Following an increase in shareholder and investor activism beyond pure executive remuneration issues in the United Kingdom (UK) in 2013, with some 25 companies targeted for public campaigns, this post provides a summary of certain principles of English law and UK and European regulation applicable to UK listed public companies and their shareholders that are relevant to the expected further increase in activism in 2014. This post covers (i) stake-building; (ii) shareholders’ rights to require companies to hold general meetings; (iii) shareholders’ rights to propose resolutions at annual general meetings; and (iv) recent developments in these and related areas through raising and answering a number of relevant questions.
Posts Tagged ‘Gibson Dunn’
2013 proved to be a watershed year for securities litigation, and 2014 is shaping up to be a “career killing” year for plaintiffs’ lawyers specializing in 10b-5 class actions. In what may turn out to be one of the most important cases in the last three decades, the Supreme Court will address the long debated fraud-on-the-market theory in Halliburton II, and address head on whether the Court’s decades-old ruling in Basic v. Levinson establishing that theory should be overruled. The case for overruling Basic is a strong one, with at least four justices having expressed serious concerns about the fraud-on-the-market theory in the Court’s 2013 decision in Amgen. See “A Shot Across the Basic Bow,” in our 2013 Mid-Year Securities Litigation Update. If, as many court observers predict, the Court in fact overturns the fraud-on-the-market theory, securities class actions as we know them may be consigned to the dust heap.
As we begin 2014, calendar-year companies are immersed in preparing for what promises to be another busy proxy season. We continue to see shareholder proposals on many of the same subjects addressed during last proxy season, as discussed in our post recapping shareholder proposal developments in 2013. To help public companies and their boards of directors prepare for the coming year’s annual meeting and plan ahead for other corporate governance developments in 2014, we discuss below several key topics to consider.
On January 8, 2014, Institutional Shareholder Services, Inc. (“ISS”) announced that it will launch a new version of QuickScore (“QuickScore 2.0”) on February 18, 2014. QuickScore benchmarks a company’s governance risk against other companies in the Russell 3000 Index based on a number of weighted governance factors. QuickScore 2.0 will use a different method to score companies’ governance risk and will automatically reflect changes in companies’ governance structures based on publicly disclosed information.
In April 2012, we wrote here about the potential future impact of the Jumpstart Our Business Startups Act (“JOBS Act”) on M&A transactions in which an acquirer seeks to issue its privately placed equity securities as consideration in an acquisition. Our discussion at the time focused on the conditions of Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”) and, in particular, the tension faced by issuers that are required to determine the offerees’ status as “accredited investors” or as otherwise suitable to evaluate the potential investment. We noted that such issuers have historically been prohibited from using any form of “general solicitation” when offering securities in such transactions. Subsequently, in July 2013, the SEC adopted final rules (effective September 23, 2013) to eliminate the absolute prohibition against general solicitation in securities offerings conducted pursuant to Rule 506, as required by Section 201(a) of the JOBS Act (Gibson Dunn’s summary and analysis of the rules may be found here). The following discussion updates our earlier post to address the legal and practical effects of these new rules for M&A transactions that include a private placement component.
Gibson Dunn successfully represented DeVry Inc. in obtaining no-action relief from the SEC staff (the “Staff”) for the exclusion of a shareholder proposal requesting that DeVry “annually report to shareholders on the expected ability of students at Company-owned institutions to repay their student loans.” The shareholder proposal, which was submitted by the New York City Comptroller’s Office on behalf of several New York City pension funds, specified particular quantitative and other information to be included in the requested report.
On September 6, 2013, the Securities and Exchange Commission (SEC) announced that it had brought—and settled—a cease-and-desist case under Regulation Fair Disclosure (Reg. FD), which requires that public companies broadly disclose material nonpublic information to the public that their covered officers and employees intentionally or inadvertently disclose to market professionals and stockholders. The SEC charged Lawrence D. Polizzotto, a former Vice President of Investor Relations at First Solar, Inc., with selectively disclosing that the company was unlikely to receive financing under a conditional loan from the Department of Energy. Mr. Polizzotto agreed to pay a $50,000 fine to settle the charges, although he did not admit or deny the findings.
