agreed to pay civil penalties to resolve the proceedings. 

According to the Order, CGMI is a wholly owned indirect subsidiary of Citigroup, Inc. that functions as a broker-dealer and investment advisor.  At the time of events, CGMI held 49% ownership interest in MSSB, a limited liability company that was also a broker dealer and investment advisor.  CGMI developed several quantitative foreign exchange trading models called the CitiFX Alpha family of strategies and incorporated them into the CitiFX Alpha Program, a financial program that operated as an investment contract to certain brokerage customers and advisory clients of MSSB (the “Relevant Investors”).  

Upon enrolling in the CitiFX Alpha Program, Relevant Investors opened foreign exchange trading accounts at CGMI and posted cash or securities to those accounts as collateral.  Financial advisors at MSSB, in tandem with CGMI, selected the notional amounts that the Relevant Investors traded.  Some Relevant Investors posted collateral as little as ten percent of their notional amount.  Additionally, Relevant Investors’ financial advisors were responsible for the size of the mark-ups charged on all CitiFX Alpha trades. 

The Commission claimed the two major assumptions regarding the CitiFX Alpha’s past performances were not adequately disclosed to the Relevant Investors during PowerPoint and oral presentations by CGMI personnel and MSSB financial advisors.  The presentations used past performance and risk metrics that assumed fully collateralized accounts, or accounts that had an equal amount of collateral to the notional amount.  The presentations also assumed no mark-ups would be charged on trades.  

The Commission also stated that the Relevant Investors included “individuals who had no experience in foreign exchange trading and who did not understand what a notional amount is; that the cash they posted to their foreign exchange accounts merely served as collateral; or that there was a difference between the notional amounts they traded and the amount of collateral they posted to their accounts.” 

Section 17(a)(2) of the Securities Act, 15 U.S.C. § 77q(a)(2), prohibits any person in the offer or sale of a security from obtaining money or property by means of any untrue statement of a material fact or any omission of material fact necessary to make statements, in light of the circumstances under which they were made, not misleading.  

The Commission determined that CGMI and MSSB had violated section 17(a)(2) of the Securities Act for failing to disclose the metrics used in presentations were not reflective of the degree of leverage the Relevant Investors would need, and for failing to disclose the adequate amount of mark-ups to be employed.  Both omissions materially altered disclosed performance and risk metrics, meaning that CGMI and MSSB omitted material information necessary to make non-misleading statements about the CitiFX Alpha program. 

CGMI and MSSB agreed the sanctions imposed by the Commission and the cease-and-desist order for their violations.  Each party was ordered to pay discouragement of $624,458.27, prejudgment interest of $89,277.34, and a civil money penalty in the amount of $2,250,000.00 to the Commission within 21 days. 

The primary materials for this case may be found on the DU Corporate Governance website.

Friday
Aug182017

No-Action Letter for Deere & Company Permitted Exclusion of Emissions Elimination Proposal

In Deere & Co., 2016 BL 406370 (Dec. 5, 2016), Deere & Company (“Deere”) requested the staff of the Securities and Exchange Commission (“SEC”) permit omission of a proposal submitted by Christine Jantz (“Shareholder”) requesting the board of directors generate a plan to reach net-zero greenhouse gas emissions by the year 2030. The SEC agreed to issue the requested no-action letter allowing for exclusion of the proposal under Rule 14a-8(i)(7).

Shareholder submitted a proposal stating:

  • RESOLVED: Shareholders request that the Board of Directors generate a feasible plan for the Company to reach a net-zero [greenhouse gas] emission status by the year 2030 for all aspects of the business which are directly owned by the Company, including but not limited to manufacturing and distribution, research facilities, corporate offices, and employee travel, and to report the plan to shareholders at reasonable expense, excluding confidential information, by one year from the 2017 annual meeting.

Deere argued the proposal may be excluded from its proxy materials under Rule 14a-8(i)(7).

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. The Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.

Under Rule 14a-8(i)(7), a company may exclude proposals that relate to the company’s “ordinary business” operations. The SEC understands “ordinary business” to mean the issues that are fundamental to a company’s management abilities on a day-to-day basis. If the proposal, however, raises a significant social policy issue, the proposal may not be excluded as long as a “sufficient nexus exists between the nature of the proposal and the company.” For additional explanation of this exclusion see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 DU Law Rev. Online 263 (2016), and Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Law Rev. Online 183 (2016).

Deere argued for omission under Rule 14a-8(i)(7) because the proposal detailed how the board of directors should plan to reduce emissions and would “transfer responsibility for critical operational and production decision-making from the board and management to the shareholders”.  Deere further argued the social policy exception should not apply given the absence of a clear nexus between climate change and the machinery manufacturing business. Even if the SEC determined the nexus sufficient, the proposal sought to micromanage by imposing a time frame for complex policy implementation, thus the social policy exception still would not apply.

In response, the Shareholder argued catastrophic climate change implicated a significant policy issue with a clear nexus to Deere because large manufacturing companies had energy-intensive operations. The Shareholder further asserted the proposal did not micromanage as it gave Deere the flexibility to determine the means of greenhouse gas elimination and only provided an overall goal.

The SEC agreed with Deere’s reasoning, and concluded Deere may exclude the proposal under subsection (i)(7). The staff noted the proposal sought to micromanage the company by probing too deeply into complex matters beyond the shareholders purview. Therefore, the staff concluded it would not to recommend enforcement of action for the proposal’s omission from proxy materials.

The primary materials for this case may be found on the SEC website.

Friday
Aug112017

Disappearing Women

How quickly things change—and not for the better.  In June, Fortune magazine reported that woman were “making strides” because a whopping 6.4% of CEOs were female.  As sad as that figure is, it just got much worse.  Avon recently announced that CEO Sheri McCoy will leave the 131-year-old cosmetics firm in March.  This news broke just one day Oreo and Cadbury owner Mondelez announced that its longtime CEO Irene Rosenfeld will give up the top spot at the company later this year.  Moreover, let us not forget that in June, Marissa Myers stepped down as the CEO of Yahoo (now known as Altaba).  Each of the CEO’s faced harsh criticism from activist shareholders during her tenure.  And so, for now, we are down to 5.8% female representation of woman in Fortune 500 companies.  Some strides.

Of course, the problem of underrepresentation is not limited to Fortune 500 companies. According to the 2017 Law360 Glass Ceiling Report, omen are 50.3 percent of current law school graduates, yet they still make up just under 35 percent of lawyers at law firms, Most important, their share of equity partnerships — where the highest compensation and leadership positions are lodged — remains at 20 percent and has not changed in recent years.

Similarly, according to the Hedge Fund Report, only 49 hedge funds managed by women are in the HFR index, or a mere 2% out of the 2,100 funds in the category.  This holds, despite the fact as reported in the Financial Times that the hedge funds led by women have outperformed a broader benchmark of alternative investment managers over the past five years, raising the question of why there are still so few female portfolio managers. HFRI Women Index produced a profitability of 4.4% over the past five years – higher than the 4.2% from the HFRI Fund Weighted Composite Index, a more extensive barometer of hedge fund performance across all strategies and for both genders.

Reams of articles have been written on this problem and myriad solutions have been suggested.  The data suggested that nothing is working thus far.  Women continue to vanish from the scene to the detriment of all.

