Former SEC Commissioner Brings Shareholder-Proposal Reform Ideas Advanced in WLF Working Paper to Capitol Hill

U_S_SEC_logoFormer Securities and Exchange Commission (SEC) Commissioner Daniel Gallagher, co-author of a 2015 WLF Working Paper, “Shareholder Proposals: An Exit Strategy for SEC,” testified before a subcommittee of the House Committee on Financial Services on May 17. The hearing was entitled, “Legislative Proposals to Enhance Capital Formation, Transparency, and Regulatory Accountability.”

Mr. Gallagher’s written testimony referenced the January 10, 2014 comments WLF filed with SEC criticizing the current proxy voting regime.  Echoing his arguments in the 2015 WLF Working Paper, Mr. Gallagher urged the Committee to move beyond attempting to reform federal regulation of the proxy voting process and instead leave such oversight to the states. He wrote, “These proposals are meant to approximate the increasingly antiquated notion of an in-person annual shareholder meeting. It’s like listening to a cassette recording of a Victrola, while everyone else is on their iPhones.” He wryly added in a footnote to that statement, “I will now wait for the hipsters of the corporate governance community to tell me that my analogy is wrong because the analog nature of the record and cassette recordings makes them preferable to the digital content on an iPhone.”

DC Circuit’s “Fokker” Decision Preserves the Separation of Powers, but Raises a Concern about DPAs

DC CircuitDeferred-prosecution agreements (DPAs) pose thorny questions from an overcriminalization perspective.  But DPA skeptics should welcome—at least for now—a decision issued last Tuesday by the U.S. Court of Appeals for the DC Circuit.  In a case entitled United States v. Fokker Services B.V., the DC Circuit held that federal district courts may not second-guess the charging decisions of prosecutors under the guise of performing their Speedy Trial Act (STA) duties.

After investigating the defendant company’s self-reporting of potential export control law and federal sanction violations with respect to Iran, Sudan, and Burma, the Department of Justice negotiated an 18-month deferred-prosecution agreement with Fokker.  To implement such a DPA the prosecutor formally initiates criminal charges against the defendant based on facts conceded in the agreement.  If the defendant meets the preconditions mapped out in the DPA (which generally involve complying with the law and keeping its nose clean), the prosecutor will then dismiss those charges at the conclusion of the deferral period.  If, on the other hand, the defendant fails to meet the preconditions at some point along the way, the prosecutor will proceed with its criminal case. Continue reading

Conflict Minerals and Pay Ratio: SEC Rules of Unintended Consequences

U_S_SEC_logoIn a highly influential 1936 essay, “The Unanticipated Consequences of Purposive Social Action,” sociologist Robert K. Merton explained that there were five sources of unintended consequences. One is the “imperious immediacy of interest:” someone wants the intended consequences of an action so badly that they consciously ignore any unintended effects. One can find many examples of this in government regulation. In fact, the Securities and Exchange Commission (SEC) provided an ideal illustration recently with its final rule that requires each listed company to express, in a ratio, how its workforce’s median pay compares with its CEO’s compensation. Continue reading

Circuit Split Clouds Definition of “Whistleblower” under Dodd-Frank Act, Complicating Corporate Compliance

829-Brower_GregjohnsonGuest Commentary

by Greg Brower and Brett W. Johnson, Snell & Wilmer LLP*

A recent decision by the U.S. Court of Appeals for the Second Circuit further complicated the issue of when an employee can be considered a whistleblower under the Dodd-Frank Act. In Berman v. Neo@Ogilvy, the Second Circuit reversed a district court decision that the plaintiff was not a whistleblower, concluding that the governing definition of “whistleblower” was not the one found in the language of Dodd-Frank, but was the broader one found in a subsequently adopted SEC rule. This interpretation runs counter to a 2013 decision from the Fifth Circuit, Asadi v. G.E. Energy, LLC, and sets up a circuit split that the Supreme Court may be asked to resolve. Continue reading

WLF Attorney Interviewed for FCPA Compliance and Ethics Report Blog Podcast

Attorney Thomas R. Fox, a prominent Foreign Corrupt Practices Act (FCPA) practitioner and author of a forthcoming WLF Legal Opinion Letter, “Is SEC Heading toward a Strict Liability Application of the Foreign Corrupt Practices Act?,” recently interviewed WLF Legal Studies Division Chief Counsel, Glenn Lammi, about WLF’s public interest work and our focus on the FCPA.

