951 Search Results

September 17, 2019 |
Ronald Mueller and Lori Zyskowski Elected Fellows by American College of Governance Counsel

Washington, D.C. partner Ronald O. Mueller and New York partner Lori Zyskowski were elected as Fellows of the American College of Governance Counsel. The American College of Governance Counsel is a professional, educational, and honorary association of lawyers widely recognized for their achievements in the field of governance. The newly elected fellows were announced in July 2019. Ronald Mueller advises public companies on a broad range of SEC disclosure and regulatory matters, executive and equity-based compensation issues, and corporate governance and compliance issues and practices. He advises some of the largest U.S. public companies on SEC reporting, proxy disclosures and proxy contests, shareholder engagement and shareholder proposals, and Section 16 reporting and compliance. Lori Zyskowski is Co-Chair of the Firm’s Securities Regulation and Corporate Governance Practice Group. She advises clients, including public companies and their boards of directors, on corporate governance and securities disclosure matters, with a focus on Securities and Exchange Commission reporting requirements, proxy statements, annual shareholders meetings, director independence issues, and executive compensation disclosure best practices.

September 9, 2019 |
SEC Staff Announces Significant Changes to Shareholder Proposal No-Action Letter Process

Click for PDF On September 6, 2019, the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (“SEC”) announced[1] two significant procedural changes for responding to Exchange Act Rule 14a-8 no-action requests that will be applicable beginning with the 2019-2020 shareholder proposal season: Oral Response by Staff: The Staff may now respond orally instead of in writing to shareholder proposal no-action requests.  The Staff’s oral response will inform both the company and the proponent of its position with respect to the company’s asserted Rule 14a-8 basis for exclusion expressed in the no-action request.  The Staff stated that it intends to issue a written response letter to a no-action request “where it believes doing so will provide value such as more broadly applicable guidance about complying with Rule 14a-8.” No Definitive Response by Staff: The Staff may now more frequently decline to state a view on whether or not it concurs that a company may properly exclude a shareholder proposal under Rule 14a-8.  Importantly, the Staff stated that if it declines to state a view on any particular no-action request, the interested parties should not interpret that position as indicating that the proposal must be included in the company’s proxy statement.  Instead, the Staff stated that in these circumstances, the company requesting exclusion may have a valid legal basis to exclude the proposal under Rule 14a-8. In the announcement, the Staff also reiterated that—in the situations described in prior Staff Legal Bulletins[2]—it continues to find an analysis by the board of directors useful when a company seeks to exclude a proposal on grounds of either ordinary business (Rule 14a-8(i)(7)) or economic relevance (Rule 14a-8(i)(5)).  The Staff also noted that parties continue to be able to seek formal, binding adjudication on the merits of Rule 14a-8 issues in court. Background of the Staff’s Announcement Under Rule 14a-8(j), if a company intends to exclude a shareholder proposal from its proxy materials, it must notify the SEC no later than 80 calendar days before it files its definitive proxy statement, and must simultaneously provide the shareholder proponent with a copy of its submission.  The company’s submission must include an explanation of why the company believes that it may exclude the proposal under Rule 14a-8, and the explanation “should, if possible, refer to the most recent applicable authority, such as prior [Staff] letters issued under the rule.”[3]  This mandatory process has evolved into the practice of companies submitting no-action requests that ask the Staff to concur with their view that shareholder proposals are properly excludable under one of the procedural requirements or substantive bases set forth in Rule 14a-8. Rule 14a-8 contemplates that the Staff will respond to these requests.  For example, Rule 14a-8(k) states that a shareholder proponent can respond to a company’s exclusion notice, but states that proponents should make such submissions as quickly as possible so that the Staff “will have time to consider fully your submission before it issues its response.”  In Staff Legal Bulletin No. 14, the Staff stated, “Although we are not required to respond [to a no-action request], we have, as a convenience to both companies and shareholders, engaged in the informal practice of expressing our enforcement position on these submissions through the issuance of no-action responses.  We do this to assist both companies and shareholders in complying with the proxy rules.”[4]  Thus, for the past several decades, the Staff has responded to almost every shareholder proposal no-action request, except in limited situations (discussed below).  Similarly, the Staff has treated Rule 14a-8 no-action requests differently than no-action requests in other contexts by publicly disclosing the Rule 14a-8 no-action requests promptly following submission, whereas most no-action requests not involving Rule 14a-8 are publicly disclosed only after the Staff has responded to the request.[5] Following the 2018-2019 shareholder proposal season, during which the Staff performed the Herculean task of timely responding to hundreds of shareholder proposal no-action requests notwithstanding the month-long partial government shutdown, the Staff stated in a number of forums that it was considering changing its practice of expressing its views in writing in response to every no-action request.  For example, Division of Corporation Finance Director William Hinman was quoted as stating, “Going forward . . . we are going to be thinking about whether every request for a no-action letter need[s] a formal response from us.”[6]  Director Hinman added, “If we don’t think we have something to add, we may not issue a letter.  Something we are thinking about.  We may actively monitor the area and not necessarily give a response.”[7] As a result of these reports, a number of groups met with and/or wrote to the Staff regarding its proposal, raising concerns with the proposed change.[8] Perspectives on the Staff’s Announcement The Staff’s announcement provides few details on how and in what circumstances its new policy will be implemented.  While the full implications of the Staff’s announcement thus are difficult to assess, some initial observations follow. No Immediate Relief for Companies or Proponents: While the number of Rule 14a-8 no-action requests submitted to the Staff has been trending downward,[9] the new procedures may further relieve some of the burdens on the Staff of the shareholder proposal process.  However, they do not appear to lessen the costs and burdens of the shareholder proposal process on companies.  Under Rule 14a-8(j), a company must still notify the Staff if it intends to exclude a shareholder proposal from its proxy statement under Rule 14a-8, and it must still explain why the company believes that it may do so.  Because the Staff’s announcement provides no clear standards on when the Staff will apply its new procedures, companies likely will conclude that they should continue to request no-action relief and fully explain and cite support for their position.  Likewise, shareholder proponents may continue to conclude that it is worthwhile for them to submit responses seeking to refute companies’ positions on the excludability of proposals. Uncertainty over Effect of Staff’s Decisions to Decline to State its Views: The Staff historically has only rarely declined to state its views on a no-action request under Rule 14a-8, typically adopting that position when a proposal topic was subject to pending litigation.[10]  Importantly, the Staff announcement noted that its determination to not state its views on a no-action request does not mean that it disagrees with a company’s analysis or conclusion and that, in fact, the company requesting exclusion may have a valid legal basis to exclude the proposal under Rule 14a-8.  Nevertheless, a company faced with this situation will have the dilemma of determining whether in fact to exclude the proposal.  As noted by the Council of Institutional Investors (“CII”) in its letter to the Staff,[11] the result may be that some companies include proposals in their proxy statements that, in the past, the Staff would have concurred could be excluded.  That result would require all of the company’s shareholders (many of whom already have been overburdened with assessing how to vote on proposals during proxy season) to expend valuable time and resources on such proposals, even though, in CII’s words, “[s]ome of these proposals are likely to be misguided or on trivial issues.”[12]  In considering whether to omit a proposal in such situation, a company will need to consider the potential reaction of its shareholders, the risk of adverse publicity, possible reactions from proxy advisory firms (discussed below), the risk of litigation, and the possibility that including the proposal in its proxy statement will attract more proposals in future years. Response of Proxy Advisors: Both Institutional Shareholder Services (“ISS”) and Glass Lewis have policies under which they may recommend votes against directors if a company excludes a proposal without having received a Staff response or court order agreeing that the proposal is excludable or withdrawal from the proponent.[13]  However, these policies were issued before the Staff’s announcement and statement that their declining to state a view on a no-action request does not mean that a company has failed to state a valid basis to exclude the proposal.  Given concerns that have been expressed over burdens imposed on all shareholders if the Staff’s new policies result in an increase in the number of proposals included in company proxy statements, it will be important to watch whether the proxy advisory firms adopt a more nuanced approach to their analyses of company decisions to omit shareholder proposals when the Staff has declined to state a view, particularly in light of the SEC’s recent interpretive guidance on the applicability of Rule 14a-9 to the firms’ voting recommendations and cautions regarding the fiduciary duties of investment advisors relying on such recommendations.[14] Increased Risk of Litigation and Related Costs: Although Staff no-action letter responses reflect only informal views of the Staff and not binding adjudications, both companies and proponents have tended to defer to the Staff’s views, and litigation under Rule 14a-8 has been rare.[15]  Shareholder proposal litigation is costly (especially compared to the costs of obtaining a no-action letter response), and federal district courts cannot be relied upon to consider and adjudicate shareholder proposal disputes on the expedited schedule required during proxy season.  Nevertheless, it has always been the case, as noted in the Staff’s announcement, that “the parties may seek formal, binding adjudication on the merits of [a Rule 14a-8 interpretive] issue in court.”  The Staff’s announcement increases the risk to both proponents and companies that they may find themselves in court addressing the excludability of a shareholder proposal under Rule 14a-8. Greater Uncertainty in Rule 14a-8 Interpretations: A number of questions remain on the potential impact of the Staff’s new policies on the long-term transparency around and dynamics of the Rule 14a-8 process. For example, the Staff currently maintains two Rule 14a-8-related websites for shareholder proposal no-action requests: one where it posts incoming no-action requests, and one where it posts Staff responses to no-action requests.  