Friday
Apr212017

Aztec Oil & Gas, Inc. v. Fisher: The Issue of Representative Shareholders

In Aztec Oil & Gas, Inc. v. Fisher, 2016 BL 16110 (S.D. Tex. Jan. 21, 2016), third party plaintiffs Frank Fisher (“Fisher”), Robert Sonfield (“Sonfield”), and the Livingston Growth Fund Trust (“Livingston”) by and through Livingston’s only trustee, Robert L. Sonfield, Jr. (“Sonfield Jr.”) (collectively, “Plaintiffs”) brought a third party shareholder derivative suit on behalf of themselves and Aztec Oil & Gas, Inc. (“Aztec Oil”) against third party defendants Jeremy Driver (“Driver”), Kenneth E. Lehrer (“Lehrer”), and Mark Vance (“Vance”) (collectively, “Defendants”) through allegations of breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraud, waste, concerted action, and conspiracy. The United States District Court for the Southern District of Texas granted Defendants’ motion to dismiss the third party derivative suit pursuant to Fed. R. Civ. P. 23.1 (“Rule 23.1”).

Prior to the third party derivative suit’s commencement, Aztec Oil and Aztec Energy, LLC brought an action against Fisher, Sonfield, Mychal Jefferson (“Jefferson”), Livingston, and International Fluid Dynamics, LLC (“IFD”), a company Fisher owned, alleging violations of federal securities law, breach of fiduciary duty, fraud, aiding and abetting fraud, aiding and abetting breach of fiduciary duty, conspiracy, legal malpractice, and violations of the Texas Deceptive Trade Practices Consumer Protection Act (the “Underlying Action”). While the Underlying Action was pending, Plaintiffs brought the third party derivative suit, which asserted Defendants, while acting as directors and officers of Aztec Oil, participated in conduct antithetical to shareholders. The derivative suit further alleged Aztec Oil failed to compensate IFD for consulting fees and Fisher for salary earned.

Defendants filed a motion to dismiss in response to Plaintiffs’ third-party claims, alleging Plaintiffs did not have standing to bring a derivative suit under Rule 23.1.

Rule 23.1 allows shareholders to bring a derivative action on behalf of a corporation to enforce a right the corporation failed to enforce. As required under Rule 23.1, a court will examine various factors to determine whether a shareholder’s derivative action fairly and adequately represents similarly situated shareholder interests. Among these factors are whether “economic antagonism” exists between the plaintiff and other shareholders, the “relative magnitude” of plaintiff’s interest in the derivative suit compared to its personal interest, and “plaintiff’s vindictiveness towards” other defendants.

Here, the court ruled Sonfield and Sonfield Jr. did not have standing because they were not shareholders of Aztec Oil. The court also found that Fisher and Livingston were not representative shareholders because they were majority shareholders of Aztec Oil and controlled 80% of the votes. The court concluded that the ownership made it "highly likely that Fisher and the entities he controls will pursue Fisher's own interests at the expense of all minority shareholders and evidencing a serious conflict of interests."   

Accordingly, the court granted Defendants’ motion to dismiss for Plaintiffs’ lack of standing.

The primary materials for this case may be found on the DU Corporate Governance website.

Wednesday
Apr192017

No-Action Letter for Equinix, Inc. Allowed Exclusion of Proxy Access Bylaw

In Equinix, Inc., 2016 WL 110889 (April 7, 2016), Equinix, Inc. (“Equinix”) requested the staff of the Securities and Exchange Commission permit the omission of a proposal submitted by John Chevedden (the “Shareholder”) requesting that Equinix adopt a bylaw that allowed for specific proxy access. The SEC agreed to issue a no action letter allowing for the exclusion of the proposal under Rule 14a-8(i)(10).

Shareholder submitted a proposal providing that:

RESOLVED: Shareholders ask our board of directors to adopt, and present for shareholder approval, a “proxy access” bylaw that . . . require the Company to include in proxy materials prepared for a shareholder meeting at which directors are to be elected by name, Disclosure Statement…of any person nominated for election to the board by a shareholder or an unrestricted number of shareholders forming a group that meets [certain criteria].

Equinix sought to exclude the proposal under subsection (i)(10) of Rule 14a-8.

Rule 14a-8 provides shareholders with the right to include a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and eligibility requirements. Moreover, the Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirement of the Rule, see The Shareholder Proposal Rule and the SEC.

Subsection (i)(10) permits a company to omit a proposal if the company has already substantially implemented the proposal. A company meets this standard if its implemented “policies, practices, and procedures compare favorably with the guidelines of the proposal.” The company need not take the exact action requested by the shareholder; it must only implement the proposal’s essential objectives. For a more detailed discussion of this exclusion, see Aren Sharifi, RULE 14A-8(I)(10): HOW SUBSTANTIAL IS “SUBSTANTIALLY” IMPLEMENTED IN THE CONTEXT OF SOCIAL POLICY PROPOSALS?.   

Equinix argued the proposal should be omitted under subsection (i)(10) because it adopted an amendment to its bylaws in March of 2016 that satisfied the proposal’s essential objective of providing shareholders a meaningful proxy access right. Specifically, the amended provision allowed any shareholder owning at least 3% or more of the company’s stock continuously for at least three years to nominate candidates for election up to the greater of (1) two candidates, or (2) 20% of our Board, to be included in Equinix’s proxy materials. Equinix believed the proxy access provision in its bylaws compared favorably to, and addressed, the essential objective of the proposal.

The SEC agreed and concluded it would not recommend enforcement action to the Commission if Equinix omitted the proposal from its proxy materials in reliance on subsection (i)(10). The SEC noted the Company’s “board has adopted a proxy access bylaw that addresses the proposal’s essential objective.”

The primary materials for this case may be found on the SEC Website.

Monday
Apr172017

No-Action Letter for Procter & Gamble Company Denied Exclusion of LGBT Discrimination Policies Proposal

In Proctor & Gamble Co., 2016 BL 271869, (Aug. 16, 2016), Procter & Gamble Co. (“P&G”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by NorthStar Asset Management, Inc. Funded Pension Plan (the “Shareholders”) requesting a report on the risks and costs to P&G caused by “enacted or proposed state policies supporting discrimination against LGBT people”, and strategies to protect its LGBT employees. The SEC declined to issue the requested no action letter, concluding P&G could not exclude the proposal under Rule 14a-8(i)(3) and Rule 14a-8(i)(7).

Shareholders submitted a proposal providing that:

RESOLVED, shareholders request that P&G issue a public report by April 1, 2017, detailing the known and potential risks and costs to P&G caused by any enacted or proposed state policies supporting discrimination against LGBT people, and detailing strategies above and beyond litigation or legal compliance that P&G may deploy to defend its LGBT employees and their families against discrimination and harassment that is encouraged or enabled by these policies.

P&G sought to exclude the proposal under subsections (i)(3) and (i)(7) of Rule 14a-8.

Rule 14a-8 provides shareholders with the right to insert a proposal in an issuer’s proxy statement. 17 CFR 240.14a-8. The shareholder, however, must meet certain procedural and ownership requirements. In addition, the Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.

Rule 14a-8(i)(3) permits the exclusion of proposals that are contrary to any of the SEC’s proxy rules or regulations. The subsection applies to proposals that may be inconsistent with Rule 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials. This subsection permits the exclusion of proposals that are vague and indefinite, rendering the company’s duties and obligations unclear.

