Category: Litigation
Commissioners Peirce and Roisman criticize “unduly broad view” of “internal accounting controls” in Andeavor
In October, the SEC settled charges against Andeavor, an energy company formerly traded on the NYSE and now wholly owned by Marathon Petroleum, in connection with stock repurchases authorized by its board in 2015 and 2016. (See this PubCo post.) Pursuant to that authorization, in 2018, Andeavor’s CEO had directed the legal department to establish a Rule 10b5-1 plan to repurchase company shares worth $250 million. At the time, however, Andeavor’s CEO was on the verge of meeting with the CEO of Marathon Petroleum to resume previously stalled negotiations on an acquisition of Andeavor at a substantial premium. After Andeavor’s legal department concluded that the company did not possess material nonpublic information about the acquisition, Andeavor went ahead with the stock repurchase. Rather than attempting to build a 10b-5 case based on a debatably defective 10b5-1 plan, the SEC opted instead to make its point with allegations that Andeavor had failed to maintain an effective system of internal control procedures in violation of Exchange Act Section 13(b)(2)(B). On Friday, the SEC posted the joint statement of SEC Commissioners Hester Peirce and Elad Roisman, who voted against the settled action, explaining the reasons for their dissents. In sum, they contend that, in the action, the SEC took an “unduly broad view of Section 13(b)(2)(B).”
Should companies be protected from securities litigation arising out of the pandemic?
If Matt Levine has a mantra in his “Money Stuff” column on Bloomberg, it’s this: everything is securities fraud. “You know the basic idea,” he often says in his most acerbic voice,
“A company does something bad, or something bad happens to it. Its stock price goes down, because of the bad thing. Shareholders sue: Doing the bad thing and not immediately telling shareholders about it, the shareholders say, is securities fraud. Even if the company does immediately tell shareholders about the bad thing, which is not particularly common, the shareholders might sue, claiming that the company failed to disclose the conditions and vulnerabilities that allowed the bad thing to happen. And so contributing to global warming is securities fraud, and sexual harassment by executives is securities fraud, and customer data breaches are securities fraud, and mistreating killer whales is securities fraud, and whatever else you’ve got. Securities fraud is a universal regulatory regime; anything bad that is done by or happens to a public company is also securities fraud, and it is often easier to punish the bad thing as securities fraud than it is to regulate it directly.” (Money Stuff, 6/26/19)
In this rulemaking petition filed by the U.S. Chamber Institute for Legal Reform and the Center for Capital Markets Competitiveness of the U.S. Chamber of Commerce, petitioners ask the SEC to take on one aspect of this type of securities litigation—event-driven securities litigation arising out of the COVID-19 pandemic. Will the SEC take action?
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—AB 979, California’s board diversity law for “underrepresented communities,” faces taxpayer challenge
It didn’t take long. Crest v. Padilla (see this PubCo post), now has a sequel, Crest v. Padilla II. You might recall that, shortly after SB 826, California’s board gender diversity bill, was signed into law, three California taxpayers challenged the new law, filing Crest v. Alex Padilla I in California state court, 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 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).
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