Posts Tagged ‘Michael Kaplan’

Court Finds Financial Advisor Liable for Aiding and Abetting Fiduciary Duty Breaches

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday March 30, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Michael Kaplan, co-head of Davis Polk’s global Capital Markets Group, and is based on a Davis Polk client memorandum. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On March 7, 2014, Vice Chancellor Travis Laster of the Delaware Court of Chancery found a financial advisor liable for aiding and abetting breaches of fiduciary duties by the board of Rural/Metro Corporation in connection with the company’s 2011 sale to an affiliate of Warburg Pincus LLC. In its 91-page, post-trial opinion, the Court concluded that the financial advisor allowed its interests in pursuing buy-side financing roles in both the sales of Rural/Metro and Emergency Medical Services (“EMS”) to negatively affect the timing and structure of the company’s sales process, that the board was not aware of certain of these actual or potential conflicts of interest, and that the valuation analysis provided to the board was flawed in several respects. Both the Rural/Metro board of directors and a second financial advisor to Rural/Metro settled before trial for $6.6 million and $5.0 million, respectively.

…continue reading: Court Finds Financial Advisor Liable for Aiding and Abetting Fiduciary Duty Breaches

SEC Proposes Crowdfunding Rules Under JOBS Act

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday October 30, 2013 at 9:15 am
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Editor’s Note: The following post comes to us from Michael Kaplan, co-head of Davis Polk’s global Capital Markets Group, and is based on a Davis Polk client memorandum.

On October 23, 2013, the Securities and Exchange Commission proposed rules under the JOBS Act that would permit startups and other businesses to raise investment capital through “crowdfunding”—the process of seeking relatively small investments from a broad group of investors via the Internet. Crowdfunding has historically not been used to raise investment capital (as opposed to being used, for example, to solicit donations) because offers and sales of securities to the public generally require compliance with the registration requirements of the Securities Act of 1933.

The proposed rules provide a limited exemption from the Securities Act registration requirements in order to—

  • permit companies to raise investment capital through crowdfunding, up to certain offering-size and per-investor dollar thresholds;
  • require disclosure from companies raising capital; and
  • create a regulatory framework for intermediaries that facilitate crowdfunding transactions.

…continue reading: SEC Proposes Crowdfunding Rules Under JOBS Act

Rule 10b5-1 Plans: What You Need to Know

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday February 5, 2013 at 9:25 am
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Editor’s Note: The following post comes to us from Michael Kaplan, co-head of Davis Polk’s global Capital Markets Group, and is based on a Davis Polk & Wardwell memorandum.

Rule 10b5-1 plans are back in the news. These plans are widely used by officers and directors of public companies to sell stock according to the parameters of the affirmative defense to illegal insider trading available under Rule 10b5-1, which was adopted by the SEC in 2000. Several recent Wall Street Journal articles suggest that some executives may have achieved above-market returns using the plans. [1] These articles are reported to have drawn the interest of federal prosecutors and the SEC enforcement staff. Rule 10b5-1 plans are no strangers to controversy. An academic study published in December 2006 found that, on average, trades under 10b5-1 plans outperformed the market by about 6% after six months. The resulting scrutiny did not lead to a significant uptick in insider-trading prosecutions, but did cause many companies to revisit their executives’ use of the plans. We suggested then that the potential for controversy was not by itself a reason to forego the benefits of employing 10b5-1 plans. We continue to believe that using properly designed plans is a good idea in many cases and can be at least as prudent as discretionary selling under normal insider-trading policies, with trading windows, blackouts and the like. Although regulators and the media may scrutinize trades made under 10b5-1 plans even when above board and done according to best practices, a well-thought-out and implemented 10b5-1 plan may help a company and its executives avoid or ultimately refute accusations of impropriety.

In light of the renewed focus on 10b5-1 plans, companies should review their 10b5-1 policies for conformity with current best practices. Below we provide an overview of 10b5-1 plans and some guidelines for their use.

…continue reading: Rule 10b5-1 Plans: What You Need to Know

The Perils of Implied Messages for Reg FD

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on Tuesday October 26, 2010 at 9:15 am
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Editor’s Note: Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk client memorandum by Michael Kaplan, William M. Kelly, Linda Chatman Thomsen and Janice Brunner.

