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The Securities Edge

Securities Blog for Middle-Market Companies

Do forum selection clauses in bylaws make sense for companies not incorporated in Delaware?

Posted in Securities Litigation

forum selection bylawsMore and more plaintiff lawyers are suing issuers outside of an issuer’s state of incorporation, which requires issuers to defend substantially identical claims in multiple forums at added expense with little to no benefit to the shareholders.  While plaintiff lawyers enjoy this lucrative source of revenue, the increasing amount of time and money expended on this multiforum shareholder litigation drives the need for a creative solution for issuers.  A 2010 Delaware court decision, provided such a solution by suggesting that Delaware corporations could amend their organizational documents to provide that Delaware courts are the exclusive jurisdiction for settling intracorporate disputes, including derivative claims.  Thus, dozens of issuers have adopted so called “forum selection” clauses in their bylaws.  Generally, these clauses are similar to Chevron’s:

Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the state of Delaware, in all cases subject to the court’s having personal jurisdiction over the indispensible parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article VII.

And while the 2010 Delaware court decision suggested these clauses were permissible, it was not until earlier this year that a Delaware court specifically ruled that the forum selection clause adopted by Chevron was valid. Although the Delaware Supreme Court hasn’t ruled on the issue (the plaintiff dropped its appeal in the Chevron case), it is clear that Delaware corporations have the power to adopt these forum selection clauses.  What is not clear is Continue Reading

The FDIC should consider updating its outdated statement of policy on bank stock offerings

Posted in Capital Raising, Financial Institutions

FDIC Statement of Policy on Bank Stock OfferingsWith the costs of compliance on the rise, we are seeing some significant consolidation in the banking industry, particularly among community banks. In a recent article on www.bankdirector.com, Rick Maroney writes that although bank M&A has been tepid thus far in 2013, some key drivers of M&A activity are starting to emerge and he predicts that we are likely to see increased merger and consolidation activity in the industry as smaller banks need to grow to remain viable. Additionally, the heightened regulatory capital requirements that are expected to be adopted as a result the Basel III accord may be an additional driver of consolidation in the banking sector.

In these merger transactions, it is fairly common for acquiring institutions to offer its common stock to target shareholders as part of the consideration to be paid. Depending on the organizational structure of the acquiring institution, there are a few options for offering stock to target shareholders as merger consideration. If the acquiror is a bank with a holding company structure, the stock portion of the merger consideration is almost always common stock of the holding company. The most significant issue when offering bank holding company stock is that the transaction must either (i) be registered on an S-4 registration statement, which involves substantial time and cost for the acquiror and would subject the acquiror to periodic reporting requirements under the Securities Exchange Act of 1934 or (ii) alternatively, the holding company stock must be issued pursuant to an exemption from registration (typically the Rule 506 safe-harbor for the Section 4(a)(2) private offering exemption). Many smaller banks, to the extent possible, will attempt to avoid registering the transaction due to the high costs and rely on an exemption to registration. If an acquiror considers privately placing holding company securities in a merger transaction, there are a number of considerations to address, some of which may be slightly alleviated by the recent changes under the JOBS Act as described in Kobi Kasitel’s recent blog post regarding stock issuances in M&A transactions after the JOBS Act.

For state-chartered banks regulated by the FDIC that do not have a holding company, the issuance of bank stock in connection with an acquisition may, at first glance, appear simpler. Under section 3(a)(2) of the Securities Act of 1933, securities issued or guaranteed by a bank are exempt securities and may be issued Continue Reading

Stock exchanges compete for technology company IPO listings – Twitter chooses NYSE, but who’s really winning?

Posted in IPOs

Where to list NYSE or Nasdaq?These are interesting times for technology companies that are contemplating initial public offerings. For companies of sufficient size, the exchange for the listing of their securities generally comes down to the New York Stock Exchange and the Nasdaq Stock Market. The NYSE has historical prestige and a long track record, while the Nasdaq has cultivated a progressive, tech-friendly reputation. If you are a high visibility technology company, you will probably find these exchanges actively competing for your listing. Such benefits as free advertising have been used, and business deals involving a company’s services may influence a company’s decision as to which exchange to list its securities. For example, Oracle’s switch to the NYSE from Nasdaq was reportedly in part due to an agreement by the NYSE to continue to use Oracle software in its operations.

