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Friday
Sep012017

No-Action Letter for McDonald's Corporation Denying Exclusion of Franchise Director Election Proposal 

In McDonald's Corporation, 2017 BL 84444 (March 16, 2017), McDonald's Corp. ("McDonald's") asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a shareholder proposal submitted by Marco Consulting Group Trust I ("Shareholder") requesting that McDonald's adopt a plan to issue a new series of preferred stock, entitling franchise owners to elect a franchise director. The SEC issued a no-action letter denying the exclusion of the proposal under Rules 14a-8(i)(7), 14a-8(i)(2), and 14a-8(i)(6).   

Shareholder submitted a proposal providing that: 

RESOLVED: that shareholders of McDonald's Corporation (“McDonald’s” or the “Company”) request that the Board take the necessary steps (including initiating appropriate amendments to the certificate of incorporation and bylaws and excluding those steps that must be taken by shareholders) to adopt a plan to give the Owner/Operators of McDonald's restaurants who pay royalties to McDonald's (hereinafter, “Franchisees”) the power to elect one new member of the Board, by issuing to Franchisees shares of a new series of preferred stock (“Franchise Preferred”), whose holders are entitled to elect the new director (the “Franchise Director”).

Shareholders requests that the Company’s amended governing documents provide that:

(i)             one share of the Franchise Preferred should be issued to each Franchisee, for each franchised restaurant;

(ii)           consideration for the Franchisee Preferred should be a minimal amount.

(iii)          the Franchisee Preferred should be redeemable by the Company at nominal cost when a Franchisee ceases to own a franchised restaurant;

(iv)          the Franchisee Preferred should entitle the holder to no amount upon liquidation, termination or dissolution of the Company;

(v)           the Franchisee Preferred should not be transferable to anyone other than McDonald’s and should not entitle its holder to vote on any matter other than the election of the new Franchisee Director; and

(vi)          the Franchisee Preferred holders have the authority to nominate and elect the Franchisee Director, who may be required to satisfy director qualifications applicable generally to independent directors.

This proposal should be implemented in a way that does not violate the terms of any existing agreement. 

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 indicates thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC & The Shareholder Proposal Rule and the SEC (Part II).

Rule 14a-8(i)(7) permits the exclusion of proposals that relate to the company's "ordinary business operations." This section understands "ordinary business" to mean issues that are fundamental to a company's daily management abilities.  Thus, proposals dealing with issues dealing in "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, 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). 

Additionally, Rule 14a-8(i)(2) permits the exclusion of proposals that would cause a company to violate state law. See Jason Haubenreiser, Rule 14a-8 and the Exclusion of Proposals that Violate the Law. Furthermore, Rule 14-8(i)(6) permits the exclusion of proposals where a company lacks the power and authority to implement the proposal. If a company must violate the law to implement a proposal, then the company authority to comply with the shareholder request.  See Donovan Gibbons, Excluding Proposals in the Absence of Corporate Authority 

McDonald's argued the proposal should be excluded under Rule 14a-8(i)(7) because proposals asking a company to issue a new series of preferred stock relates to the management of a company's capital structure, thereby constituting "ordinary business” operations. Additionally, McDonald's argued proposals seeking corporate governance reforms “in a manner that involve[d] a company’s ordinary business” had consistently been excluded. Finally, McDonald's argued that electing a new director would amount to corporate governance reform under the rule.  

Shareholder disagreed, arguing that the main thrust of the proposal was seeking to provide board representation for franchisees, not to address the company’s capital structure. Shareholder further argued that issuing shares of a new class of preferred stock is the mechanism proposed to affect the representation on the board and that this type of governance reform was “not the kind of day-to-day tasks on which the ordinary business exclusion seeks to preclude shareholder oversight.”

McDonald's also argued for exclusion under Rule 14a-8(i)(2) and Rule 14a-8(i)(6), arguing the terms of the new stock did not confer preferences, which was required by Delaware law, the company’s state of incorporation. Thus, McDonald’s lacked the power and authority to implement a proposal that violated Delaware law.   