The SEC recently announced settled Reg FD charges against Office Depot and its CEO and former CFO related to “signals” that Office Depot made in one-on-one conversations with analysts implying that it would not meet future earnings expectations. The Office Depot settlement, which is the SEC’s third Reg FD action in a little over a year after an approximately four-year hiatus, is distinctive because the challenged statements appear to have been crafted—unsuccessfully, as it turned out—to walk the FD compliance line by avoiding express references to changes in the company’s business.

…continue reading: The Perils of Implied Messages for Reg FD

Cuban Decision Casts Doubt on SEC Position on Insider Trading

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on Monday July 20, 2009 at 2:23 pm
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Editor’s Update: The recent decision of the Court of Appeals for the Second Circuit in SEC v. Dorozhko further illustrates the uncertain state of the limits of insider trading. Reversing an earlier District Court decision, the Court held that while a breach of a fiduciary duty is required where the fraud is premised on silence, no such breach is required where there has been an affirmative misrepresentation. A memo by Davis Polk & Wardwell LLP, available here, discusses the decision.)

Editor’s Note: This post is by Annette Nazareth’s colleagues William M. Kelly, Joseph A. Hall, Michael Kaplan, William J. Fenrich, and Janice Brunner.

On Friday, a federal district court in the Northern District of Texas dismissed the SEC’s insider trading case against Dallas Mavericks owner Mark Cuban. While the celebrity of the defendant has undoubtedly contributed to the widespread publicity of the dismissal, the real news is that the SEC has, for the moment at least, lost a case on what might seem to have been slam-dunk facts:

• Company shares material nonpublic information with its largest shareholder, who agrees to keep the information confidential.

• The shareholder, upon learning the information, says “Well, now I’m screwed. I can’t sell”.

• Shareholder nonetheless turns around and dumps all of his shares, sparing himself a $750,000 loss when the material nonpublic information is later disclosed.

What’s missing here? Mr. Cuban, abetted by a group of law professor amici, argued that Rule 10b-5 liability requires a fiduciary or fiduciary-like relationship with the provider of the information, and that a mere agreement cannot provide a basis for liability. The court rejected this view, but it also rejected the SEC’s long-held view, reflected in its adoption of Regulation FD and Rule 10b5-2, that third parties who accept material nonpublic information from a company on a confidential basis are precluded from trading on the information. The court held that Mr. Cuban’s oral agreement to maintain confidentiality, without an agreement not to trade, was not enough.

What does this decision mean for potential providers and recipients of material nonpublic information?

For providers—for example, companies interested in sharing information with potential investors or acquirers—the case says that if you want the recipient not to trade, you had better be specific. The safest approach, of course, is to seek a written contractual standstill from recipients. But agreements of this sort are often difficult to get parties to agree to, especially where, as in this case, the recipient would be asked to sign the agreement “blind”, without knowing the nature of the information. As a practical matter, providers may have to content themselves with a “sole use” provision, along the lines of “recipient agrees to use the information solely for the purpose of considering an investment”. Had such a provision been in place, the result in this case might well have been different.

For recipients of material nonpublic information, our advice is not to rely on this decision. The case was decided at the trial court level, is not binding on other courts, and the SEC has been given the right to file an amended complaint. Whether or not the SEC chooses to replead the case or to appeal the decision, we are certain that it will not accept the case as the final word and will continue to seek enforcement action on facts like these. Thus, while the decision will provide comfort to parties who have to defend themselves for what they have done, we would not use it as a basis for deciding what you should do. The prudent judgment continues to be that if you have agreed to keep information confidential, you should not use it as a basis for trading.

Lastly, the case highlights the curious fact that, 75 years after the enactment of the Securities Exchange Act and the creation of the SEC, and after decades of judicial exegesis of the Delphic text of Section 10(b), we still don’t quite know when insider trading is illegal.

See S.E.C. v. Cuban, No. 3:08-CV-2050-D (N.D. Tex. July 17, 2009)

SEC Publishes Final Rules for Credit Rating Agencies

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on Thursday February 5, 2009 at 10:45 am
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Editor’s Note: This post is based on a memo by Annette Nazareth, Joseph Hall and Michael Kaplan of Davis Polk & Wardwell.

On February 2, 2009 the Securities and Exchange Commission published the text of its new rules for credit rating agencies registered as nationally recognized statistical rating organizations (NRSROs). These rules were adopted at the SEC’s December 3, 2008 open meeting. The new rules are generally scheduled to go into effect on April 10, 2009. The SEC also re-proposed additional rules for NRSROs. Comments on the re-proposed rules are due March 26, 2009.