Nasdaq has long been the favorite exchange for the listing of technology company offerings. This was probably due to the initial progressive use of automation and electronics in this exchange’s early operations which resonated with technology company executives. Rather than traders waving pieces of paper (the historical process at the NYSE), Nasdaq pioneered the use of electronic quotation boards and other advanced methods in its operations. Nasdaq was willing to list the offerings of smaller companies and was also cheaper than the NYSE. All of these factors allowed Nasdaq to build a reputation as the technology companies’ preferred exchange. This reputation was fostered and supported by the listing of a large number of technology companies, including big hitters like Apple and Microsoft.

Nasdaq’s role as the preeminent exchange for technology companies has been diminished. One of the major blows for this exchange was Continue Reading

Proposed changes to Regulation D: Are these really so bad?

Posted in Capital Raising

What is the right balance between investors and issuers?On the same day that the SEC proposed rules that may make capital raising easier for companies by repealing the ban on general solicitation for private offerings, the SEC also proposed rules that may make it much more difficult to raise capital.  Why would they do this?  The repeal on the ban on general solicitation was required by the JOBS Act, but there is a lot of concern about fraud without the ban in place.  And while the SEC’s mission is to maintain fair, orderly, and efficient markets and facilitate capital formation, the SEC has a third mission: to protect investors.

Here is a highlight (or a lowlight depending on your perspective) of what is being proposed:

  • Require the filing of a Form D at least 15 calendar days in advance of using any general solicitation (rather than the current requirement of 15 calendar days after the first sale of securities);
  • Require the filing of a “closing amendment” to Form D within 30 calendar days after the termination of an offering (there is no current requirement to file a final amendment);
  • Increase the amount of information gathered by Form D such as the number of investors in the offering and the type of general solicitation used in the offering;
  • Automatically disqualify an issuer from using Regulation D for one year if the issuer failed to file a Form D (currently no such harsh consequences);
  • Mandate certain legends on all written general solicitation materials; and
  • Require the filing of general solicitation materials with the SEC (temporary rule for two years)

Now, while these are still only proposed rules and the comment period continues through November 4, 2013, there has been a huge outcry from the startup community.  Critics of these proposed Continue Reading

Protect your Board from merger and acquisition lawsuits with these five critical considerations

Posted in Mergers and Acquisitions

Protecting your board from shareholder lawsuits when you announce a dealFor a board of directors of a company, perhaps no decision is as important (and litigious) as the sale of the company in a change-of-control transaction. Shareholder lawsuits aimed at merger and acquisition (“M&A”) transactions (usually in the form of a putative shareholder class action or derivative suit) often allege that the directors of the acquisition target company breached their fiduciary duties in approving the transaction in question, and name the acquiring company and other defendants as aiders and abettors of the fiduciary violation. In support of their claim, the plaintiffs typically assert one, all, or a few of the following:

  • Transaction price is inadequate,
  • Directors failed to exercise due care to maximize the price being offered,
  • Transaction is coercive to shareholders because of so-called deal protection measures included in the agreements,
  • Public disclosures associated with the transaction are inadequate or misleading, and/or
  • Some or all of the directors have some form of conflict of interest.

The rationale for shareholder litigation generally stems from the idea that managerial agency costs are high, and that class actions and derivative suits are key shareholder monitoring mechanisms necessary to keep managers in line. On the other hand, representative litigation claims are often lawyer-driven, reflecting the agency costs that arise out of contingency fee suits that make the lawyer the real party in interest in these cases. In any event, the fact is that shareholder litigation in the United States has exploded in recent years. According to one study, in 2012, shareholders challenged 93 percent of M&A deals valued over $100 million and 96 percent of transactions valued over $500 million.

And while the deferential business judgment rule (i.e., the presumption that the directors’ actions were informed and taken in the good-faith belief that the actions were in the company’s best interests) generally enables directors to Continue Reading

Effect of government shutdown on SEC

Posted in Announcements

Will SEC be closed by government shutdown?While the U.S. government over the past few years seems to be in a constant state of imminent closure, it finally has happened.  What does this mean to issuers?  At the moment, as Broc Romanek blogged about today, it will be business as usual (at least for the SEC).  For the next few weeks, the SEC believes it has access to sufficient funds to continue normal operations.  The SEC was able to stay open in the last government shutdown in the 1990s.