Shareholder, however, argued a redemption can constituted preference, and Franchise Preferred stock provided for redemption. 

The SEC did not agree with McDonald’s arguments that the proposal would fall under normal business operations, and that they would to violate state law to implement requirements of the proposal.  Therefore, the SEC recommended enforcement action if McDonald’s omitted the proposal from its proxy materials. 

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

Thursday
Aug312017

No-Action Letter for The Walt Disney Co. Did Not Permit Exclusion of "Proxy Access" Bylaw Amendment Proposal

In The Walt Disney Co., 2016 BL 371081 (Feb. 3, 2016), The Walt Disney Company (“Disney”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission a proposal submitted by shareholder, James McRitchie, (“Shareholder”) requesting the board of directors (the "Board") amend its "Proxy Access" bylaw, and any other associated documents, to include essential elements for substantial implementation to better facilitate meaningful proxy access by more shareholders. The SEC declined to issue the requested no action letter under Rules 14a-8(c) and 14a-8(i)(10) of the Securities Exchange Act.

Shareholder submitted a proposal providing that:

RESOLVED: Shareholders of The Walt Disney Company (the "Company") ask the board of directors (the "Board") to amend its "Proxy Access" bylaw, and any other associated documents, to include essential elements for substantial implementation to better facilitate meaningful proxy access by more shareholders as follows:

 

  • 1. The number of "Stockholder Nominees" eligible to appear in proxy materials shall be 25% of the directors then serving or 2, whichever is greater. Current bylaws restrict Stockholder Nominees to 20% of directors. Under the current 12-member board, stockholder nominees are currently limited to nominating two. Any shareholders nominee elected under the current bylaws could be easily isolated.
  • 2. No limitation shall be placed on the number of stockholders that can aggregate their shares to achieve the 3% "Required Shares" for an "Eligible Stockholder." Under current provisions, even if the 20 largest public pension funds were able to aggregate their shares, they would not meet the 3% criteria at most of companies examined by the Council of Institutional Investors. Allowing an unlimited number of shareholders to aggregate shares will facilitate greater participation by individuals and institutional investors in meeting the Ownership Requirements.
  • 3. No limitation shall be imposed on the re-nomination of "Stockholder 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.

 

Disney sought exclusion of the proposal from its proxy materials under subsections (c) and (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 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(c) provides that a shareholder may submit only one proposal to a company per shareholder meeting. A single well-defined unifying concept must bind multiple Proposals together for one proposal.

 

Rule 14a-8(i)(10) permits a company to exclude a shareholder proposal from its proxy materials if the company has substantially implemented the proposal. The purpose of subsection (i)(10) is to "avoid the possibility of shareholders having to consider matters which have already been favorably acted upon by management." The SEC has considered particular policies, practices, and procedures that compare favorably with the guidelines of the proposal to determine if it is substantially implemented. 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?

Disney asserted the proposal should be excluded under subsection (c) because the Shareholder’s proposal was composed of three separate proposals – one proposal seeking to eliminate the limit on the number of aggregate shareholders, one seeking to change the number of director nominees that may be included, and a third seeking to eliminate the limit on nominees who have previously failed to attain the minimum percentage vote. Disney argued the proposal combined “separate and distinct elements that lack a single well-defined unifying concept,” in violation of the regulatory limit in Rule 14a-8(c) of no more than one proposal per shareholder. Therefore, the proposal may be excluded.

Disney also argued it substantially implemented a proxy access bylaw that compared favorably with the guidelines of the proposal. Specifically, the Board adopted a proxy access bylaw in June 2016 already accomplishes the proposal’s objective of “better facilitat[ing] meaningful proxy access by more shareholders.” As such, the proposal was already substantially implemented and should be excluded under subsection (i)(10).

