A Proven Success: The SEC Whistleblower Regime Provides a Roadmap for DOJ’s New Program

Posted by Allison Herren Lee, Kohn, Kohn & Colapinto LLP, on
Thursday, April 25, 2024
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Allison Herren Lee is a former SEC Commissioner and Of Counsel at Kohn, Kohn & Colapinto LLP. This post is based on her Kohn, Kohn, & Colapinto piece.

The Department of Justice (DOJ) recently announced that it is embarking on a “90-day  sprint” to develop a whistleblower award program. This is a promising and welcome development for fairness and the rule of law in corporate America. Whistleblower programs at other federal agencies have been resounding successes, bolstering enforcement efforts against hard-to-detect crimes by incentivizing those with knowledge of misconduct to come forward.

As DOJ considers how best to construct this new program, it fortunately has a model of success to consider in the programs created under Dodd-Frank at the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC).  READ MORE »

Unicorn Shareholder Suits

Posted by Verity Winship (University of Illinois Urbana-Champaign), on
Thursday, April 25, 2024
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Verity Winship is a Professor of Law and Senior Associate Dean for Academic Affairs at the University of Illinois Urbana-Champaign. This post is based on her article forthcoming in the Indiana Law Journal.

Huge private companies like Epic Games or SpaceX are everywhere, creating gaps between the private-market reality and legal structures that were designed for public companies. This major economic shift has created a blind spot in the law and its analysis. Although an emerging literature explores the world of startups, whole areas remain unexamined. A key uncharted area is shareholder litigation: suits brought by investors against the company in which they own shares.

Shareholder litigation against public companies is frequent and expected. Given its importance, academic and industry analysis of shareholder litigation is extensive. To date, however, the analysis has focused almost exclusively on shareholder litigation against public companies. Given the shift from large public to large private companies, it is natural to ask how shareholders sue in the private context. Unicorn Shareholder Suits offers a systematic account of shareholder litigation against the private companies that now dominate the corporate landscape.

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Issuers see former directors take on activist role

Posted by Will Arnot, Diligent Market Intelligence, on
Thursday, April 25, 2024
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Will Arnot is Senior Editorial Specialist at Diligent Market Intelligence (DMI). This post is based on his Diligent memorandum.

A growing number of former directors and founders have turned dissident as of late, returning to companies to push for new strategies and reforms.

Outside of campaigns where former executives are brought forward as nominees, such as Trian Partners’ slate for Walt Disney featuring the media giant’s former chief financial officer Jay Rasulo, U.S.-headquartered companies have seen a considerable increase in campaigns directly led by former affiliates, with seven such advances recorded in 2023, compared to four in 2022.

Europe-based insider campaigns doubled from three to six in the same period, with most demands by former executives and directors focused on refreshing the board.

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Environmental & Social Policy Issues in the 2024 U.S. Proxy Season

Posted by Heidi Welsh, Sustainable Investment Institute, on
Wednesday, April 24, 2024
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Heidi Welsh is the Executive Director at the Sustainable Investments Institute. This post is based on her recent Si2 memorandum.

Introduction

Proponents as of mid-Feburary 2024 had filed at least 527 shareholder resolutions on environmental, social and related sustainable governance issues for the 2024 proxy season.  This is down by only a few from 536 last year at the same time.  It still seems possible the total will reach the 630-year-end total of last year.

Support levels have fallen substantially on average in the last two years, largely because the biggest asset managers have stopped supporting as many proposals.  Some of the chill clearly comes from attacks on the use of investment strategies that consider social and environmental matters in business, underscored by related litigation that is testing out novel legal theories that could upend shareholder rights and decades of investor engagement.  Some also comes from the types of resolutions filed, as well as the context of a surging U.S. economy and fallout from global conflicts that has pushed energy prices higher.  Proposals that favor changes that would strengthen corporate approaches to societal responsibility continued to drop are still earning far more than those that oppose such efforts by a wide margin, but the pro-ESG average did fall to 21.5 percent last year, down from an apex of 33.3 percent in 2021.  The relatively small number of anti-ESG proposals still have gained no traction, though, and last year saw their already low average fall to only 2.5 percent.

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The Limits of Individual Prosecutions in Deterring Corporate Fraud

Posted by Samuel Buell (Duke University School of Law), on
Wednesday, April 24, 2024
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Samuel Buell is Bernard M. Fishman Distinguished Professor of Law at the Duke University School of Law. This post is based on his article forthcoming in the Wake Forest Law Review.

One must search long and hard to find an academic, journalist, politician, or citizen who does not believe that the best tool for deterring corporate crime is criminal prosecution of individual employees, especially managers.  Even the Justice Department’s oft-maligned program for negotiated settlements with offending companies prioritizes leveraging corporate criminal liability to produce otherwise elusive evidence of individual violations, to assist in visibly and reliably imposing criminal sanctions, especially prison, on natural persons.

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U.S. Supreme Court Rules on Liability for Item 303 Omissions in Shareholder Suits

Posted by Julia A. Malkina, Cason J.B. Reily and Matthew A. Schwartz, Sullivan & Cromwell LLP, on
Wednesday, April 24, 2024
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Julia A. Malkina and Matthew A. Schwartz are Partners and Cason J.B. Reily is an Associate at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Malkina, Mr. Reily, Mr. Schwartz, Robert J. Giuffra Jr., Judson O. Littleton, and Morgan L. Ratner.