Final Rules
The rules adopted by the SEC in final form include bans on certain conduct which should be of interest to companies with current credit ratings issued by Standard & Poor’s Ratings Services, Moody’s Investors Service, Fitch Ratings, or another credit rating agency registered as an NRSRO. Since the consequences of violating one of the new bans are severe – requiring the credit rating agency to withdraw its rating – companies should carefully review their policies and procedures for interacting with credit rating agencies.

The new bans include:

Ban on Recommendations. Under the new rules, a credit rating agency may not issue or maintain a credit rating on an obligor or security where the credit rating agency, or an affiliate, made “recommendations” to the obligor or the issuer, underwriter or sponsor of the security about the corporate or legal structure, assets, liabilities or activities of the obligor or issuer.

Despite concerns raised that a ban on recommendations could unnecessarily chill communications between rated issuers and credit rating agencies, the line between permissible and prohibited communications remains blurred. Attempting to distinguish between a permissible communication and a prohibited recommendation, the SEC stated, for example, that it “does not view an explanation by an NRSRO of the assumptions and rationales it uses to arrive at ratings decisions and how they apply to a given rating transaction as a recommendation.” On the other hand, “if the feedback process turns into recommendations by the NRSRO about changes to the structure, assets, liabilities or activities of the obligor or security that the person seeking the rating potentially could make to obtain a desired credit rating, the NRSRO would be in violation of the new rule.”

Companies and credit rating agencies both will need to exercise care to ensure that their discussions do not cross the line to soliciting or providing an impermissible recommendation.

…continue reading: SEC Publishes Final Rules for Credit Rating Agencies

FINRA Proposes Changes to Research Quiet Period

Posted by Margaret E. Tahyar, Davis Polk & Wardwell LLP, on Wednesday October 29, 2008 at 12:50 pm
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Editor’s Note: This post from Margaret E. Tahyar is based on a memorandum by Michael Kaplan and Janice Brunner of Davis Polk & Wardwell.

FINRA has issued and is requesting comment on Proposed Research Registration and Conflict of Interest Rules. The proposed rules would replace the existing NYSE and NASD Rules governing research analyst conflicts of interest and would also supersede the proposed changes to those rules published by the SEC in January 2007.

Significantly, the proposed rules would shorten, and in some cases eliminate, the “quiet period” during which a member firm participating in an offering cannot publish or distribute research reports about the issuer, and the firm’s research analyst cannot make public appearances relating to the issuer.

Under current rules, the quiet period is:

• 40 days following the date of the initial public offering for lead underwriters and 25 days after the offering for other underwriters or dealers;

• 10 days following a follow-on offering; and

• 15 days before and after expiration, waiver or termination of a lock-up agreement.

Under the proposed rules, the quiet period would be limited to a single 10-day period following an IPO. Follow-on offerings and lock-up expirations, waivers and terminations would no longer trigger a quiet period. Note that the 25-day prospectus delivery period for an IPO may lead to all underwriters continuing to maintain a 25-day quiet period.

FINRA is requesting comment on the proposed rules by November 14, 2008. If, after receiving comment, FINRA determines to proceed with the proposed rules, it would need to file them with the SEC for approval. The SEC would publish the proposed rules in the Federal Register and subject them to an additional public comment period.

The proposed rules are available here.

SEC Issues Corporate Website Guidance

Posted by Andrew Tuch, co-editor, HLS Forum on Corporate Governance and Financial Regulation on Thursday September 4, 2008 at 1:20 pm
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The Securities and Exchange Commission has issued an interpretive release on the use of corporate websites by public companies. The release provides a means of complying with Regulation FD through posting information on websites in certain circumstances, and also gives additional clarification as to the use of websites for providing other information to investors. While we do not expect the release to lead to significant changes in practice for most companies, it presents a valuable opportunity for companies to revisit their website-related practices.

Our memorandum, available here, explains the circumstances under which information posted on a company’s website will be considered “public” for purposes of Regulation FD and factors companies should consider in determining whether to alter their practices for disseminating information in view of the SEC’s new guidance. The interpretative release may be accessed here.

The SEC is soliciting comments on issues concerning corporate use of technology in providing information to investors. Comments are due on or before November 5, 2008.

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