On January 16, 2015, SEC Chair Mary Jo White issued a directive that the staff of the SEC review its position on Rule 14a-8(i)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”). Concurrent with SEC Chair White’s directive, the Division of Corporation Finance announced that it will “express no views” on the application of Rule 14a-8(i)(9) for the current proxy season.
In Stratte-McClure v. Morgan Stanley, No. 13-0627-cv, 2015 WL 136213 (2d Cir. Jan. 12, 2015), the United States Court of Appeals for the Second Circuit affirmed the dismissal of securities fraud claims against Morgan Stanley arising out of its exposure to and losses from a proprietary subprime mortgage trade in 2007. In reaching its decision, the Second Circuit held that a failure to make a disclosure required by Item 303 of Regulation S-K, 17 C.F.R. § 229.303(a)(3)(ii), may serve as a basis for a securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities & Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. The Second Circuit recognized that its holding regarding Item 303 of Regulation S-K was directly “at odds” with the 2014 decision of the United States Court of Appeals for the Ninth Circuit in In re NVIDIA Corp. Securities Litigation, 768 F.3d 1046 (9th Cir. 2014). Morgan Stanley establishes a circuit split between the Second and Ninth Circuits on the issue of whether failure to make adequate disclosures under Item 303 may serve as the basis for Section 10(b) claims, potentially warranting review by the United States Supreme Court.
1. Higher Thresholds For HSR Filings
On January 15, 2015, the Federal Trade Commission announced revised, higher thresholds for premerger filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The filing thresholds are revised annually, based on the change in gross national product and will be effective thirty days after publication in the Federal Register. Publication is expected within a week, so the new thresholds will most likely become effective in late February 2015. Acquisitions that have not closed by the effective date will be subject to the new thresholds.
In United Technologies Corp. v. Treppel, No. 127, 2014, 2014 Del. LEXIS (Del. Dec. 23, 2014), the Delaware Supreme Court held that the Delaware Court of Chancery is authorized regulate how stockholders use information obtained through books and records inspections under Section 220 of the Delaware General Corporation Law (“Section 220”). The defendant corporation, in opposing a stockholder’s Section 220 proceeding, had sought to bar the stockholder from using any obtained information in any legal action brought outside of Delaware. The Vice Chancellor, however, expressed the belief that the Chancery Court lacked the statutory authority to impose such a restriction. The Delaware Supreme Court reversed and identified the factors the Chancery Court should consider in exercising its discretion to impose the restriction on remand. United Technologies reaffirms the Chancery Court’s important role in regulating books and records inspections in a manner that avoids inflicting unnecessary costs and burdens on corporations and their stockholders.
In Arduini v. Hart, 2014 WL 7156764 (9th Cir. Dec. 17, 2014), the United States Court of Appeals for the Ninth Circuit considered whether the doctrine of issue preclusion prevents a stockholder from relitigating a prior adverse determination concerning demand futility in derivative action brought by a different stockholder. Applying Nevada law, the Court held that a subsequent stockholder cannot again litigate the issue of demand futility after prior adverse determination of the issue in an earlier derivative action concerning the same alleged wrongful conduct.
In Jones v. Martinez, 230 Cal. App. 4th 1248 (2014), the California Court of Appeal, Second Division, held that a plaintiff asserting a shareholder derivative action against directors of a Delaware corporation in a California state court may not obtain discovery before the plaintiff establishes legal standing to sue derivatively as required under Delaware law. Under Delaware law, a stockholder-plaintiff may not prosecute a derivative suit unless he alleges that he demanded that the directors pursue the claim and the directors have wrongfully refused to do so, or that such demand is excused because it would have been futile. In order for pre-suit demand to be excused as futile, the stockholder-plaintiff must plead particularized facts creating reasonable doubt that the directors were unlikely to act in good faith in considering the demand. Delaware courts hold routinely that a derivative plaintiff is not entitled to discovery unless and until he has met the threshold standard for pleading demand futility. The decision in Jones marks the first time that a California appellate court has applied this rule to a derivative plaintiff suing in California state court under Delaware law.
In United States v. Newman, No. 13-1837 (2d Cir. Dec. 10, 2014), the United States Court of Appeals for the Second Circuit reversed the 2013 convictions of Anthony Chiasson and Todd Newman on charges of conspiracy to commit insider trading and insider trading under 18 U.S.C. § 371, Sections 10(b) and 32 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78ff, SEC Rules 10b-5 and 10b5-2, 17 C.F.R. § 240.10b-5, 10b5-2, and 18 U.S.C. § 2. Both individuals were portfolio managers at hedge funds who were charged with and convicted of receiving material non-public information from analysts with whom they worked. The Second Circuit’s decision greatly clarifies the elements required to prove “tippee” liability under the insider trading laws.
Recently the SEC announced enforcement actions which highlight the importance of complying with the beneficial ownership reporting requirements under Sections 13(d), 13(g) and 16(a) of the Securities Exchange Act of 1934, or the Exchange Act.
Most companies will be impacted by the immigration initiatives announced by the White House this week. It will take up to several months for the initiatives to be implemented in order to give the U.S. Department of Homeland Security (DHS) time to ramp up. And some of the initiatives are aspirational in nature so the end result and timing is unclear at this time. Be advised that because these are executive acts, they are subject to repeal in the future. The impact to employers includes the following:
In Regulatory Notice 14-40, FINRA reminds members that it is a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) to incorporate into a settlement agreement a confidentiality provision restricting or prohibiting a customer or other person from communicating with the Securities and Exchange Commission (SEC), FINRA, or any federal or state regulatory authority regarding a possible securities law violation.