Additionally, Rule 14a-8(i)(7) permits the exclusion of proposals that relate to the company’s “ordinary business operations”, including the company’s litigation strategy and legal compliance. “Ordinary business” refers to those issues that are fundamental to management’s ability to run the company on a day-to-day basis. As such, “ordinary business” issues cannot practically be subject to direct shareholder oversight.  For a more detailed discussion of this exclusion, see Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7)  and Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure

P&G argued the proposal should be excluded under subsection (i)(7) because the scope of the proposal extended into ordinary business matters. While it acknowledged the proposal involved discrimination concerns, P& G argued the proposal also encompassed matters fundamental to its day-to-day business. Specifically, P&G asserted the proposal and its supporting statement relates to hiring and workplace practices, litigation risks, and location of operations, all of which are ordinary business matters.

The Shareholders disagreed and contended the proposal addressed a significant policy issue – LGBT discrimination policies. They argued the proposal did not attempt to “micro-manage” P&G operations by prescribing specific actions, but only sought reporting and analyses on relevant issues. The Shareholder further argued state LGBT discrimination policies have a clear nexus to P&G because it has operations in states with discriminatory laws.

P&G also argued the proposal should be excludable under subsection (i)(3) because the language of the proposal was ambiguous and vague. Specifically, the proposal did not define or explain exactly which policies P&G must consider. P&G questioned whether the proposal meant P&G to report on policies that form an “outright attack” on the LGBT community, or those policies that may not directly address LGBT rights, but could conceivably lead to policies that impact these rights in the future.

In response, the Shareholders argued the proposal was neither vague nor indefinite. They contended the inclusion of bills that may impact future LGBT rights in the proposal presented no problematic ambiguity in the scope of the report. The Shareholders also argued the proposal language clearly calls for disclosure of the impact of both proposed and enacted policies.

The SEC agreed with Shareholders that the proposal was not excludable under either subsection (i)(3) or (i)(7). The SEC noted the proposal was not “so inherently vague or indefinite” that P&G would not be able to determine what actions it must take to implement the proposal. In addition, the SEC noted the proposal did not relate to the company’s ordinary business operations under (i)(7).

The primary materials for this post can be found on the SEC Website.

Wednesday
Apr122017

Loeza v. Doe et al.: Second Circuit Dismisses ERISA Complaint for Failure to Allege Preventing Harm Would Not Cause "More Harm Than Good."

In Loeza v. Doe et al., No. 16-222-cv, 2016 BL 292694 (2d Cir. Sept. 08, 2016), the United States Court of Appeals for the Second District dismissed the putative class action of current and former employees (“Plaintiffs”) of JPMorgan Chase & Co. ("JPMorgan"). The court found that the Complaint failed to plausibly allege that the named fiduciaries (“Defendants”) of the JPMorgan 401(k) Savings Plan (the "Plan") breached the duty of prudence owed to Plan participants under the Employee Retirement Income Security Act ("ERISA").

According to the allegations, Plaintiffs participated in the Plan and invested portions of their retirement in the JPMorgan Common Stock Fund (the "Fund").  The Fund primarily invested in JP Morgan Stock and, as a result, fell under ERISA. Plaintiffs alleged that defendants-appellees Douglas Braunstein and James Wilmot should have prevented the Fund from purchasing JPMorgan stock at an inflated price because they knew the firm's Chief Investment Officer (the "CIO") had taken risky trading positions and helped circumvent JPMorgan's internal risk controls. Braunstein and Wilmot allegedly could have discharged their duty of prudence and prevented harm to the Fund by either freezing its purchases of JPMorgan stock or through public disclosure as required under federal securities laws. According to Plaintiffs, by allowing the fraud to continue, Braunstein and Wilmot created a “more painful” stock price correction, and therefore increased the amount of harm to Plan participants, allegedly causing JPMorgan's stock price to fall by approximately 16% in one day. The Plaintiffs argue that the remedial measures would not have caused the Fund “more harm than good.”

ERISA requires the fiduciaries of a pension plan to act prudently in managing the plan's assets. Fifth Third Bancorp establishes new pleading standards regarding ERISA fiduciaries breaching their duty of prudence.  134 S. Ct. 2459 (2015).  To state a claim for breach of the duty of prudence, a complaint must plausibly allege a legal alternative action that the defendant could have taken that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than benefit it.

The district court granted Defendants' motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failing to allege that the challenged actions would cause the Fund “more harm than good.” The court reviewed the district court's decision de novo to determine whether the Complaint satisfied the "more harm than good" prong of Fifth Third Bancorp.

The U.S. Court of Appeals for the Second District affirmed the district court's judgment, finding the allegations “wholly conclusory and materially indistinguishable from the allegations that the Supreme Court found insufficient” in Amgen Inc. v. Harris, 136 S.Ct. 758 (2016). 

The primary material for this case can be found on the DU Corporate Governance Website.

Monday
Apr102017

IBM’s Motion to Dismiss ERISA Claims Granted

This post is the one of two posts discussing claims brought against International Business Machines Corporation (“IBM”) in 2016 regarding a seventeen percent drop in the company’s stock price. This post will specifically focus on claims brought pursuant to the Employee Retirement Income Security Act (“ERISA”). The other post covers claims brought pursuant to federal securities laws.

In Jander v. International Business Machines Corp., No. 15cv3781, 2016 BL 291159 (S.D.N.Y. Sept. 7, 2016), the United States District Court for the Southern District of New York granted IBM’s motion to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6) with leave to amend Larry W. Jander’s and Richard J. Waksman’s (together, “Plaintiffs”) Amended Complaint.

On behalf of participants in IBM’s 401(k) Plus Plan (the “Plan”), who invested in the IBM Company Stock Fund (the “Fund”) between January 21, 2014, and October 20, 2014, Plaintiffs brought claims against IBM and the Retirement Plans Committee of IBM, including IBM’s Chief Accounting Officer, Richard Carroll, IBM’s Chief Financial Officer, Martin Schroeter, and IBM’s General Counsel, Richard Weber (collectively, “Defendants”) pursuant to Section 502 of ERISA. The Plan permitted employees to defer compensation into various investment options, including the Fund, which was predominately invested in IBM common stock. As members of the Retirement Plans Committees, Defendants Schroeter and Weber were named as fiduciaries under ERISA. Defendant Carroll, as the Plan Administrator, was also named as a fiduciary.

In their Amended Complaint, Plaintiffs alleged that IBM’s stock price was overvalued and dropped approximately 17% as a result of the company’s divestiture announcement. Specifically, in October 2014, the company announced it was transferring its microelectronics business to another company and, consequently, it was taking a $2.4 billion write-down. Additionally, the company announced disappointing third-quarter results. Moreover, in two separate pending cases, allegations that Generally Accepted Accounting Principles (“GAAP”) required the company to record an earlier impairment of its microelectronics assets were asserted.

Defendants moved to dismiss Plaintiffs’ Amended Complaint for failure to state a claim on which relief can be granted arguing the following: (1) Plaintiffs failed to plead the microelectronics assets were impaired; (2) IBM was not a fiduciary; (3) Plaintiffs’ alternative actions assertion failed to meet the requisite standard; and (4) Plaintiffs’ duty to monitor claim was derivative of the underlying claims.

Under ERISA, fiduciaries must “‘act in a prudent manner under the circumstances then prevailing,’ a standard that eschews hindsight and focuses instead on the ‘extent to which plan fiduciaries at a given point in time reasonably could have predicted the outcome that followed.’” In an ERISA action where a GAAP violation is alleged, the higher pleading standard required by Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act regarding scienter are not applicable. As such, the court concluded Plaintiffs’ allegations that the fiduciaries knew the company’s stock price was inflated by undisclosed material facts regarding its microelectronics business plausibly suggested an impairment and, thus, a violation of GAAP.

