Once again, protection of retail investors is of primary concern for the OCIE. Among the detailed areas of focus are examining risks related to electronic investment advice, “wrap fee” programs where investors are charged a single fee for bundled advisory and brokerage services, and “Never-before examined” Investment advisers, an initiative that was started in 2014 to engage with newly-registered advisers that had never-before been examined. Examination of Exchange-Traded funds (ETFs) and continuation of the ReTIRE initiative are two carryovers from 2016 priorities . The OCIE previously identified ETFs, which are sometimes seen as alternatives to mutual funds, for examination related to compliance with the Securities Exchange Act of 1934 and the Investment Company Act of 1940. ReTIRE, launched in June 2015, places particular focus on those SEC-registered investment advisers and broker dealers who offer retirement-oriented investment services to retail investors, including examining whether there is a reasonable basis for the recommendations made. This year, the SEC will expand ReTIRE to include “assessing controls surrounding cross-transactions, particularly with respect to fixed income securities.”
The SEC recently proposed amendments to the proxy voting rules to require parties in a contested election to use universal proxy cards that would include the names of all board of director nominees. This proposed change would eliminate the two “competing slates” cards and allow shareholders to vote for their preferred combination of board candidates, as they could if they voted in person.
The new rules would apply to all non-exempt votes for contested elections other than those involving registered investment companies and business development companies, would require management and dissidents to provide each other with advance notice of the names of their nominees, and would set formatting requirements for the universal proxy cars. As with any newly proposed SEC rule, there will be a comment period of 60 days to solicit public opinion.
Interestingly, the Commission’s vote to adopt the newly proposed rules was a split decision, with Commissioner Piwowar issuing a strongly worded dissent. According to Commissioner Piwowar, the proposed universal proxy rules “would increase the likelihood of proxy fights at public companies,” and would allow special interest groups to “use their increased influence to advance their own special interests at the expense of shareholders.” He also noted that under the new rules, dissidents are only required to solicit holders of shares representing a majority of those entitled to vote, meaning that many retail investors will not receive either the dissident’s proxy statement or disclosures about the dissident’s nominees.
On June 6, 2016, the Supreme Court of Delaware affirmed a decision of the Chancery Court finding that corporate directors and officers involved in a sales transaction breached a contract with option holders to fairly value their options (see here for a thorough explanation of the Chancery Court decision, and in particular, the Court’s criticism of the retained financial advisers that provided a valuation analysis). The Supreme Court decision also included a disproportionately lengthy dissent condemning both the Chancery Court’s findings and its reliance on “social science studies” to reach them.
On May 31, 2016, the Delaware Chancery Court rejected shareholders’ allegations of corporate wrongdoing in a derivative suit against a national healthcare company, Bioscrip, holding that Plaintiff failed to adequately allege demand futility with respect to Bioscrip’s board of directors. For the first time, the Delaware Court found that Plaintiff was required to demonstrate demand futility with respect to the board of directors that was in place after shareholders filed their derivative complaint. Park Emps.’ & Ret. Bd. Emps.’ Annuity & Ben. Fund v. Smith, No. 11000-VCG (Ch. May 31, 2016).
On May 19, 2016, the Delaware Chancery Court preliminarily enjoined the directors of Cogentix Medical from reducing the size of the company’s board because, under the facts presented, there was a reasonable probability that the board reduction plan was implemented to defeat insurgent candidates in a contested director election. Pell v. Kill, C.A. No. 12251-VCL (Del. Ch. May 19, 2016). The decision is a reminder that board actions that affect the shareholder vote—particularly decisions that make it more difficult for stockholders to elect directors not supported by management—will be subject to enhanced judicial scrutiny by Delaware courts on the lookout with a “gimlet eye” for conduct having a preclusive or coercive effect on the stockholder vote.
