A few months ago, the U.S. Court of Appeals for the D.C. Circuit upheld portions of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the “conflicts mineral rule.” The rule, enacted by Congress in July of 2010,requires certain public companies to provide disclosures about the use of specific conflict minerals supplied by the Democratic Republic of Congo (DRC) and nine neighboring countries. In the D.C. Circuit case, the National Association of Manufacturers, or NAM, challenged the SECs final rule implementing the conflicts mineral rule, raising Administrative Procedure Act, Exchange Act, and First Amendment claims. The D.C. Circuit agreed with NAM on its third claim and held that the final rule violates the First Amendment to the extent the rule requires regulated companies to report to the SEC and to post on their publically available websites information on any of their products that have not been found to be “DRC conflict free.” Despite this adverse ruling, the SEC made it clear that the conflicts minerals rule is here to stay: in a statement on the effect of the D.C. Circuit’s decision, the SEC communicated its expectation that public companies continue to comply with those deadlines and substantive requirements of the rule that the D.C. Circuit’s decision did not affect. So, what is the conflicts mineral rule, how far does it reach, and what are public companies doing to comply?
In an unusual attempt to curtail human rights abuses in Africa through regulation of U.S. public companies, the conflicts mineral rule requires companies to trace the origins of gold, tantalum, tin, and tungsten used in manufacturing and to Continue Reading
Interest in corporate governance has increased exponentially over the last several years, as has shareholder and governmental pressure – often successful – for companies to change how they are governed. Since 2002, we’ve seen Sarbanes-Oxley, Dodd-Frank, higher and sometimes passing votes on a wide variety of shareholder proposals, and rapid growth in corporate efforts to speak with investors. And that’s just for starters.
These developments represent the latest iteration of what has become part of our normal business cycle – scandals (e.g., Enron, WorldCom, Madoff, derivatives), followed by significant declines in stock prices, resulting in public outrage, reform, litigation, and shareholder activism. Now that the economy is rebounding, should we anticipate a return to “normalcy” (whatever that may be)? Are we back to “business as usual”?
Gazing into a crystal ball can be risky, but I’m going to take a chance and say “no.” While our economic problems have abated, I believe that the past is prologue – in other words, we’re going to continue to see more of the same: investor pressure on companies, legislation and regulation seeking a wide variety of corporate reforms, and the like. Some more specific predictions follow:
- Increased Focus on Small- and Mid-Cap Companies: Investors have picked most if not all of the low-hanging governance fruit from large-cap companies. Sure, there are some issues that may generate heat and some corporate “outliers” that investors will continue to attack. However, most big companies have long since adopted such reforms as majority voting in uncontested director elections, elimination of supermajority votes and other anti-takeover provisions, and shareholder ability to call special meetings, to name just a few. If investors (and their partners, the proxy advisory firms) are to continue to grow, Continue Reading
The Securities Edge is excited to announce a new blogger to the fold: Bob Lamm! After a 12-year “hiatus”, Bob has rejoined Gunster.
Bob is widely considered a national expert in the securities and corporate governance space and frequently speaks and writes on securities law, corporate governance, and related topics. Bob’s unparalleled depth of experience will prove to be a great addition to The Securities Edge and Gunster.
Bob has over four decades of in-house experience. His most recent experience was as Assistant General Counsel and Assistant Secretary with Pfizer. In addition to Pfizer, Bob’s previous experience includes service as Vice President and Secretary of W. R. Grace & Co., Senior Vice President – Corporate Governance and Secretary of CA, Inc., and Managing Director, Secretary and Associate General Counsel of FGIC Corporation/Financial Guaranty Insurance Company. Bob also has extensive experience with small- and mid-cap public companies as well as non-profit entities.
At Gunster, Bob will co-chair the Securities and Corporate Governance Practice Group, where his deep expertise will be welcomed in the Florida market.
Bob is a long-term member of the Society of Corporate Secretaries and Governance Professionals. He is the immediate past Chair of the Society’s Securities Law Committee and has served on the Society’s Corporate Practices, Finance and National Conference Committees, and as a member of its Board of Directors. He is also a Senior Fellow of The Conference Board Governance Center.
Bob is a member of the New York State Bar, The Florida Bar, and the American Bar Association (including its Business Law Section and Committees on Corporate Governance and Federal Regulation of Securities). He received a Bachelor of Arts from Brandeis University and a Juris Doctor from the University of Pennsylvania School of Law.
We are all looking forward to reading some great posts from Bob!
On Thursday, Institutional Shareholder Services Inc. (ISS) announced the launch of a new data verification portal to be used for equity-based compensation plans that U.S. companies submit for approval by their shareholders. This is a welcome change to ISS policy; although call me a cynic, but I believe this new policy has more to do with the SEC Staff’s recent interpretive guidance and less to do with actually improving their product.
