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Thursday
Apr262018

Webb v. SolarCity Corporation: Founders' Conduct Regarding Accounting Error Before IPO Not Sufficient to Prove Scienter

In Webb v. SolarCity Corp., No. 5:14–CV–01435–BLF, 2018 BL 79348 (9th Cir. Mar. 08, 2018), the Ninth Circuit Court of Appeals affirmed the district court’s dismissal of a securities fraud action brought in a third amended complaint (“TAC”) by James Webb (“Plaintiff”), a member of a class of plaintiffs who purchased shares in SolarCity, against SolarCity Corporation and two of its cofounders, Lyndon Rive and Robert Kelly (collectively “Defendants”). The court held Plaintiff failed to adequately plead the scienter element necessary to state a claim under § 10(b) of the Securities Exchange Act of 1943 (“Act”).

According to the court’s factual background, SolarCity is an energy company that sells and leases solar energy systems. The costs associated with leases and sales are accounted for differently in SolarCity’s financials. While installation and overhead costs in each lease are amortized across the entire duration of the lease’s standard twenty-year term, the same costs in each direct sale are realized at the time of sale. SolarCity uses a formula, which divides the indirect overhead costs by the prior and current period direct costs to allocate the appropriate amount of overhead costs between the lease and direct sales systems.

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Wednesday
Apr252018

No-Action Letter for Pfizer Inc. Permitted Exclusion of Shareholder Proposal Seeking Report on the Risks from Raising Drug Prices 

In Pfizer Inc. 2018 BL 030118 (March 1, 2018), Pfizer Inc. ("Pfizer") asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a shareholder proposal submitted by Trinity Health (“Proponents”) requesting Pfizer disclose the risks from rising pressure to contain U.S. prescription drug prices and explain how Pfizer plans to mitigate those risks. The SEC issued the requested no action letter allowing for the exclusion of the proposal under Rule 14a-8(i)(10).

The Shareholder submitted a proposal providing that:

RESOLVED, that shareholders of Pfizer Inc. (“Pfizer”) ask the Board of Directors to report to shareholders by December 31, 2018, at reasonable cost and omitting confidential or proprietary information, on the risks to Pfizer from rising pressure to contain U.S. prescription drug prices, including the likelihood and potential impact of those risks as applied to Pfizer, the steps Pfizer is taking to mitigate or manage those risks and the Board’s oversight role. The report should address risks created by payer cost-effectiveness analysis, patient access concerns, outcomes-based pricing, and price sensitivity of prescribers, payers and patients.

Pfizer sought to exclude the proposal under subsections (i)(7) and (i)(10) of Rule 14a-8.

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Tuesday
Apr242018

No Action Letter for General Electric Company Permitting Exclusion of Proposal Images But Denying Exclusion of Cumulative Voting Proposal 

In General Electric Co., 2018 BL 71731 (Mar. 1, 2018), General Electric Company (“GE”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission of a proposal submitted by Martin Harangozo (“Shareholder”) requesting that GE’s board of directors provide cumulative voting in the election of directors. In addition, Shareholder submitted images he wished to be displayed in support of his proposal, three unattributed quotes, and the following statement: “The increase in shareholder voice as represented in cumulative voting may serve to better align shareholder performance to CEO performance (see image).” The SEC declined to issue the requested no action letter in its entirety under Rule 14a-8(i)(4) but found grounds to exclude the attached images under Rule 14a-8(i)(3).

Shareholder submitted a proposal providing that:

RESOLVED, That the stockholders of General Electric, assembled in Annual Meeting in person and by proxy, hereby request the Board of Directors to take the necessary steps to provide for cumulative voting in the election of directors, which means each stockholder shall be entitled to as many votes as shall equal the number of shares he or she owns multiplied by the number of directors to be elected, and he or she may cast all of such votes for a single candidate, or any two or more of them as he or she may see fit.

In the cover letter of the proposal, Shareholder stated, “Please include my attached proposal and images in the GE 2018 Proxy”. Attached to the proposal is a full-page image including a chart, text, equations, and emoji’s (collectively, the “Images”).

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Friday
Apr202018

No Action Letter for Ford Motor Company Permitted Exclusion Under Ordinary Business Activity

In Ford Motor Company., 2018 BL 424 (Jan. 2, 2018), Ford Motor Company (“Ford”) asked the staff of the Securities and Exchange Commission (“SEC”) for permission to exclude a shareholder proposal submitted by Martin Harangozo (“Shareholder”) requesting that Ford issue a report outlining the costs and benefits of feeding its employees, specifically regarding the effects on employee health, productivity, and company profitability. The SEC issued the requested no action letter allowing for the exclusion of the proposal under Rule 14a-8(i)(7).

Shareholder submitted a proposal providing that:

This proposal recommends that Ford prepare a report, following all applicable laws, at reasonable expense, outlining the costs and benefits of feeding its employees, with the intention to promote health, productivity, and profitability.

Ford argued the proposal may be excluded from the company’s proxy materials under Rule 14a-8(i)(7).

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Thursday
Apr192018

Freidman v. Endo International PLC: Plaintiff’s Third Amended Complaint Dismissed for Failure to Plead Claims of Securities Fraud

In Friedman v. Endo International PLC, No. 16-CV-3912 (JMF), 2018 BL 13320 (S.D.N.Y. Jan. 16, 2018), Endo International PLC (“Endo”) and its executive officers, Rajiv De Silva, Suketu Upadhyay, and Paul Campanelli (collectively “Defendants”), moved to dismiss the Third Amended Complaint of Craig Friedman, individually and on behalf of others similarly situated (collectively “Plaintiffs”), alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. The United States District Court for the Southern District of New York granted Defendants’ motion to dismiss.

Endo develops, manufactures, and distributes branded and generic pharmaceutical products worldwide. Endo acquired Par Pharmaceuticals (“Par”) in 2015. Between May 2015 and May 2016, Defendants publically stated Endo was “making progress” toward strategic priorities resulting from the acquisition of Par. In January 2016, Endo announced $118.46 million in losses for the fourth quarter of 2015, stock prices fell 21 percent after the announcement. In March 2016 and May 2016, Endo revised its 2016 revenue expectations downward, stock prices fell 11 percent and 39 percent, respecivelly, after each revision. Additionally, in May 2016, Defendants released a series of statements indicating trouble with the integration of Par. Plaintiffs allege Defendants made material misrepresentations to investors when they intentionally misled investors with public comments about the company’s sales outlook and the integration of the Par acquisition. Plaintiffs, additionally allege Defendants attempted to defraud investors by unlawfully boosting sales when the company engaged in “improper and illegal sales practices” by offering deep discounts on two of its drugs to secure relationships with Pharmaceutical Benefit Managers.