A threshold question in ERISA cases, however, is whether each defendant acted as a fiduciary of the plan. In addition to named fiduciaries, those who exercise “discretionary control or authority over the plan’s management, administration, or assets” are deemed de facto fiduciaries. The court reasoned that Plaintiffs’ allegations IBM was a de facto fiduciary because it had ultimate oversight over the Plan were bare legal conclusions and, therefore, failed to adequately allege that IBM was a fiduciary.

In cases in which fiduciaries allegedly “behaved imprudently by failing to act on the basis of nonpublic information that was available to them because they were . . . insiders,” pleading a breach of the duty of prudence requires a plaintiff to plausibly allege: (1) “‘an alternative action that the defendant could have taken that would have been consistent with the securities laws,’ and (2) ‘that a prudent fiduciary in the same circumstances [as Defendants] would not have viewed [the alternative action] as more likely to harm the fund than to help it.’”

First, the court determined, as Plaintiffs asserted, Defendants could have issued corrected statements regarding the valuation of the company’s microelectronics business while complying with the federal securities laws. Regarding the second prong, however, the court concluded the company could not reasonably be expected to disclose insider information or halt the Plan from further investing in the company’s stock as Plaintiffs asserted. In so finding, the court reasoned that a prudent fiduciary in Defendants’ circumstances would not have believed that such conduct would be more likely to help rather than harm the Fund.

Lastly, the court held Plaintiffs failed to adequately plead a claim for breach of duty to monitor because such claim was derivative of their claims for breach of duty of prudence, which they failed to sufficiently allege.

Accordingly, the court dismissed Plaintiffs’ claims brought pursuant to ERISA without prejudice and allowed Plaintiffs to file a Second Amended Complaint within thirty days.

Primary materials for this case may be found on the DU Corporate Governance website.

Wednesday
Apr052017

Geier v. Mozido: Motion to Dismiss Granted 

In Geier v. Mozido, No. 10931-VCS 2016 BL 321867, (Del. Ch. Sept. 29, 2016), the Court of Chancery of Delaware granted Mozido, LLC’s (“Mozido”) motion to dismiss Philip H. Geier’s (“Plaintiff”) breach of contract complaint against Mozido.  The court found that Plaintiff failed to state a claim for breach of contract under Court of Chancery Ruel 12(b)(6), as he released all claims asserted in this actions as part of a previous settlement. 

According to the allegations, representatives of Mozido had asked Plaintiff multiple times to join Mozido’s Board of Directors (the “Board”).  In March 2012, Plaintiff agreed to join the Board in exchange for 1% of the then issued and outstanding membership units in Mozido (the “Options”).  Plaintiff served on the Board until his resignation in May 2013.  In July 2012, Modizo needed to raise capital, and Plaintiff had the Philip H. Geier Irrevocable Trust (the “Geier Irrevocable Trust”) and The Geier Group, LLC (the “Geier Group”) loan $3 million to Mozido. Upon default of the note, the Geier Group and the Geier Irrevocable Trust sought action against Mozido and members of the Board who had guaranteed the loan. 

In November 2013, a General Release agreement was executed.  Geier Irrevocable Trust and Geier Group were named releasors, and the agreement contained a carve out claim for any claims by Plaintiff with respect to the Options.  Plaintiff alleged he demanded that Mozido issue his Options and was not able to exercise the Options since his departure from the Board.  Plaintiff, however, only made a formal demand to exercise the Options in October 2014. 

Plaintiff alleged the General Release was inapplicable to the claims regarding the Options.  He asserted that the release should not apply to him because it related only to claims arising from the $3 million loan of the Geier Trust and the Geier Group.  Alternatively, he was not “an intended releaser”. 

A motion to dismiss under Rule 12(b)(6) should be denied if a plaintiff “could recover under any reasonably conceivable set of circumstances susceptible of proof.”  Therefore, Plaintiff must sufficiently prove he can recover the Options with the court assuming the truth of all well-pled facts in the complaint and drawing reasonable inferences in Plaintiff’s favor. 

The court found that the General Release agreement extended to Plaintiff as an individual and released his claims against Mozido related to the Options.  The court first evaluated the General Release itself, and found when the language of the release was clear and unambiguous.  In addition, the court declined to read the General Release in conjunction with the settlement.  Instead, “[t]he General Release must be interpreted within its four corners.” As for the contention that Plaintiff was not subject to the release, the court concluded that he controlled the Geier Irrevocable Trust and the Geier Group.  Moreover, even if he did not, he constituted an “affiliate” and was therefore covered by the General Release. 

For the above reasons, the Court of Chancery of Delaware granted Mozido’s motion, dismissing Plaintiff’s claim. 

The primary material for this case may be found on the DU Corporate Governance website.

Monday
Apr032017

Janvey v. Golf Channel: Objective Value Provided Prevails Over Ponzi Claims

In Janvey v. Golf Channel, Inc., No. 13-11305, 2016 BL 272349 (5th Cir. Aug. 22, 2016), the United States Court of Appeals for the Fifth Circuit affirmed the district court’s decision denying summary judgment to Janvey, the court-appointed receiver for Stanford International Bank, (“Plaintiff”) and granting summary judgment to Golf Channel (“Defendant”) allowing Golf Channel to retain the $5.9 million paid by Stanford International Bank for advertising services.

According to the allegations, the Golf Channel had an advertising contract with Stanford International Bank worth over $5.9M. After the SEC exposed Stanford International Bank’s Ponzi scheme, the court appointed a receiver, Janvey, to recover fraudulent transfers.  Janvey contended, relying on the Texas Uniform Fraudulent Transfer Act (“TUFTA”), that the payments made to Golf Channel did not benefit the investors or creditors, even though the advertising services would be “valuable” to another business. The district court granted Golf Channel’s motion for summary judgment based on its interpretation of TUFTA and the affirmative defense by the Golf Channel that the payments received were “in good faith and for a reasonably equivalent value.” Under TUFTA, a creditor can recover transfers made with the intent to defraud unless the transferee establishes that the transfers were received in good faith and for reasonable equivalent value. The Supreme Court of Texas certified that the inquiry of “value” under TUFTA does not depend on whether the debtor was operating a Ponzi scheme, but whether “the services would have been available to another buyer at market rates.” Other states’ fraudulent transfer laws and section 548(c) of the Bankruptcy Code examine “the degree to which the transferor’s net wealth is preserved,” but TUFTA does not.

In early 2015, the Fifth Circuit initially reversed the district court’s judgment, based on its interpretation of TUFTA finding that “the payments to Golf Channel were not for “value” because Golf Channel’s advertising services could only have depleted the value of the Stanford estate and thus did not benefit Stanford’s creditors.”  In response to the Golf Channel’s petition for rehearing, the court certified a question to the Texas Supreme Court on what constitutes “value.”  The Texas Supreme Court reasoned that the Golf Channel’s advertising had objective “value and utility from a reasonable creditor’s perspective at the time of the transaction, regardless of Stanford’s financial solvency at the time.” Janvey v. Golf Channel, Inc., 487 S.W.3d 560 (Tex. 2016).

Based on the opinion from the Texas Supreme Court, the appeals court affirmed the district court’s judgment for the Defendant.

The primary materials for this case may be found on the DU Corporate Governance website.

Wednesday
Mar012017

Lanier v. Bats Exch. Inc.: Appellate Court Upholds SRO’s Motion to Dismiss

This is one of two posts discussing Lanier v. Bats Exch. Inc., 838 F.3d 139  (2d Cir. 2016). This post will specifically cover the breach of contract claims. The second post covers subject matter jurisdiction.