Criticism of ISS (and the other proxy advisors) is nothing new. Public companies have long complained about ISS’s conflicts of interest (ISS “grading” issuers’ corporate governance policies and then charging companies a subscription fee to learn how to improve their “grades”). Further, ISS constantly churns their corporate governance policies (presumably) to keep their services relevant. But, the biggest complaint from public companies occurs when ISS makes a recommendation based on erroneous data. In fact, in a study from the Center on Executive Compensation, 17% of respondents reported erroneous analysis of long-term incentive plans and 15% of respondents reported that Continue Reading
There is an attraction for companies to incorporate in Delaware, likely due to the abundance of well-known publicly traded corporations that have chosen to incorporate there. However, it is not necessarily true that the Delaware General Corporation Law (“DGCL”) is better than corporate laws of other states; it is just more developed due to the abundance of case law interpreting it. This usually provides for greater certainty, which is often looked upon favorably by not only directors and management, but investors as well. On the other hand, it is generally more expensive to incorporate and maintain a Delaware corporation. Unless your company has a physical presence in Delaware, you’ll need to pay for a registered agent who is physically located in the state and who can accept service of process on behalf of your company. Delaware also imposes a franchise tax based on a corporation’s capitalization, which is generally higher than similar fees and taxes imposed by other states (for example, Florida’s annual report fee, the only corporate fee that is required to be paid to the state each year to maintain corporate status, is only $150).
Thus, while there may be good reasons for incorporating or reincorporating in Delaware (e.g., because a private equity investor requires it as a condition for investment), the costs of using a Delaware corporation are probably not justified Continue Reading
Illustration by Royce Bair
Accredited investors have long been critical participants in private financing transactions, and the success of most private financings is largely determined by the participation of these investors and the availability of their capital. State and Federal securities laws have been written or amended to foster and facilitate investment by these accredited investors. Based on recent developments, the standards for qualification as an accredited investor may be changing, and these changes could pose problems for companies seeking financing.
The current requirements for accredited investor status are contained in Rule 501(a) of the 1933 Act. The most commonly used standards for individual investors are a $200,000 annual income (or $300,000 combined income with a spouse) or a $1,000,000 net worth (excluding the value of the investor’s primary residence). Other than the exclusion of the investor’s primary residence (which became effective in 2012), these standards have been in place since 1982 without any changes to reflect the effects of inflation during that period.
Based on these current standards, observers estimate that there are approximately 8.5 million accredited investors in the United States. Some critics have asserted that this number is far higher than it should be, and that many of these people only qualify as accredited investors because Continue Reading
Who says Congress isn’t popular? Well, Congress may become much more popular with public company executives if Congressman Patrick McHenry (R-NC) can make good on his recent promise to challenge the power of proxy advisory firms if the SEC doesn’t act. In a recent keynote speech at an American Enterprise Institute conference on the role of proxy advisory firms in corporate governance, Rep. McHenry stated that proxy advisory firms are a significant issue on Capitol Hill.
As I have blogged about before, there are some real questions as to whether proxy advisory firms actually serve investors’ interests. While ISS and Glass Lewis are entitled to create a business model based on providing services to institutional investors, there has been either a market or regulatory failure that has forced public companies to consider corporate governance policies promulgated by two unregulated proxy advisory firms before making business decisions. Public companies should be making decisions based on what makes sense for their company and their shareholders and not based on trying to meet arbitrary policies of ISS or Glass Lewis (policies that seem to be continuously tweaked to keep the proxy advisory firms services relevant). To be fair, ISS and Glass Lewis claim that their policies aren’t arbitrary at all, but rather their policies reflect their clients’ views. Of course, for that to be the case, all of their institutional investor clients would need to have a monolithic view toward corporate governance.
Because institutional investors may own hundreds or even thousands of positions in public companies, institutional investors do not have the ability or the resources to research all of the issues facing each of those holdings. That is where ISS and Glass Lewis step in to provide guidance to these institutional investors. While some institutional investors have robust voting policies and attempt to make educated and informed voting decisions, Continue Reading
Photo by Sharon Drummond
In a case of first impression, the Delaware Supreme Court held that provisions contained in a nonstock corporation’s bylaws, requiring a plaintiff stockholder to reimburse the corporation’s legal expenses if the plaintiff loses on a claim it has brought against the corporation, are facially valid if adopted properly and for a proper purpose (i.e., not for the purpose of deterring meritorious litigation). The court reached its conclusion in its May 8, 2014 decision based on the following factors and analysis:
- the Delaware General Corporation Law (“DGCL”) and other Delaware statutes did not forbid the enactment of fee-shifting bylaws;
- the fee-shifting bylaw related to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees because it related to the allocation of risk in connection with intra-corporation litigation (DGCL § 109(b));
- a provision for fee-shifting was not required to be included in the charter and could therefore be adopted in the bylaws (DGCL § 102(a)); and
- because the Delaware Supreme Court has held that bylaws are treated as contracts among a corporation’s stockholders, it was permissible to modify the American attorney’s fees rule (i.e., that each party in litigation bears its own costs and expenses) by adopting a fee-shifting bylaw.