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Thursday
Apr192018

Perez v. Higher One Holdings, Inc.: Plaintiff’s Second Amended Complaint Sufficiently Pleads Claims of Securities Fraud

In Perez v. Higher One Holdings, Inc., No. 3:14-cv-755 (D. Conn. Sept. 25, 2017), the United States District Court for the District of Connecticut granted in part and denied in part Higher One Holdings, Inc. (“Higher One”) and its current or former officers, Mark Volcheck, Christopher Wolf, Jeffrey Wallace, Miles Lasater, Dean Hatton, and Patrick McFadden’s (collectively “Defendants”) motion to dismiss the Second Amended Class Action Complaint of Brian Perez and Robert E. Lee, individually and on behalf of other similarly situated investors (collectively “Plaintiffs”), alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder.

Plaintiffs purchased Higher One stock between August 7, 2012 and August 6, 2014. Higher One provides financial management and banking products and services to higher education institutions and their students. According to the complaint, on August 7, 2012, Higher One agreed to a consent order (“2012 Order”) issued by the Federal Deposit Insurance Corporation (“FDIC”) alleging violations of the Federal Trade Commission Act (“FTC Act”). Under the 2012 Order, Higher One was required to revise its compliance management system. According to the allegations, Defendants did not make the necessary changes to their policies, but claimed they had undertaken the requisite changes in various public statements. Higher One was again found in violation of the same provisions of the FTC Act under a FDIC Consent Order issued in 2015, and a Federal Reserve Cease and Desist Order. Plaintiffs further allege Cole Taylor Bank (“CTB”), one of Higher One’s banking partners, terminated its relationship with Higher One,in 2013,out of fear it would be subject to regulatory penalties related to Higher One’s conduct. According to the allegations, Defendants, in their public statements, stated the decision to end the relationship was mutual,and did not disclose the true reason for the termination when discussing Higher One’s relationships with other banks. Plaintiffs’ complaint alleged Defendants made statements that were materially false and misleading regarding: (1) Higher One’s compliance with the 2012 Order, (2) the dissolution of Higher One’s relationship with CTB, (3) the transparency of Higher One’s products, (4) required changes to practices due to a class action settlement, and (5) Higher One’s financial and operating results.

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Thursday
Apr192018

No-Action Letter for Qualcomm Permitted Exclusion of Proposal to Allow Simple Majority Vote

In QUALCOMM, Incorporated, 2017 BL 441240 (Dec. 8, 2017), QUALCOMM, Inc. (“QUALCOMM”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by James McRitchie (“Shareholder”) to remove each voting requirement in QUALCOMM’s charter and bylaws that called for a greater than simple majority vote. The SEC issued the requested no action letter allowing for the exclusion of the proposal from QUALCOMM’s proxy statement under Rule 14a-8(i)(10).

Shareholder submitted a proposal providing that:

RESOLVED, Shareholders request that our board take each step necessary so that each voting requirement in our charter and bylaws that calls for a greater than simple majority vote be eliminated, and replaced by a requirement for a majority of the votes cast for and against applicable proposals, or a simple majority in compliance with applicable laws. If necessary this means the closest standard to a majority of the votes cast for and against such proposals consistent with applicable laws. It is important that our company take each step necessary to adopt this proposal topic. It is important that our company take each step necessary to avoid a failed vote on this proposal topic.

QUALCOMM argued the proposal may be excluded from the company’s proxy materials for its 2018 Annual Meeting of Stockholders under Rule 14a-8(i)(10).

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Tuesday
Apr172018

U.S. District Court Denies Motion to Dismiss for Securities Fraud Action: Wins Used False Headquarters to get onto the Russell Index

In Desta v. Wins Fin. Holdings Inc. Et. Al., No. 17-cv-02983-CAS(AGRx), 2018 BL 70590 (C.D. Cal. Feb. 28, 2018), the United States District Court for the Central District of California denied Wins Finance Holdings Inc. (“Wins”), and Wins Co-CEO Jianming Hao, Co-CEO and COO Renhui Mu, and CFO Junfeng Zhao’s, (collectively the “Defendants”) motion to dismiss Michael Desta’s (“Plaintiff”) complaint for failure to state a claim for securities fraud pursuant to Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rules 10b– 5(a) and (c) under, 17 C.F.R. § 240.10b–5(a) & (c). The court held that the Plaintiff alleged sufficient facts to show the elements of falsity, scienter, loss causation, and reliance under the Act, such that a proper claim was pleaded.

According to the complaint, Defendants falsified the location of Wins' principal executive offices in the United States in order to be included on the Russell 2000 Index, which would also affect Wins’ Nasdaq listing. The complaint alleges that since Wins went public in 2006, it conveyed to the U.S. Securities & Exchange Commission (“SEC”) that its principal executive offices were in the People’s Republic of China; however, in 2016, Wins reported in an SEC filing that its principal executive offices were in New York, NY. Thereafter, Wins was included on the Russell 2000 Index where its stock trading volume rapidly increased. After several publications released information as to the falsehood of the principal executive office in New York, Wins’ stock price plummeted. Wins subsequently changed its address back to Beijing. Thereafter, Nasdaq delisted Wins’ shares for, among other things, potential misrepresentations.

In a successful claim under Section 10(b) and Rule 10b–5, a plaintiff must prove six elements: (1) a material misrepresentation or omission; (2) scienter or an intent to deceive or defraud; (3) a connection between the misrepresentation and the purchase or sale of a security; (4) reliance upon the misrepresentation, “often established in ‘fraud-on-the-market’ cases via a presumption that the price of publicly traded securities reflects all information in the public domain”; (5) economic loss; and (6) loss causation, a connection between the wrongful act which amounts to securities fraud and the injury suffered by the plaintiff. Defendants argued that Plaintiff failed to state a claim due to their failure to properly assert material misrepresentation or falsity, scienter, loss causation, and reliance, as such, the court only addressed these elements.

First, the court found the allegations were sufficient to establish falsity by relying on Plaintiff’s assertions that Wins had no presence or actual business activity at the office in New York, other than the infrequent visits by its former president; and therefore, the SEC filings contained false information. Second, the court found the alleged facts support a strong inference of scienter since the individual Defendants, as Win executives, must know the company's principal address and that despite this knowledge they still signed the SEC filings, which falsely alleged having an executive office in New York. Last, the court found that the Plaintiffs’ claims evidenced both loss causation and reliance because Wins’ stock price plunged after the first disclosure revealed the fraudulent disclosure about the New York office. The court also asserted that these elements are all questions of fact and that a motion to dismiss was essentially not proper in order to decide these issues.

For the aforementioned reasons, the court denied Defendant’s motion to dismiss.