The Staff could effectively maintain the same level of transparency as in the past by maintaining this practice and, when it issues an oral response, including some indication on the website where it posts decided no-action letters, indicating the nature of its oral response (Concur, Unable to concur, or No View) and, if it concurs, the basis of its concurrence.  However, the Staff announcement does not indicate whether the Staff intends to inform the company and proponent of the basis of its decision when issuing an oral response to a no-action request that makes multiple exclusion arguments (including, for example, that it concurs with the company on the basis of its Rule 14a-8(i)(7) argument), much less whether it will include some public indication on its website in such instances. Clearly there will be less definitive guidance on the application of Rule 14a-8 when the Staff declines to state a view on whether a proposal may properly be excluded from a company’s proxy statement. Nevertheless, depending on the frequency, context, and disclosure (if any) around the Staff’s determinations not to state a view, we expect that participants will seek to interpret or read meaning into the situation, rightly or wrongly. The Staff announcement indicates that one instance in which the Staff will issue response letters will be to provide “more broadly applicable guidance about complying with Rule 14a-8.” Although the Staff has on occasion used a Rule 14a-8 no-action response to elaborate on its interpretation of the rule, historically the Staff has utilized Staff Legal Bulletins to provide “more broadly applicable guidance” regarding its interpretation of Rule 14a-8.  The Staff’s announcement appears to suggest that it now will more commonly spring guidance on the shareholder proposal community in the middle of the season and in the context of specific factual situations, which may make such guidance harder to apply in other contexts than if the Staff addressed such issues more generally. In light of the foregoing, there is concern that the Staff’s procedural changes will result in companies and proponents being less able to easily or accurately determine the Staff’s views on the applicability of Rule 14a‑8 to a certain proposal.[16] In the absence of any written record, third parties may not know whether a proposal that was challenged in a no-action letter was excluded, and on what grounds, or if the Staff declined to state its position (the Staff’s announcement did not indicate that it would cease to disclose when a no-action request was withdrawn).  If that does occur, over time this may (ironically) result in an increase in the number of shareholder proposals submitted to companies and the number of no-action exclusion requests submitted to the Staff, as proponents and companies have less guidance on when and on what grounds proposals are excludable. Conclusions Although the shareholder proposal landscape is constantly evolving, the Staff’s announcement heralds a more significant shift in the landscape.  Combined with the implications of the SEC’s recent guidance for proxy advisory firms and investment advisers engaged in the proxy voting process,[17] it means that the 2019-2020 shareholder proposal season could be particularly tumultuous.  Moreover, it remains likely that the SEC will propose amendments to Rule 14a-8 in the near future,[18] although any such rules are unlikely to be in effect for much of the 2019-2020 shareholder proposal season.  Nevertheless, shareholder proponents likely will be mindful of these dynamics when evaluating whether to submit novel proposals, and companies should consider now how these changes may bear on their approaches in seeking no-action exclusion of shareholder proposals and engaging with their shareholders in advance of and during the upcoming proxy season. [1]   Available at https://www.sec.gov/corpfin/announcement/announcement-rule-14a-8-no-action-requests. [2]   See, e.g., Staff Legal Bulletin No. 14I (Nov. 1, 2017), available at https://www.sec.gov/interps/legal/cfslb14i.htm, and Staff Legal Bulletin No. 14J (Oct. 23, 2018), available at https://www.sec.gov/corpfin/staff-legal-bulletin-14j-shareholder-proposals. [3]   Rule 14a-8(j)(2)(ii). [4]   Staff Legal Bulletin No. 14, Shareholder Proposals (July 13, 2001), available at https://www.sec.gov/interps/legal/cfslb14.htm.  As stated in the Division of Corporation Finance’s “Informal Procedures Regarding Shareholder Proposals” (Nov. 2, 2011), which in the past the Staff has attached to each of its Rule 14a-8 no-action letter responses, “The Division of Corporation Finance believes that its responsibility with respect to matters arising under Rule 14a-8 [17 C.F.R. § 240.14a-8], as with other matters under the proxy rules, is to aid those who must comply with the rule by offering informal advice and suggestions and to determine, initially, whether or not it may be appropriate in a particular matter to recommend enforcement action to the Commission.”  Available at https://www.sec.gov/divisions/corpfin/cf-noaction/14a-8-informal-procedures.htm. [5]   See 17 C.F.R. § 200.82 (providing for public availability of materials filed pursuant to Rule 14a-8(d)). [6]   The Deal, “SEC’s Clayton Eyes Tougher Rules for Proxy Firms, Proposals” (July 16, 2019).  See also Bloomberg Law, “SEC May Curb Review of Contested Shareholder Proposals” (July 16, 2019). [7]   Id. [8]   For example, see Council of Institutional Investors, Letter to Staff: SEC Corporation Finance 14a-8 Process (August 12, 2019), available at  https://www.cii.org/files/issues_and_advocacy/correspondence/2019/ August%2012%202019%2020190812%2014a-8%20No-Action%20Process%20letter.pdf. [9]   The following statistics are based on information we have compiled from the SEC’s website and the Institutional Shareholder Services shareholder proposals and voting analytics databases. No-Action Request Statistics   2019* 2018* 2017* Total number of proposals submitted 792 788 827 Total no-action requests submitted 228 256 288 No-action submission rate 29% 32% 35% Staff responses 180 194 242 Exclusions granted 119 (66%) 125 (64%) 189 (78%) Exclusions denied 61 (34%) 69 (36%) 53 (22%) *   Year references are to each year’s shareholder proposal season, which we define to mean the period from October 1 of the preceding year through June 1 of the indicated year.  The number of Staff responses is lower than the number of no-action requests submitted due to withdrawals and also reflects no-action letters submitted late in the season that are responded to after our June 1 measurement date. [10]   See, e.g., Electronic Arts Inc. (avail. May 23, 2008) (“We note that litigation is pending in the United States District Court for the Southern District of New York with respect to EA’s intention to omit the proposal from EA’s proxy materials.  In light of the fact that arguments raised in your letters and that of the proponent are currently before the court in connection with the litigation between EA and the proponent concerning this proposal, in accordance with staff policy, we will not comment on those arguments at this time.  Accordingly, we express no view with respect to EA’s intention to omit the instant proposal from the proxy materials relating to its next annual meeting of security holders.”). [11]   See note 8. [12]   Id. [13]   ISS, U.S. Proxy Voting Research Procedures & Policies (Excluding Compensation-Related) Frequently Asked Questions (Aug. 13, 2018), FAQ 67 (available at https://www.issgovernance.com/file/policy/active/americas/US-Procedures-and-Policies-FAQ.pdf): [U]nder our governance failures policy, ISS will generally recommend a vote against one or more directors (individual directors, certain committee members, or the entire board based on case-specific facts and circumstances), if a company omits from its ballot a properly submitted shareholder proposal when it has not obtained: 1) voluntary withdrawal of the proposal by the proponent; 2) no-action relief from the SEC; or 3) a U.S. District Court ruling that it can exclude the proposal from its ballot. … If the company has taken unilateral steps to implement the proposal, however, the degree to which the proposal is implemented, and any material restrictions added to it, will factor into the assessment. Glass Lewis, 2019 Proxy Paper™ Guidelines, An Overview Of The Glass Lewis Approach To Proxy Advice – United States (2019) (available at https://www.glasslewis.com/wp-content/uploads/2016/11/Guidelines_US.pdf.): In instances where companies have excluded shareholder proposals . . . Glass Lewis will take a case-by-case approach, taking into account the following issues: . . . The company’s overall governance profile, including its overall responsiveness to and engagement with shareholders . . . Glass Lewis will make note of instances where a company has successfully petitioned the SEC to exclude shareholder proposals.  If after review we believe that the exclusion of a shareholder proposal is detrimental to shareholders, we may, in certain very limited circumstances, recommend against members of the governance committee.   [14]   Gibson, Dunn & Crutcher LLP, “SEC Issues New Guidance for Proxy Advisors and Investment Advisers Engaged in the Proxy Voting Process,” available at https://www.gibsondunn.com/sec-issues- new-guidance-for-proxy-advisors-and-investment-advisers-engaged-in-proxy-voting-process/. [15]   But see TransDigm Group Incorporated (avail. Jan. 28, 2019) (New York City Office of the Comptroller commenced litigation over the proposed exclusion of its proposal prior to the Staff issuing its no-action letter response). [16]   Agenda, “SEC Launches ‘Brand New’ Changes to No-Action Process” (Sept. 6, 2019) (quoting the New York City Comptroller and representatives from the Council of Institutional Investors and As You Sow expressing concern with the Staff announcement). [17]   See note 14. [18]   See Commission Elad L. Roisman, “Statement at the Open Meeting on Commission Guidance and Interpretation Regarding Proxy Voting and Proxy Voting Advice” (Aug. 21, 2019), available at https://www.sec.gov/news/public-statement/statement-roisman-082119 (“As our Regulatory Flexibility Agenda notes, in the near future the Commission expects to consider . . . proposed rules to amend the submission and resubmission thresholds for shareholder proposals under Rule 14a-8 under the Exchange Act . . . .”); Gibson Dunn Securities Regulation Monitor, “SEC To Propose Shareholder Proposal and Proxy Advisory Firm Rule Amendments” (May 24, 2019), available at  https://www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=367. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work in the Securities Regulation and Corporate Governance practice group, or any of the following lawyers: Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 9, 2019 |
Law360 Names Seven Gibson Dunn Lawyers as 2019 Rising Stars

Seven Gibson Dunn lawyers were named among Law360’s Rising Stars for 2019 [PDF], featuring “attorneys under 40 whose legal accomplishments transcend their age.”  The following lawyers were recognized: Washington D.C. partner Chantal Fiebig in Transportation, San Francisco partner Allison Kidd in Real Estate, Washington D.C. associate Andrew Kilberg in Telecommunications, New York associate Sean McFarlane in Sports, New York partner Laura O’Boyle in Securities, Los Angeles partner Katherine Smith in Employment and Century City partner Daniela Stolman in Private Equity. Gibson Dunn was one of three firms with the second most Rising Stars. The list of Rising Stars was published on September 8, 2019.

