On January 12, 2015, the United States Court of Appeals for the Second Circuit issued an unprecedented decision holding that a company’s failure to disclose a known trend or uncertainty in its Form 10-Q filings, as required by Item 303 of SEC Regulation S-K, can give rise to liability under Section 10(b) of the Securities Exchange Act of 1934. Stratte-McClure v. Morgan Stanley, 2015 WL 136312 (2d Cir. Jan 12, 2015). The decision in Stratte-McClure is in direct conflict with the Ninth Circuit’s recent ruling in In re NVIDIA Corp. Securities Litigation, 768 F.3d 1046 (9th Cir. 2014) (“NVIDIA“), the only other court of appeals decision to squarely address this issue. The Second Circuit’s decision, while affirming the dismissal of the case against Morgan Stanley, potentially exposes issuers to greater liability under Section 10(b) for alleged failures to disclose known adverse trends and uncertainties as required by Item 303, in addition to the already existing exposure to regulatory claims arising out of such alleged disclosure violations. In light of Stratte-McClure, issuers should proceed with even greater care in crafting their MD&A disclosures, and in particular their disclosures related to known trends and uncertainties.
Posts Tagged ‘U.S. federal courts’
A tenet of corporate law is that directors—not shareholders—manage a company’s business and affairs. Recognizing that proposals adopted through the Rule 14a-8 process could allow shareholders to intrude on matters traditionally within the directors’ discretion and control, Rule 14a-8(i)(7) permits the exclusion of shareholder proposals from a company’s proxy statement that relate to a “company’s ordinary business operations.” This ordinary business exception to Rule 14a-8 is an acknowledgement that certain “tasks are so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight.”
In interpreting Rule 14a-8(i)(7), the staff of the Securities and Exchange Commission (SEC) has found that proposals otherwise related to an ordinary business matter may not be permissibly excluded from a company’s proxy statement where they also relate to a significant social policy issue. In this circumstance, the SEC’s staff will not provide its concurrence (in the form of a no-action letter) with a company’s decision to exclude a shareholder proposal on the basis of the ordinary business exception if the staff determines that the issue “transcend[s] the day-to-day business matters and raise[s] policy issues so significant that it would be appropriate for a shareholder vote.” The line between a proposal related to ordinary business and one related to a significant social policy issue is often blurry, and it is the subject of intense debate between companies and shareholder proponents.
Earlier today [Wednesday, December 10, 2014], the Second Circuit Court of Appeals issued an important decision overturning the insider trading convictions of two portfolio managers while clarifying what the government must prove to establish so-called “tippee liability.” United States v. Newman, et al., Nos. 13-1837-cr, 13-1917-cr (2d Cir. Dec. 10, 2014). The Court’s decision leaves undisturbed the well-established principles that a corporate insider is criminally liable when the government proves he breached fiduciary duties owed to the company’s shareholders by trading while in possession of material, non-public information, and that such a corporate insider can also be held liable if he discloses confidential corporate information to an outsider in exchange for a “personal benefit.”
On November 20, 2014, the New York Appellate Division, First Department, in a case of first impression under New York law, ruled in favor of Kenneth Cole in a litigation where minority shareholders had challenged the fashion designer’s transaction to take private Kenneth Cole Productions, Inc. Mr. Cole controlled approximately 89% of KCP’s voting power and owned a 46% economic interest in KCP. Willkie Farr & Gallagher LLP represented Mr. Cole in the transaction and the class action litigation.
The Appellate Division found that the business judgment standard of review—and not the heightened entire fairness standard—applied to judicial review of breach of fiduciary claims because the transaction had been structured at the outset with dual protections of an independent special committee review and the vote of a “majority of the minority” (that is, non-Cole) shareholders. The judicial standard of review can have important litigation consequences, as cases governed by the business judgment rule can be dismissed at an early stage, as occurred here, whereas transactions governed by the “entire fairness” standard generally require discovery and further proceedings, which can be burdensome and expensive.
A federal district court today ruled that serious questions existed as to the legality of Pershing Square’s ploy to finance Valeant’s hostile bid for Allergan. Allergan v. Valeant Pharmaceuticals Int’l, Inc., Case No. SACV-1214 DOC (C.D. Cal. November 4, 2014).