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

Thursday
Apr052018

City Trading Fund v. Nye: Approval of Settlement Denied When Terms of Disclosure-Only Settlement Made Company and Its Shareholders Net Losers. 

In City Trading Fund v. Nye, 2018 BL 44689, (Sup. Ct. Feb. 08, 2018), the Supreme Court of New York denied City Trading Fund’s (“Shareholder”) motion, on behalf of themselves and other similarly situated stockholders, for final approval of their settlement with Martin Marietta Materials, Inc. (“Company”), the Company’s individually named directors, and Texas Industries, Inc. (“Texas Industries”), after the Shareholder alleged the Company breached its fiduciary duties to stockholders by making material misstatements and omissions in the proxy materials provided to stockholders in preparation for a vote on the Company’s proposed merger with Texas Industries.

Shareholder originally filed suit against the Company for a preliminary injunction to enjoin the merger in 2014. Before the hearing, Shareholder and the Company reached a “disclosure-only” settlement, which did not provide any monetary relief to stockholders, but provided for payment of Shareholder’s attorneys’ fees of $500,000. The court reviewed, and denied Shareholder’s motion for preliminary approval of the settlement, finding the supplemental disclosures were immaterial. On appeal, the New York Supreme Court Appellate Division (“Appellate Division”) held the lower court’s findings were premature and remanded the cases so a fairness hearing on the settlement could be conducted. Subsequently, the Appellate Division issued its decision in Gordon v. Verizon Communications, Inc., which provides the controlling standard in New York for evaluating disclosure-only settlements. 148 A.D.3d 146, (N.Y. App. Div., 2017).

Here, the additional information provided in the disclosure-only settlement, included: (1) discussions of Texas Industries’ forecasts and value assessment; (2) the publicly available consensus estimates the Company’s financial advisors used in their analyses; (3) the involvement of three banks in the merger that also owned shares in Texas Industries; and (4) the specific addition of the Company’s CEO, as one of the executives, who may receive additional compensation under the Company’s compensation programs for additional responsibilities in connection with the merger. As part of the fairness hearing, two other Company stockholders filed objections with the court to the final settlement because they believed these additional disclosures were not necessary or helpful.

Under Gordon, to grant final approval of a disclosure-only settlement, courts should consider the following factors: (1) the likelihood of success on the merits; (2) the extent or support from the parties; (3) the judgment of counsel; (4) the presence of bargaining in good faith; (5) the nature of the issues of law and fact; (6) whether the proposed settlement is in the best interests of the putative settlement class as a whole; and (7) whether the proposed settlement is in the best interests of the corporation. Gordon does not require a plaintiff to show the supplemental disclosures are material, just that they provide “some benefit” to stockholders. Looking to Delaware law, an omission is material if there is a substantial likelihood that a reasonable investor would consider the omitted fact important in deciding how to vote.

The court determined none of the Gordon factors weighed in favor of approval. First, on the merits, summary judgment would have been appropriate for the Company as the Shareholder failed to allege any material misstatements or omissions. Second, only one of the Company’s numerous stockholders, the Shareholder, supported the settlement. Third, the approach of Shareholder’s counsel was flawed and the present case was frivolous. Fourth, the supplemental disclosures were of little to no value as they did not alter the total information available to stockholders. Finally, the court held that settlement of the present baseless claim was bad for both stockholders and Company because it provided payment for attorneys’ fees in exchange for worthless disclosures, and it would prevent stockholders from pursuing future legitimate claims.

For the reasons above, the court determined the settlement did not benefit the Company, or its other stockholders, and denied final approval of the settlement.

The primary materials for this case are available on the DU Corporate Governance website.

Monday
Mar262018

Hawkins v. Borsy: Court Finds It Does Not Have Proper Subject Matter Jurisdiction

In Hawkins v. Borsy, No. 1:05-cv-1256–LMB-JFA, 2018 WL 793599 (E.D. Va. Feb. 8, 2018), the United States District Court for the Eastern District of Virginia granted corporate affiliates (“Respondents”) of MediaTechnik Kft. (“MediaTechnik”) motion to vacate, the district court’s decision granting William Hawkins (“Hawkins”), Eric Keller, Thomas Zato, Kristof Gabor, and Justin Panchley (collectively, “Plaintiffs”) default judgment against Laszlo Borsy (“Borsy”), Mediaware Corporation (“Mediaware”), MediaTechnik, i-TV, and Peterfia Kft. (“Peterfia”) (collectively, “Defendants”) for lack of subject matter jurisdiction.

According to the allegations, Borsy approached Hawkins in 2001 to invest in MediaTechnik. As a result, Hawkins paid $330,000 for 35% of MediaTechnik’s stock and 33.33% of Peterfia’s stock. After Borsy approached Hawkins again, Hawkins paid $1 million for a 49% stake in MediaTechnik and its corporate affiliates. Allegedly, Borsy diverted those funds to purchase the remaining shares of i-TV to become i-TV’s sole owner, and conveyed Hawkins voting rights for Mediaware to himself. Furthermore, the complaint alleged that the remaining Plaintiffs in exchange for their services expected compensation with positions and equity in one or more of the companies, which they did not receive. In 2005, Plaintiffs filed a complaint against Defendants alleging fraud, breach of contract, conversion, breach of fiduciary duties (against Borsy), and unjust enrichment. The 2005 complaint sought an accounting of all Defendants’ transactions and a declaration establishing Plaintiffs’ interest in the corporate Defendants. In 2008, Plaintiffs received, and the Fourth Circuit affirmed, a default judgment against all of the Defendants. In response to Plaintiffs’ motion to enforce, Defendants argued the district court lacked subject matter jurisdiction because at least one of the original defendants, Peterfia, should be treated as an LLC, rather than a corporation.

District courts have original jurisdiction over civil actions involving sums or values over $75,000 when the controversy is between “citizens of a State and citizens or subjects of a foreign state” or “citizens of different States and in which citizens or subjects of a foreign state are additional parties.” 18 U.S.C. § 1332(a). To maintain an action in federal court under diversity jurisdiction, no plaintiff may be a citizen of the same state as any defendant. Diversity jurisdiction for an LLC is determined by the citizenship of all of its members. Finally, a judgment is void for lack of subject matter jurisdiction when the court cannot find that it had jurisdiction.

In applying the standards, the court concluded a Hungarian kft. should be treated like an LLC for purposes of § 1332(c) because its distinguishing characteristics fall closer to an American-style LLC. Accordingly, the court found Peterfia should be treated as an LLC and not a corporation. The court held that because Hawkins was a member of Peterfia when the complaint was filed, there was not complete diversity between the parties. As a result, the court did not have subject matter jurisdiction over the litigation. Furthermore, the court declined to use its discretion to drop a dispensable party, Peterfia, because Plaintiffs were “well aware that the kfts. were like limited liability companies, rather than corporations.”