Because of the statutory basis of the court’s decision, the holding was presumed to also apply to ordinary stock corporations. Thus, a fee-shifting bylaw would likely allow Delaware corporations to require the loser of an intra-corporate lawsuit to pay the corporation’s attorney expenses.
In response to the Delaware Supreme Court’s ruling, the Delaware State Bar Association (with significant plaintiff’s attorney membership) was considering a proposed amendment to the DGCL would amend Section 102(b)(6) and add a new Section 331 to clarify that these costs cannot be borne by stockholders of stock corporations. The proposed legislation was expected to be presented to the Delaware General Assembly before the end of the current session and, if passed, would have become effective on August 1, 2014.
However, in a recent development, Continue Reading
Photo by Josh Turner
The JOBS Act’s crowdfunding provisions were once one of the most eagerly anticipated items contained in that Act. Many companies and their advisors had high hopes that these crowdfunding provisions would open up new arenas for financing smaller companies while easing the costs and challenges associated with securities regulatory compliance. These hopes and dreams have been substantially curtailed as the SEC’s proposed crowdfunding rules (issued in 2013) did not provide the anticipated relief. The SEC received a significant number of comments on these proposed crowdfunding rules, and these comments were predominantly critical due to the perceived regulatory and cost burdens that the proposed Rules seemed to contain.
Hope springs eternal, however, and many people are still eagerly awaiting the SEC’s final crowdfunding regulations to determine if the SEC will adopt a more reasonable position that may be useful to small companies seeking financing. The Federal crowdfunding exemption from registration will not be effective until the SEC issues these final regulations. Many people just want to know what they are actually dealing with here and whether crowdfunding will offer any viable opportunities for small company financing. Somewhat surprisingly given the significant amount of attention and publicity that crowdfunding has generated, the SEC still has not issued those final regulations despite the JOBS Act’s deadline. This situation has caused a significant amount of frustration in the corporate finance community.
Given the uncertainty regarding the status of Federal crowdfunding regulation, some states have seen an opportunity and have taken somewhat bold steps in establishing crowdfunding exemptions on the state level. The states moving ahead of the SEC is somewhat unusual, but it appears that the initial impact of these state crowdfunding initiatives may be economically beneficial to these states.
The predominant model for these state crowdfunding structures is the creation of an intrastate crowdfunding exemption from registration. The states have been very creative in their efforts, as they appear to have used the strong desire for a useful crowdfunding regulatory structure to create state structures that will help to provide economic growth in the states. This is also very compatible with the nature of crowdfunding – since many crowdfunding projects are smaller and localized, they may not be affected by being required to be contained in any one state.
The participating states have mainly modeled their crowdfunding regulations to be Continue Reading
The Foreign Account Tax Compliance Act (“FATCA”) is a US law designed to counter offshore tax avoidance by US persons. Controversial because of its wide-ranging breadth and application to non-US financial institutions, in the most general sense, FATCA imposes a 30% withholding tax on payments of US source income made to foreign financial institutions (“FFIs”) unless they enter into an agreement with the US Internal Revenue Service (“IRS”) and disclose information about their US account holders.
After having revised the timelines for FATCA’s implementation on several occasions (culminating in an implementation delay of over three years from the date of its adoption in March of 2010), FATCA’s official July 1, 2014 implementation date is on the horizon. As a result, FFIs worldwide have made a mad dash in the race toward FATCA compliance over the last few months.
So why does this matter to non-banking/non-financial institutions? Well, as an initial matter, FATCA’s definition of an FFI is broad, including more types of entities than one might expect. As a result, US entities must make sure they have evaluated their corporate structure to determine whether its network includes an FFI. Under FATCA rules, the following types of entities may qualify as FFIs, subject to certain exceptions:
- Non-US retirement funds and foundations
- Special purpose entities and banking-type subsidiaries
- Captive insurance companies
- Treasury centers, holding companies, and captive finance companies
Additionally, even if an organization’s affiliate network does not include an FFI, US-based entities could be Continue Reading