August 23, 2019 |
SEC Issues New Guidance for Proxy Advisors and Investment Advisers Engaged in the Proxy Voting Process

Click for PDF On August 21, 2019, the Securities and Exchange Commission (the “Commission”) issued new guidance regarding two elements of the proxy voting process[1] that are influenced by proxy advisory firms: proxy voting advice issued by proxy advisors and proxy voting by investment advisers who use that proxy voting advice. The guidance, in the words of Commissioner Elad L. Roisman, “reiterate[s] longstanding Commission rules and positions that remain applicable and very relevant in today’s marketplace.” Notably, the two releases issued by the Commission are not subject to notice and comment and will instead become effective upon publication in the Federal Register. Specifically, the Commission approved issuing both: a Commission interpretation that the provision of proxy voting advice by proxy advisory firms generally constitutes a “solicitation” under federal proxy rules and new Commission guidance about the availability of exemptions from the federal proxy rules and the applicability of the proxy anti-fraud rule to proxy voting advice (the “Proxy Voting Advice Release”);[2] and new Commission guidance intended to facilitate investment advisers’ compliance with the fiduciary duties owed to each client in connection with the exercise of investment advisers’ proxy voting responsibilities, including in connection with their use of proxy advisory firms (the “Proxy Voting Responsibilities Release”[3] and together, the “Releases”). The Commission approved both Releases by a vote of 3-2, with Commissioners Robert J. Jackson, Jr. and Allison Herren Lee dissenting from each Release. In their statements explaining their opposition, Commissioners Jackson and Lee expressed concern that neither was subject to a notice and comment period, which prevented the Commission from fully considering the consequences of the new guidance.[4] Both Commissioners also questioned whether the Releases will increase costs associated with the provision and use of proxy voting advice, and Commissioner Lee expressed concern that greater issuer involvement in the proxy voting recommendation process could “undermine the reliability and independence of voting recommendations.” Background Over the past several years, the Commission and its staff (the “Staff”) have issued statements and held public forums to discuss issues related to voting advice issued by proxy advisory firms and investment advisers’ reliance on that advice. For example, in July 2010, the Commission issued a concept release[5] that sought public comment on, among other topics, the legal status and role of proxy advisory firms.[6] And in June 2014, the staff of the Divisions of Investment Management and Corporation Finance issued Staff Legal Bulletin No. 20 (“SLB 20”),[7] which provided guidance on investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms and the availability and requirements of two exemptions to the federal proxy rules often relied upon by proxy advisory firms.[8] Subsequently the Staff held a roundtable in November 2018 to provide an opportunity for market participants to engage with the Staff on various aspects of the proxy process (the “2018 Roundtable”).[9] The 2018 Roundtable included panels addressing each of the regulation of proxy advisory firms, proxy voting mechanics and technology, and shareholder proposals. Participants on the proxy advisory firms panel discussed investor advisers’ reliance on voting advice provided by proxy advisory firms, how proxy advisory firms address conflicts of interest and challenges issuers face in correcting factual errors in voting recommendations published by proxy advisory firms.[10] Following the 2018 Roundtable, Chairman Jay Clayton announced that Commissioner Roisman would lead the Commission’s efforts to improve the proxy voting process and infrastructure.[11] In his opening remarks at the Commission’s August 21 meeting, Commissioner Roisman indicated that the Releases were the first of several matters that the Commission may consider in the near future relating to its proxy voting rules.[12] Other matters that Commissioner Roisman mentioned would likely be considered “in the near future” include proposed reforms to the rules addressing proxy advisory firms’ reliance on proxy solicitation exemptions and the rules regarding the thresholds for shareholder proposals announced as part of the Commission’s Spring 2019 Regulatory Flexibility Agenda.[13] Summary of the Proxy Voting Advice Release The Proxy Voting Advice Release, developed by the Commission’s Division of Corporation Finance, addresses two topics: the Commission articulates its view that proxy voting advice provided by proxy advisory firms generally constitutes a “solicitation” subject to the federal proxy roles, and the Commission provides an interpretation and additional guidance on the applicability of the federal proxy rules to proxy voting advice that is designed to influence the voting decisions of a proxy advisory firm’s clients. Proxy Voting Advice Constitutes a Solicitation Under the Federal Proxy Rules As explained in the Proxy Voting Advice Release, under Rule 14a‑1(l) of the Securities Exchange Act of 1934 (the “Exchange Act”), a “solicitation” includes “a communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.” This includes communications seeking to influence the voting of proxies, even if the person issuing the communication does not seek authorization to act as a proxy and may be indifferent to its ultimate outcome. Communications that constitute “solicitations” under Rule 14a‑1(l) are subject to the information and filing requirements of the federal proxy rules. However, Exchange Act Rule 14a-2(b)(1) provides an exemption from the Commission’s information and filing requirements (but not from the anti-fraud rules) for “any solicitation by or on behalf of any person who does not, at any time during such solicitation, seek directly or indirectly, either on its own or another’s behalf, the power to act as a proxy for a security holder and does not furnish or otherwise request, or act on behalf of a person who furnishes or requests, a form of revocation, abstention, consent or authorization.” Based on this background, in the Proxy Voting Advice Release the Commission explains that its interpretation is informed by the purpose, substance and circumstances under which the proxy voting advice is provided. Where a proxy advisory firm markets its expertise in the research and analysis of voting matters to assist a client in making proxy voting decisions by providing voting recommendations, the proxy advisory firm is not “merely performing administrative or ministerial services.” Instead, the Commission believes that providing such proxy voting recommendations constitutes a solicitation because the recommendations are “designed to influence the client’s voting decision.” Importantly, the Commission believes that such recommendations constitute a solicitation even where a proxy advisory firm bases its recommendations on its client’s own tailored voting guidelines or the client ultimately decides not to follow the proxy voting recommendations.[14] The Commission makes clear that its interpretation does not prevent a proxy advisory firm from relying on the exemptions from the federal proxy rules information and filing requirements under Exchange Act Rule 14a-2(b)(1).[15] Nevertheless, the Commission’s interpretation is an important foundational basis for any subsequent regulation of proxy advisory firms that addresses conditions for the availability of Rule 14a-2(b)(1). Proxy Voting Advice Remains Subject to Exchange Act Rule 14a-9 In the second part of the Proxy Voting Advice Release, the Commission emphasizes that even where a proxy advisory firm’s voting advice is otherwise exempt from the information and filing requirements of the federal proxy rules under Exchange Act Rule 14a-2(b)(1), that voting advice remains subject to the anti-fraud provisions of Exchange Act Rule 14a-9. Accordingly, when issuing proxy voting advice, proxy advisory firms may not make materially false or misleading statements or omit material facts that would be required to make the voting advice not misleading. Exchange Act Rule 14a-9 prohibits any solicitation from containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact. In addition, solicitations may not omit any material fact necessary in order to make the solicitation false or misleading. Of particular importance for proxy voting advice based on the research and analysis of proxy advisory firms, Exchange Act Rule 14a-9 also extends to opinions, reasons, recommendations or beliefs that are disclosed as part of a solicitation. Where such opinions, recommendations or similar views are provided, disclosure of the underlying facts, assumptions, limitations and other information may need to be disclosed so that these views do not raise concerns under the rule. Depending on the materiality of the information and the particular circumstances, the Commission indicates that proxy advisory firms may need to disclose additional information to avoid issues under Exchange Act Rule 14a-9, including: an explanation of the firm’s methodology used to formulate its voting advice on a particular matter; non-public information sources and the extent to which the information from these sources differs from the publicly available disclosures; and any material conflicts of interest that arise in connection with providing the proxy voting advice in reasonably sufficient detail so that the client can assess the relevance of those conflicts. Summary of the Proxy Voting Responsibilities Release Developed by the Commission’s Division of Investment Management, the Proxy Voting Responsibilities Release clarifies how an investment adviser’s fiduciary duties to its clients inform the investment adviser’s proxy voting responsibilities, particularly where investment advisers retain proxy advisory firms to assist in some aspect of their proxy voting responsibilities. Under Rule 206(4)-6 of the Investment Advisers Act of 1940, an investment adviser that assumes proxy voting authority must implement policies and procedures that are reasonably designed to ensure it makes voting decisions in the best interest of clients. The Commission reiterates throughout the Proxy Voting Responsibilities Release that proxy voting must be consistent with the investment adviser’s fiduciary duties and in compliance with Rule 206(4)-6. The Proxy Voting Responsibilities Release sets forth six examples of considerations investment advisers should evaluate when discharging their fiduciary duties in connection with proxy voting. The Commission emphasizes that this list of considerations is non-exhaustive, and while its guidance is generally phrased as considerations or actions investment advisers “should” evaluate, the Commission further indicates that these examples are not the only way for investment advisers to discharge their fiduciary duties when voting proxies. 1. Determine the scope of the investment adviser’s proxy voting authority and responsibilities If an investment adviser agrees to assume proxy voting authority, the scope of the voting arrangements should be determined between the investment adviser and each of its clients on an individual basis.  The Commission emphasizes that any proxy voting arrangements must be subject to full and fair disclosure and informed consent. Among the variety of potential approaches to proxy voting arrangements, the Commission provides several examples to which an investment adviser and its client may appropriately agree, including the investment adviser exercising proxy voting authority pursuant to specific parameters designed to serve the best interests of the client based on the client’s individual investment strategy, the investment adviser refraining from exercising proxy voting authority under agreed circumstances or the investment adviser voting only on particular types of proposals based on the client’s express preferences. 2. Demonstrate that the investment adviser is making voting determinations in its clients’ best interests and in accordance with its proxy voting policies and procedures The Commission indicates that investment advisers must at least annually review and document the adequacy of its proxy voting policies and procedures, including whether the policies and procedures are reasonably designed to result in proxy voting in the best interest of the investment adviser’s clients. Because clients often have differing investment objectives and strategies, if an investment adviser has multiple clients then it should consider whether voting all of its clients’ shares under a uniform voting policy is in the best interest of each individual client.  