 

In response, the Shareholder argued the proposal had a "single well-defined unified concept.” Shareholder differentiated the no-action letters Disney cited because none involved a case like this where a proponent sought amendments to a single section of a company's existing proxy access bylaws. The Shareholder also highlighted that Disney freely admitted it took no steps to “substantially implement any measures in the Proposal,” insisting that adopting what has become something of an industry standard for proxy access exempts them from having to include a valid shareholder Proposal for further amendments.

 

The Commission disagreed with Disney’s reasoning, and concluded Disney may not omit the proposal from its proxy materials in reliance on Rule 14a-8(c) because the proponent submitted only one proposal. It also concluded Disney could not exclude the proposal under subsection (i)(10). Based on the information presented, the Staff was unable to conclude Disney's proxy access bylaw compared “favorably with the guidelines of the proposal.” Accordingly, the Commission did not permit Disney’s exclusion of the Proposal under Rule14a-8(c) or 14a-8(i)(10).

 

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

Wednesday
Aug302017

Retail Wholesale & Dep’t Store Union Local 338 Ret. Fund v. Hewlett-Packard Co.: HP Stockholders Fail to State a Claim for Securities Fraud

In Retail Wholesale & Dep’t Store Union Local 338 Ret. Fund v. Hewlett-Packard Co., 845 F.3d 1268 (9th Cir. 2017), the United States Court of Appeals for the Ninth Circuit affirmed the District Court’s dismissal of plaintiffs’ amended class action complaint (the “Complaint”) against Hewlett-Packard Company (“HP”) and Mark Hurd, former CEO and Chairman of HP (“Defendants”). The Ninth Circuit held Retail Wholesale & Department Store Union Local 338 Retirement Fund, individually and on behalf of those similarly situated (“Plaintiffs”), failed to sufficiently allege a material misrepresentation or omission under Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). 

Plaintiffs purchased HP stock between November 13, 2007, and August 6, 2010 (the “Class Period”) and held shares on August 6, 2010. According to the allegations, the HP Board conducted a sexual harassment investigation into Mark Hurd in 2010 after a former independent contractor made allegations against him. The HP Board discovered Hurd, during the Class Period, “falsified expense reports and lied about his relationship” with the independent contractor. Hurd admitted to violating HP’s corporate code of ethics, the Standards of Business Conduct (“SBC”), and conceded that at times he had failed to “live up to the standards and principles of trust, respect, and integrity” which he actively promoted at HP. According to the Complaint, the price of HP stock dropped immediately after Hurd’s resignation and resulted in a $10 billion loss to HP’s stockholders. 

The Complaint alleged violations of Sections 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder. Plaintiffs claimed that Defendants’ made misrepresentations about the business ethics of the Company.  In part, the Complaint relied on statements within the SBC. In the alternative, Plaintiffs asserted that Defendants’ omitted material information by failing to disclose Hurd’s unethical behavior. 

In order to survive a motion to dismiss a claim brought under Section 10(b) of the Exchange Act and Rule 10b-5, plaintiffs must allege: (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation. Under Fed. R. Civ. P. 9(b) and the PLSRA, plaintiffs must plead with particularity the facts giving rise to a material misrepresentation or misleading omission and explain why it is misleading. The materiality of the misrepresentation or omission, determined by an objective standard, depends on whether a reasonable investor would have viewed the information as having “significantly altered the total mix of information made available” for the purpose of investment decisions. Likewise, a material omission is actionable only when disclosure is required “to make the statements made, in light of the circumstances under which they were made, not misleading.”    

The court had to determine “whether statements made in or about an ethical code are actionable representations if the ethical code is violated.”  The court found that the allegations relating to ethical behavior were “inherently aspirational” and thus were not capable of objective verification. Moreover, representations about ethical behavior “did not reasonably suggest that there would be no violations of the SBC by the CEO or anyone else.”  The court left open the possibility that the statements could be actionable had they occurred closer in time to the scandal involving Hurd.  See Id. (“We note that the case may have been closer had Hurd's sexual harassment and false expenses scandal involved facts remotely similar to those presented by the 2006 scandal, as the ethical code could then have been understood as at least promising specifically not to do what had been done in 2006.”).  With respect to Plaintiffs’ alternative pleading, the court found neither the promotion of business ethics at HP nor Defendants’ statements created an impression of total compliance with the SBC. Therefore, Defendants’ failure to inform investors of Hurd’s unethical behavior was not a material omission.

