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Robert B. Lamm

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Bob Lamm chairs Gunster’s Securities and Corporate Governance Practice Group.  He has held senior legal positions at several major companies – most recently Pfizer, where he was assistant general counsel and assistant secretary; has served as Chair of the Securities Law Committee and in other leadership positions with the Society for Corporate Governance; and is a Senior Fellow of The Conference Board Center for Corporate Governance.  Bob writes and speaks extensively on securities law and governance matters and has received several honors, including a Lifetime Achievement Award in Corporate Governance from Corporate Secretary magazine.

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A few years ago, a wonderfully outspoken member of the institutional investor community congratulated me on a corporate governance award I’d received.  She apologized for not being able to make it to the awards ceremony, referring to it – very aptly, IMHO – as the “nerd prom.”

Well, we’ve progressed from the nerd prom to a nerd war – specifically, the nasty fight over the August 19 Statement on the Purpose of the Corporation, signed by 181 CEO members of The Business Roundtable.  The Statement suggested that the shareholder-centric model of the modern American corporation needs to be changed and that “we share a fundamental commitment to all of our stakeholders.”  The stakeholders listed in the Statement were customers, employees, suppliers, and the communities in which the companies operate; however, other stakeholders were referred or alluded to, such as the environment.  And the final bullet point in the list stated that the signers were committed to:

“Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.”

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In case you think that SEC Regulation FD is old news, think again.  A recent enforcement action makes it clear that Reg FD is alive and well.  (And, I might add, living in Boca Raton, Florida.)

Specifically, in an August 20 announcement, the  SEC announced that it had charged a Boca Raton-based pharmaceutical company with FD violations “based on its sharing of material, nonpublic information with sell-side research analysts without disclosing the same information to the public.”  The more detailed allegations include the following:

  • In June 2017, the company privately advised analysts of a “very positive and productive” meeting with the FDA about approval of a new drug. The next day – before any public announcement – the company’s stock closed up nearly 20% on heavy volume.
  • One month later, the company issued an early morning press release that it had submitted additional information to the FDA but “did not yet have a clear path” regarding its new drug application. The stock declined 16% in pre-market trading following the issuance of the release.  However, after issuing the press release but before the opening of the market, the company provided analysts with previously undisclosed information about the June FDA meeting.   The analysts published research notes with these details, and the stock rebounded, to close “only” 6.6% down for the day.

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In recent years, the SEC has made a number of incremental changes to make disclosures more effective – not only more meaningful and user-friendly for investors, but also helpful to those of us who prepare disclosures for our companies and clients.

The drive to make disclosures more effective seems to have kicked into a higher gear with the August 8 issuance of a proposal that may result in the most significant changes in the disclosure rules in more than 30 years.  The proposal would modify some key provisions of Regulation S-K, and in doing so would move considerably closer to a principles-based approach to disclosure.   Some details follow.…
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I recently came across an article reporting that the interim president of a state university system had failed to report a number of corporate board seats on his ethics forms.  That got me thinking about the forms he may have been asked to complete, which in turn got me thinking about D&O questionnaires.

Getting directors and officers to accurately complete and return questionnaires in a timely manner is one of the most frustrating tasks faced by corporate secretaries.  Years ago, I was speaking at a program for aspiring corporate governance nerds, when a young aspirant asked me if I had the secret to getting this task done.  If memory serves me correctly, my response was to the effect that if I had the answer to her question, I could retire.

However, I sometimes think that people who circulate questionnaires are their own worst enemies.  For example, a recent study reported that D&O questionnaires averaged 40 pages and 65 questions.  That means that some, perhaps many, questionnaires are far longer.  It’s unrealistic to expect someone with a life – much less a day job – to devote the amount of time necessary to complete a 40-page (or longer) questionnaire, particularly when many questions don’t lend themselves to simple “yes” or “no” answers.…
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In December 2014, I posted my concerns with the law on insider trading.  Perhaps someone read it, because the following year, H.R. 1625, the “Insider Trading Prohibition Act,” was introduced in the House of Representatives.  I regarded it as imperfect but a start.   Of course, it went nowhere, and the state of the law has not changed.

Well, it’s back – sort of – and may have a bit of life.   H.R. 2534, with the same title as in 2015, was introduced by Congressman Jim Himes (D-CT), who introduced the 2015 bill, and co-sponsored by Carolyn Maloney (D-NY) and Denny Heck (D-WA).  What’s new about the bill is that it was approved – unanimously – by the Financial Services Committee in May.  That probably doesn’t mean anything, as Congress seems to be the place where legislation goes to die, but I suppose anything is possible.

Like its predecessor, it’s a start.  But I still think it’s imperfect.  The title of the first section is promising: “Prohibition Against Trading Securities While In Possession Of Material, Nonpublic Information.”  Sounds good, right?  The mere possession of MNPI means you can’t trade.  Wrong.  The text of the section gives the lie to its title.  Specifically, the prohibition exists only if the person trading “knows, or recklessly disregards, that such information has been obtained wrongfully, or that such purchase or sale would constitute a wrongful use of such information.”  In other words, (1) the bill seems to say it’s OK to trade while in possession of inside information as long as the information was not known to have been obtained wrongfully or is being used wrongfully (whatever the latter means), and (2) it would get us right back into the very issues that make the present state of the law so confusing.  You can’t trade in a stock if you know (or should have known) that the MNPI was wrongfully obtained, but what if you don’t know or have no reason to know it was wrongfully obtained?  If someone suggests that you buy (or sell) a particular stock, what is your duty of inquiry, and where does it end?