Summary

The U.S. Supreme Court ruled today in Macquarie Infrastructure Corp. v. Moab Partners, L. P., 601 U.S. ___, 2024 WL 1588706 (2024), that a violation of Securities and Exchange Commission Item 303—which requires public companies to disclose “known trends or uncertainties” that could impact their income— cannot, in the absence of an otherwise misleading statement, support a private lawsuit brought under SEC Rule 10b-5(b), a regulation that implements Section 10(b) of the Securities Exchange Act of 1934. In a unanimous opinion by Justice Sotomayor, the Court ruled in favor of Macquarie, reversing the Second Circuit’s decision allowing such claims to survive a motion to dismiss.

The Court’s ruling resolves a circuit split and changes the law in the Second Circuit, which in 2015 held that an Item 303 violation standing on its own could form the basis of a 10b-5(b) claim. See Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 101 (2d Cir. 2015). After Macquarie, a plaintiff must identify a “statement” rendered misleading by the omission. The Court declined, however, to resolve questions about the scope of “statements” that could be rendered misleading by such an omission.

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The Gist of Tornetta

Posted by Michael R. Levin, The Activist Investor, on
Tuesday, April 23, 2024
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Michael R. Levin is the Founder and Editor of The Activist Investor. This post is based on his TAI memorandum.

Sounds like a novel, right? Rather than our effort to distill to its essence the complicated, enormous lawsuit that TSLA shareholder Richard Tornetta won against CEO Elon Musk and eight directors to clawback $56 billion in exec comp? Now that TSLA published its preliminary proxy statement for its 2024 AGM, we know how the company wants to respond to that lawsuit.

Tornetta v. Musk, an Unlikely Story

To refresh memories, Tornetta sued in 2018, with a trial in Delaware Chancery Court in February 2023 before Chancellor Kathaleen McCormick. (She presided over a number of TSLA and Musk matters, including the director comp case where we intervened and the one requiring him to buy Twitter.) In January 2024, Chancellor McCormick issued her order, rescinding the entire $56 billion in stock options the BoD granted to Musk in 2018.

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“ES” Versus “G” in Corporate Governance: You Can’t Have It All

Posted by Patrick Corrigan (University of Notre Dame), on
Tuesday, April 23, 2024
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Patrick Corrigan is an Associate Professor of Law at the University of Notre Dame Law School. This post is based on his working paper.

The environmental, social, and governance (ESG) moniker implies a coherence between corporate social responsibility and corporate governance. In a paper recently posted to SSRN, I argue, to the contrary, that governance trade-offs must be made if corporations are going to be able to pursue social benefits other than just profits. The analysis provides a novel diagnosis for why, years after the 2019 Business Roundtable statement on the purpose of the corporation and talk about ESG factors from institutional investors, ESG proponents remain frustrated by the lack of progress on the environmental and social goals of corporations. It also provides two institutional solutions—if pro-social founders and investors are actually willing to pay the requisite costs.

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Alternative Data – A COSO perspective

Posted by Nicolas H.R. Dumont, Dave Navetta and Michael Egan, Cooley LLP, on
Tuesday, April 23, 2024
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Nicolas H.R. Dumont, Dave Navetta and Michael Egan are Partners at Cooley LLP. This post is based on a Committee of Sponsoring Organizations of the Treadway Commission (COSO) memorandum by Mr. Dumont, Mr. Navetta, Mr. Egan, and Ryan Blair.

What is alternative data?

Altdata generally is understood to include information about an organization that is available outside of traditional financial and regulatory reporting channels, press releases, or other authorized materials. It includes data about an organization and its operations that the organization makes public or otherwise discloses to third parties knowingly or unknowingly. Altdata has no standard definition provided by industry groups or regulators, and as such the definition remains inherently fluid. Common sources of altdata include e-mail, information from mobile devices and apps, payment card transactions, geolocation data, social media information, sensors, web-scraped data, internet traffic, Internet of Things-based devices, satellite data, point-of-sale information, and rewards programs. This list is not exhaustive: as the volume of data produced by organizations rises, so too does the volume of altdata, absent operational or definitional reframing.

Every organization needs to be aware that altdata about them is widely collected. Altdata is commonly collected and used to identify patterns and obtain insights relevant to or about a target industry, company, or user-base. It is leveraged to gain market intelligence and advantage by using multiple available data points to extrapolate timely and valuable information.

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Q1 2024 Review of Shareholder Activism

Posted by Jim Rossman, Chris Ludwig, and Quinn Pitcher, Barclays, on
Monday, April 22, 2024
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Jim Rossman is Global Head of Shareholder Advisory, Chris Ludwig is Managing Director, and Quinn Pitcher is Vice President- M&A and Shareholder Advisory at Barclays. This post is based on a Barclays memorandum by Mr. Rossman, Mr. Ludwig, Mr. Pitcher, and Michael Sun-Huang.

Observations on the Global Activism Environment in Q1 2024

1 U.S. and APAC Campaign Activity Remains Steady as Europe Sees Slow-Down
  • There have been 63 campaigns launched through Q1, down 19% versus the 78 launched YTD in 2023
  • Activity in the U.S. and APAC has remained steady, with 29 and 20 campaigns YTD vs. 30 and 17 in 2023, respectively
    • European activity is down 52% (11 campaigns YTD vs. 23 in 2023) as top global activists such as Elliott, TCI, and ValueAct focused on existing campaigns or other markets
  • More dispersed activity among activists, with the top 10 busiest activists accounting for 33% of campaigns YTD vs. 46% in 2023
      • 29% of campaigns this year have been launched by first-timers, well above the multi-year average of 16%
      • Nevertheless, familiar names such as Elliott, Icahn, Land & Buildings, Oasis and Starboard have been most active YTD

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