Accordingly, the United States District Court for the Eastern District of Virginia granted Respondents’ motion to vacate for lack of subject matter jurisdiction.

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

Wednesday
Mar212018

In re Psychemedics Corp. Securities Litigation: Plaintiffs Failed to Sufficiently Allege Claims Based on Violations of the FCPA

In In re Psychemedics Corp. Securities Litigation, No. 17-cv-10186-RGS, 2017 BL 399136 (D. Mass. Nov. 07, 2017), the United States District Court for the District of Massachusetts granted Psychemedics Corp. (“Psychemedics”) and Raymond Kubacki’s (“Kubacki”), Psychemedics’ Chief Executive Officer, (collectively, “Defendants”) motion to dismiss for failure to state a claim in a putative class action brought by Mary Kathleen Hermann on behalf of all of those who purchased Psychemedics common stock between February 10, 2014 and January 31, 2017 (collectively, “Plaintiffs”). Based on Plaintiffs’ failure to allege facts sufficient to support an inference of scienter, the court granted dismissal of the claims alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

According to the allegations, the Brazilian government announced professional drivers were required to submit to a hair drug test when applying to renew licenses. On February 10, 2014, a press release issued by Kubacki stated Psychemedics was “very excited about competing for the hair testing business in Brazil.” Further, Kubacki allegedly oversaw the expansion in Brazil and Psychometrics’ SEC filings emphasized how the company differentiated itself from its competitors due to its unique patented drug extraction method. On January 31, 2017, a Psychometrics’ competitor issued a press release after winning a judgment against Psychemedics’ exclusive Brazilian distributor. In the judgment, a Brazilian judge held that Psychemedics Brasil had conspired with the competitor’s subsidiary for the hair-test market. Based on a PR Newswire press release, Bloomberg reported the distributor was also under investigation for “cartel practices.” On the day of these announcements, Psychemedics’ stock fell 25%. Plaintiffs alleged Defendants knew, or must have known, its Brazilian distributor was “cheatingnot competingin order to expand Psychemedics’ collection network and win new business in Brazil.” Plaintiffs alleged Defendants’ conduct resulting in Foreign Corrupt Practices Act (“FCPA”) violations led to material misstatements in its SEC filings in violation of Sections 10(b) and 20(a).

Under Section 10(b) and Rule 10b-5, a court may find a material misrepresentation or omission actionable in a financial statement when a company has failed to disclose an uncharged, unadjudicated wrongdoing where the failure would make other disclosures materially misleading. A court may find scienter when a plaintiff alleges facts sufficient to create a strong inference the statements would have been approved by corporate officials sufficiently knowledgeable about the company to know the statements were misleading. Further, in the First Circuit, scienter may be found when a defendant “acted with a high degree of recklessness.” Finally, under Section 20(a) control persons can be found liable for the fraud of the entities they control.

The court found Plaintiffs’ allegations would not support the inference Defendants knew of its distributor’s anti-competitive scheme or acted recklessly. Further, the court found that, absent an alter-ego relationship, actions of the distributor and its corporate officers do not support an inference of scienter to the Defendants. Finally, the court held the mere fact Defendants gained some compensation from the success of the expansion into Brazil did not support an inference of scienter.

Accordingly, the court granted Defendants’ motion to dismiss.

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

Saturday
Mar172018

Southern District of New York Dismisses Securities Fraud Claims Against Horizon Pharma

In Schaffer, et al. v. Horizon Pharma PLC, et al., No. 16-CV-1763 (JMF), 2018 BL 16225 (S.D.N.Y. Jan. 18, 2018), the Southern District of New York dismissed the claims brought by a class of plaintiffs (“Plaintiffs”) against Horizon Pharma PLC (“Horizon”), a number of Horizon’s executives (“Individual Defendants”), and various underwriters (Horizon, Individual Defendants and the underwriters, collectively “Defendants”). The complaint alleged Horizon and Individual Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and Rule 10b-5 thereunder, and Defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended (“Securities Act”). The court held Plaintiffs’ complaint only gave conclusory statements and insufficient facts to establish securities fraud or scienter and dismissed the complaint.

The complaint alleged the Defendants made material misrepresentations and omissions that misled investors about the sustainability of Horizon’s “Prescription-Made-Easy” (“PME”) business plan, in addition to misstatements concealing improper business practices. The complaint also alleged the Individual Defendants had motive and the opportunity to deceive investors and inflate Horizon’s stock price, and they acted with conscious misbehavior and recklessness to the detriment of Horizon’s shareholders. Most notably, Plaintiffs’ claims center around Horizon’s alleged controlling relationship over PME pharmacies and the misrepresentation of this relationship to shareholders, along with alleged misrepresentation of sales results and company risk factors.

Section 10(b) and Rule 10b-5 of the Exchange Act requires plaintiffs to allege both a material misrepresentation or omission and the requisite scienter. The Private Securities Litigation Reform Act (“PSLRA”) requires plaintiffs to allege particular facts to support fraud and scienter. Under PSLRA, optimistic forward-looking statements, when accompanied by cautionary language, and absent false or misleading information, are not sufficient to establish fraud. To establish scienter, a plaintiff may allege facts (1) showing the defendant had motive and opportunity to commit fraud, or (2) constituting strong circumstantial evidence of conscious misbehavior or recklessness. Section 11 of the Securities Act prohibits material misrepresentations or omissions in registration statements, and Section 12(a)(2) prohibits the same in the sale of securities. The Securities Act claims do not require a showing of scienter. Finally, Section 20(a) of the Exchange Act and Section 15 of the Securities Act hold control persons liable for the fraud of the entities they control.

The court determined Plaintiffs did not allege particular facts to make their claim plausible, rather than conceivable. While the complaint alleged some relevant facts of a material misrepresentation or omission, Plaintiffs improperly relied on non-specific statements from PME pharmacy employees and facts regarding Horizon’s relationship with PME pharmacies. The court ruled the statements from pharmacy employees did not implicate Horizon because they were not directly related to Horizon’s business practices, only the operations of the individual pharmacies. Furthermore, the court stated the relationship between Horizon and the PME pharmacies was nothing more than a normal relationship between a supplier and vendor. Similarly, the court dismissed Plaintiffs’ argument that statements made by Individual Defendants were false or misleading. During earnings calls, Individual Defendants touted their “unique commercial business model” and potential for sales growth, while using opinionated or cautionary language about future profitability. The court ruled these statements were corporate puffery protected by the PSLRA. Further, the court held Plaintiffs failed to establish scienter because they did not allege Defendants received a concrete and personal benefit from the alleged misrepresentations, omissions, or improper business practices. Additionally, Plaintiffs failed to establish independently sufficient facts that would constitute strong circumstantial evidence of conscious misbehavior or recklessness. Finally, because Plaintiffs did not sufficiently allege underlying claims of the Exchange Act or Securities Act, the claims relating to control person liability also failed.