Alternatively, an investment adviser should consider whether it should implement voting policies that are in line with the particular investment strategies and objectives of individual clients.  An investment adviser should also consider whether its voting policy or policies should be tailored to permit or require more detailed analysis for more complex matters, such as a corporate event or a contested director election. In addition, where an investment adviser retains a proxy advisory firm to provide voting advice or execution services, the investment adviser should consider undertaking additional steps to evaluate whether its voting determinations are consistent with its voting policies and in the best interests of its clients. 3. Evaluate any proxy advisory firm in advance of retaining it Before retaining a proxy advisory firm, investment advisers should consider whether the proxy advisory firm has the capacity and competency to adequately analyze the matters for which it is providing voting advice.  The Commission indicates that the scope of the investment adviser’s proxy voting authority and the services for which the proxy advisory firm has been retained should inform the considerations that the investment adviser undertakes. Such consideration could include an assessment of the adequacy and quality of the proxy advisory firm’s staffing, personnel and/or technology.  In addition, investment advisers should consider the proxy advisory firm’s process for obtaining input from issuers and other clients with respect to its voting polices, methodologies and peer group design. 4. Evaluate processes for addressing potential factual errors, incompleteness or methodological weakness in a proxy advisory firm’s analysis An investment adviser should have policies and procedures in place to ensure that its proxy voting decisions are not based on materially inaccurate or incomplete information provided by a proxy advisory firm.  By way of example, the Commission suggests that an investment adviser should consider periodically reviewing its ongoing use of the proxy advisory firm’s research or voting advice, including whether any potential errors, incompleteness or weaknesses materially affected the research or recommendations that the investment adviser relied on. In addition, the Commission indicates that investment advisers should consider the proxy advisory firm’s policies and procedures to obtain current and accurate information, including the firm’s engagement with issuers, efforts to correct identified material deficiencies, disclosure regarding its sources of information and its methodologies for issuing voting advice and the firm’s consideration of facts unique to the issuer or proposal. 5. Adopt policies for evaluating proxy advisory firms’ services Where an investment adviser has retained a proxy advisory firm to assist with its proxy voting responsibilities, the investment adviser should adopt policies and procedures that are designed to evaluate the services of the proxy advisory firm to ensure that votes are cast in the best interests of the investment adviser’s clients. The Commission indicates that investment advisers should consider implementing policies and procedures to identify and evaluate a proxy advisory firm’s conflicts of interest on an on-going basis and evaluate the proxy advisory firm’s “capacity and competency” to provide voting advice and execute votes in accordance with the investment adviser’s instructions. In addition, investment advisers should consider how and when the proxy advisory firm updates its methodologies, guidelines and voting advice. 6. Determine when to exercise proxy voting opportunities An investment adviser is not required to exercise every opportunity to vote in either of two circumstances—where the investment adviser and its client have agreed in advance that the investment adviser’s proxy voting authority is limited under certain circumstances and where the investment adviser and its client have agreed in advance that the investment adviser has authority to cast votes based on the best interests of the client. In both situations, the investment adviser’s action must be in accordance with its prior agreement with its client. Moreover, where an investment adviser may refrain from voting because doing so is in the best interest of its client, the investment adviser should first consider its duty of care to its client in light of the scope of services it has agreed to assume. Practical Considerations Just as the Commission was divided in approving the Releases, reactions to the Releases are likely to vary among participants in the proxy process. For example, public companies may both view the Releases as a positive step and believe that additional Commission action is needed to address the errors, conflicts of interests and other challenges with proxy advisory firms. The Commission was limited in the actions it could take via interpretation and issuing guidance in the Releases. However, the Commission signaled that the Staff is working on proposed rules “to address proxy advisory firms’ reliance on the proxy solicitation exemptions in Exchange Act Rule 14a‑2(b).” Given that the rulemaking process can be time-consuming, the Releases provide helpful immediate guidance heading into the 2020 proxy season. That said, it remains to be seen whether and to what extent the proxy advisory firms and their investment adviser-clients will adjust their practices in response to the Releases. For example, the proxy advisory firms may increase the disclosures included in their reports, particularly when they are relying on debated premises such as studies asserting that certain corporate governance or sustainability actions increase shareholder value. They may also be less willing to rely on information provided either by proponents or activists unless that information has been filed with the Commission. Investment advisers inclined to vote lock-step with proxy advisory firm recommendations may be more willing to engage with companies in advance of voting. Similarly, the Commission’s statements on the application of Rule 14a-9 to proxy advisory firm reports and recommendations[16] may affect various proxy advisory firm practices due to the threat (real or perceived) of public companies commencing litigation against these firms in the event that statements in a proxy advisory firm’s report are viewed as materially false or misleading. For example, it is common to see parties in contested solicitations commence litigation under Rule 14a‑9 challenging the other side’s solicitation materials. It is not hard to envision similar litigation playing out in the future when there are differences of opinion as to whether a proxy advisory report contains information that is either inaccurate or misleading, or where it simply omits information that leaves the disclosed information materially misleading. As a result, proxy advisory firms may change their practices for vetting and issuing their voting recommendation reports; for example, the firms may be more inclined to provide drafts of their reports to public companies in advance of the reports being issued. ________________________ [1]   The two most influential proxy advisory firms are Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. [2]   Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice, Exchange Act Release No. 34-86721 (Aug. 21, 2019), available at https://www.sec.gov/rules/interp/2019/34-86721.pdf. [3]   Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Investment Advisers Act Release No. IA-5325 and Investment Company Act Release No. IC-33605 (Aug. 21, 2019), available at https://www.sec.gov/rules/interp/2019/ia-5325.pdf. [4]   See Commissioner Robert J. Jackson, Jr., “Statement on Proxy-Advisor Guidance” (Aug. 21, 2019), available at https://www.sec.gov/news/public-statement/statement-jackson-082119; Commissioner Allison Herren Lee, “Statement of Commissioner Allison Herren Lee on Proxy Voting and Proxy Solicitation Releases” (Aug. 21, 2019), available at https://www.sec.gov/news/public-statement/statement-lee-082119. [5]   Concept Release on the U.S. Proxy System, Release No. 34-62495, 75 FR 42982 (July 22, 2010), available at https://www.sec.gov/rules/concept/2010/34-62495.pdf. [6]   For additional information on the 2010 concept release, please see our client alert dated July 22, 2010, available at https://www.gibsondunn.com/securities-and-exchange-commission-issues-concept-release-seeking-public-comment-on-u-s-proxy-system/. [7]   Staff Legal Bulletin No. 20 (June 30, 2014), available at http://www.sec.gov/interps/legal/cfslb20.htm. [8]   For additional information regarding SLB 20, please see our client alert dated July 1, 2015, available at https://www.gibsondunn.com/sec-staff-releases-guidance-regarding-proxy-advisory-firms/. [9]   See Securities and Exchange Commission, “Spotlight on Proxy Process” (Nov. 15, 2018), available at https://www.sec.gov/proxy-roundtable-2018. [10]   See Securities and Exchange Commission Webcast Archive, “Roundtable on the Proxy Process” (Nov. 15, 2018), available at https://www.sec.gov/video/webcast-archive-player.shtml?document_id=111518roundtable. [11]   See Chairman Jay Clayton, “Remarks for Telephone Call with SEC Investor Advisory Committee Members” (Feb. 6, 2019), available at https://www.sec.gov/news/public-statement/clayton-remarks-investor-advisory-committee-call-020619. [12]   See Commission Elad L. Roisman, “Statement at the Open Meeting on Commission Guidance and Interpretation Regarding Proxy Voting and Proxy Voting Advice” (Aug. 21, 2019), available at https://www.sec.gov/news/public-statement/statement-roisman-082119. [13]   See Agency Rule List – Spring 2019, available here. [14]   In contrast, ISS previously asked the Commission to confirm that “a registered investment adviser who is contractually obligated to furnish vote recommendations based on client-selected guidelines does not provide ‘unsolicited’ proxy voting advice, and thus is not engaged in a ‘solicitation’ subject to the Exchange Act proxy rules.” Letter from Gary Retelny, President and CEO, ISS, to Brent J. Fields, Secretary, Commission (Nov. 7, 2018), available at https://www.sec.gov/comments/4-725/4725-4629940-176410.pdf. [15]   For additional information regarding the Staff’s views on the availability of such exemptions for proxy advisory firms, please see our client alert regarding SLB 20 dated July 1, 2015, available at https://www.gibsondunn.com/sec-staff-releases-guidance-regarding-proxy-advisory-firms/. [16]   The solicitation exemption in Rule 14a-2(b)(3) explicitly does not also provide an exemption from Rule 14a-9. Thanks to associate Geoffrey Walter in Washington, D.C. for his assistance in the preparation of this client update. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers: Securities Regulation and Corporate Governance: Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) James J. Moloney – Orange County, CA (+ 949-451-4343, jmoloney@gibsondunn.com) Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Brian J. Lane – Washington, D.C. (+1 202-887-3646, blane@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Shareholder Activism: Eduardo Gallardo – New York (+1 212-351-3847, egallardo@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 16, 2019 |
Delaware Court of Chancery Issues Important Ruling on Validity of Advance Notice Bylaws

