Appellate Court Issues Opinion on SEC’s Conflict Minerals Rule

Yesterday, the Court of Appeals for the D.C. Circuit issued its opinion in the challenge to the SEC’s Conflict Minerals Rule.  We have reviewed the D.C. Court of Appeals decision and find that it leaves much of the SEC’s rule intact.  It is specifically the requirement that companies describe products as not “DRC conflict free” in their SEC filings and on their website that the Court held constitutes “compelled speech” in violation of the First Amendment.  In the words of the Court:  Products and minerals do not fight conflicts. The label ‘conflict free’ is a metaphor that conveys moral responsibility for the Congo war. It requires an issuer to tell consumers that its products are ethically tainted. . . .  By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.”

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Cybersecurity: Breaching The Boardroom

When the President of the United States calls something “one of the gravest national security dangers that the United States faces,” it seems worthwhile to pay attention. The President’s statement, on February 12, 2014, was not referring to the dangers of war or terrorism, but to the threat of cyber attacks on the nation’s critical infrastructure and U.S. companies. Over the past couple of years, cybersecurity has become an important corporate governance issue, as recent cyber attacks, increased federal oversight, potential legal liability and economic risks have made paying attention certainly worthwhile.

This article was originally published in The Metropolitan Corporate Counsel. To read the full article, please click here.

District Court Cites Recent “Evolution” of Rule 23 Standards to Deny Class Certification Motion in Securities Action Based Upon Allegedly Misleading Registration Statement

In In re Kosmos Energy Ltd. Securities Litigation, No. 3:12-CV-373-B, 2014 U.S. Dist. LEXIS 36365 (N.D. Tex. Mar. 19, 2014), the United States District Court for the Northern District of Texas (Boyle, J.) denied lead plaintiff’s class certification motion in a consolidated action alleging claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (“1933 Act”), 15 U.S.C. §§ 77k, 77l(a)(2), 77o.  The 1933 Act regulates registration and offering statements by holding issuers and other offering participants strictly liable for material misstatements and omissions.  Reliance is not an element of the claim.  Plaintiff’s class certification motion rested on the notion that 1933 Act claims presumptively deserve class treatment.  The district court, however, rejected the continued vitality of this notion in light of the recent “evolution of the case authority on class certification” requiring “a more skeptical view with a more exacting review process.”  The district court’s decision recognizes that, as with other substantive areas of law, this “evolution” applies in securities law cases.  Hence, historically “pro-plaintiff” approaches to class certification in securities cases (including cases based on 1933 Act claims) must yield to the newly evolved class certification standards.

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Applying a Legal Bandaid to Defective Acts: Delaware Law Creates New Procedures to Ratify Defective Corporate Acts

On June 30, 2013, the State of Delaware amended the Delaware General Corporations Law (the “DGCL”) to include two new sections, Section 204 and Section 205 (together, the “Ratification Provisions”). Set to take effect on April 1, 2014, the Ratification Provisions provide Delaware companies with two alternative processes to remedy defective corporate acts that may have previously been deemed void or voidable: by the company itself (under Section 204) or by the Delaware Court of Chancery (under Section 205). Upon the ratification or the validation by either the company or the court, the defective corporate act will be deemed retroactively effective and valid as of the time the defective corporate act was taken.

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SEC Brings Charges Against SEC Registered Investment Adviser for Improperly Allocating Expenses and Other Violations of the Investment Advisers Act of 1940 (the “Advisers Act”)

On February 25, 2014 the Securities and Exchange Commission (the “SEC”) filed public administrative and cease-and-desist proceedings against Arizona-based Clean Energy Capital, LLC (a registered investment adviser, “CEC”) and its founder and Chief Executive Officer Scott Brittenham charging that CEC and Brittenham committed the following violations with respect to the 20 private equity funds sold and managed by CEC primarily under the name of Ethanol Capital Partnership, L.P. (the “ECP Funds”)…

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United States Supreme Court Holds That Section 806 of the Sarbanes-Oxley Act Extends to Employees of Private Companies Who Are Contractors or Subcontractors for Covered Public Companies