On May 6, 2016, the Delaware Supreme Court affirmed the Delaware Chancery Court’s ruling that Zale Corporation’s sale to Signet Jewelers withstood scrutiny under the business judgment rule because the transaction was approved by a fully-informed, uncoerced vote of the disinterested stockholders, and that an aiding and abetting breach of fiduciary duty claim against Zale’s financial advisor failed as a matter of law where the plaintiff failed to establish that the Zale board had acted with gross negligence. In so holding, the Court reaffirmed its holding in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), that in cases in which Revlon would otherwise apply, approval of the transaction by a fully-informed, uncoerced majority of disinterested stockholders invokes the deferential business judgment rule standard of review. While the Court also affirmed the Chancery Court’s dismissal of the aiding and abetting claim against Zale’s financial advisor, it called the Chancery Court’s reasoning for the dismissal into doubt and sounded a cautionary note to gatekeepers that they are not insulated from liability merely because they are alleged to have aided and abetted a non-exculpated breach of fiduciary duty by their director clients.
We have previously written about how, over the past few years, the SEC and other regulatory agencies have devoted substantial resources to investigations regarding allegations that public companies have inadequate internal controls and/or a system for reporting those controls. See here, here and here. That effort shows no signs of waning. As recently as March 23, 2016, the SEC announced a settlement with a multi-national company due in part to the internal controls failures at two foreign subsidiaries. On March 10, 2016, the SEC announced a settlement of claims against Magnum Hunter Resources Corporation in connection with alleged internal control failures. And, on February 17, 2016, the SEC announced a settlement of claims against a biopesticide company, Marrone Bio Innovations, based on the company having reported misstated financial results caused in part by internal control failures.
On December 10, 2015, the Oregon Supreme Court held that an exclusive forum bylaw provision adopted unilaterally by a Delaware company’s board was a valid and enforceable contractual forum selection clause. Importantly, the Oregon decision is the only reported non-Delaware appellate court decision to date addressing the validity of exclusive forum bylaws on the merits.
The decision, Roberts v. TriQuint Semiconductor, Inc., comes on the heels of the Delaware Court of Chancery’s forum bylaw ruling in Boilermakers Local 154 Retirement Fund v. Chevron Corporation. As previously noted on this blog, in Chevron, then-Chancellor Strine of the Delaware Court of Chancery held that an exclusive forum bylaw provision adopted unilaterally by a board was both facially valid under the Delaware General Corporation Law (“DGCL”) and an enforceable contractual forum selection clause. Citing Chevron, the Oregon Supreme Court similarly concluded that an exclusive forum bylaw adopted only two days prior to the announcement of a merger was permissible and did not render the bylaw unenforceable in the shareholder merger litigation that followed.
On December 19, 2014, the Supreme Court of Delaware reversed the Delaware Court of Chancery’s November decision to preliminarily enjoin for 30 days a vote by C&J Energy Services stockholders on a merger with Nabors Red Lion Limited, to allow time for C&J’s board of directors to explore alternative transactions. The Supreme Court decision clarifies that in a sale-of-control situation, Revlon and its progeny require an effective, but not necessarily active, market check, and there is no “specific route that a board must follow” in fulfilling fiduciary duties.
On November 26, 2014, the Delaware Court of Chancery denied a motion to dismiss a complaint challenging a going-private transaction where the company’s CEO, Chairman and 17.5% stockholder was leading the buyout group. In his decision in the case, In Re Zhongpin Inc. Stockholders Litigation, Vice Chancellor Noble concluded that the complaint pled sufficient facts to raise an inference that the CEO, Xianfu Zhu, was a controlling stockholder, and as a result, the deferential business judgment rule standard of review did not apply. Instead, the far more exacting entire fairness standard governed, which in turn led the Court to deny the motion.
This is the fourth recent decision to address when a less-than 50% stockholder can be considered a controller, an issue that determines whether the alleged controller owes fiduciary duties to other stockholders and the standard of review the Court will apply in evaluating the challenged transaction. The decision therefore provides important guidance for directors and their advisors in structuring transactions involving large stockholders.