As we wrote about in April, Pershing Square and Valeant hatched a plan early this year attempting to exploit loopholes in the federal securities laws to enable Pershing Square to trade on inside information of Valeant’s secret takeover plan, creating a billion dollar profit at the expense of former Allergan stockholders that could then be used to fund the hostile bid. Since then, Pershing Square and Valeant have trumpeted their maneuver as a new template for activist-driven hostile dealmaking.
My essay, Morrison at Four: A Survey of Its Impact on Securities Litigation, published by the U.S. Chamber of Commerce Institute for Legal Reform as part of a collection of essays on the shifting legal landscape governing federal claims involving foreign disputes, recounts the extraordinary impact of the Supreme Court’s landmark decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), in the realm of securities litigation.
In a recent decision, the U.S. District Court for the Southern District of Ohio invoked federal procedural law to enforce a board-adopted forum selection bylaw. North v. McNamara, No. 1:13-cv-833 (S.D. Ohio Sept. 19, 2014). In so ruling, the court recognized that such bylaws can promote “cost and efficiency benefits that inure to the corporation and its shareholders by streamlining litigation into a single forum.”
The litigation involves Chemed, a Delaware corporation headquartered in Cincinnati, Ohio. In August 2013, the corporation’s board adopted a bylaw selecting any state or federal court in Delaware as the exclusive forum for intracorporate litigation. Several months later, a stockholder filed a derivative suit in federal court in Delaware on behalf of the corporation challenging certain conduct dating back to 2010. Shortly thereafter, a different stockholder filed substantially similar litigation, also on behalf of the corporation, against the same defendants concerning the same conduct in Ohio federal court. Invoking the bylaw, defendants moved to transfer the case to the Delaware federal district court under the federal venue statute, essentially seeking to consolidate it with the earlier-filed Delaware federal action.
On August 26, 2014, in the case In re MPM Silicones, LLC, Case No. 14-22503 (Bankr. S.D.N.Y.) (“Momentive”), the United States Bankruptcy Court for the Southern District of New York held that secured creditors could be “crammed down” in a chapter 11 plan with replacement notes bearing interest at substantially below market rates. Unless overturned on appeal, this decision will introduce a new level of risk to leveraged lending—secured lenders will face the specter of losing in a bankruptcy restructuring not only their negotiated rates, but any semblance of market treatment. This risk could result in a tightening of availability and increased costs to borrowers in levered transactions.
In its landmark 2010 decision in Morrison v. National Australia Bank, the Supreme Court articulated what seemed to be a bright-line test for determining the extent to which the U.S. securities laws apply to transactions with international elements. In so doing, the Court harshly rejected the fact-intensive “conduct/effects” tests propounded several decades ago by the Second Circuit and followed by many other courts throughout the country.
Last week, the Second Circuit got its revenge. In a long-awaited decision in ParkCentral Global Hub Limited v. Porsche Automobile Holdings SE, the court declined “to proffer a test that will reliably determine when a particular invocation of [the Securities Exchange Act’s anti-fraud provision] will be deemed appropriately domestic or impermissibly extraterritorial.” Instead, the Second Circuit held that courts must carefully consider the facts and circumstances of each case to avoid the very result that the Supreme Court had hoped to prevent in Morrison: promiscuous application of the U.S. securities laws to transactions that have little, if any, relationship to the United States.
In a one-two punch illustrating the continuing vigor of the presumption against extraterritoriality, the United States Court of Appeals for the Second Circuit, on consecutive days last week, issued important decisions applying Morrison v. National Australia Bank in two disparate but significant contexts under the federal securities laws. Last Thursday, in Liu v. Siemens AG, No. 13-4385-cv (2d Cir. Aug. 14, 2014), the court rejected the extraterritorial application of the whistleblower anti-retaliation provision of the Dodd-Frank Act. And on the very next day, in Parkcentral Global Hub Ltd. v. Porsche Automobil Holdings SE, No. 11-397-cv (2d Cir. Aug. 15, 2014), the court rejected the extraterritorial application of Rule 10b-5 to claims seeking recovery of losses on swap agreements that reference foreign securities.