Category: Litigation

Andeavor charged with internal control violations

A couple of weeks ago, the SEC settled charges against Andeavor, an energy company formerly traded on the NYSE and now wholly owned by Marathon Oil, in connection with stock repurchases, authorized by its board in 2015 and 2016. Pursuant to that authorization, in 2018, Andeavor’s CEO directed the legal department to establish a Rule 10b5-1 plan to repurchase company shares worth $250 million. At the time, however, the company’s CEO was on the verge of meeting with the CEO of Marathon Oil to resume previously stalled negotiations on an acquisition of Andeavor at a substantial premium. Of course, a 10b5-1 plan typically doesn’t work to protect against insider trading charges if you have material inside information when you establish the plan, and the SEC’s order highlights facts that, from the SEC’s perspective, make the information appear material—at least in hindsight. But wait—this isn’t even an insider trading case. No, it’s a case about inadequate internal controls—at least, that’s how it ended up. Instead of attempting to make a 10b-5 case based on a debatably defective 10b5-1 plan, the SEC opted instead to make its point by focusing on the failure to maintain effective internal control procedures and comply with them. Companies may want to take note that charges related to violations of the rules regarding internal controls and disclosure controls seem to be increasingly part of the SEC’s Enforcement playbook, making it worthwhile for companies to emphasize, in the words of SEC Chair Jay Clayton, the practice of “good corporate hygiene.”

ISS proposes voting policy changes for 2021

Last week, ISS released for public comment a number of proposed voting policy changes to be applied for shareholder meetings taking place on or after February 1, 2021. The proposed changes for U.S. companies relate to board racial/ethnic diversity, director accountability for governance failures related to environmental or social issues and shareholder litigation rights, i.e., exclusive forum provisions. Comments may be submitted on the proposals through October 26, 2020.

Enforcement again targets failure to disclose perks

Failure to disclose perks seems to be a fairly attractive target for SEC Enforcement these days. In another fiscal year-end action, Enforcement has charged Hilton Worldwide Holdings Inc. with failure to disclose in its proxy statements various perks and personal benefits provided to its executive officers. This action has the distinction of being the result of the staff’s use of risk-based data analytics to uncover potential violations related to corporate perks. The case serves as a reminder that the analysis of whether a benefit is a disclosable perk can be complicated and is not the same as the “business purpose” test used for tax purposes.

Crest v. Padilla redux—conservative activist group challenges AB 979, California’s board diversity law for “underrepresented communities”

It didn’t take long. From the folks that brought you Crest v. Padilla (see this PubCo post), we now have the sequel, Crest v. Padilla II. You might recall that, shortly after SB 826, California’s board gender diversity bill, was signed into law, a conservative activist group challenged the new law, filing Crest v. Alex Padilla I in California state court on behalf of three California taxpayers seeking to prevent implementation and enforcement of SB 826. With AB 979 signed into law just last week (see this PubCo post), the same three plaintiffs represented by the same conservative group have now filed a similar lawsuit challenging this new law on essentially the same basis. AB 979 requires boards of public companies, including foreign corporations with principal executive offices located in California, to include specified numbers of directors from “underrepresented communities.” Framed as a “taxpayer suit” much like Crest v. Padilla I, the litigation seeks to enjoin Alex Padilla, the California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, alleging that the law’s mandate is an unconstitutional quota and violates the California constitution.

SEC charges HP with failure to disclose known trends and uncertainties

Enforcement has certainly been busy at the end of the SEC’s fiscal year, with disclosure violations receiving their fair of attention. In this action against HP Inc., the company was charged with failing to disclose known trends and uncertainties regarding the impact of sales and inventory practices, as well as failure to maintain adequate disclosure controls and procedures. HP was ordered to pay a penalty of $6 million.

Cookie-jar KPIs lead to Securities Act violation

Last week, the SEC charged BMW and subsidiaries with Securities Act violations for disclosing inaccurate and misleading information about the company’s retail sales volume in the U.S.—not as sales in its financial statements, but rather as key performance indicators in its offering memoranda to prospective investors for bond offerings that raised approximately $18 billion. Because of BMW’s “substantial cooperation during the investigation, notwithstanding the challenges presented by the global COVID-19 pandemic,” according to the Order, the SEC determined to impose a reduced penalty of only $18 million.