For the reasons stated above, the court dismissed Plaintiffs’ complaint for failure to state a claim.

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

Friday
Mar162018

No-Action Letter for Eli Lilly & Co. Permitted Exclusion of Proposal to Eliminate Supermajority Voting Requirements

In Eli Lilly & Co., 2018 BL 7440 (Jan. 8, 2018), Eli Lilly & Company (“Eli Lilly”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by William Steiner (“Shareholder”) requesting the board to replace the company’s supermajority voting requirement with a simple majority requirement. The SEC issued the requested no-action letter allowing for the exclusion of the proposal from the 2018 proxy materials under Rule 14a-8(i)(10).

Shareholder submitted a proposal providing that: 

            RESOLVED, Shareholders request that our board take each step necessary so that each voting requirement in our charter and bylaws that calls for a greater than simple majority vote be eliminated, and replaced by a requirement for a majority of the votes cast for and against applicable proposals, or a simple majority in compliance with applicable laws. If necessary this means the closest standard to a majority of the votes cast for and against such proposals consistent with applicable laws. It is important that our company take each step necessary to adopt this proposal topic completely.

Eli Lilly argued the proposal may be excluded from the company’s proxy materials under Rule 14a-8(i)(10). 

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’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 and The Shareholder Proposal Rule and the SEC (Part II).

Rule 14a-8(i)(10) allows a company to exclude a shareholder proposal from its proxy statement if the company has substantially implemented the proposal. The rule’s purpose is to avoid having shareholders considering matters which have already been favorably acted upon. Further, Rule 14a-8(i)(10) does not require that the company implement the exact proposal to be excluded. For additional information on the exclusion, see Aren Sharifi, Rule 14a-8(I)(10): How Substantial is “Substantially” Implemented in The Context of Social Policy Proposals?, 93 DU Law Rev. Online 301 (2016).

Eli Lilly argued that the board had approved amendments to the company’s articles of incorporation to eliminate the supermajority voting provisions and believed the amendments address the essential elements of the proposal. The amendments would be submitted to the shareholders for approval at the company’s next annual meeting of shareholders in 2018 and Eli Lilly would recommend that the shareholders approve the amendments. Accordingly, Eli Lilly asserted it had substantially implemented the proposal and it was therefore excludable under Rule 14a-8(i)(10).

The SEC agreed with Eli Lilly’s reasoning, and concluded Eli Lilly could omit the proposal under Rule 14a-8(i)(10).

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

Friday
Mar162018

City of Hialeah Employees' Retirement System v. FEI: Defendants' Motion to Dismiss Plaintiff's Second Amended Complaint Granted

In City of Hialeah Employees' Retirement System v. FEI, No. 3-16-cv-1792-SI, 2018 BL 25615 (D. Or. Jan. 25, 2018), the United States District Court for the District of Oregon granted a motion to dismiss the City of Hialeah Employees’ Retirement System’s (“Plaintiff”) Second Amended Complaint (“SAC”), filed against FEI Company ("FEI"), Thermo Fisher Scientific Inc. ("Thermo"), and named Individual Defendants, Thomas Kelly, Donald Kania, Homa Bahrami, Arie Huijser, Jan Lobbezoo, Jami Dover Nachstsheim, James Richardson, and Richard Wills (collectively, "Defendants"), finding Plaintiff failed to adequately plead that Defendants’ violated Section14(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and that Individual Defendants violated Section 20(a) of the Exchange Act. 

According to the SAC, in fall 2015, FEI management prepared two sets of financial management projections of combined operations, higher and lower projections. In February 2016, FEI retained Goldman Sachs as a financial advisor, and FEI and Thermo entered into merger negotiations. According to the allegations, FEI directed Goldman Sachs to use the lower projections in its financial analysis and fairness opinion. The proxy that was sent to FEI shareholders included Goldman Sachs’ financial analysis. Plaintiff alleged the proxy statement that FEI’s Board filed and disseminated to the company’s shareholders on July 27, 2016 was false and misleading for several reasons. First, it stated that the Board believed the higher projections were unrealistic, which was both subjectively and objectively false. Second, Goldman Sachs improperly double-discounted the cash flow analysis. Third, the proxy misrepresented the higher projections by omitting certain line items, which were included in the lower projections. Fourth, the proxy did not disclose the underlying data and key assumptions in the Goldman Sachs’ fairness analysis. Finally, Plaintiff alleged that individual Defendants gained material benefits, such as securing liquidity for hundreds of thousands of shares of illiquid FEI stock, valued at more than $42.8 million, and certain benefits not available to other stockholders. In response, Defendants argued the management projections were forward-looking statements protected by the safe harbor provisions of the Private Securities Litigation Reform Act (“PSLRA”).

Under Section 14(a) of the Exchange Act, it is unlawful for any person to solicit a proxy, consent, or authorization through deceptive or misleading means. Specifically, SEC Rule 14a–9 “disallows the solicitation of a proxy by a statement that contains either (1) a false or misleading declaration of material fact, or (2) an omission of material fact that makes any portion of the statement misleading.” Therefore, a plaintiff must allege the defendant omitted material information that caused the proxy statements to become misleading. All private claims under the Exchange Act are subject to the PSLRA’s heightened pleading standard, under which a plaintiff must plead with particularity both falsity and scienter. Further, PSLRA provides safe harbor provisions for forward-looking statements. A forward-looking statement is any statement regarding (1) financial projections, (2) plans and objectives of management for future operations, (3) future economic performance, or (4) the assumptions underlying or related to any of these issues. Finally, section 20(a) of the Exchange Act holds control persons liable for the fraud of the entities they control. 

The court held the statements were protected by the safe harbor provision as forward-looking statements. Further, even if the statements were not protected, Plaintiff did not sufficiently plead misrepresentation. The court found Plaintiff did not plead with specificity either facts alleging the Board’s opinion about the projections was actually false, or facts alleging the Defendants knew the lower projections were false.  Further, the court held that the Goldman Sachs financial analysis and accounting details did not amount to material misrepresentations. Therefore, Plaintiff failed to state a claim under section 14(a) and SEC Rule 14a–9. Finally, because Plaintiffs failed to state a primary violation of the Exchange Act, the Section 20(a) claim was dismissed. 

For the above reasons, the court granted Defendant’s motions to dismiss the SAC.