In Lanier v. Bats Exch. Inc., 2d Cir., No. 15-1683 (2d Cir. Sep. 23, 2016), the United States Court of Appeals for the Second Circuit affirmed the district court’s dismissal of Harold Lanier’s (“Plaintiff”) breach of contract claims against a group of national securities exchanges (“Defendants”) for failure to state a claim.

National security exchanges are self-regulatory organizations (“SRO”) subject to the Securities and Exchange Commission’s (“SEC”) approval and oversight. The SEC has the authority to revoke their status as SROs. The national exchanges are required to comply with the SEC’s rules and regulations, including those addressing the distribution of “[i]nformation with respect to quotations for or transactions in any security.” The quotation and transaction information must be distributed “on terms that are not unreasonably discriminate.”

According to the complaint, Plaintiff contracted with Defendants to receive consolidated data via a securities information processor about securities traded on the Defendants’ exchanges. Plaintiff alleges that Defendants disseminated the same market date sent to the processor directly to a group of preferred customers and, due to the preferred customers’ bandwidth, transfer protocol, and physical location of servers, these customers received data as quickly as “one microsecond” after the data was sent. Plaintiff claimed the preferred customers benefited from the speed at which they received the market data.  Plaintiff and other similarly positioned traders (collectively “Subscribers”), in contrast, received stale data. Plaintiff alleged Defendants breached their contracts because the preferred customers received market data up to 1,499 microseconds faster than Subscribers.

Plaintiff argued Subscribers should have received market data prior to or at the same time as the preferred customer to be fair and nondiscriminatory. The court disagreed and noted that the SEC appeared to interpret the requirement to mean data must be sent at the same time, not received. Moreover, the court found that if Plaintiff’s theory were allowed, it would undermine Congress’ intent to create uniform rules for governing the national market system, a task given to the SEC. Thus, Plaintiff’s interpretation of the contracts was preempted.

The court next turned to the breach of contract claims. To plead a breach of contract claim, the claim must have been premised on failure to fulfill contractual obligations independent of the obligations imposed by the SEC. The court failed to find any basis in the contract for the allegation that the preferred customers could not receive data prior to the processer. Nor could the contract be read to require that the processor be a “single source” of the NBBO. As the court concluded: “As Lanier has failed to identify any contractual promise independent of the relevant regulations that was breached by the prior receipt of data by Preferred Customers, he has failed to state a claim for breach of contract.”

Finally, the court found Plaintiff failed to exhaust all remedies at the administrative level. Under the exhaustion rule, a party may not seek federal judicial review of an adverse administrative determination until the party has first sought all possible review with the agency itself. The court noted Plaintiff still had the right to seek review before the SEC of any breach of contract claim. Consequently, the Plaintiff’s claims were not ripe for review.

Accordingly, the court affirmed the district court’s ruling and dismissed the complaint for failure to state a claim.

The primary materials for this case may be found at the DU Corporate Governance website

Wednesday
Mar012017

The U.S. District Court for the Northern District of California Denies Fitbit’s Motion to Dismiss Investors’ Exchange Act Violation Claims

This post is one of two posts discussing Fitbit’s allegedly false marketing claims regarding its heart rate monitoring devices. This post will specifically focus on claims made under the Securities Exchange Act of 1934 (“Exchange Act”). The other post covers claims made under the Securities Act of 1933.

In Robb v. Fitbit, Inc., et al., No. 16-cv-00151-SI 2016 BL 359028 (N.D. Cal. Oct. 26, 2016), Plaintiff Brian Robb filed a class action lawsuit on behalf of all persons who acquired Fitbit securities prior to the drop in Fitbit’s stock value, which was allegedly caused by inaccuracy of its heart rate monitors. Fitbit Inc. and Fitbit control persons James Park, William Zerella, and Eric Friedman, (collectively “Defendants”) filed a motion to dismiss claims made against them under the Exchange Act in connection with Fitbit’s marketing of its heart rate monitoring devices and its initial public offering (“IPO”). The district court denied the Defendants’ motion to dismiss and determined the plaintiff class (“Plaintiffs”) sufficiently alleged material misrepresentation or omission, scienter, and loss causation actionable under the Exchange Act.

According to the allegations, Fitbit in October 2014 announced its new “heart rate technology” and advertised heavily that it would be featured in two products. A January 2015 press release described the technology as superior tracking that “works no matter what you’re doing.” In June 2015, Fitbit completed its IPO with net proceeds reaching approximately $416 million. The IPO Prospectus described the new products as key revenue drivers. The sales of these devices led Fitbit’s revenues to reach $1.858 billion in 2015, up from $745.4 million in 2014. In August 2015, defendant Park made statements that the heart rate technology took many years to develop and Fitbit only launches products “when we feel they’re ready.” 

On January 5, 2016, Fitbit purchasers filed a class action lawsuit alleging inaccuracy of the heart rate monitoring technology, and on the same day, Fitbit’s stock dropped from $30.96 per share to $24.30 per share. On May 19, 2016 purchasers filed an amended complaint including study findings of the product’s inaccuracy and by that day’s closing Fitbit’s stock fell to $13.99 per share.

Plaintiffs filed the current lawsuit alleging Defendants violated Section 10(b) of the Exchange Act by making, knowingly, or with deliberate recklessness, misstatements and/or failing to disclose information about the technology’s inaccuracy. Plaintiffs asserted the impact of these products on Fitbit’s revenue motivated investment and gave Defendants incentive to inflate the devices’ performance. Two confidential witness statements from Fitbit data contractors reported Fitbit’s internal testing revealed the heart rate technology was inaccurate. Plaintiffs further alleged violations of Section 20(a) of the Exchange Act against the “control persons” by virtue of their roles in the company.

Defendants filed a motion to dismiss both claims on the basis that the Plaintiffs failed to sufficiently allege misstatements, scienter, and loss causation.

Section 10(b) of the Exchange Act prohibits any act or omission resulting in fraud connected with securities transactions. A plaintiff asserting a Section 10(b) claim must adequately allege the defendant’s material misrepresentation or omission, scienter, and loss causation. Section 20(a) of the Exchange Act holds “control persons” liable for violation of Section 10(b).

The court determined the alleged misstatements concerning the accuracy of the Fitbit products made in press releases and by control persons were statements upon which a reasonable investor would rely and were sufficient to state a claim for material misrepresentation. With respect to scienter, the court rejected Plaintiffs assertion that knowledge of the products “limited accuracy” could be inferred from the personal use of the device by some of the Defendants.  “Though defendants may have used the devices to track their own heart rates, there is no indication that they had any metric against which to compare these measurements in order to determine their accuracy. Their mere use of the devices thus fails to establish defendants' knowledge of inaccuracy and, taken individually, does not prove scienter.”

The court did, however, find that the statements by the confidential witnesses were sufficient to plead scienter. “In addressing the first prong of the CW analysis, both CW 1 and CW 2 held positions that exposed them directly to data and consumer complaints on the Charge HR and Surge, establishing their reliability and personal knowledge of the alleged inaccuracies. Second, both CW 1 and CW 2 reported directly to COO . . . indicating scienter by Fitbit executives.”

Finally, the court determined the correlation between the timing of the lawsuit questioning Fitbit’s technology and the drop in stock price was adequate to plausibly establish loss causation. Given these findings, the court held the Plaintiffs sufficiently alleged a claim for violation of Section 10(b), thus the claim for liability under Section 20(a) was also valid. Accordingly, the court denied the dismissal of either claim.

The primary materials for this case can be found on the DU Corporate Governance website.