Click for PDF In an important transcript ruling issued this week,[1] the Delaware Court of Chancery upheld the validity and vitality of advance notice bylaw provisions, which govern the timing and disclosure requirements of stockholder nominations of board candidates. The ruling should give further comfort to boards of public corporations in enforcing reasonable and customary safeguards commonly imposed on the critical director nomination process. The recent transcript ruling was issued in connection with the unsolicited efforts by Bay Financial Capital to acquire Barnes & Noble Education, Inc. (BNED). BNED operates physical and virtual bookstores for educational institutions, sells textbooks wholesale, and provides digital educational solutions. BNED was spun off from Barnes & Noble, Inc. in 2015. BNED’s bylaws require that director nominations be submitted by stockholders no earlier than 120 days and no later than 90 days prior to the anniversary date of the prior year’s annual meeting of stockholders. As customary, under BNED’s bylaws a stockholder must be a record holder as of the notice deadline in order to nominate directors. Between February and June 2019, Bay Capital submitted three unsolicited proposals to acquire BNED. The BNED Board rejected all three proposals, primarily for two reasons. First, the Board determined the financial consideration to be inadequate. Second, the Board believed that Bay Capital was not a credible potential acquirer, having doubts of its ability to finance an acquisition of a public company. On June 27, 2019, the last day to submit director nominations for the 2019 annual meeting of stockholder, Bay Capital noticed the nomination of a slate of director candidates. Although the notice was timely, as of June 27 Bay Capital was just a beneficial owner of BNED stock and not a record holder. BNED’s Board of Directors therefore rejected the notice as invalid. Two weeks later, Bay Capital filed a complaint in Delaware Court of Chancery seeking injunctive relief to run its slate of directors at the upcoming annual meeting of stockholders. The Court found that despite being reminded no fewer than four times by its advisor of the record holder requirement set forth in the BNED bylaws, Bay Capital did not acquire shares until three days before the nomination deadline. And when the shares were acquired, it was done through a broker such that there was not sufficient time to get the shares transferred in Bay Capital’s record name. The Court dismissed various arguments advanced by Bay Capital in seeking an injunction, including a purported ambiguity in the BNED bylaws as to the need for the nominating stockholder to be a holder of record at the time it delivered the notice of nomination. Ultimately, the Court noted: “Needless to say, not even Delaware’s strong public policy favoring the stockholder franchise will save Bay Capital from its dilatory conduct. Bay Capital blew the deadline. It then made up excuses for doing so. No record evidence suggests that the company is in any way at fault for that mistake. If this Court required the company to accept the nomination in these circumstances, advance notice requirements would have little meaning under Delaware law.” In light of the continuing prevalence of shareholder activism and hostile takeover activity, public corporations should continuously review their advance notice bylaw with counsel to confirm that they include state-of-the-art guardrails that can ensure an orderly and timely nomination process. And, more importantly, well-informed boards should feel comfortable uniformly enforcing those provisions, and not be intimidated by efforts by activist shareholders and hostile bidders to try to bypass their requirements due to carelessness or ignorance. Gibson Dunn represents Barnes & Noble Education, Inc. in this matter. ________________________    [1]   Bay Capital Finance, LLC v. Barnes & Noble Education, Inc. (August 14, 2019), available here. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, or the following authors: Eduardo Gallardo – New York (+1 212-351-3847, egallardo@gibsondunn.com) Adam H. Offenhartz – New York (+1 212-351-3808, aoffenhartz@gibsondunn.com) Aric H. Wu – New York (+1 212-351-3820, awu@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 15, 2019 |
2019 Mid-Year Securities Litigation Update

Click for PDF The rate of new securities class action filings appears to be stabilizing, but that does not mean 2019 has been lacking in important developments in securities law. This mid-year update highlights what you most need to know in securities litigation trends and developments for the first half of 2019: The Supreme Court decided Lorenzo, holding that, even though Lorenzo did not “make” statements at issue and is thus not subject to enforcement under subsection (b) of Rule 10b-5, the ordinary and dictionary definitions of the words in Rules 10b-5(a) and (c) are sufficiently broad to encompass his conduct, namely disseminating false or misleading information to prospective investors with the intent to defraud. Because the Supreme Court dismissed the writ of certiorari in Emulex as improvidently granted, there remains a circuit split as to whether Section 14(e) of the Exchange Act supports an implied private right of action based on negligent misrepresentations or omissions made in connection with a tender offer. We explain important developments in Delaware courts, including the Court of Chancery’s application of C & J Energy, as well as the Delaware Supreme Court’s (1) application and extension of its recent precedents in appraisal litigation to damages claims, (2) elaboration of its recent holding on MFW’s “up front” requirement, and (3) rare conclusion that a Caremark claim—“possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment”—survived a motion to dismiss. Finally, we continue to monitor significant cases interpreting and applying the Supreme Court’s decisions in Omnicare and Halliburton II. I.   Filing And Settlement Trends New federal securities class action filings in the first six months of 2019 indicate that annual filings are on track to be similar to the number of new cases filed in each of the prior two years. According to a newly released NERA Economic Consulting study (“NERA”), 218 cases were filed in the first half of this year. While there was a relative surge in new cases in the first quarter of the year, this higher level of new cases did not persist in the second quarter. Filing activity in the first half of 2019 indicates a continuation of the shift in the types of cases observed in 2018—an increase in the number of Rule 10b-5, Section 11, or Section 12 cases, and a decrease in the number of merger objection cases. If the filing composition and levels observed in the first half of 2019 are indicative of the pattern for the rest of the year, we will see a 15% increase in Rule 10b-5, Section 11, and Section 12 cases compared to the approximate 1% growth in this category of filings in 2018. On the other hand, merger objection cases filed in 2019 are on pace to be more than 16% lower than similar cases filed in the prior year. While the median settlement values for the first half of 2019 are roughly equivalent to those in 2018 (at $12.0 million, down from $12.70 million in 2018), average settlement values are down over 50% from 2018 (at $33 million, down from $71 million in 2018).  That said, this discrepancy is due predominantly to one settlement in 2018 exceeding $1 billion.  Excluding such outliers, we actually see a slight increase in average settlement values compared to the prior two years. The industry sectors most frequently sued thus far in 2019 continue to be healthcare (22% of all cases filed), tech (20%), and finance (15%). Cases filed against healthcare companies in the first half of 2019 are showing the continuation of a downward trend from a spike in 2016, while cases filed against tech and finance companies are on pace with 2018. A.   Filing Trends Figure 1 below reflects filing rates for the first half of 2019 (all charts courtesy of NERA). So far this year, 218 cases have been filed in federal court, annualizing to 436 cases, which is on pace with the number of filings in 2017 and 2018, and significantly higher than the numbers seen in years prior to 2017. Note that this figure does not include the many class suits filed in state courts or the rising number of state court derivative suits, including many such suits filed in the Delaware Court of Chancery. B.   Mix Of Cases Filed In First Half Of 2019 1.   Filings By Industry Sector As seen in Figure 2 below, the split of non-merger objection class actions filed in the first half of 2019 across industry sectors is fairly consistent with the distribution observed in 2018, with few indications of significant shifts or increases in particular sectors. As in 2018, the Health Technology and Services and the Electronic Technology and Technology Services sectors accounted for over 40% of filings. The two sectors reflecting the largest changes from 2018 thus far are Consumer Durables and Non-Durables (at 9%, up from 6% in 2018) and Consumer and Distribution Services (at 5%, down from 9% in 2018). See Figure 2, infra. 2.   Merger Cases As shown in Figure 3, 83 “merger objection” cases have been filed in federal court in the first half of 2019 —below the pace of 109 cases at this point in 2018. If the 2019 trend continues, the 166 merger objection cases projected to be filed in 2019 will be about 16% fewer than the 198 merger objection cases filed in the prior year. C.   Settlement Trends As Figure 4 shows below, during the first half of 2019, the average settlement declined to $33 million, more than 50% lower than the average in 2018 but higher than the average in 2017. This phenomenon is primarily driven by one settlement in 2018 exceeding $1 billion, heavily skewing the average for that year.  If we limit our analysis to cases with settlements under $1 billion, there is actually a slight increase in the average settlement value in 2019 compared to the prior years. Finally, as Figure 5 shows, the median settlement value for cases was $12 million, which is in line with the median in 2018 and almost double the median value in 2017. II.   What To Watch For In The Supreme Court A.   Lorenzo Affirms That Disseminators Of False Statements May Be Held Liable Under Rules 10b-5(a) And 10b-5(c) Even If Janus Shields Them From Liability Under Rule 10b-5(b) We discussed the Supreme Court’s decision to grant review of Lorenzo v. Securities and Exchange Commission, No. 17-1077, in our 2018 Mid-Year Securities Litigation Update, and our 2018 Year-End Securities Litigation Update. Readers will recall that the question presented in Lorenzo was whether a securities fraud claim premised on a false statement that was not “made” by the defendant can be actionable as a “fraudulent scheme” under Section 17(a)(1) of the Securities Act and Exchange Act Rules 10b-5(a) and 10b-5(c), even though it would not support a claim under Rule 10b-5(b) pursuant to the Court’s ruling in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). On March 27, 2019, the Supreme Court affirmed the D.C. Circuit in a 6–2 opinion by Justice Breyer (Justice Kavanaugh took no part in the decision because he participated in the panel decision while a judge on the court of appeals).  The Court held that the ordinary and dictionary definitions of the words in Rules 10b-5(a) and 10b-5(c) are sufficiently broad to encompass Lorenzo’s conduct, namely disseminating false or misleading information to prospective investors with the intent to defraud, even if the disseminator did not “make” the statements and is thus not subject to enforcement under subsection (b) of the Rule.  Lorenzo v. SEC, 587 U.S. ___ (2019), slip op. at 5–7. Underlying the Court’s opinion is the principle that the securities laws and regulations work together as a whole. The Court rejected Lorenzo’s argument that Rule 10b-5 should be read to mean that each provision of the Rule governs different, mutually exclusive spheres of conduct. Under Lorenzo’s reading, he could be liable for false statements only if his conduct violated provisions that specifically refer to such statements, such as Rule 10b-5(b), and could therefore not be liable under other provisions of the Rule, which do not specifically mention misstatements. The Court noted, however, that it has “long recognized considerable overlap among the subsections of the Rule” and related statutory provisions.  Id. at 7–8.  The opinion further noted that Lorenzo’s conduct “would seem a paradigmatic example of securities fraud,” making it difficult for the majority to reconcile Lorenzo’s argument with the basic purpose and congressional intent behind the securities laws.  Id. at 9. The majority also adopted the SEC’s argument that Janus concerned only Rule 10b-5(b), and thus does not operate to shield those who disseminate false or misleading information from scheme liability, even if they do not “make” the statement.  In response to Lorenzo’s contention that imposing primary liability here would weaken the distinction between primary and secondary liability, the Court drew what it characterized as a clear line:  “Those who disseminate false statements with intent to defraud may be held primarily liable under Rules 10b-5(a) and (c),” as well as Section 10(b) of the Exchange Act and Section 17(a)(1) of the Securities Act, “even if they are secondarily liable under Rule 10b-5(b).”  Id. at 10–11.  Finally, the Court identified a flaw in Lorenzo’s suggestion that he should only be held secondarily liable.  