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

Friday
Mar162018

No-Action Letter for Starbucks Corporation Allowed Exclusion of Charitable Contributions Report Proposal

In Starbucks Corp., 2018 BL 2480 (January 4, 2018), Starbucks Corp. (“Starbucks” or “Company”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by Thomas Strobhar (“Proponent”) requesting the board issue a report disclosing Starbucks’ standards and process for making charitable contributions. The SEC issued the requested no action letter allowing for the exclusion of the proposal under Rule 14a-8(i)(7).

Proponent submitted a proposal providing that:

RESOLVED: The Proponent requests that the Board of Directors consider issuing a semiannual report on the Company website, omitting proprietary information and at reasonable cost, disclosing: the Company’s standards for choosing which organizations receive the Company’s assets in the form of charitable contributions, the rational, if any, for such contributions, the intended purpose of each of the charitable contributions and, if appropriate, the benefits to others of the Company’s charitable works.

Starbucks argued the proposal may be excluded from the company’s proxy materials under 14(a)-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. 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.

Under Rule 14a-8(i)(7), a company may exclude from its proxy materials a proposal dealing with a matter relating to a company’s ordinary business operations. The purpose of the “ordinary business” exclusion is “to confine the resolution of the ordinary business problem to management and the board of directors since it is impracticable for shareholders to decide how to solve problems at an annual shareholders meeting.” “Ordinary business” refers to those issues that are fundamental to management’s ability to run the company on a day-to-day basis. For additional discussion on this exclusion, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 DU Online L. Rev. 263 (2016), and Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Online L. Rev. 183 (2016).

Starbucks argued Proponent’s proposal should be excluded under 14a-8(i)(7) because the proposal relates to contributions to specific types of organizations and this related to a company’s ordinary business operations. Furthermore, Starbucks argued that even where a resolution itself is facially neutral, the SEC has consistently permitted the exclusion of proposals where the statements surrounding a facially neutral proposed resolution indicate the proposal would serve as a shareholder referendum on charitable contributions to particular types of charitable organizations or groups. Starbucks claimed that when read with Proponent’s supporting statements, the  proposal simply represented the Proponent’s opposition to particular types of organizations while masquerading as a facially neutral proposal regarding charitable contributions.

The SEC agreed with Starbucks that the proposal did relate to contributions to specific types of organizations, and concluded it would not recommend enforcement action if Starbucks omitted the proposal from its proxy materials in reliance on Rule 14a-8(i)(7).

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

Friday
Mar162018

Moore v. Payson Petroleum Grayson: Investors in 3-Well Program Denied Transfer of Venue

In Moore v. Payson Petroleum Grayson, LLC, No. 3:17-CV-1436-M-BH, 2018 BL 21203 (N.D. Tex. Jan. 23, 2018), the court denied a motion to transfer venue filed by seven Payson Petroleum Grayson, LLC (“Payson”) investors (“Plaintiffs”), from the Northern District of Texas, Dallas Division (“Dallas Division”), to the Eastern District of Texas, Sherman Division (“Sherman Division”). In the class action, Plaintiffs’ alleged Payson and twelve other defendants (collectively “Defendants”) violated the Texas Securities Act. In denying the motion to transfer, the court reasoned both private and public interest factors, as well as the interest of justice, did not warrant transfer.

The complaint alleged Payson committed to funding 20% of its 3-Well Program, which would drill, complete, and operate three oil wells owned by Payson in Grayson County, Texas. The complaint alleged Payson ultimately failed to fund the project despite having successfully raised a total of $23 million from investors. According to the allegations, the SEC launched its own investigation, and filed a civil action alleging fraud against Payson’s owner, Matthew Carl Griffin, and his brother in the Sherman Division on November 23, 2016. SEC v. Griffin, No. 4:16-CV-00902 (E.D. Tex. Nov. 23, 2016). The Griffins subsequently entered into a consent agreement with the SEC. Nearly three months later, Plaintiffs filed a class action in state court in Dallas County, alleging Defendants violated the Texas Securities Act. Defendants removed the case to federal court under the Class Action Fairness Act provisions of 28 U.S.C. § 1332(d)(2). Plaintiffs filed a motion to transfer the venue to the Sherman Division.

When venue is proper in federal court, a party may seek a transfer of the case for the convenience of parties and witnesses, or in the interest of justice, so long as the transferee court is one where the case could have been brought. 28 U.S.C. § 1404(a). The burden is on the moving party to show the transferee court is a proper venue and the transferee court is “clearly more convenient” for this case. 28 U.S.C. § 1391(b), § 1404(a). Once proper venue is established in the transferee court, the transferor court will consider (a) four private interest factors to evaluate the transfer: 1) relative ease of access to sources of proof, 2) availability of compulsory process to secure the attendance of witnesses, 3) cost of attendance for willing witnesses, and 4) all other practical problems that make trial of a case easy, expeditious and inexpensive; and (b) four public interest factors: 1) court congestion, 2) local interest, 3) familiarity with governing law, and 4) avoidance of conflict of laws. Courts will also assess the interest of justice and the plaintiff’s choice of forum.

The court held that all but one of the private and public interest factors were neutral at best, with one factor – cost of attendance for willing witnesses – weighing against transfer. The court held Plaintiffs failed to prove documents or key witnesses would be more accessible in the Sherman Division. Additionally, there was no reason to assume key witnesses were outside of the Dallas Division’s subpoena power, and more events occurred outside the Sherman Division than within it. Moreover, the court noted many, if not most, of the willing witnesses cited in Plaintiffs’ complaint actually lived closer to the Dallas courthouse than to the Sherman courthouse.

As for the interest of justice, the court held Plaintiffs’ argument in support of transfer - that the SEC’s pending case against Griffin was in the Sherman Division - was inadequate justification because all that remained to be settled in the SEC action was the amount of penalty. Furthermore, the underlying case was based on federal securities laws and resulted in an uncontested motion for interlocutory judgment over Griffin. In contrast, the current class action was highly contested, based on alleged violations of the Texas Securities Act, and involved additional Defendants not named in the SEC action. Finally, Plaintiffs’ argument that they were left without their choice of forum was not accepted by the court because Plaintiffs knew their case could be removed to the Dallas Division when they filed in a Dallas County state court, just a few blocks away.

For the above reasons, the court held the Plaintiffs did not satisfy their burden of showing the requested transfer was more convenient for parties and witnesses or would serve the interest of justice, and therefore denied the motion.