Monday
Feb272017

Moreno v. Deutsche Bank: Employees Sufficiently Plead Claims for Breach of Fiduciary Duty and Prohibited Transactions

In Moreno v. Deutsche Bank Am.s Holding Corp., No. 15 Civ. 9936 (LGS), 2016 BL 342731 (S.D.N.Y. Oct. 13, 2016), the United States District Court for the Southern District of New York denied in part and granted in part defendants’ motion to dismiss plaintiffs’ amended class action complaint against Deutsche Bank Americas Holding Corp. (“DBAHC”), DBAHC Executive Committee, Deutsche Bank Matched Savings Plan Investment Committee (the “Investment Committee”), Richard O’Connell, Deutsche Investment Management Americas Inc. (“DIMA”), and RREEF America, LLC (“RREEF”) (collectively, “Defendants”). The court held that Ramon Moreno and Donald O’Halloran, individually and on behalf of those similarly situated (“Plaintiffs”), sufficiently pleaded claims for breach of fiduciary duty and prohibited transactions under the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq. 

According to the allegations, Plaintiffs, from 2009 until February 2013, participated in the Deutsche Bank Matched Savings Plan (the “Plan”), a 401(k) plan with $1.9 billion in assets that offered Deutsche Bank employees various investment options. According to the complaint, the Plan included three proprietary index funds that charged excessive fees in relation to other comparable index funds managed by the Vanguard Group” and actively managed proprietary funds that charged fees up to five times higher fees than comparable funds.  The proprietary funds also allegedly underperformed “as measured by benchmark indices.”  For at least two of the proprietary funds, “the Plan was the only defined contribution plan among roughly 1,400 such plans with more than $500 million in assets to hold these funds.”

On December 21, 2015, Plaintiffs filed a complaint alleging Defendants were fiduciaries and that they breached their fiduciary duties of loyalty and care in selecting and managing the Plan investments. Plaintiffs alleged that the Plan’s inclusion of propriety funds resulted in prohibited transactions because DBAHC entities received monthly payment for services rendered to the funds. Moreover, Plaintiffs asserted that DBAHC, DIMA, and RREEF conducted prohibited self-dealing transactions by receiving consideration for investment services provided by DIMA and RREEF, subsidiaries of DBAHC.

Defendants moved to dismiss the complaint, arguing that the action was barred by ERISA’s statute of limitations, that Plaintiffs failed to state a claim, and that RREEF and DIMA lack fiduciary status.

Under 29 U.S.C. § 1104, a fiduciary owes duties of loyalty and care to act solely in the interest of the participants in the plan.  The standard looks to “whether a fiduciary employed the appropriate methods to investigate and determine the merits of a particular investment.” Prohibited transactions between a plan and a common trust fund managed by a trust company which is supervised by a State or Federal agency are exempt under 29 U.S.C. § 1108(b)(8) if: (1) the transaction involves selling or purchasing fund interests; (2) the trust company is not overcompensated; and (3) the transaction is expressly permitted by an authoritative party.     

The court held that Plaintiffs’ claims were not barred under ERISA’s statute of limitations, 29 U.S.C. § 1113, because, according to the allegations, Plaintiffs did not have actual knowledge of the violations until shortly before the complaint was filed. Next, the court found that Plaintiffs plausibly alleged that Defendants violated the obligation of care by including excessively costly proprietary funds in the Plan.  “Equally important, the Complaint alleges that Defendants stood to benefit from the alleged excessive fees because Deutsche Bank entities were paid investment management fees by these proprietary funds.” 

With respect to the statute of limitations, the court disagreed with Defendant contention that the period had begun when the initial decision was made to include the proprietary funds in the Plan.  Instead, the court noted that the Complaint alleged that the prohibited transactions were periodic service fees paid to Deutsche Bank entities. 

The court, however, agreed with Defendants’ assertion that DIMA and RREEF lacked fiduciary status under 29 U.S.C. § 1002(21)(A) because the complaint failed to sufficiently allege that DIMA and RREEF were compensated for providing investment advice that influenced the Plan’s investment decisions.

For the above reasons, the court dismissed DIMA and RREEF from the action and denied Defendants’ motion to dismiss. 

The primary materials for this case may be found on the DU Corporate Governance website.

Friday
Feb242017

Lanier v. BATS Exch. Inc.: Court Finds It Has Proper Subject Matter Jurisdiction

This is one of two posts discussing Lanier v. BATS Exch. Inc., 838 F.3d 139 (2d Cir. 2016). This post will specifically cover subject matter jurisdiction. The second post covers failure to state a contract claim.

In Lanier v. BATS Exch. Inc., 2d Cir., No. 151683 (2d Cir. Sep. 23, 2016), the United States Court of Appeals for the Second Circuit held it had proper subject matter jurisdiction to consider the claims.

Defendants, national Securities Exchanges (the “Exchanges”), provide information about securities traded on the Exchanges to an exclusive securities processor (“Processor”) pursuant to Regulation National Market System (”Reg NMS”). Reg NMS standardizes the dissemination of market information by all exchanges trading U.S. securities under the authority of the Securities and Exchange Commission (“SEC”). The Processor consolidates data and makes it available to subscribers (“Subscribers”), who pay fees for access. The Exchanges also provided access to market data on proprietary distribution channels to customers who paid higher fees (“Preferred Customers”) than standard Subscribers. According to the complaint, Preferred Customers could access market data up to 1,499 microseconds faster than Subscribers due to the difference in processing time between the two services, and therefore trade on the data earlier.

Harold Lanier, on behalf of himself and others similarly situated (collectively, the “Plaintiffs”), filed suit against the Exchanges alleging that the Exchanges had breached their contract with the Plaintiffs by providing preferentially fast access to the Preferred Customers. The Exchanges argued that the district court lacked subject matter jurisdiction because the Plaintiffs were required to seek SEC review of their claims first, and then appeal any adverse decision directly to the court of appeals.

A district court lacks subject matter jurisdiction to hear claims when Congress creates a comprehensive regulatory scheme where it is fairly discernable Congress intended agency expertise would be brought to bear prior to any court review. In determining whether Congress implicitly precluded federal district court jurisdiction, the court must first determine if preclusion is discernable from the text, structure, and purpose of the statute. Second, the court must then decide whether the claim is of the type Congress intended to be reviewed within the statutory structure. Tilton v. Sec. & Exch. Comm’n, 824 F.3d 276, 281 (2d Cir. 2016). This second step is guided by three factors: (1) whether “a finding of preclusion could foreclose all meaningful judicial review”; (2) whether the suit is “wholly collateral to a statute’s review provisions”; and (3) whether the claims are outside of the agency’s expertise. Thunder Basin Coal Co. v. Reich, 510 U.S. 200, (1994).

The court elected not to address the first step of the Tilton analysis, as it determined the Plaintiffs’ contract claims are not the type Congress intended to be precluded from district court jurisdiction. Under the second step of the Tilton analysis, the court held the Plaintiffs’ claims were not “wholly collateral” because the claims were not substantively intertwined with the merits of an issue that, under the statute’s provisions, must first be heard by the SEC. The court further held that the SEC possessed no “agency expertise” that would make a district court less competent to hear the case, as the Plaintiffs’ claims are rooted in contract law, an area of law squarely within the district court’s competency. Finally, the court found the preclusion of district court jurisdiction would foreclose the Plaintiffs’ ability to obtain meaningful judicial review as the Plaintiffs principally seek monetary damages and the administrative review provisions of the Securities and Exchange Act do not provide for such damages.

Accordingly, the court held it had proper subject matter jurisdiction to hear the Plaintiffs’ claims.