Accordingly, the Ninth Circuit affirmed the District Court’s dismissal of the Complaint, with prejudice, and held that Plaintiffs failed to state a claim under the Exchange Act.

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

Tuesday
Aug292017

United States v. Gentile: Motion to Dismiss for Untimely Indictment Granted

In United States v. Gentile, No. 16-cr-00155 (JLL), (D.N.J. Jan. 30, 2017), the United States District Court for the District of New Jersey granted Guy Gentile’s (“Defendant”) motion to dismiss an indictment for securities fraud violations.  The court held the defendant unknowingly extended the statute of limitations and the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (“Dodd-Frank”) statute of limitations did not apply retroactively.  Therefore, the original five-year statute of limitations in 18 U.S.C. § 3282(a) applied. 

According to allegations, Defendant was indicted for securities fraud violations connected to “pump-and-dump schemes” occurring between April of 2007 and June 2008.  The statute of limitations at the time the alleged criminal activity had ceased was five years.  18 U.S.C. § 3282(a).  Defendant, acting in cooperation with the Government, signed two waivers tolling “any statute of limitations” relating to the charges through July of 2014.  Defendant then refused to sign a third tolling waiver, stating he wanted the entire matter to be resolved by June 30, 2015.  In June 2015, Defendant rejected the Government’s felony disposition plea agreement, and was indicted on March 23, 2016. 

Defendant moved to dismiss the indictment, asserting it was untimely on two different grounds.  First, Defendant argued the six-year statute of limitations in Dodd-Frank was inapplicable because the alleged criminal acts took place prior to the statute’s enactment.  As a result, the five-year statute of limitations remained the applicable time period.  Second, Defendant argued that, if the six-year statute of limitations applied, the waivers were signed unknowingly and therefore invalid.  Defendant asserted both he and the Government were operating under the assumption the proper statute of limitations was five years when he signed both tolling waivers.  Defendant maintained he signed both tolling waivers without knowledge or a clear understanding as to the rights subject to waiver.    

In deciding the validity of the waivers, the court equated waiving a statute of limitations to that of a plea bargain in abandoning a statutory right.  For a waiver involving the relinquishing of rights to apply, a party must have an informed understanding of the consequences of the waiver.   Furthermore, a presumption existed against retroactive legislation.  Retroaction application required a clear manifestation from Congress that the presumption did not apply.    

The court first found the waivers invalid.  The Defendant had unknowingly executed both tolling waivers.  By waiving specific and important rights, Defendant would unknowingly extend his liability an additional three years rather than the two years he had expected.  As a result, the statute expired under the five-year statute of limitations on June 30, 2013, and under the six-year statute of limitations on June 30, 2014.  As a result, the indictment was untimely.    

The court further held the six-year statute of limitations created by Dodd-Frank inapplicable to the Defendant because Section 3301 of Dodd-Frank contained no discussion or mention of intent to apply the section retroactively to crimes committed prior to enactment. 

For the above reasons, the United States District Court for the District of New Jersey granted Defendant’s motion to dismiss. 

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

Monday
Aug282017

Claims Challenging the Validity of Paylocity’s Fee-Shifting Bylaws Under Section 109(b) of the Delaware General Corporation Law Move Forward

In Solak v. Paylocity Holding Corp., No. 12299-CB, 2016 BL 431917 (Del. Ch. Dec. 27, 2016), the Court of Chancery of Delaware denied in part and granted in part Paylocity Holding Corporation’s (“Paylocity” or the “Company”) Motion to Dismiss John Solak’s Verified Class Action Complaint (the “Complaint”), brought on behalf of Company stockholders (“Plaintiffs”), for lack of subject matter jurisdiction pursuant to Fed. R. Civ. P. 12(b)(1) and failure to state a claim on which relief can be granted pursuant to Fed. R. Civ. P. 12(b)(6).