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

Friday
Mar162018

Charles McDonald v. John P. Abizaid et. Al.: Stay Granted During Pendency of SEC Action 

In Charles McDonald v. John P. Abizaid et. Al., No. 1:17CV907 2018 WL 692006 (N.D. Ohio February 2, 2018), the United States District Court for the Northern Division of Ohio granted John Abizaid’s (“Defendant”) motion to stay a shareholder derivative complaint filed by Charles McDonald on behalf of nominal defendant, RPM International, Inc. (“Plaintiff”), until the completion of an SEC action. The court held the Plaintiff would not be prejudiced by the stay, but there was a higher likelihood of duplicative litigation without the stay.

According to the allegations, the directors of PRM International, Inc. consciously disregarded multiple signs of possible violations of securities laws. Plaintiff also argued the individual directors attempted to cover up the misconduct by filing materially false and misleading statements with the SEC that caused the company greater harm. Additionally, Plaintiff alleges Defendant has done the opposite of what is required by fiduciaries because Defendant is supporting the wrongdoers and pledging to fight the SEC through trial.

Courts allow a stay of a shareholder derivate suit if there is also an enforcement action by the SEC so long as the plaintiff is not unfairly prejudiced. Courts weigh three factors when determining the hardships to the parties in determining if a stay is justified: (1) if a stay is necessary to prevent harm to the entity; (2) if a stay is necessary to promote justice or avoid duplicative litigation; and, (3) if the plaintiff will be prejudiced by the stay.

The court held the factors weighed in favor of a stay. First, the court reasoned because of the similarities in the SEC enforcement action and the current case, Defendant would be wasting litigation resources in defending the duplicative litigation. Next, the court held the similarity of the underlying facts necessitated a stay because the complaint cited to the SEC record seventy-five times indicating the facts were sustainably similar. Finally, the court held that although the Plaintiff’s relief may be delayed, it would not be unduly prejudiced.

For the above reasons, the court granted a stay in the present case until the SEC action is completed. 

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

 

Tuesday
Mar062018

Fries v. Northern Oil and Gas, Inc.: Court Grants Motion to Dismiss with Leave to Amend for Non-Actionable 10b–5 Claims.

In Fries v. Northern Oil and Gas, Inc., No. 16-cv-06543-ER, 2018 BL 9786 (S.D.N.Y. Jan. 10, 2018), the United States District Court for the Southern District of New York granted a motion to dismiss the Consolidated Amended Complaint (“CAC”) of Matthew Atkinson (“Plaintiff”) against Northern Oil and Gas, Inc. (“Northern Oil”) and Northern Oil executives, Michael L. Reger (“Reger”) and Thomas W. Stoelk (“Stoelk”), (collectively “Defendants”), alleging violations of the Securities Exchange Act of 1934, as amended (“Exchange Act”) for violations of Section 10(b) and 20(a). The court held the Plaintiffs failed to state a claim.

While holding his position with Northern Oil, Reger co-founded Dakota Plains Holdings, Inc. (“Dakota Plains”), a non-party to the suit. The complaint alleged Reger’s improper financial control over Dakota Plains, which came under investigation by the United States Securities and Exchange Commission (“SEC”), affected Northern Oil’s stock price. Upon notifying Northern Oil of his Wells Notice, Reger was terminated, and concurrently, Northern Oil’s stock price fell 6.28%. Plaintiff asserted the Defendants made fraudulent representations and omissions in their public filings, including, among other assertions, that Northern Oil’s policies and Code of Business Conduct and Ethics (“Code of Ethics”) were inadequate to prevent and detect misconduct, and Reger’s involvement with Dakota Plains violated Northern Oil’s conflicts of interest policies. Additionally, Plaintiff asserted the statements regarding Reger’s expertise were false and misleading because the Defendants did not disclose Reger’s: (1) stake in Dakota Plains, (2) SEC violations, and (3) stock manipulation scheme. Finally, Plaintiffs asserted he relied on the Defendants’ disclosures, which prompted him to pay “artificially inflated prices” for Northern Oil stock.

Section 10b5 of the Exchange Act makes unlawful, any omission of a material fact or untrue statement of a material fact necessary to make the statement not misleading. To succeed on a claim of a 10b-5 violation the burden is on the plaintiff to prove (1) 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. An omission is material when there is a substantial likelihood that a reasonable investor would view the disclosure as significantly altering the total mix of information available. All private securities fraud complaints are subject to the heightened pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”) requiring the complaint to plead, with particularity,both falsity and scienter. Under the PSLRA, a plaintiff may establish scienter by alleging facts that show either (1) that the defendant had the “motive and opportunity” to commit the alleged fraud, or (2) strong circumstantial evidence of conscious misbehavior or recklessness.

The Court held the Plaintiff failed to allege any actionable misstatements or omissions, and failed to plead sufficient evidence to infer scienter. First, there were no allegations the Defendants made repeated assurances regarding the Code of Ethics, just that they adopted it annually. Second, the statements about Reger’s expertise were not inaccurate. Third, none of the Plaintiff’s allegations addressed whether: (1) Northern Oil and Stoelk were aware of Reger’s illegal activity with Dakota Plains; (2) Reger was in violation of the Code of Ethics, or (3) Reger failed to fulfill his role as CEO. Further, the court held the Dakota Plains allegations were entirely unrelated to Northern Oil, and Reger’s failure to disclose the SEC investigation was negligent, not fraudulent. Reger’s alleged violations of the Code of Ethics were not intentionally fraudulent,  but “mere mismanagement.” Thus, the court determined the Plaintiff’s scienter argument, regarding Reger, was not compelling. The court noted that Northern Oil’s termination  of Reger undermined scienter with regard to the company. Finally, Plaintiff’s failure to adequately plead an underlying Section 10(b) claim rendered the Section 20(a) claims invalid.

For the above reasons, the court granted Defendant’s motion to dismiss with Leave to Amend.

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

Sunday
Mar042018

No-Action Letter for The Cato Corp. Permitted Exclusion of Shareholder Proposal Explicitly Prohibiting Discrimination Based on Sexual Orientation and Gender Identity

In The Cato Corp., 2017 BL 63285 (Feb. 28, 2017), The Cato Corporation (“Cato”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by Walden Asset Management (“Shareholder”) requesting the board amend its written equal employment opportunity (“EEO”) policy to explicitly prohibit discrimination based on sexual orientation and gender identity or expression and report on its programs to substantially implement this policy. The SEC issued the no action letter allowing for exclusion of the proposal under Rule 14a-8(i)(10).

Shareholder submitted a proposal providing that:

RESOLVED

The Shareholders request that Cato Corp. amend its written equal employment opportunity policy to explicitly prohibit discrimination based on sexual orientation and gender identity or expression and report on its programs to substantially implement this policy.

Cato argued the proposal may be excluded from the company’s proxy materials under subsections (i)(10) and (i)(7) of Rule 14a-8.

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy materials17 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 and The Shareholder Proposal Rule and the SEC (Part II).