If the budget impasse continues beyond a few weeks, however, the SEC’s Operational Plan for a governmental shutdown would presumably go into effect.  According to the SEC’s contingency plan, of its 4,149 employees only 252 would report to work. The employees not furloughed would largely consist of those critical for the safety of human life or the protection of property or to carry out emergency enforcement activities. No one may volunteer to work without pay.  All law enforcement and litigation matters, except emergency matters, all processing and approvals of filings and registration statements, and all non-emergency rule-making would be suspended. EDGAR would remain operational; however, the SEC would be unable to process filings, provide interpretive advice, issue no-action letters or conduct any other normal activities.

Most likely, public outcry will cause the government factions to compromise and strike a budget deal before the SEC need to implement its shutdown plan, but an impending SEC shutdown is worth watching especially if you are currently contemplating a securities offering.

Government mandated pay ratio disclosure will fail to achieve its intended objectives

Posted in Disclosure Guidance

CEO pay ratio disclosure will not have the intended effectCompensation of public company executives re-emerged back into the public limelight after the recent financial crisis which began in late 2007. The public perception was one of outrage in large part due to the fact that many investors in public companies were experiencing significant losses in their investment portfolios while CEOs and other executives were still being paid record levels of compensation and bonuses.

As a direct result, Congress enacted a number of new laws intended to fix these perceived social injustices, most of which were included in the Dodd-Frank Act. Section 953(b) of Dodd-Frank, for example, was a highly controversial part of Dodd-Frank which directed the SEC to adopt rules requiring  public companies to disclose the ratio of the CEO’s total compensation to that of its median employee. The crux of the controversy surrounding this rule related to how companies should determine median employee salary. Should part-time employees be included or just full-time employees? How should companies treat international employees in countries that have significantly lower relative wages as compared to the U.S.? Another concern of critics was whether the pay ratio metric was useful for investors.

On September 18, 2013, the SEC promulgated proposed rules regarding CEO pay ratio disclosures. As required by the Dodd-Frank Act, the proposal would amend existing executive compensation disclosure rules to require companies to disclose:

  • The median of the annual total compensation of all its employees except the CEO.
  • The annual total compensation of its CEO.
  • The ratio of the two amounts.

The proposed rule would not specify any required calculation methodologies for identifying the median employee in terms of total compensation for all employees.  Instead, it would allow companies to select a methodology that is appropriate to the size and structure of their own businesses and the way they compensate employees.

Like the other SEC disclosure rules mandated by Dodd-Frank, it seems that Congress is attempting to indirectly fix situations it views as problematic for one reason or another by mandating that public companies disclose certain things in their public filings. I presume the thought is that companies will be incentivized to change their practices so as not to be publicly shamed through these disclosures in their public filings. My presumption is supported, to some extent, by Continue Reading

Twitter announces its IPO in a tweet

Posted in IPOs

The next big tech IPO is in the works. Twitter, the hugely popular short message social media site, announced last week that it has filed a Form S-1 registration statement with the SEC in connection with the company’s proposed initial public offering. This IPO has been rumored and anticipated for some time, and it will generate substantial interest among members of the tech and investment communities. This offering may not have the impact of last year’s Facebook IPO, but it will be close.

Twitter appropriately announced its planned IPO in a tweet on September 12:

Twitter announces IPO in tweet

(followed by a “get back to work” tweet):

Twitter IPO

This offering should proceed more smoothly and productively than the ill-fated Facebook IPO. The various participants in the IPO process learned a lot from the significant problems that the Facebook IPO encountered, and in some cases these lessons were driven home by significant monetary penalties (See my prior blog post regarding the Facebook IPO and its problems). No one wants a repeat of that situation, especially with such a high profile IPO. Twitter has also always impressed me as a more thoughtful and rational company than some in the tech space, and this should carry through in their IPO.