In 2015, the Delaware state legislature added two new provisions to the Delaware General Corporation Law (“DGCL”) regarding corporate bylaws. First, Section 115 authorized corporations to adopt bylaws requiring internal corporate claims to be filed exclusively in Delaware. Second, amendments to Section 109(b) prohibited the bylaws from containing “any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim.”

Approximately six months after these changes to the DGCL, Paylocity, a publicly-traded Delaware corporation, adopted two new bylaws: the Exclusive Forum Bylaw and the Fee-Shifting Bylaw. The Exclusive Forum Bylaw required internal corporate claims to be filed in a Delaware court absent the Company’s consent. The Fee-Shifting Bylaw shifted attorneys’ fees and other litigation expenses to a stockholder who filed an internal corporate claim outside of Delaware without the Company’s consent if the stockholder failed to obtain “a judgment on the merits that substantially achieve[d] the full remedy sought.”

Plaintiffs sought a declaration that the Company’s Fee-Shifting Bylaw violated Sections 109(b) and 102(b)(6) of the DGCL. Additionally, Plaintiffs asserted that Paylocity’s board members breached their fiduciary duties by adopting the Fee-Shifting Bylaw and failing to include certain information in the disclosure of the bylaw’s adoption. Paylocity and its Board of Directors (“Defendants”) moved to dismiss the Complaint as unripe and for failure to state a claim.

Ripeness is a question of subject matter jurisdiction and concerns whether a suit has been brought at the correct time. Because an “actual controversy” must exist for a court to determine the validity of a bylaw and to issue a declaratory judgment, “the issue in dispute must be ripe for determination.” Where a claim challenges measures that have a substantial deterrent effect on stockholders, Delaware courts have found such claims to be ripe. The courts do so where the claims may repeat but otherwise evade review. Despite no internal corporate claim having been filed nor any intention to file such claim having been pled, the court determined that the Fee-Shifting Bylaw might never be subject to review if a stockholder first had to file a claim outside of Delaware, as such action would violate the Exclusive Forum Bylaw.

To survive a 12(b)(6) motion to dismiss when a challenge to the facial validity of a corporate bylaw is asserted, the plaintiff must show that the “bylaws cannot operate lawfully or equitably under any circumstances.” Because Section 109(b) of the DGCL provides that “bylaws may not contain any provision that impose liability on a stockholder for the attorneys’ fees or expenses of the corporation,” the court found the Fee-Shifting Bylaw invalid. Section 109(b) prohibited “any” provision shifting fees to a stockholder. As a result, the Fee-Shifting Bylaw could not operate lawfully under any circumstances.

Under Section 102(b)(6) of the DGCL, a corporation may include a provision in its articles of incorporation imposing liability on stockholders for the corporation’s debts under certain circumstances and for their own conduct. Because Plaintiffs failed to provide any authority interpreting the term “debts,” the court found Plaintiffs could not demonstrate that the Fee-Shifting Bylaw violated Section 102(b)(6).

Lastly, regarding Plaintiffs’ breach of fiduciary duties claims, the court stated that Plaintiffs failed to allege any facts suggesting any conflicts of interests, personal or financial interests in adopting the bylaws, or bad faith on behalf of the members of the Board of Directors. Further, the court opined Plaintiffs’ allegations that adopting bylaws in violation of applicable law constituted bad faith were insufficient to support an inference that the Board members acted with scienter in adopting the Fee-Shifting Bylaw.

Accordingly, the court denied Defendants’ Motion to Dismiss regarding the Section 109(b) claim, and dismissed Plaintiffs’ claims regarding Section 102(b)(6) and breach of fiduciary duties.