A company may exclude a shareholder proposal from its proxy material in reliance on Rule 14a-8(i)(10) “if the company has already substantially implemented the proposal.” For a proposal to be substantially implemented, the actions of the company must compare favorably to the guidelines and essential purposes of the proposal. For additional discussion of the exclusion, see Aren Sharifi, Rule 14a-8(I)(10): How Substantial is “Substantially” Implemented in The Context of Social Policy Proposals?, 93 DU L. Rev. Online 301 (2016).

Additionally, Rule 14a-8(i)(7) permits a company to exclude a shareholder proposal from its proxy materials if it “deals with a matter relating to the company’s ordinary business operations.” However, when a proposal relates to the company’s operations but also raises important issues of public policy, the SEC will reject the requested no action relief. For additional explanation of this exclusion, see Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Law Rev. Online 183 (216), and Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 DU L. Rev. Online 263 (2016).

Cato first argued its existing EEO policy prohibited discrimination based upon an individual’s sex or any other legally protected classifcation and therefore substantially implemented the Shareholder proposal under 14a-8(i)(10). Cato further argued that because its employment policies and practices already achieve the objectives of Shareholder’s proposal, any further modification would be superfluous and unnecessary.

Additionally, Cato argued that Shareholder’s proposal should be excluded under Rule 14a-8(i)(7) because the proposal interfered with the right to conduct conduct ordinary business practices specifically by infringing upon the relationship between a company and its employees. Cato further argued Shareholder’s proposal disrupted the company’s ability to draft and communicate certain workplace policies with its employees in a manner beyond the purview of shareholders, without relating to a sufficiently significant policy issue.

In response, Shareholder argued Cato’s current EEO policy was insufficient to be considered substantially implemented because Cato failed to explicitly prohibit discrimination based on sexual orientation and gender identity, and the current status of legally protected categories does not result in consistent protection for the LGBT community. Therefore, according to Shareholder, Cato failed to substantially implement the proposal. Furthermore, Shareholder argued the proposal could not be excluded under 14a-8(i)(10) because it addressed a significant policy issue.

The SEC agreed with Cato’s reasoning and concluded Cato may exclude the proposal from its proxy materials in reliance on Rule 14a-8(i)(10) because Cato had substantially implemented the proposal through their policies and actions. The SEC expressed no position on whether the proposal deals with matters relating to Cato’s ordinary business operations. Accordingly, the SEC concluded it would not recommend enforcement action if Cato omitted the proposal in reliance on Rule 14a-8(i)(10)

 

The primary website for the post may be found on the SEC Website

Sunday
Mar042018

SEC v. Chang - Complaint

On September 20, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint (“Complaint”) against Peter C. Chang (“Chang”), alleging Chang violated Sections 10(b), 14(e), and 16(a) of the Exchange Act and Rules 10b-5, 14e-3, and 16a-3 thereunder. The SEC asserted Chang knowingly engaged in an insider-trading scheme and failed to disclose his ownership of securities in accordance with federal securities laws.

According to the Complaint, Chang served as the Chief Executive Officer, Chairman of the Board, and President of Alliance Fiber Optic Products, Inc. (“AFOP”) from its formation in 1995 until its acquisition by Corning, Inc. (“Corning”) in 2016. In 2015 and 2016, through his position with AFOP, Chang acquired material nonpublic information about AFOP’s earning results and financial performance, as well as the intended acquisition by Corning. Chang traded AFOP shares in two nominee accounts held in his wife’s and brother’s names in advance of AFOP’s two public earnings’ announcements and the Corning acquisition announcement. Chang also allegedly informed his brother to trade AFOP shares on the basis of the same material, nonpublic information.  

The SEC asserted that as an officer and director at AFOP, Chang was subject to restrictions designed to limit his ability to trade AFOP shares, to disclose any such trading, and to keep confidential information regarding AFOP. AFOP also had an insider trading policy that prohibited all employees from trading on the basis of material nonpublic information regarding AFOP and trading during blackout periods around the earnings release for each quarter, and a nondisclosure agreement in connection with the proposed acquisition by Corning. Chang was further required to file statements reflecting his ownership, pursuant to Section 16 of the Exchange Act.

To properly claim violation of rules, the SEC must allege the defendant directly or indirectly: 1) employed devices, schemes, or artifices to defraud; 2) made untrue statements of material facts and failed to state material facts necessary to make those statements not misleading; and 3) engaged in acts which would operate as a fraud upon other persons, including buyers and sellers of securities

The SEC alleged Chang acted with scienter by opening a nominee brokerage account which controlled significant amounts of AFOP shares in both his wife’s name and brother’s name, failing to disclose ownership of the nominee accounts, trading AFOP shares on the basis of material nonpublic information, and informing his brother to do the same.

Chang allegedly opened a nominee brokerage account in his brother’s name in 2002 and one in his wife’s name in 2011, both funded from foreign bank accounts he held or controlled. Chang properly filed the correct forms to disclose his stock ownership held on behalf of himself, an LLC, a foundation, and his two sons, but failed to disclose ownership in the two nominee accounts.

Chang allegedly knew that AFOP had suffered a decline in purchase orders and its revenue would likely miss the provided earnings’ guidance for Q3 and Q4 in 2015. The SEC argued that Chang began selling off AFOP shares, and informed his brother to do the same in advance of the scheduled earnings announcements, despite AFOP’s trading blackout for all officers and directors during that time.

During the entire duration Chang’s brother’s trading account was open, AFOP comprised the entire trading activity in his account, with minor exceptions. Chang’s brother’s AFOP trades closely tracked Chang’s AFOP trades in the nominee accounts in timing, size, and direction.

The SEC represented that in May 2015, Chang contacted the brokerage firm for one of his nominee accounts and failed to correct the representative who understood that the account owner was unrelated to Peter Chang.

Later, in 2016, Chang identified his brother but failed to identify his wife when FINRA requested a review of persons whose accounts traded in AFOP around the time of Corning’s acquisition, and to identify any past or present relationships.   

The SEC further alleged Chang and his brother avoided losses totaling more than $950,000 due to violations of the AFOP trading policies and federal securities laws.

Based on these allegations, the SEC initiated this action against Chang and requested the court to: 1) permanently restrain and enjoin Chang “from directly or indirectly violating Sections 10(b), 14(e), and 16(a) of the Exchange Act . . . and Rules 10b-5, 14e-3, and 16a-3 thereunder; 2) order Chang “to disgorge, with prejudgment interest, all illicit trading profits, losses avoided, or other ill-gotten gains as a result of the conduct alleged herein”; 3) prohibit Chang “from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act”; and 4) order Chang to pay civil penalties pursuant to Section 21A and 21(d)(3) of the Exchange Act.

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