 Episode 151-Glenn Lammi, Washington Legal Foundation.

Supreme Court’s “Omnicare” Decision Follows Middle Path Advocated by Lane Powell and WLF

greeneddavisjGuest Commentary

By Douglas W. Greene and Claire Loebs Davis, Shareholders with Lane Powell PC in Seattle, Washington. They co-authored WLF’s amicus brief pro bono in Omnicare.

In the opinion issued on March 24 in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund (“Omnicare”), the Supreme Court rejected the two extremes advocated by the parties regarding how the truth or falsity of statements of opinion should be considered under the securities laws. Instead, it adopted the middle path advocated in the amicus brief filed by Lane Powell on behalf of Washington Legal Foundation (“WLF”).

In doing so, the Court also laid out a blueprint for examining claims of falsity under the securities laws, which we believe will do for falsity analysis what Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007), did for scienter analysis. Hence, Omnicare will help defense counsel defeat claims that opinions were false or misleading in § 11 cases, as well as in cases brought under § 10(b) of the Securities Exchange Act. Continue reading

Move by Biotech Company Tees Up Court Consideration of Attorneys’-Fee Clause in Corporate Bylaws

DelawareThe Wall Street Journal Law Blog reported today that Philadelphia-based (but Delaware-incorporated) biotechnology company Hemispherx BioPharm Inc. has injected itself into the middle of a growing dispute over attorneys’ fees in shareholder class action lawsuits. (A hat-tip to the Institute for Legal Reform, whose must-read daily email referenced the WSJ Law Blog piece) Prompted by a May 14 Delaware Supreme Court decision, ATP Tour, Inc. v. Deutscher Tennis Bund, et al., Hemispherx earlier this month adopted a provision in its corporate bylaws that shareholder plaintiffs must pay the company’s legal fees if Hemispherx prevails in a shareholder-initiated lawsuit. The provision applies retroactively to pending suits, and lawyers for shareholders in a class action against Hemispherx have asked the Delaware Chancery Court to invalidate the bylaws.

A July 11 Washington Legal Foundation Legal Backgrounder, Is Delaware High Court Ruling an Ace for Merging Companies Served with Shareholder Suits?, discussed the ATP Tour decision and assessed how it could be applied to deter frivolous shareholder class actions. Authored by Snell & Wilmer LLP attorneys Greg Brower and Casey Perkins, the paper explains that ATP Tour involved not a public company, but a private membership corporation which included in its bylaws a fee-shifting provision. The Delaware Supreme Court, answering a question certified to it by the U.S. Court of Appeals for the Third Circuit, held that the fee-shifting provision was a matter of private contract, and nothing in the state’s corporate law prohibited its inclusion in ATP’s bylaws.

The authors went on to examine whether Delaware statutory or common law would permit public companies to include such a fee-shifting mechanism in their bylaws. They found that a recent Delaware Chancery Court case, Boilermakers Local 154 Retirement Fund, et al. v. Chevron Corporation, et al., strongly supported the legality of fee-shifting through bylaws.  Brower and Perkins concluded:

Chevron and ATP Tour together make it clear that Delaware law is intended to give broad leeway to corporations, private and public, to adopt bylaws not otherwise prohibited by law, and that duly adopted bylaws are presumed to be part of the contract between the company and the member or shareholder. This means that publicly-traded companies and their shareholders ought to be able to freely contract for the details of their relationship, including details such as where disputes between them will be litigated, and whether the losing party in such litigation should have to pay the legal fees of the prevailing party. Such contracts are part of the fundamental structure of the corporate law of Delaware—or, it seems, of any other state for that matter.

Given the financial implications for the securities fraud class action bar and the promise such provisions hold for public companies, the Hemispherx case is likely just the first skirmish in what will be a drawn-out, intense battle over fee-shifting through corporate bylaws.