On October 23, 2017, the Securities and Exchange Commission approved the Public Company Accounting Oversight Board’s (“PCAOB”) proposal to adopt a new auditing standard, AS 3101. AS 3101 will require auditors to disclose more detailed information about what they learn during the course of an audit. This new auditing standard requires a major revision in how auditors think about what and how they communicate to boards and investors. It requires increased transparency on the part of auditors. Continue Reading
In Parametric Sound Corp. v. The Eighth Judicial District Court of the State of Nevada, ___ P.3d ___, 2017 WL 4078845 (Nev. Sept. 14, 2017), the Nevada Supreme Court addressed the circumstances under which breach of fiduciary duty claims asserted in connection with a strategic transaction may be brought by shareholders directly (including in a class action) or must be bought derivatively, on behalf of the corporation. In reaching its decision, the Supreme Court expressly adopted the test articulated by the Delaware Supreme Court in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), and clarified prior ambiguities in Cohen v. Mirage Resorts, Inc., 119 Nev. 1, 62 P.3d 720 (2003). The Nevada Supreme Court thus held that whether a claim is direct or derivative turns on the following two questions: (1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually). Applying this test, the Court granted defendants’ petition for writ of mandate and directed the district court to dismiss the shareholder plaintiff’s direct, class claims for breach of fiduciary duty arising from the approval by the board of directors of Parametric Sound Corporation (“Parametric”) of a reverse triangular merger between a subsidiary of Parametric and VTB Holdings, Inc. (“Turtle Beach”). This decision provides much needed legal certainty in a jurisdiction seeking to expand its incorporations. Continue Reading
The Multistate Tax Commission (“MTC”) has implemented a limited-time voluntary disclosure initiative for online marketplace sellers (the “VDI”). The VDI creates an opportunity in many states to have a retailer’s historic liability for sales and use taxes and income taxes waived, including penalties and interest, in exchange for registration and compliance going forward. Continue Reading
On July 25, 2017, the U.S. Securities and Exchange Commission (“SEC”) issued a report (“Report”) detailing its investigation into whether the DAO (an unincorporated “decentralized autonomous organization”), Slock.it UG (“Slock.it”), Slock.it’s co-founders, and intermediaries violated the federal securities laws. The SEC determined that the tokens issued by the DAO are securities under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”), and advised those who would use a distributed ledger or blockchain-enabled means for capital raising to take appropriate steps to comply with the U.S. federal securities laws. However, the SEC decided not to pursue an enforcement action at this time. Continue Reading
The SEC has opined that, depending on the facts and circumstances of each individual ICO, the virtual coins or tokens that are offered or sold may be securities. If they are securities, the offer and sale of these virtual coins or tokens in an ICO are subject to the federal securities laws. Continue Reading
In a shareholder derivative action, to survive a motion to dismiss for failure to plead facts showing demand futility, a derivative plaintiff must plead particularized facts showing either actual involvement by a majority of the board in illegal conduct or conduct amount to an intentional dereliction of duty. Illegal conduct at a company, untethered to board participation, is not enough. To the contrary, a board’s consideration of and remedial response to alleged illegal conduct inoculates the board from derivative liability even where a stockholder plaintiff alleges, with the benefit of hindsight, that a different course of action would have been more favorable for the company. In In re Qualcomm Inc. FCPA Stockholder Derivative Litig., No. CV 11152-VCMR, 2017 WL 2608723 (Del. Ch. June 16, 2017), the Delaware Court of Chancery rejected several conclusory arguments that illicit behavior by the company automatically supports an inference of director knowledge or involvement. The Qualcomm decision underscores that company directors should freely exercise their discretion when implementing remedial measures in response to company legal violations without fear that an enterprising set of plaintiff’s attorneys will use those remedial measures to bootstrap derivative liability on the directors. Continue Reading
In Stadnick v. Vivint Solar, Inc., 2017 WL 2661597 (2d Cir. June 21, 2017), the United States Court of Appeals for the Second Circuit affirmed the dismissal of claims for violations of Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, arising out of Vivint Solar, Inc.’s (“Vivint”) 2014 initial public offering (“IPO”). Plaintiffs, citing Shaw v. Digital Equipment Corp., 83 F.3d 1194 (1st Cir. 1996), alleged that Vivint was obligated to disclose in its registration statement financial information for the quarter ending one day before the IPO because the company’s performance in that quarter constituted an “extreme departure” from previous performance, even though Securities & Exchange Commission (“SEC”) Regulation S-X, 17 C.F.R. § 210.3-12(a), (g), requires a registrant to update financial statements only if they are more than 135 days old from the effective date of the IPO. The Second Circuit declined to adopt the First Circuit’s “extreme departure” test, and instead followed its own “long-standing test for assessing the materiality of an omission of interim financial information . . . set forth in DeMaria v. Andersen,” 318 F.3d 170 (2d Cir. 2003), to hold that a reasonable investor would not view the omission of the quarterly financial information at issue as significantly altering the “total mix” of information made available. This decision reflects a split in the Circuits regarding the duty to disclose interim financial information in IPO registration statements. Continue Reading
In In re Lehman Bros. Holdings Inc. 855 F.3d 459 (2d Cir. 2017), the United States Court of Appeals for the Second Circuit affirmed a district court order subordinating the claims of former Lehman Bros. (“Lehman”) employees for undelivered equity-based compensation to those of the defunct bank’s general creditors. The Court determined the compensation benefits were securities that had been purchased by the former employees when they agreed to receive them in exchange for their labor and the asserted damages arose from those purchases, requiring the claims’ subordination under the Bankruptcy Code. The decision is important to employees and employers weighing the value of hybrid compensation packages and creditors seeking to safeguard their priority position among bankruptcy claimants. Continue Reading
This is not a drill.
Companies and law enforcement agencies around the world have been left scrambling after the world’s most prolific ransomware attack hit over 500,000 computers in 150 countries over a span of only 4 days. The ransomware – called WannaCry, WCry, WannaCrypt, or WannaDecryptor – infects vulnerable computers and encrypts all of the data. The owner or user of the computer is then faced with an ominous screen, displaying a countdown timer and demand that a ransom of $300 be paid in bitcoin before the owner can regain access to the encrypted data. The price demanded increases over time until the end of the countdown, when the files are permanently destroyed. To date, the total amount of ransom paid by companies is reported to be less than $60,000, indicating that companies are opting to let their files be destroyed and to rely instead on backups rather than pay the attackers. Nevertheless, the total disruption costs to businesses is expected to range from the hundreds of millions to the billions of dollars. Continue Reading
On March 1, 2017, the Securities and Exchange Commission (“SEC”) announced the adoption of amendments that will require registrants that file certain registration statements and reports subject to the exhibit requirements of Item 601 of Regulation S-K (i) to include within each filing a hyperlink to each exhibit referenced therein and (ii) to submit all such filings to EDGAR in HTML format. The new requirements are set to go into effect on September 1, 2017 for most registrants.