In Lawson v. FMR, LLC, No. 12-3, 2014 WL 813701 (U.S. Mar. 4, 2014), the Supreme Court of the United States, in a 6-3 decision reversing the United States Court of Appeals for the First Circuit, held that the whistleblower protection provision in Section 806 of Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1514A (“SOX”), protects employees of publicly traded companies and employees of privately held companies that are contractors or subcontractors for a covered publicly traded company.  In reaching this decision, the Supreme Court has clarified the definition of “covered employee” under the whistleblower provisions of SOX and expanded the scope of SOX.

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Second Circuit Upholds SEC’s Authority to Obtain Disgorgement from Non-Trading Insider Profits Earned by Portfolio Fund from Insider Trading

In SEC v. Contorinis, 2014 U.S. App. LEXIS 2927 (2d Cir. Feb. 18, 2014), the United States Court of Appeals for the Second Circuit upheld the authority of the Securities and Exchange Commission (“SEC”) to obtain “disgorgement” from a money manager profits earned by another party from trades based material nonpublic information known to the money manager, even though the manager did not receive any of those profits.  Citing the intangible benefits received by the manager and the underlying misuse of inside information, the appellate panel’s decision upheld a broad view of insider trading liability in civil enforcement actions brought by the SEC.

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Delaware Court of Chancery Grants Summary Judgment Dismissing Breach of Fiduciary Duty Claims In Absence of Evidence of Directors’ “Conscious Disregard” of Fiduciary Duties

In In re Answers Corp. Shareholders Litigation, C.A. No. 6170-VCN, 2014 WL 463163 (Del. Ch. Feb. 3, 2014), the Delaware Court of Chancery (Noble, V.C.) granted summary judgment in favor of defendants in a stockholder class action for breach of fiduciary duty arising out of the merger of Answers Corporation (“Answers” or the “Company”) with AFCV Holdings, LLC (“AFCV”).  Because the undisputed material facts showed that a disinterested majority of the Board of Directors approved the transaction, plaintiffs were required to offer evidence that the Board consciously acted in bad faith or was controlled by an interested party to survive summary judgment.  Plaintiffs were unable to do so.  The Answers decision highlights the high burden stockholder plaintiffs face to proceed with breach of fiduciary duty claims where a merger is approved by an independent/non-controlled board, even where the sale process may have been flawed.  As the court explained, there is a vast difference between “a flawed inadequate effort to carry out fiduciary duties and a conscious disregard for them.”

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Tenth Circuit Looks Past “General Partnership” Labels in Agreements to Determine Whether Certain Investments Constitute “Securities”

In SEC v. Shields, No. 12-1438, 2014 U.S. App. LEXIS 3369 (10th Cir. Feb. 24, 2014), the United States Court of Appeals for the Tenth Circuit reversed the district court’s order granting defendants’ motion to dismiss, holding that the complaint alleged sufficient facts to (1) raise a plausible claim that the interests at issue involved are securities, and (2) rebut the presumption that an investment labeled as a “general partnership” is a “security.”  The Tenth Circuit’s holding reaffirms that although an investment may be labeled as a “general partnership” interest, courts must look beyond the labels to determine whether the investment constitutes a “security.”

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United States Supreme Court Resolves Circuit Split and Narrows Scope of SLUSA

In Chadbourne & Parke LLP v. Troice, Nos. 12-79, 12-86 and 12-88, 2014 U.S. LEXIS 1644 (U.S. Feb. 26, 2014), the Supreme Court of the United States resolved a split in the circuits regarding whether alleged misrepresentations were made “in connection with the purchase or sale of a covered security” for purposes of the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C. § 78bb(f)(1)(A).  The Court held that a “misrepresentation or omission of a material fact” is made “in connection with the purchase or sale of a covered security” only if the misrepresentation is “material” to the plaintiff’s decision to buy or sell that covered security.  This decision narrows the scope of removal and preclusion of state law securities fraud class actions by the federal courts under SLUSA.

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