SEC amends rules for whistleblower program

On Wednesday, the SEC voted (by a vote of three to two) to adopt amendments to the rules related to its whistleblower program. The program provides for awards in an amount between 10% and 30% of the monetary sanctions collected in the SEC action based on the whistleblower’s original information. It is widely acknowledged that the program, which has been in place for about ten years, has been a resounding success. According to the press release, since inception, the SEC has obtained over $2.5 billion in financial remedies based on whistleblower tips. Most of those funds have been, or are scheduled to be, returned to affected investors. In addition, since inception, the SEC has awarded approximately $523 million to 97 individuals in whistleblower awards, with the five largest awards—two at $50 million, and one each at $39 million, $37 million and $33 million—made in the past three and a half years. So why mess with success? The press release indicates that the amendments “are intended to provide greater transparency, efficiency and clarity, and to strengthen and bolster the program in several ways. The rule amendments increase efficiencies around the review and processing of whistleblower award claims, and provide the Commission with additional tools to appropriately reward meritorious whistleblowers for their efforts and contributions to a successful matter.” The SEC also adopted interpretive guidance regarding the meaning of “independent analysis” as used in the definition of “original information,” and the SEC’s whistleblower office released guidance for award determinations. Although the final amendments may sound anodyne, the discussion at the SEC’s open meeting was quite contentious. The amendments to the whistleblower rules become effective 30 days after publication in the Federal Register.

California court enforces Delaware exclusive federal forum provision

In Salzberg v. Sciabacucchi (pronounced Shabacookie), the Delaware Supreme Court unanimously held that charter provisions designating the federal courts as the exclusive forum for ’33 Act claims are “facially valid.” (See this PubCo post.) Given that Sciabacucchi involved a facial challenge, the Court had viewed the question of enforceability as a “separate, subsequent analysis” that depended “on the manner in which it was adopted and the circumstances under which it [is] invoked.” With regard to the question of enforceability of exclusive federal forum provisions if challenged in the courts of other states, the Delaware Supreme Court said that there were “persuasive arguments,” such as due process and the need for uniformity and predictability, that “could be made to our sister states that a provision in a Delaware corporation’s certificate of incorporation requiring Section 11 claims to be brought in a federal court does not offend principles of horizontal sovereignty,” and should be enforced. But would they be? Following Sciabacucchi, many Delaware companies that did not have FFPs adopted them, and companies with FFPs involved in current ’33 Act litigation tried to enforce them by moving to dismiss state court actions. In an apparent case of first impression, one such case was just decided in the San Mateo Superior Court in California, Wong v. Restoration Robotics (18CIV02609, Sept. 1, 2020).

Delaware bill to update emergency powers, revise PBC provisions and amend indemnification provisions signed into law

Delaware Assembly Bill 341 has finally been signed into law.  Among other things, the bill confirms the availability of specific powers relating to stockholders’ meetings that may be exercised by the board during an emergency condition, such as the current pandemic. These powers include changing the date, time and place of meetings (including to virtual formats) and, for public companies, providing notice of these changes through an SEC filing. These provisions are effective retroactively as of January 1, 2020. (See this PubCo post.) The bill also makes it easier to convert a traditional corporation to a public benefit corporation or a PBC to a traditional corporation and amps up the protections for directors of a PBC. (See this PubCo post.) Another provision of the bill, less widely discussed, relates to indemnification, discussed below. 

Will the California courts enforce a Delaware exclusive federal forum provision?

In Salzberg v. Sciabacucchi (pronounced Shabacookie), the Delaware Supreme Court unanimously held that charter provisions designating the federal courts as the exclusive forum for ’33 Act claims are “facially valid.” (See this PubCo post.) Given that Sciabacucchi involved a facial challenge, the Court had viewed the question of enforceability as a “separate, subsequent analysis” that depended “on the manner in which it was adopted and the circumstances under which it [is] invoked.” With regard to the question of enforceability of exclusive federal forum provisions if challenged in the courts of other states, the Court said that there were “persuasive arguments,” such as due process and the need for uniformity and predictability, that “could be made to our sister states that a provision in a Delaware corporation’s certificate of incorporation requiring Section 11 claims to be brought in a federal court does not offend principles of horizontal sovereignty,” and should be enforced. But would they be? Following Sciabacucchi, many Delaware companies that did not have FFPs adopted them, and companies with FFPs involved in current ’33 Act litigation tried to enforce them by moving to dismiss state court actions. One such case is currently being fought in California state court involving ’33 Act claims against Dropbox, and, as noted in this column in Reuters, a group of former Delaware jurists and a former SEC Commissioner have filed an amicus brief in support of the company’s effort to enforce the FFP in that case.