The NASDAQ Stock Market LLC (Nasdaq) recently filed with the Securities and Exchange Commission (SEC) a proposed rule [1] requiring listed companies to establish and maintain an internal audit function. [2] The SEC is soliciting comments on the proposed rule through March 29, 2013. [3]

Under the proposed rule, the internal audit function would be required to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control. In addition, new Rule 5645 would require the audit committee to:

• meet periodically with the company’s internal auditors (or other personnel responsible for this function); and
• discuss with the outside auditors the responsibilities, budget, and staffing of the company’s internal audit function.

Companies would be permitted to outsource their internal audit function to a third-party service provider other than their independent auditor. For companies that choose to outsource this function, Nasdaq has stated that the company’s audit committee maintains sole responsibility to oversee the internal audit function and may not allocate or delegate this responsibility to another board committee.

According to Nasdaq, the proposed rule is designed to:

…continue reading: Proposed NASDAQ Rule Requires Internal Audit Function at Listed Companies

In the world of insider trading, Rule 10b5-1 plans are a blessing and a curse: a blessing, because they enable executives to diversify their company holdings in a stable, law-abiding manner; a curse, because they tempt cheaters into hiding their malfeasance in a cloak of invisibility.

For years, 10b5-1 plans received little scrutiny. In private shareholder lawsuits, plaintiffs’ lawyers generally scrunched their eyes shut and tried to ignore them. The SEC, having created the structure, lost interest postpartum. As a result, aggressive insiders sometimes were able to use the plans in ways the framers never intended.

Recently, journalists have started to focus on the specifics of 10b5-1 plans, along with perceived abuses of them. [1] Those articles appear to have roused the SEC. So this may be a good time for counsel, both inside and outside, to revisit their existing plans. In this post, I address what I consider to be best practices under 10b5-1. This does not mean that contrary practices are improper or unlawful. Think of it, rather, as 10b5-1 for the risk averse.

…continue reading: The Best-Laid Plans of 10b5-1

Shareholder lawsuits over mergers are as ubiquitous as they are meritless. The incidence of suits over public-company acquisitions rounds to always. It doesn’t matter how high the premium or how clean the deal: someone (usually, one of the same someones) will sue.

The frequency of merger lawsuits has increased steadily over time. What has changed more abruptly is their life cycle. Until recent years, once a deal closed, the lawsuit usually went away. If the plaintiffs had been unable to wring out a “therapeutic” settlement pre-close (usually, “enhanced” disclosure + a fee) they ignored or dismissed the case after the acquisition was complete. The conventional wisdom was that plaintiffs’ leverage — threatening to interfere with the deal — was gone, and so there was no longer a path to payday.

In several recent cases, however, plaintiffs’ merger lawyers have refined their business model. They keep the litigation alive post-close. They take extensive discovery, especially against the executives of the acquirer, who now control the pursestrings. This phenomenon occurs even in situations where objective factors suggest a lack of merit to the claims: e.g., high premium; no contesting bidders; overwhelming shareholder approval; customary deal terms.

Why are the plaintiff lawyers pursuing these cases?

…continue reading: Litigating Post-Close Merger Cases

Companies incorporated outside of California but with significant California contacts (so-called “quasi-California corporations”) have struggled with exactly how to comply with the long-arm statute found in Section 2115 of the California Corporations Code. The statute purports to impose a number of provisions of the California Corporations Code on quasi-California corporations, including the state’s requirement to obtain separate approval from holders of each class of capital stock on a merger “to the exclusion of the law of the jurisdiction in which [the quasi-California corporation] is incorporated.” Section 2115 has been thought to be legally infirm for some time, particularly after a decision by the Delaware Supreme Court in 2005. However, there never has been an acknowledgement by a California court that Section 2115 reaches too far. That changed earlier this year, when a California Court of Appeal stated in dicta that certain matters of internal corporate governance fall within a corporation’s internal affairs and should be governed by the laws of the corporation’s state of incorporation.

…continue reading: California Court Acknowledges “Quasi-California Corporation” Decision

Overview

On August 10, 2012, President Obama signed the Iran Threat Reduction and Syria Human Rights Act into law. The act is available at http://www.gpo.gov/fdsys/pkg/BILLS-112hr1905enr/pdf/BILLS-112hr1905enr.pdf.

The purpose of the act is to expand U.S. sanctions against Iran in order to compel Iran to stop pursuing a nuclear weapons program and other controversial initiatives.

Public companies, however, may have new disclosure obligations as a consequence of the act. Among other things, the act requires that companies subject to the reporting requirements of the Securities Exchange Act of 1934 (Exchange Act) make certain disclosures relating to activities that they and their worldwide affiliates knowingly engage in involving Iran in their quarterly and annual reports filed with the Securities and Exchange Commission (SEC). This provision of the act does not require additional rulemaking by the SEC in order to be effective. As a consequence, public reporting companies must comply with the new reporting obligations under the act by February 6, 2013.

…continue reading: SEC Requirements under the Iran Threat Reduction and Syria Human Rights Act

Last month, the Delaware Court of Chancery issued an important post-trial decision that held the majority and managing member of an LLC liable for breaches of fiduciary duty in connection with the member’s management and eventual purchase of the company. The opinion unequivocally shows that the Court of Chancery considers Delaware’s LLC Act to impose default fiduciary obligations analogous to those in the corporate context absent a clear expression otherwise in the LLC agreement.

…continue reading: LLC Controlling Member Fiduciary Liabilities

Background

Wilson Sonsini Goodrich & Rosati recently surveyed various corporate governance and disclosure practices of venture-backed companies incorporated in the United States and involved in U.S. initial public offerings (IPOs) from January 2010 through June 2011. A copy of the report is available here. We believe that this is the first such survey specifically relating to venture-backed companies.

We examined the 50 companies involved in the largest IPOs measured by deal size over those 18 months. By deal size, measured by gross proceeds, the IPOs examined ranged from $56 million to $352.8 million, with an average deal size of $123.3 million and a median deal size of $90.1 million.

Nineteen of the companies examined were headquartered in the San Francisco Bay Area; six in southern California; five in Texas; three each in Georgia and Massachusetts; and the remainder in 11 other states and one foreign country.

Forty-eight of the companies examined were incorporated in Delaware; one in California; and one in Maryland.

Twenty of the companies examined were listed on The NASDAQ Global Market; 17 on the New York Stock Exchange; and 13 on The NASDAQ Global Select Market.

…continue reading: Governance and Disclosure Practices of Venture-Backed IPOs

In the fall of 2009, the New York Stock Exchange formed a diverse and independent commission to examine core governance principles that could be widely supported by issuers, investors, directors, and other market participants. Chaired by Wilson Sonsini Goodrich & Rosati chairman Larry Sonsini, the NYSE Commission on Corporate Governance recently issued its final report, which was released by NYSE Euronext on September 23, 2010. The report identifies 10 core governance principles covering such topics as the fundamental objectives of the board, management’s responsibility for governance, and the relationship between shareholders’ trading activities, voting decisions, and governance.

The principles outlined by the commission are a significant contribution to understanding the core duties and responsibilities of boards, management, and shareholders in the governance process, and provide an important framework outlining the common interests of these groups.

…continue reading: NYSE Commission Report Defines Core Principles of Corporate Governance