In its IPO filing process Twitter took advantage of one of the key available provisions of the JOBS Act. Section 6(e) of the Securities Act allows an “emerging growth company” to file an IPO registration statement on a confidential basis. This provision is designed to give the company and the SEC time to identify and work through potential problem areas or issues before investors see any information. It also allows companies to keep material nonpublic information confidential until late in the SEC review process. If the company decides not to proceed with its IPO, it has avoided the public disclosure of this information. If the company and the SEC can work out these problems and issues satisfactorily, the registration statement (amended as necessary) eventually becomes available to the public and the IPO process goes forward. This should make the registration process very quick and efficient after it emerges from the initial SEC review.

This confidential filing opportunity has been popular with emerging growth companies. According to an Ernst & Young JOBS Act study, approximately 63% of eligible companies used this process during the first year of its availability under the JOBS Act. The SEC has published a set of helpful FAQ’s which clarify many components of this confidential filing process.

Twitter added one interesting change to this Continue Reading

It was me! SEC to toss “neither admit nor deny” policy in certain cases

Posted in SEC Enforcement

SEC wants you to confessSEC Chair Mary Jo White has indicated that the SEC will require that, in certain cases, admissions be made as a condition of settling rather than permitting the defendant to “neither admit nor deny” the allegations in the complaint of its enforcement action.  The move marks a departure from the typical practice at the SEC and many other civil federal regulatory agencies of allowing defendants to settle cases without admitting or denying the charges.  The policy of allowing defendants to neither admit nor deny the allegations has been increasingly criticized for its inherent lack of transparency regarding both the alleged wrongdoing and the corresponding disgorgement and forfeiture penalties.

According to White, the new policy will apply only in select cases, such as those where there is egregious conduct and/or wide spread public interest. While the precise parameters of the new policy have not been specified, White did note that the new policy would be applied on a case by case basis and that for most cases currently settling, the old policy would still apply.

Debate about the old policy began about two years ago, when Judge Jed S. Rakoff rejected a $285 million settlement that the SEC negotiated with Citigroup, in part because the deal included “neither admit nor deny” language.  The SEC has appealed, and the case is pending before a panel of the U.S. Second Circuit Court of Appeals. Since then, a handful of other judges have voiced their discomfort with allowing defendants to pay fines without admitting liability.

In previously defending the old policy, the SEC has argued that most defendants would refuse to settle if they had to admit wrongdoing.  Essentially, companies and executives would rather fight in court than admit liability and face additional liability in parallel civil lawsuits, as well as the added difficulty of losing director and officer indemnification coverage which often pays the legal fees for corporate officers (a benefit which can be lost if Continue Reading

PCAOB proposal piling on more costs for public companies (again)

Posted in Accounting

Costs of PCAOB proposal greatly outweigh benefitsThe PCAOB’s recently proposed auditing standards aim to “provide investors and other financial statement users with potentially valuable information that investors have expressed interest in receiving but have not had access to in the past” by changing the standard auditor’s report and increasing the auditor’s responsibilities.  Sounds like a lofty goal, except that the information that they are proposing to require auditors to provide is either (i) self-evident; (ii) an infringement on the judgment of the issuer’s audit committee; or (iii) just plain not helpful.  What the proposed auditing standards do accomplish, however, is to add more costs to being a public company just like their last proposal on mandatory auditor rotation.

Critical Audit MattersUnder the proposed auditing standards, an auditor will be required to include a discussion in its auditor’s report about the issuer’s “critical audit matters.”  Difficult, subjective, or complex judgments, items that posed the most difficulty in obtaining sufficient evidence, and items that posed the most difficulty in forming the opinion on the financial statements are deemed to be “critical audit matters.”  While this requirement may seem straightforward at first, the reality is that this “new” information should be self-evident by anyone who knows how to read a financial statement.  Revenue recognition, estimates for allowances, pension assumptions, etc. are typically deemed to be “critical audit matters” by an auditor when planning audit procedures.  These critical accounting policies are already discussed in issuers’ MD&A and in their financial statements.  Further, any investor who actually is looking at the fundamentals of an issuer’s business and historical results should already be highly focused on estimates that, if wrong, could materially impact the financial statements.  Auditors will end up being overly inclusive on what is deemed “critical” for fear of having Continue Reading