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

Friday
Aug252017

OM Group, Inc. Stockholder Litigation Dismissed

In In re OM Group, Inc., No. 11216-VCS, 2016 BL 339835 (Del. Ch. Oct. 12, 2016), the Court of Chancery of Delaware granted former members of OM Group, Inc. (“OM” or the “Company”) board of directors’ (“Defendants”) Motion to Dismiss former OM stockholders’ (“Plaintiffs”) Consolidated Amended Certified Class Action Complaint (the “Complaint”) for failure to state a claim on which relief can be granted pursuant to Fed. R. Civ. P. 12(b)(6).

On behalf of the Company, Plaintiffs sought declarations that the individual former directors of OM breached their fiduciary duties by entering into a merger and an award of post-closing “recessionary damages.” In the Complaint, Plaintiffs alleged Defendants rushed to sell OM to avoid a prolonged proxy fight and wrapped its business units in one package ignoring the Company’s financial advisors’ opinion that separate sales would yield maximum value.

According to the complaint, OM, a Delaware corporation, was a global chemical and technology conglomerate comprised of five diverse business units. After ten years of engaging in a growth strategy favoring acquisitions, OM’s lackluster performance became the focus of several shareholder proposals. Soon thereafter, potential strategic purchasers began expressing interest in OM’s various business lines.

After receiving an indication of acquisition interest, the Company limited its outreach efforts “to financial buyers reasonably likely to consider a transaction involving a sale of the entire company,” despite having been advised that its ability to maximize value through a merger or sale of the whole company would be limited. Prior to approving an offer to acquire all of OM’s outstanding shares, the OM Board reached an agreement with an activist investor. In particular, the Company agreed to include two of the investor’s nominees in the Company’s proxy statement and to expand the Board by one seat to be filled by an additional stockholder nominee. The investor agreed to abide by standstill provisions, which prohibited, among other things, participation in merger proposals or communications in opposition to any merger. The OM Board then held a special stockholder meeting to vote on a merger agreement, resulting in stockholder approval by a margin of 10:1.

Plaintiffs alleged the Defendants acted unreasonably in approving the transaction and breached their fiduciary duties under Revlon. First, Plaintiffs asserted Defendants “deliberately shut out strategic acquirors from the process in favor of a quick deal” to avoid a proxy fight. Second, Plaintiffs asserted Defendants failed to manage conflicts of interest among its investment bankers. Lastly, Plaintiffs asserted Defendants allowed a less-than-reasonable merger price to appear fair to stockholders by including manipulated projections and misleading, incomplete public disclosures in the Company’s proxy materials, which resulted in overwhelming shareholder support to approve the merger. Defendants moved to dismiss on the grounds that the irrebuttable business judgment rule applied because the majority of fully informed, uncoerced, disinterested stockholders voted in favor of the merger.

When considering a breach of fiduciary duties claim in regard to a board of directors’ course of conduct in negotiating and approving a corporate transaction, the court must first determine the applicable standard of review. Where a sale is inevitable, the enhanced Revlon scrutiny applies, and the court considers whether the directors “acted reasonably to pursue the transaction that offered the best value reasonably available to the [company’s] stockholders.” Where the disinterested stockholders approve the transaction through a fully-informed, uncoerced vote, however, the board’s decision to approve the transaction is “insulate[d] . . . from all attacks other than on grounds of waste.” Under the business judgment rule, the entire fairness standard applies. To hold directors liable under this standard, a plaintiff must “(1) demonstrate that the transaction amounted to corporate waste; or (2) demonstrate that the stockholder vote was uninformed or coerced.” A successful challenge to the soundness of the shareholder vote requires showing the directors either omitted material information or made material misrepresentations to stockholders regarding the transaction. For a fact to be considered material, it must present a “substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”

The court reasoned the Company’s disclosures with respect to a competing bid, an alleged conflict of interest, and the engagement of a second financial advisor, were adequate. First, the court opined the disclosures regarding a competing proposal obtained during the Go-Shop Period adequately provided stockholders with the necessary information to conclude the “Board, in good faith, had determined that the offer would not be more favorable to stockholders.” Next, the court determined Plaintiffs failed to allege any facts plausibly suggesting an actual conflict of interest existed. Thus, omissions regarding the potential conflict could not be deemed material. Finally, with respect to the financial advisor’s engagement, the court concluded the stockholders were fully informed because the terms and circumstances of that engagement were disclosed in the proxy materials.