Under that theory, someone who disseminated false statements (even if knowingly engaged in fraud) could not be held to have aided and abetted a “maker” of a false statement if the maker did not violate Rule 10b-5(b). That is because the aiding and abetting statute requires that there be a violator to whom the secondary violator provides “substantial assistance.” Id. at 12. And if, under Lorenzo’s theory, the disseminator did not primarily violate other subsections (perhaps because the disseminator lacked the necessary intent), the fraud might go unpunished altogether.  Id. at 12–13. We noted in our 2018 Year-End Securities Litigation Update that Justice Gorsuch appeared accepting of Lorenzo’s positions during the oral argument, and he did join Justice Thomas (the author of Janus) in dissent. The dissent contended that the majority “eviscerate[d]” the distinction drawn in Janus between primary and secondary liability by holding that a person who did not “make” a fraudulent misstatement “can nevertheless be primarily liable for it.” Id. at 1 (Thomas, J., dissenting).  The dissent faulted the Court for holding, in essence, that the more general provisions of other securities laws each “completely subsumes” the provisions that specifically govern false statements, such as Rule 10b-5(b). Id. at 3.  Instead, the dissenters argued that these specific provisions must be operative in false-statement cases, and that the more general provisions should be applied only to cases that do not fall within the purview of these more specific provisions. B.   Pending Certiorari Petitions Regular readers of these updates will recall that we wrote about the Supreme Court’s pending decision in Emulex Corp. v. Varjabedian, No. 18-459, in the 2018 Year-End Securities Litigation Update. In April, the Supreme Court heard oral argument and then dismissed the writ of certiorari as improvidently granted. Emulex Corp. v. Varjabedian, 587 U.S. ___ (2019), slip op. at 1. As is common in such dismissals, the Justices offered no explanation of why they dismissed the case. Therefore, there remains a circuit split as to whether Section 14(e) of the Exchange Act supports an implied private right of action based on negligent misrepresentations or omissions made in connection with a tender offer. There is also at least one notable securities case in which a petition for certiorari is pending. Putnam Investments, LLC v. Brotherston, No. 18-926, an ERISA case, presents the question whether the plaintiff or defendant must prove that an alleged fiduciary breach related to investment option selection caused a loss to participants or the plan. The case also raises the issue of whether the First Circuit correctly held that showing that particular investment options did not perform as well as a set of index funds, selected by the plaintiffs with the benefit of hindsight, suffices as a matter of law to establish “losses to the plan.” The Supreme Court has entered an order requesting the Solicitor General file a brief expressing the views of the United States. The government has not yet filed its brief in this case. We will continue to monitor the petition and provide an update if the Supreme Court grants certiorari. III.   Delaware Developments A.   Delaware Supreme Court Affirms Deal Price Is Best Evidence Of Fair Value In Appraisal, And Of Damages In Entire Fairness Regular readers of these updates will recall that, since our 2017 Year-End Securities Litigation Update, we have been reporting on the significant shift in Delaware appraisal law resulting from the Delaware Supreme Court’s landmark decision in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017), where it directed the Court of Chancery to use market factors to determine the fair value of a company’s stock. In our 2018 Mid-Year Securities Litigation Update, we wrote about the Delaware Court of Chancery’s decision in Verition Partners Master Fund v. Aruba Networks, Inc., where the trial court interpreted Dell as endorsing a company’s unaffected market price and deal price as reliable indicators of fair value under certain circumstances. 2018 WL 2315943, at *1 (Del. Ch. May 21, 2018). In April, however, the Delaware Supreme Court reversed the trial court, clarifying that, although the “unaffected market price” of a seller’s stock “in an efficient market is an important indicator of its economic value that should be given weight” under appropriate circumstances, Dell “did not imply that the market price of a stock was necessarily the best estimate of the stock’s so-called fundamental value at any particular time.” Verition Partners Master Fund v. Aruba Networks, Inc., 210 A.3d 128, 2019 WL 1614026, at *6 (Del. Apr. 16, 2019). Eschewing remand, the Supreme Court instead ordered the trial court to enter judgment awarding deal price less synergies as the company’s “fair value.” Id. at *8–9. Then, in May, the Delaware Supreme Court extended the same market-based deference from the appraisal context to damages claims in its affirmance of In re PLX Technology Inc. Stockholders Litigation, 2018 WL 5018535 (Del. Ch. Oct. 16, 2018), aff’d, 2019 WL 2144476, at *1 (Del. May 16, 2019) (TABLE). Late last year, the Delaware Court of Chancery determined in a post-trial opinion that an activist hedge fund aided and abetted a breach of fiduciary duties by directors in connection with their sale of the target company. 2018 WL 5018535, at *1. This was a pyrrhic victory, however, as the Court of Chancery concluded that the plaintiffs failed to prove their allegation that, had the company remained a stand-alone entity, its value would have exceeded the deal price by more than 50%. Id. at *2. Instead, the Court of Chancery found that “[a] far more persuasive source of valuation evidence is the deal price that resulted from the Company’s sale process.” Id. at *54; see also id. & n.605 (citing Dell, 177 A.3d at 30). In affirming the Court of Chancery’s decision on appeal, the Delaware Supreme Court rejected the plaintiffs’ argument that “the Court of Chancery erred . . . by importing principles from . . . appraisal jurisprudence to give deference to the deal price.” In re PLX Tech. Inc. Stockholders Litig., 2019 WL 2144476, at *1 (Del. May 16, 2019) (TABLE). B.   Joint Valuation Exercise Constitutes Substantive Economic Negotiations Under Flood, Fails MFW’s “Up Front” Requirement In our 2018 Year-End Securities Litigation Update, we reported on the Delaware Supreme Court’s decision in Flood v. Synutra International, Inc., where it held that the element of Kahn v. M & F Worldwide Corp. (“MFW”), 88 A.3d 635, 644 (Del. 2014) that requires a transaction to be conditioned “ab initio” or “up front” on the approval of both a special committee and a majority of the minority stockholders, in turn “require[s] the controller to self-disable before the start of substantive economic negotiations, and to have both the controller and Special Committee bargain under the pressures exerted on both of them by these protections.” Flood v. Synutra Int’l, Inc., 195 A.3d 754, 763 (Del. 2018). In Olenik v. Lodzinski, 208 A.3d 704 (Del. 2019), the Delaware Supreme Court added color to its holding in Flood that “up front” means “before the start of substantive economic negotiations,” Flood, 195 A.3d at 763. In the decision underlying Olenik, the Court of Chancery found that, although the parties to the merger had “worked on the transaction for months” before implementing MFW’s “up front” conditions, those “preliminary discussions” were “entirely exploratory in nature” and “never rose to the level of bargaining.” Olenik, 208 A.3d at 706, 716–17. Disagreeing with and reversing the Court of Chancery, the Delaware Supreme Court held that “preliminary discussions transitioned to substantive economic negotiations when the parties engaged in a joint exercise to value” the merging entities. Id. at 717. In particular, the Delaware Supreme Court found it reasonable to infer that two presentations valuing the target “set the field of play for the economic negotiations to come by fixing the range in which offers and counteroffers might be made.” Id. Thus, the parties could not invoke MFW’s protections because they did not condition the transaction on approval of both a special committee and a majority of the minority stockholders until after these “substantive economic negotiations.” Id. C.   Under C & J Energy, Curative Shopping Process “Cannot Be Granted” To Remedy Deal Subject To Entire Fairness Recently, the Court of Chancery declined to “blue-pencil” a merger agreement resulting from a flawed process based on the Delaware Supreme Court’s decision in C & J Energy Services v. City of Miami General Employees’ & Sanitation Employees’ Retirement Trust, 107 A.3d 1049 (Del. 2014). See FrontFour Capital Grp. LLC v. Traube, 2019 WL 1313408, at *33 (Del. Ch. Mar. 22, 2019). Recall that, in C & J Energy, the Delaware Supreme Court cautioned the Court of Chancery against depriving “adequately informed” stockholders of the “chance to vote on whether to accept the benefits and risks that come with [a flawed] transaction, or to reject the deal,” 107 A.3d at 1070, where (1) “no rival bidder has emerged to complain that it was not given a fair opportunity to bid,” id. at 1073, and (2) a preliminary injunction would “strip an innocent third party [buyer] of its contractual rights while simultaneously binding that party to consummate the transaction,” id. at 1054. In FrontFour, the plaintiff proved that the deal at issue was not entirely fair because conflicted insiders tainted the sale process; the special committee failed to inform itself adequately; standstill agreements prevented third parties from coming forward; and other deal protections prevented an effective post-signing market check, among other things. 2019 WL 1313408, at *32. Nevertheless, the Court of Chancery declined to grant “the most equitable relief” available—“a curative shopping process, devoid of [management] influence, free of any deal protections, plus full disclosures.” Id. at *33. The Court of Chancery reasoned that it had “no discretion” to do so under C & J Energy because the injunction sought would “strip an innocent third party of its contractual rights” under the merger agreement. Id. D.   Delaware Supreme Court Holds Caremark Claim Adequately Pleaded As we reported in our 2017 Year-End Securities Litigation Update, a Caremark claim generally seeks to hold directors personally accountable for damages to a company arising from their failure to properly monitor or oversee the company’s major business activities and compliance programs. On June 19, 2019, the Delaware Supreme Court reversed the Court of Chancery’s dismissal of a derivative suit against key executives and the board of directors of Blue Bell USA, carrying implications for both determinations of director independence and fiduciary duties under Caremark. See Marchand v. Barnhill, 2019 WL 2509617 (Del. June 19, 2019). In its demand futility analysis, the Court held that a combination of a “longstanding business affiliation” and “deep . . . personal ties” cast reasonable doubt on a director’s ability to act impartially. Id. at *2. Notably, the reversal turned on the length and depth of one director’s relationship with the CEO of Blue Bell and his family. Although being “social acquaintances who occasionally have dinner or go to common events” does not per se preclude one’s independence, the current CEO’s father and predecessor had hired, mentored, and quickly promoted the director in question to senior management. Id. at *11. The director maintained a close relationship with the CEO’s family that spanned more than three decades and the family even spearheaded a campaign to name a college building after the director. Id. at *10. This combination of facts persuaded the Court that this director was not independent for demand futility purposes. Id. at *10–11. The Court also held that a board’s failure to implement oversight systems related to a “compliance issue intrinsically critical to the business operation” gives rise to a duty of loyalty claim under Caremark. Id. at *13. The Court concluded that because food safety compliance was critical to the operation of a “single-product food company,” id at *4, neither the Company’s nominal compliance with some applicable regulations, nor management’s discussion of general compliance matters with the board were sufficient to satisfy the board’s oversight responsibilities, id. at *13–14. IV.   