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For those of you who’ve heard me sing, rest easy – I’m not going to break into “As Time Goes By.”  But the lyric I’ve quoted in the title is worth noting.  In fact, it was noted, albeit in substance rather than form, in the June 18 opinion of the Delaware Supreme Court in Marchand v. Barnhill.  The opinion, written by soon-to-retire Chief Justice Leo Strine (more on that below) addressed two fundamental matters – director independence and the board’s oversight responsibilities.

The case resulted from a listeria outbreak caused by contaminated ice cream.  (The thought of contaminated ice cream is too upsetting, but that’s for another day.)  The key holdings referred to above were as follows:

  • Director Independence: The trial court had dismissed the complaint for failing to make a pre-suit demand on the board, based on its conclusion that the a majority of the board – albeit the slimmest majority of one director – was independent. However, when the Supreme Court considered the background of that one director, it determined that he was not independent.  Thus, the slim majority went away.  The relevant facts included that the director had worked for the company in question for 28 years, including as its CFO and a director, and that the company’s founding family had helped to raise more than $450,000 for a local college that named a building after the director.  The fact that the director had supported a proposal that the founding family opposed – i.e., separating the chair and CEO positions – was deemed by the Supreme Court to be insufficient to support a finding of independence.
  • Board Oversight: The Delaware Supreme Court found that the board had breached its fiduciary duty of loyalty by failing to oversee a significant risk – product contamination – leading to the conclusion that the board had demonstrated bad faith. As is usually the case, Chief Justice Strine says it better than I possibly could.  Citing the landmark 1996 Caremark decision, he writes:

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“Where was the board?”  It’s a question we hear whenever something – anything – goes wrong at a public company.  The question has been asked in all sorts of circumstances, ranging from failing jet systems, to networks being hacked, to harassment allegations, and so on.

Don’t get me wrong – there are most assuredly cases in which the question needs to be asked. Without naming names, there have been numerous instances where it seems apparent (and in some cases has been proven) that the board elected not to see or hear evil and thus hadn’t a clue that there was a problem, and other cases where the board created or fostered a rotten culture that seemed to beg for problems.  However, what concerns me is that society at large seems to think that the board is or should be responsible for every sin of commission or omission by the company.  And that just seems wrong.

Boards are charged with oversight.  And while the definition of that word can be difficult to pin down, it seems clear that the board was never supposed to be a guarantor.  Yet that’s precisely where we are headed – or perhaps where we’ve arrived.  You even see it in articles and treatises by governance nerds who should know better: “The board should ensure that…”.  Boards cannot “ensure” anything.  They are part-time consultants, and even the best boards cannot possibly know everything that a company does.

As a result, we’ve seen an upswing in suggestions as to how to help boards, including the following:…
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Four years ago, I commented on the then-recent announcement that Jamie Dimon, Chairman and CEO of JP Morgan Chase, was battling cancer.  At the time, Dimon noted that he had struggled with whether the company should disclose his illness.

It’s a struggle that executives, companies, and their securities lawyers face when a CEO is diagnosed with a serious illness, or when there is some other arguably personal news about the CEO.  With apologies for quoting myself, here is an excerpt from my 2015 posting:

“It’s a very challenging issue for several reasons.  First, there isn’t any rule – or even any literature (at least to my knowledge) – that tells us whether and what to disclose in this situation.  So when a client says, “show me the rule that says we have to disclose this,” there’s nothing to show.  Second, and more important, the issue pits the need to disclose against information that is quintessentially personal.  It’s also not just an issue between the executive and the company; often, the executive’s family and, possibly, his/her medical team and others are equally involved.  And even when there’s agreement to disclose, it’s very difficult to know what to say about the prognosis, if and when the executive can return to work, and so on.”

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There probably aren’t too many subjects nerdier than corporate minutes.  Lawyers (among others) tend to focus on exciting (dare I say sexy?) matters like M&A, activism, and bet-the-company litigation. Those and other topics are surely exciting, but failing to pay attention to minutes can cost big time. Like it or not, minutes are among the few pieces of evidence – sometimes the only evidence – that boards and committees have properly executed their fiduciary duties.  Did the board give a matter due consideration? Did the directors ask the right questions?  Any questions? Did they consider the risks as well as the benefits of an action or of inaction?  If these and other questions are not answered by reading the minutes, they may not be answerable at all.

Failing to have good minutes can have serious adverse consequences.  Aside from the potential liability and reputational damage associated with a failure to fulfill fiduciary obligations, transactions can be voided, and so on. And in one recent case, the Delaware Supreme Court found that in the absence of minutes, plaintiffs making a “books and records” demand on a company would be able to see emails between directors, among other things.  (You can find my prior posting on that case here.)  If that doesn’t put butterflies in your stomach, nothing will.…
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As our readers know, I am irritated by Congress’s penchant for naming bills so as to create nifty acronyms. And for including provisions that have nothing to do with the name or the acronym.  However, I can better put up with these irritants when the legislation – and SEC regulations implementing the legislation – create a good result.

Such is the case with the FAST Act. It stands for “Fixing America’s Surface Transportation Act,” and despite its acronymic name and its questionable connection to securities law, it contained some provisions to make disclosures more effective and the process by which disclosures are made somewhat easier.

These benefits were engraved in stone by the SEC on March 20, when it adopted a series of rules under the FAST Act. The rules provide for the following types of relief:…
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