According to the SEC order,  Mr. Polizzotto attended a September 13, 2011 investor conference with the company’s then-CEO, who “publicly expressed confidence” that First Solar would receive three loan guarantees of $4.5 billion from the Department of Energy. Several executives, including Mr. Polizzotto, learned a couple of days later that First Solar would not get at least one of the loan guarantees. The company began discussing how and when to publicly disclose this information. However, before the company issued a public announcement, a number of analysts and stockholders began contacting the company after the House Committee on Energy and Commerce sent a letter to the Department of Energy inquiring about its loan guarantee program and the status of the guarantees that had not yet closed, including all three of First Solar’s conditional guarantees. Even though the company had not yet issued its public announcement, Mr. Polizzotto and his subordinate had phone conversations with more than 30 analysts and investors. They used talking points on the calls that “effectively signaled” First Solar would not receive one of the loan guarantees. The SEC charged that these calls violated Reg. FD, which requires simultaneous public disclosure of material nonpublic information that is intentionally disclosed by covered corporate officers and company spokespersons to market professionals and stockholders.  In addition to the $50,000 penalty from the settlement of these charges, Mr. Polizzotto agreed to cease and desist from violating Reg. FD and Section 13(a) of the Securities and Exchange Act of 1934.
This post addresses the end of the Dodd-Frank Act moratorium on the ability of “commercial firms” to acquire FDIC-insured banks that are excluded from the definition of “bank” in the Bank Holding Company Act: industrial banks (or “ILCs,” as they are commonly labeled) and credit card banks. The moratorium, set forth in section 603 of the Dodd-Frank Act, ended on July 21, 2013, and it is now again legally permissible for any type of company—retailer, manufacturer, or any type of nonfinancial firm—to seek to acquire or establish such an FDIC-insured bank.
Federal law has contained provisions expressly permitting any type of company to control an ILC or credit card bank for decades, but the Federal Reserve Board and, more recently, the FDIC have expressed policy concerns with the control of insured banks by commercial firms. The Dodd-Frank moratorium followed a similar moratorium on approvals for an ILC to be controlled by a non-financial firm, which the FDIC implemented in 2006-2008 and then continued de facto after it formally ended. We understand that at least three applications filed before the beginning of the FDIC moratorium were not acted on even though the moratorium did not apply to them. Section 603 of Dodd-Frank reflected the same policy concerns, but it has now expired, and the underlying provisions of law permitting control by commercial firms remain in effect.
Today, the Public Company Accounting Oversight Board (“PCAOB”) proposed for public comment two audit standards that, if adopted, would significantly change the audit report model, and dramatically expand the auditor’s responsibilities in reporting on management’s disclosures outside the financial statements. PCAOB Chairman Doty remarked that the proposed standards—running to almost 300 pages—mark a “watershed moment” for auditing in the United States.
The first proposal—The Auditor’s Report on an Audit of Financial Statements—moves well beyond the traditional audit report and would require the following additional statements:
One of the most difficult, and therefore most heavily negotiated, issues in carve-out transactions is the division of liabilities between the parent and the carved-out business. Typically, the division of liabilities will follow the business: liabilities attributable to the parent’s business will be retained by the parent, and liabilities attributable to the subsidiary or division’s business will be assigned to the subsidiary or division. As explained below, in the case of an M&A transaction, this application can vary depending on whether the transaction is a stock sale or an asset sale. 
- Stock Sale. In a stock sale, liabilities of the carved-out entity typically pass to the buyer by operation of law. The carved-out entity is acquired “as is” with all of its existing liabilities. However, to the extent the parent is creditworthy, the buyer may be able to obtain protection from certain liabilities through indemnification.
- Asset Sale. In an asset sale, by contrast, the buyer is contractually responsible only for those liabilities that it specifically assumes as part of the negotiated asset purchase agreement. This flexibility allows the parties to choose from any number of liability arrangements, from “all liabilities resulting from the ownership and operation of the carved-out division” to only specifically enumerated liabilities in a schedule, with the parent typically providing unlimited indemnification for all other liabilities. However, even where the buyer does not expressly agree to assume any liabilities, the buyer should be aware that it may nonetheless be subject to certain successor liabilities arising out of the asset purchase. 
- Applicable Law. No matter what the transaction structure, both parties should be aware that under applicable state, federal or international law, certain environmental, product and employee liabilities may pass to the buyer or be retained by the parent even if the parties have contractually provided for another allocation.