Loss Causation Developments The first half of 2019 saw several notable developments regarding loss causation, including continued developments relating to Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014), discussed below in Section VI. Separately, on June 24, 2019, the Supreme Court rejected a petition for a writ of certiorari filed in First Solar, Inc. v. Mineworkers’ Pension Scheme, which we discussed in the 2018 Mid-Year Securities Litigation Update. First Solar involved a perceived ambiguity in prior precedent regarding the correct test for loss causation under the Securities Exchange Act of 1934 (the “Exchange Act”). Readers will recall that the Ninth Circuit held in First Solar that loss causation can be established even when the corrective disclosure did not reveal the alleged fraud on which the securities fraud claim is based. Mineworkers’ Pension Scheme v. First Solar, Inc., 881 F.3d 750, 754 (9th Cir. 2018), cert. denied, No. 18-164, 2019 WL 2570667 (U.S. June 24, 2019). First Solar filed its petition for writ of certiorari in August 2018, arguing that loss causation can be proven only if the market learns of, and reacts to, the underlying fraud. In May 2019, the Solicitor General filed an amicus brief recommending that certiorari be denied, arguing that the Ninth Circuit correctly rejected a “revelation-of-the-fraud” requirement for loss causation, pursuant to which a stock-price drop comes immediately after the revelation of a defendant’s fraud. Following the Ninth Circuit’s decision in First Solar, some courts have found that a plaintiff adequately pleaded loss causation for the purposes of stating a claim under the Exchange Act when the revelation that caused the decline in a company’s stock price could be tracked back to the facts allegedly concealed, thus establishing proximate cause at the pleadings phase. See, e.g., In re Silver Wheaton Corp. Sec. Litig., 2019 WL 1512269, at *14 (C.D. Cal. Mar. 25, 2019) (denying motion to dismiss); Maverick Fund, L.D.C. v. First Solar, Inc., 2018 WL 6181241, at *8–10 (D. Ariz. Nov. 27, 2018) (denying motion to dismiss and finding that plaintiffs had adequately pleaded facts that, if proven, would establish that disclosures related to misstatements were “casually related” to fraudulent scheme). We will continue to monitor these and other developments regarding loss causation. V.   Falsity Of Opinions – Omnicare Update In the first half of 2019, courts continued to define the boundaries of Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015), the case in which the Supreme Court addressed the scope of liability for false opinion statements under Section 11 of the Securities Act. In Omnicare, the Court held that “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong.” Id. at 1327. Under that standard, opinion statements give rise to liability under only three circumstances: (1) when the speaker does not “actually hold[] the stated belief;” (2) when the statement contains false “embedded statements of fact;” and (3) when the omitted facts “conflict with what a reasonable investor would take from the statement itself.” Id. at 1326–27, 1329. Consistent with past years, Omnicare remains a high bar to pleading the falsity of opinion statements. See, e.g, Plaisance v. Schiller, 2019 WL 1205628, at *11 (S.D. Tex. Mar. 14, 2019) (dismissing complaint that was “[m]issing . . . allegations of fact capable of proving that [the company] did not subjectively believe its audit opinions when they were issued”); Teamsters Local 210 Affiliated Pension Tr. Fund v. Neustar, Inc., 2019 WL 693276, at *5 (E.D. Va. Feb. 19, 2019) (finding that plaintiffs did not “allege facts that create a strong inference that at the time they [made the alleged misstatement], the Defendants could not have reasonably held the opinion” proffered). For example, in Neustar, plaintiffs alleged that defendants’ opinion that a certain transition “would occur by September 30, 2018” was false or misleading. 2019 WL 693276, at *5. Even though defendants were in possession of a “Transition Report, which warned that the transition might not occur” by that date, the court found that “[t]hese statements were far from definitive pronouncements that the transition date would occur later than September 2018.” Id. In addition, courts have continued to flesh out the contours of when a plaintiff has alleged that a company is in possession of sufficient information cutting against its statements to render it liable for an omission. In In re Ocular Therapeutix, Inc. Securities Litigation, the court found that a CEO’s statement that the company “think[s]” it had remedied deficiencies leading to the FDA’s denial of its New Drug Application was inactionable, even where the FDA later rejected the resubmitted application. 2019 WL 1950399, at *8 (D. Mass. Apr. 30, 2019). Not only did the CEO’s language “signal[] to investors that his statement was an opinion and not a guarantee,” but he also cautioned that it was up to the FDA to determine whether or not those deficiencies were corrected. Id. In Securities & Exchange Commission v. Rio Tinto plc, the SEC alleged that Rio Tinto violated securities laws by overstating the valuation of its newly acquired coal business when there had been certain adverse developments concerning the ability to transport coal and the quality of coal in the ground. 2019 WL 1244933, at *9 (S.D.N.Y. Mar. 18, 2019). The court dismissed the claim based on early valuation statements because those statements were opinions that “‘fairly align[ed] with’” information known at the time: namely, the main transportation option had not been entirely rejected, and the SEC did not “allege that Rio Tinto had come to fully appreciate the difficulties” concerning other transportation options and coal reserves by the time of those statements. Id. The SEC has moved to amend its complaint. Gibson Dunn represents Rio Tinto in this and other litigation. This year, courts also weighed in on the question of whether Omnicare applies to claims other than those brought under Section 11. Specifically, a Northern District of California court found that “[t]he Ninth Circuit has only extended Omnicare to Section 10(b) and Rule 10b-5 claims, not to Section 14 claims,” and therefore “decline[d] to extend Omnicare past the Ninth Circuit’s guidance.” Golub v. Gigamon Inc., 372 F. Supp. 3d 1033, 1049 (N.D. Cal. 2019) (citing City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 616 (9th Cir. 2017)). Gibson Dunn represents several defendants in that matter. In contrast, the Fourth Circuit applied Omnicare to dismiss a Section 14 claim without any discussion about Omnicare’s limitations, determining that a forward-looking statement was still actionable as an omission. Paradise Wire & Cable Defined Benefit Pension Plan v. Weil, 918 F.3d 312, 322–23 (4th Cir. 2019). Rather, the court emphasized the importance of context when evaluating opinion statements, noting that “words matter” and, as in Paradise Wire, can “render the claim for relief implausible.” Id. at 323. “When the words of a proxy statement, like the ones in this case, . . . contain tailored and specific warnings about the very omissions that are the subject of the allegations, those words render the claim for relief implausible.” Id. Additionally, a District of Delaware court recently declined to apply Omnicare to Section 10(b) claims: “Because the Third Circuit has twice declined to decide that Omnicare applies to Exchange Act claims, the Court is reluctant to decide that issue of first impression in connection with a motion to dismiss.” Lord Abbett Affiliated Fund, Inc. v. Navient Corp., 363 F. Supp. 3d 476, 496 (D. Del. 2019) (citing Jaroslawicz v. M & T Bank Corp., 912 F.3d 96 (3d Cir. 2018); In re Amarin Corp. PLC Sec. Litig., 689 F. App’x 124, 132 n.12 (3d Cir. 2017)). The Southern District of New York also considered whether Omnicare required broad disclosure of attorney-client privileged communications that might bear on whether omitted information rendered an opinion misleading. Pearlstein v. BlackBerry Ltd., 2019 WL 1259382, at *16 (S.D.N.Y. Mar. 19, 2019). In Pearlstein, plaintiffs argued that under Omnicare, a company’s “decision to include a legal opinion in [a] press release waived all attorney-client communications” related to the issuance of that release. Id. at *15. The court noted that Omnicare did not mandate a wholesale waiver, but “[a]t best . . . suggest[ed] that communications specific to a particular subject allegedly omitted or misrepresented within a securities filing may be subject to disclosure and, if the communications happen to be privileged, those communications may be subject to a finding of waiver.” Id. at *16. Accordingly, the company could not insulate itself with the privilege—documents containing relevant factual information were discoverable. However, privilege was not waived over the “side issue” of the company’s legal exposure, including as to documents on the strength and likelihood of any legal claims and “communications conducted solely for purposes of document preservation in connection with anticipated legal claims.” Id. VI.   Courts Continue To Define “Price Impact” Analysis At The Class Certification Stage We are continuing to monitor significant decisions interpreting Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) (“Halliburton II”), but the one federal circuit court of appeal decision issued in the first half of 2019 did little to resolve outstanding questions regarding what it will mean for securities litigants. Recall that in Halliburton II, the Supreme Court preserved the “fraud-on-the-market” presumption, permitting plaintiffs to maintain the common proof of reliance that is required for class certification in a Rule 10b-5 case, but also permitting defendants to rebut the presumption at the class certification stage with evidence that the alleged misrepresentation did not impact the issuer’s stock price. There are three key questions we have been following in the wake of Halliburton II. First, how should courts reconcile the Supreme Court’s explicit ruling in Halliburton II that direct and indirect evidence of price impact must be considered at the class certification stage, Halliburton II, 573 U.S. at 283, with the Supreme Court’s previous decisions holding that plaintiffs need not prove loss causation or materiality until the merits stage? See Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804, 815 (2011); Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 568 U.S. 455 (2013). Second, what standard of proof must defendants meet to rebut the presumption with evidence of no price impact? Third, what evidence is required to successfully rebut the presumption? As noted in our 2018 Year-End Securities Litigation Update, the Second Circuit addressed the first two questions in Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017) (“Barclays”) and Arkansas Teachers Retirement System v. Goldman Sachs Group, Inc., 879 F.3d 474 (2d Cir. 2018) (“Goldman Sachs”). Those decisions remain the most substantive interpretations of Halliburton II. Barclays addressed the standard of proof necessary to rebut the presumption of reliance and held that after a plaintiff establishes the presumption of reliance applies, the defendant bears the burden of persuasion to rebut the presumption by a preponderance of the evidence. This puts the Second Circuit at odds with the Eighth Circuit, which cited Rule 301 of the Federal Rules of Evidence when reversing a trial court’s certification order on price impact grounds, see IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775, 782 (8th Cir. 2016), because Rule 301 assigns only the burden of production—i.e., producing some evidence—to the party seeking to rebut a presumption, but “does not shift the burden of persuasion, which remains on the party who had it originally.” Fed. R. Evid. 301. Nonetheless, that inconsistency was not enough to persuade the Supreme Court to review the Second Circuit’s decision.  Barclays PLC v. Waggoner, 138 S. Ct. 1702 (Mem.) (2018) (denying writ of certiorari). In Goldman Sachs, the Second Circuit vacated the trial court’s ruling certifying a class and remanded the action, directing that price impact evidence must be analyzed prior to certification, even if price impact “touches” on the issue of materiality.  Goldman Sachs, 879 F.3d at 486. On remand, the district court again certified the class. In re Goldman Sachs Grp. Sec. Litig., 2018 WL 3854757, at *1–2 (S.D.N.Y. Aug. 14, 2018). Plaintiffs argued on remand that because the company’s stock price declined following the announcement of three regulatory actions related to the company’s conflicts of interest, previous misstatements about its conflicts had inflated the company’s stock price.  