The primary materials for this case can be found on the DU Corporate Governance website.

Wednesday
Feb222017

Local No. 8 IBEW Ret. Plan & Tr. v. Vertex Pharm., Inc.: Plaintiff Unable to Prove Scienter

In Local No. 8 IBEW Ret. Plan & Tr. v. Vertex Pharm., Inc., 838 F.3d 76 (1st Cir. 2016), the United States Court of Appeals for the First Circuit affirmed the dismissal of Local No. 8 IBEW Retirement Plan & Trust’s (“Plaintiff”) claims against Vertex and six of its current and past employees (collectively “Defendants”). The court found that Plaintiff failed to plead facts that would allow the court to draw a reasonable inference that Defendants acted with the scienter required to show fraud under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) when Defendants allegedly misstated the interim results of its study on a cystic fibrosis combination treatment.

According to the allegations, Vertex received approval from the Food and Drug Administration (FDA) in early 2012 to market its drug, Kalydeco. Thereafter, Vertex began a three-phase clinical investigation on the effectiveness of the combination of Kalydeco and VX-809 in cystic fibrosis patients. During the second phase of the investigation, Vertex discovered forty-six percent patients improved by five percent and thirty percent improved by ten percent. Vertex issued a press release May 7, 2012 on the findings, which was followed by a stock increase from $58.12 per share to $64.85. 

Shortly thereafter, Vertex discovered the results had been overstated; only thirty-five percent of patients improved by five percent improvement and nineteen percent of the patients improved ten percent. Vertex issued a second press release May 29, 2012 correcting the findings. Subsequently, its stock dropped to $57.80 per share. 

Plaintiff acquired Vertex stock in reliance on the press release issued May 7, 2012. Two years later, Plaintiff filed a class action against Defendants on behalf of everyone who also acquired stock relying on the May 7, 2012 press release. Plaintiff alleged Defendants committed securities fraud under Section 10(b) by not double-checking interim results that seemed implausible before announcing results to the public. Plaintiff claimed the error was so obvious Defendants knew or should have been aware of the error. The complaint further alleged the increase in stock sales and the retirement of the Executive Vice president showed Defendants acted with a motive. 

Under Section 10(b), a securities fraud claim is found when alleged facts show a strong and compelling inference Defendants acted with scienter. Scienter is established “by showing that [D]efendants either consciously intended to defraud, or acted with a high degree of recklessness.” 

The court held Plaintiff failed to plead facts that showed Defendants acted with the requisite scienter. Plaintiff did not state facts that suggested the results were not obvious and implausible (i.e. there was no proof that cystic fibrosis scientist would have regarded the facts as obviously mistaken). Nor did the complaint allege facts which showed Defendants noticed the error. While the press release was followed with an increase in stock sales and the retirement of Vertex’s Executive Vice President, these facts were insufficient to demonstrate scienter. Particularly with the retirement of the executive, the court noted that “[a]lternative explanations” to fraudulent intent “abound[ed].”   

For the above reasons, the United States Court of Appeals for the First Circuit granted Defendants’ motion, dismissing Plaintiff’s complaint. 

The primary materials for this case may be found on the DU Corporate Governance Website.

Monday
Feb202017

Binning v. Gursahaney: Demand Futility Analysis Fails to Persuade Court

In Binning v. Gursahaney, No. 10586-VCMR, 2016 BL 145556 (Del. Ch. May 6, 2016), the Delaware Chancery Court granted ADT’s CEO Naren Gursahaney, other board members, and investment management firm Corvex Management LP’s (collectively the “Defendants”) motions to dismiss ADT stockholder, Jeran Binning’s (“Plaintiff”) Verified First Amended Stockholder Derivative Complaint (“FAC”). The court held the FAC was not alleged under Court of Chancery Rule 23.1 that pre-suit demand was futile.

According to Plaintiff’s allegations, ADT’s Board of Directors made several decisions designed to appease activist investor Keith Meister following his purchase, through Corvex Management LP, of ADT’s outstanding stock. Meister allegedly used his stockholder position to encourage the Board to issue debt securities to fund stock repurchases, repurchase stock from Corvex for over $450 million, and execute a standstill agreement that ensured Meister a seat on the Board. Plaintiff claimed the members of the board entrenched themselves, perceiving a threat to their positions from Mesiter’s actions, instead of acting in stockholders’ best interests.

On January 27, 2015, Plaintiff filed suit against the Board under Court of Chancery Rule 23.1. Court of Chancery Rule 23.1 enables a stockholder plaintiff to bring a derivative action on behalf of the corporation. Under the rule, plaintiffs must allege that they made demand on the board or state with particularity why pre-suit demand was futile. Defendants alleged a failure to adequately allege demand futility. In addition, Defendants sought dismissal on the basis of stare decisis. 

The stare decisis claim arose out of a suit “based on the same Board action” that had been previously dismissed. In Ryan v. Gursahaney, C.A. No. 9992-VCP, 2015 WL 1915911 (Del. Ch. Apr. 28, 2015), the Chancery Court dismissed the claim for failure to establish demand futility.  The court found that the “non-conclusory allegations in the Complaint . . . do not raise a reasonable doubt as to the Director Defendants' disinterestedness or independence based on this entrenchment theory.” Moreover, the court found that the shareholder had not rebutted the presumption of the business judgment rule by alleging particularized facts demonstrating gross negligence. 

The court in Binning agreed that the principle of stare decisis controlled the outcome of the decision. As the court noted, “the principle of stare decisis, therefore, counsels that Binning's Complaint should be dismissed absent a sufficient factual or legal distinction from Ryan.” The court examined the distinctions asserted by Plaintiff in the two suits and found them “insufficient to plead demand futility.” With respect to Plaintiff’s allegations of an ongoing SEC investigation, the court noted that plaintiff did not explain how the fact would support a finding of futility and that the case filed by the SEC had been dismissed. 

The court found that without more information to support the additional allegations, Plaintiff’s claims failed under Rule 23.1. The court concluded that the new allegations were insufficient to alter the demand futility analysis already found in Ryan. Accordingly, the court granted Defendants’ motions to dismiss all claims based on Plaintiff’s failure to bring a pre-suit demand to the Board or to show the pre-suit demand was futile, as required by Rule 23.1.

The primary materials for this case may be found on the DU Corporate Governance website.

Friday
Feb172017

It’s Official: Trump Signs Resolution Repealing the Resource Extractive Industries Rule Pursuant to the Congressional Review Act: Now What?

President Trump recently signed Joint House Resolution 41, sponsored by Congressman Bill Huizenga, R-MI. This bill eliminates the resource extractive industries rule (discussed here and here). According to Rep. Huizenga, the “bill eliminates a burdensome regulation put in place by the Securities and Exchange Commission (SEC) that hurts our economy by putting American companies at a disadvantage globally.”  Whether one agrees with Rep. Huizenga or with others who view the resource extractive industries rule as a vital tool in fighting global corruption is an interesting debate, but there much more at stake here than this rule.  What is of greater import is the method by which the rule was repealed. 

The repeal of the resource extractive industries rule was done pursuant to the Congressional Review Act. It marks what is the first time this year the CRA has been used “successfully” and only the second time in history.  The first was in 2001 when then President George W. Bush signed a resolution of disapproval of an ergonomics rule adopted in 2000 during the Clinton Administration.   In order to understand the importance of this, a brief overview of the Congressional Review Act is in order.