Accordingly, because the majority of the disinterested stockholders were uncoerced and fully informed and approved the merger, the court held Plaintiffs failed to overcome the presumption of the business judgment rule. As such, the court granted Defendants’ Motion to Dismiss the Complaint.

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

Thursday
Aug242017

The Fifth Circuit Court of Appeals Dismisses Sessa Capital’s Injunction Appeal as Moot

In Ashford Hosp. Prime, Inc. v. Sessa Capital (Master), LP, No. 16-10671, 2016 BL 418598 (5th Cir. Dec. 16, 2016), the Fifth Circuit Court of Appeals dismissed hedge fund Sessa Capital’s (“Sessa”) appeal of the district court’s decision.  Sessa had filed for injunctive relief concerning the election of the board of director at Ashford Hospitality Prime, Inc.’s (“Ashford Prime”) annual meeting.  The court found the appeal moot since the injunctive relief did not present a live controversy.

Sessa sought to nominate directors to replace five current members of the Ashford Prime board.  Ashford Prime’s bylaws required nominees to submit, in advance, questionnaires so that the Board could evaluate their qualifications and plans if elected. Sessa’s candidates provided the required questionnaires, but Ashford Prime rejected them as incomplete and alleged nondisclosure of plans to either force sale of the company or invalidate an advisory agreement containing a substantial termination fee in the event of major board composition changes.

Sessa argued these omissions were immaterial and filed suit in Maryland seeking court ordered approval of the nominees. In the litigation that ensued, Sessa sought to prevent Ashford Prime from soliciting proxies until the board approved Sessa’s candidates. Consequently, Ashford Prime sought a court declaration that the Sessa candidates were ineligible due to their incomplete and noncompliant questionnaires. 

The district court, applying Maryland law, ruled in favor of Ashford Prime, finding that the business judgment rule warranted deference to Ashford Prime’s decision to deny approval of Sessa’s candidates.  Sessa filed a notice of appeal from the district court’s order denying its request for injunction and granting Ashford Prime’s request. Sessa asked the Fifth Circuit to stay the district court’s order and postpone the June 10 election until resolution of the appeal. A motions panel denied Sessa’s request and the board election occurred on June 10, 2016, resulting in the re-election of Ashford Prime’s board directors. 

Sessa pursued the appeal of the injunction alleging the business judgment rule did not apply to board election matters. Ashford Prime filed a motion to dismiss the appeal as moot given the election had already taken place. Sessa argued its appeal was not moot for three reasons: (1) the part of the injunction enjoining it from soliciting votes extended beyond the June election, (2) the appeal constituted an “exceptional situation”, and (3) success in the appeal could invalidate the election.

With respect to the continuing nature of the injunction, the court found the matter abandoned because the appeal did not ask for changes to that portion of the preliminary injunction.  The court also acknowledged the exception to mootness for situations “capable of repetition yet evading review”.  Sessa’s failure to obtain a stay in this case did not establish it would be unable to do so in a repeat controversy.

As for the argument against mootness that the court could invalidate the results of the election, interlocutory review was only possible of relief sought in trial court.  28 U.S.C. § 1292(A)(1).   Sessa, however, provided no argument in the alternative stipulating that if the election took place, results should be invalid.

Accordingly, the court dismissed the appeal as moot.  The court did not express a view whether Sessa may start again in a trial court requesting the relief of undoing the June election or whether such relief is warranted in the event it can establish liability.

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

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