The CRA, authored by Representative David McIntosh (R–IN), was signed into law by President Clinton in 1996 as part of the “Contract with America.”  The Act is intended to make it easier for Congress to repeal regulations.  Congress can of course stop any legislation it wants to but the CRA provides a streamlined process for Congress to disapprove a final rule and does not allow for filibuster.  Importantly, the CRA states that

A rule that does not take effect (or does not continue) under paragraph (1) may not be reissued in substantially the same form, and a new rule that is substantially the same as such a rule may not be issued, unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.

The CRA Review Process

The CRA process begins with a notification to Congress from an agency that is has adopted a new regulation. The notification triggers a 60-day period in which Congress can introduce a “resolution of disapproval” of a rule. Rules that are still within this 60-day period when Congress adjourns will have a fresh 60-day review period at the start of the next Congress.  The 60-day period is calculated in terms of “legislative” days, not actual calendar days. As calculated by the Congressional Research Service (CRS), this means that rules adopted as far back as June 3, 2016, are still within this review period

As with all legislation, once approved by Congress, the resolution of disapproval goes to the President for signature or veto. If the President signs the CRA resolution into law, or Congress overrides a presidential veto, the regulation is deemed “disapproved” and will not take effect.  Moreover, as mentioned above, the CRA prohibits the agency from promulgating any rule which is “substantially the same” as the one disapproved. 

The Trump Administrations Use of the CRA

The repeal of the resource extractive industries rule is by no means the only use of the CRA by the Trump administration.  It is difficult to get an exact count of how many regulations are under attack given how quickly the motions to approve resolutions of disapproval are coming.  A recent Washington Post article estimated that in the first ten days of the Trump administration thirty-seven such motions have been made.  Regulations on tap for repeal include, among others, Rules under the Dodd–Frank financial regulation law, sick leave for federal contractors, offshore drilling rules, energy mandates for home appliances, and rule that would bar gun ownership by some who have been deemed mentally impaired by the Social Security Administration.  There is much to say about this unprecedented use of the CRA—for now however it is worth considering the legal limbo the SEC now finds itself in due to the repeal of the resource extractive industries rule. 

Legal Limbo Caused by the CRA 

Let us consider where the SEC is left after the repeal of the resource extractive industries rule.  Section 1504 of Dodd-Frank still stands.  Pursuant to that statute, the SEC must “issue final rules that require each resource extraction issuer to include in an annual report of the resource extraction issuer information relating to any payment made by the resource extraction issuer…”

So the SEC is legally required to issue a rule that satisfies the above requirement.  According to a CRA Fact Sheet, the agency has one year to do so-- “[i]f a statute or court establishes a deadline for promulgating a rule, the CRA joint resolution of disapproval does not prohibit an agency from issuing future rules as required by the deadline. Instead, the deadline to do so is extended by one year from the date of the joint resolution of disapproval.” Thus, the SEC has until February 2018 to issue a new rule.

However, recall that under the CRA the agency cannot issue a rule that is substantially the same as the rule that was subject to a resolution of disapproval.  So now what?  A court could seek to define what “substantially similar” means in the context of the CRA—something that has not yet been done. "There's no body of law on that, so everything that happens is going to be critically important," said Lisa Gilbert, director of Public Citizen's Congress Watch division.  But any judicial attempt to provide clarity may be hampered by a provision in the CRA that states, “no determination, finding, action, or omission under this chapter shall be subject to judicial review.”

Of course, this may become moot if Trump succeeds in totally gutting Dodd-Frank.  Nevertheless, until that happens we are in uncharted waters.

Wednesday
Feb082017

No-Action Letter for Microsoft, Corp. Prevents Exclusion of Proxy Access Bylaw Proposal

In Microsoft, Corp., 2016 BL 320577 (Sept. 27, 2016), Microsoft Corporation (“Microsoft”) asked the staff of the Securities and Exchange Commission to permit the omission of a proposal submitted by shareholder James McRitchie ("McRitchie") requesting that the board of directors amend certain provisions of its proxy access bylaw. The SEC denied the request for no-action relief, concluding that Microsoft may not exclude McRitchie’s proposal from its annual proxy statement under Rule 14a-8(i)(10).

Shareholder submitted a proposal providing:

RESOLVED, Shareholders of Microsoft (the “Company”) asks the board of directors (the “Board”) to adopt, and present for shareholders approval, an enhancement package of its Proxy Access for Director Nominations bylaw, with essential elements for substantial implementation as follows:

1. The number of shareholder-nominated candidates eligible to appear in proxy materials should   not exceed one quarter of the directors then serving or two, whichever is greater. Expansion of the  current number of director positions could substantially dilute the influence of shareholders under the  Company’s current proxy access provisions.

2.     No limitations on the number of shareholders that can aggregate their shares to achieve the 3% “Required Shares,” outstanding shares of the Company entitled to vote in the election of directors.  Under current provisions, even if the 20 largest public pensions funds were able to aggregate their shares, they would not meet the 3% criteria at most of the companies examined by the Council of Institutional Investors.

3.     No limitation on the re-nomination of shareholder nominees based on the number or percentage of votes received in any election.  Such limitations do not facilitate the shareholders’ traditional state law rights and add unnecessary complexity.

4.     To the extent possible, the Board should defer decisions about the suitability of the shareholder nominees to the vote of the shareholders.

Microsoft sought exclusion of the proposal from its proxy materials under subsection (i)(10) of Rule 14a-8. 

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the Rule provides companies thirteen substantive grounds for exclusion of the proposal. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.

Rule 14a-8(i)(10) allows the exclusion of a shareholder proposal that has s already substantially implemented by the company. Specifically, companies can exclude proposals relating to matters that have already been “favorably acted upon” by the company. The SEC staff considers whether a company can demonstrate that its actions address the “essential objective” of the proposal.  For a more detailed discussion of this exclusion, see Aren Sharifi, Rule 14a-8(i)(10):  How Substantial Is “Substantially” Implemented in the Context of the Social Policy Proposals?

Microsoft argued the proposal should be excluded under subsection (i)(10) because it substantially implemented the proposal. Specifically, in August 2015, the Board adopted amendments to Microsoft’s bylaws to implement a proxy access bylaw. Microsoft’s bylaw differed from the shareholder proposal in a number of respects. While applying a 3% threshold, the bylaw permitted aggregation by no more than 20 shareholders. The bylaw also prohibited shareholders relying on proxy access from re-nominating “the same proxy access candidate for two years if that candidate failed to receive at least 25% of the votes cast for his or her election as a director.” The bylaw limited the number of directors to the greater of two or 20% and did not provide for deference to the suitability of a shareholder nominee.  

A letter on behalf of the proponent by John Chevedden took particular issue with the limit on the number of shareholders allowed to aggregate their interests. He argued that a proposal specifying a range allowed the board to implement the proposal at the high end or to round down to the nearest whole number. In the shareholder access context, however, boards should not be entitled under Rule 14a-8(i)(10) to round an infinite number of shareholders forming a group down to 20. That is not substantial implementation. In a letter by the proponent, he noted that the limit on the ability to aggregate would result in the inability of “individuals and all but the largest institutional investors” to “meaningfully participate in making proxy access nominations, except in the rarest of circumstances.”

The Commission disagreed with Microsoft’s reasoning. The Commission concluded Microsoft may not omit the proposal from its annual proxy statement in reliance on Rule 14a-8(i)(10) because Microsoft’s proxy access bylaw did not substantially implement the proposal. The staff reasoned Microsoft’s proxy access bylaw did not “compare favorably with the guidelines of the proposal.”

The primary materials for this case may be found on the SEC website.