See id. at *2. Defendants’ experts testified that correction of the alleged misstatements could not have caused the stock price drops, both because thirty-six similar announcements had not impacted the company’s stock price and because alternative news (i.e., news of regulatory investigations), in fact, caused the price drop. Id. at *3. The court found the plaintiffs’ expert’s “link between the news of [the company]’s conflicts and the subsequent stock price declines . . . sufficient,” and defendants’ expert testimony insufficient to “sever” that link. Id. at *4–6. In January, however, the Second Circuit agreed to review Goldman Sachs for a second time.  See Order, Ark. Teachers Ret. Sys. v. Goldman Sachs, Case No. 18-3667 (2d Cir. Jan. 31, 2019) (“Goldman Sachs II”). In Goldman Sachs II, the Second Circuit is poised to address what evidence is sufficient to rebut the presumption and how the analysis is affected by plaintiffs’ assertion that the alleged misstatements’ price impact is evidenced not by a price increase when the alleged misstatement is made, but by a price drop when the alleged misstatements are corrected, known as “price maintenance theory.” Defendants-appellants challenged the district court’s finding in two primary ways. First, they argued that the district court impermissibly extended price maintenance theory. See Brief for Defendants-Appellants, Goldman Sachs II, at 28–52 (2d Cir. Feb. 15, 2019). They reasoned that a price maintenance theory is unsupportable where the alleged corrective disclosures revealed no concrete financial or operational information that had been hidden from the market for the purpose of maintaining the stock price, see id. at 28–40, and where the challenged statements are too general to have induced reliance (and thus impacted the stock’s price), see id. at 40–50. Second, defendants-appellants argued that the district court misapplied the preponderance of the evidence standard by considering plaintiffs-appellees’ allegations as evidence and misconstruing defendants-appellants’ evidence of no price impact. See id. at 53–67. Plaintiffs-appellees responded that defendants-appellants’ price-maintenance arguments are not supported by law and that such arguments regarding the general nature of the statements are, in essence, a materiality challenge in disguise and thus not appropriate at the class certification stage. Brief for Plaintiffs-Appellees, Goldman Sachs II, at 20–30 (2d Cir. Feb. Apr. 19, 2019). Plaintiffs-appellees further argued that the district court did not abuse its discretion in weighing the evidence. Id. at 36–61. Defendants-appellants submitted their reply brief in May, Reply Brief for Defendants-Appellants, Goldman Sachs II (2d Cir. May 3, 2019), and the Second Circuit heard the case in June. Seven amicus briefs were filed in this case, including by the United States Chamber of Commerce and a number of securities law experts supporting defendants-appellants, and by the National Conference on Public Employee Retirement Systems supporting plaintiffs-appellees. Our 2018 Year-End Securities Litigation Update also noted that the Third Circuit was poised to address price impact analysis in Li v. Aeterna Zentaris, Inc. in the coming months. Briefing there invited the Third Circuit to clarify the type of evidence defendants must present, including the burden of proof they must meet, to rebut the presumption of reliance at the class certification stage and whether statistical evidence regarding price impact must meet a 95% confidence threshold. The district court had rejected defendants’ argument that plaintiff’s event study rebutted the presumption, and criticized defendants for not offering their own event study. See Li v. Aeterna Zentaris, Inc., 324 F.R.D. 331, 345 (D.N.J. 2018). With limited analysis, the Third Circuit affirmed, finding that the district court did not abuse its discretion in its consideration of conflicting expert testimony. Vizirgianakis v. Aeterna Zentaris, Inc., 2019 WL 2305491, at *2–3 (3d Cir. May 30, 2019). We will continue to monitor developments in Goldman Sachs II and other cases. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Jefferson Bell, Monica Loseman, Brian Lutz, Mark Perry, Shireen Barday, Lissa Percopo, Lindsey Young, Mark Mixon, Emily Riff, Jason Hilborn, Andrew Bernstein, Alisha Siqueira, Kaylie Springer, and Collin James Vierra. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following members of the Securities Litigation practice group steering committee: Brian M. Lutz – Co-Chair, San Francisco/New York (+1 415-393-8379/+1 212-351-3881, blutz@gibsondunn.com) Robert F. Serio – Co-Chair, New York (+1 212-351-3917, rserio@gibsondunn.com) Meryl L. Young – Co-Chair, Orange County (+1 949-451-4229, myoung@gibsondunn.com) Jefferson Bell – New York (+1 212-351-2395, jbell@gibsondunn.com) Jennifer L. Conn – New York (+1 212-351-4086, jconn@gibsondunn.com) Thad A. Davis – San Francisco (+1 415-393-8251, tadavis@gibsondunn.com) Ethan Dettmer – San Francisco (+1 415-393-8292, edettmer@gibsondunn.com) Barry R. Goldsmith – New York (+1 212-351-2440, bgoldsmith@gibsondunn.com) Mark A. Kirsch – New York (+1 212-351-2662, mkirsch@gibsondunn.com) Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com) Monica K. Loseman – Denver (+1 303-298-5784, mloseman@gibsondunn.com) Jason J. Mendro – Washington, D.C. (+1 202-887-3726, jmendro@gibsondunn.com) Alex Mircheff – Los Angeles (+1 213-229-7307, amircheff@gibsondunn.com) Robert C. Walters – Dallas (+1 214-698-3114, rwalters@gibsondunn.com) Aric H. Wu – New York (+1 212-351-3820, awu@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 15, 2019 |
Gibson Dunn Lawyers Recognized in the Best Lawyers in America® 2020

The Best Lawyers in America® 2020 has recognized 158 Gibson Dunn attorneys in 54 practice areas. Additionally, 48 lawyers were recognized in Best Lawyers International in Belgium, Brazil, France, Germany, Singapore, United Arab Emirates and United Kingdom.

August 13, 2019 |
Delaware Bankruptcy Court Rules That Liquidation Trustee Controls the Privilege of Board of Directors’ Special Committee

Click for PDF A Delaware bankruptcy court has held that a special committee’s advisors cannot withhold privileged documents from a liquidation trustee appointed pursuant to a chapter 11 plan. This decision serves as an important reminder that a bankruptcy trustee, including a trustee appointed to manage a liquidating trust established pursuant to a chapter 11 plan, may have exclusive control over a company’s privilege and that executives, board members, and their advisors may be unable to withhold documents from the trustee. Importantly, this decision highlights that even a company’s establishment of a special, independent committee with its own advisors may not be effective in shielding otherwise privileged communications from disclosure. I. Background In In re Old BPSUSH Inc.,[1] a company’s board of directors formed an audit committee (the “Audit Committee”), which investigated questions surrounding senior management’s financial reporting. The Audit Committee retained separate legal counsel, and its legal counsel retained financial advisors.[2] The Audit Committee’s advisors reviewed millions of documents, conducted multiple interviews, and generated a substantial amount of work product.[3] The company subsequently filed bankruptcy.[4] In bankruptcy, the company confirmed a chapter 11 plan that created a liquidation trust and vested the trust with all of the company’s “rights, titles, and interests in any Privileges,” which the plan defined to include “any privilege or immunity” of the company.[5] After the chapter 11 plan was confirmed and a trust was established, the liquidation trustee filed a motion to compel the Audit Committee’s legal and financial advisors to turn over all records related to the investigation.[6] The Audit Committee’s advisors objected to the trustee’s motion, arguing that the Audit Committee “was organized as an independent body, created and governed by a separate charter, with the right and power to engage independent counsel with separate attorney-client privileges and other protections”; therefore, the advisors argued that the liquidation trustee did not acquire the Audit Committee’s privileges.[7] Accordingly, the advisors withheld attorney notes of employee interviews, draft memoranda, the financial advisors’ internal analytics and work papers, and communications/emails with Audit Committee members.[8] II. Bankruptcy Court’s Analysis The Delaware bankruptcy court began its analysis by recognizing the longstanding principle established by the Supreme Court in Commodity Futures Trading Commission v. Weintraub, which held that a “trustee of a corporation in bankruptcy has the power to waive the corporation’s attorney-client privilege with respect to prebankruptcy communications.”[9] The Audit Committee’s advisors attempted to distinguish Weintraub, relying primarily on a Southern District of New York decision in In re BCE West, L.P. In BCE West, the court held, under similar circumstances, that a trustee appointed pursuant to a chapter 11 plan could not access privileged documents held by the advisors of a special committee appointed by the company’s board of directors.[10] The BCE West court reasoned that “[i]t is counterintuitive to think that while the Board permitted the Special Committee to retain its own counsel, the Special Committee would not have the benefit of the attorney-client privilege inherent in that relationship or that the Board of Directors or management, instead of the Special Committee, would have control of such privilege.”[11] Accordingly, the BCE West court determined that the special committee was a “separate and distinct group” from the remainder of the board of directors and that the trustee did not control the privilege.”[12] The Delaware bankruptcy court disagreed with BCE West and instead followed a subsequent Southern District of New York case, Krys v. Paul, Weiss, Rifkind, Wharton, & Garrison LLP (In re China Medical Technologies), which addressed a similar situation and refused to follow BCE West.[13] In China Medical, the court considered whether a foreign representative in a chapter 15 bankruptcy could obtain documents related to an internal investigation conducted by the foreign debtor’s audit committee.[14] The court first determined that an audit committee is not completely separate from the board of directors; rather, it is a committee of the board and a “critical component of [the company’s] management infrastructure.”[15] The court also discussed the policy considerations in Weintraub and that “corporate management is deposed in favor of the trustee, and there is no longer a need to insulate committee-counsel communications from managerial intrusion.”[16] Based on these considerations, the China Medical court rejected BCE West and held that the foreign representative controlled the audit committee’s privilege. The Delaware bankruptcy court agreed with the China Medical court’s reasoning that “it is appropriate to extend the Supreme Court’s analysis in Weintraub and recognize that the trustee appointed as the representative of a corporate debtor controls the privileges belonging to the independent committee established by the corporate debtor.”[17] Accordingly, the court held that the liquidation trustee controlled the Audit Committee’s privileges and that its advisors were required to turn over all documents, communications, and work product, including any “draft factual memoranda and draft legal memoranda,” but excluding the legal advisor’s “firm documents intended for internal law office review and use.”[18] III. Implications of Decision It remains to be seen whether other courts will likewise reject BCE West and instead follow China Medical and Old BPSUSH. Although there does not appear to be much case law specifically addressing the issue, China Medical and Old BPSUSH serve as a warning that a special committee’s documents and communications may very well be discoverable by a trustee (including a trustee of a liquidating trust created pursuant to a chapter 11 plan) and/or company representative in bankruptcy. Therefore, members of a company’s board of directors, special committee, management, and all outside advisors should assume that any communications and work product will be discoverable by and subject to the exclusive control of a trustee if the company ultimately files for bankruptcy. More broadly, Old BPSUSH serves as a reminder, particularly to companies in financial distress, that communications assumed by the parties to be protected by privilege may ultimately be discoverable by a bankruptcy trustee. ______________________    [1]   In re Old BPSUSH Inc., 2019 WL 2563442, at *1 (Bankr. D. Del. June 20, 2019).    [2]   Id.    [3]   Id.    [4]   Id.    [5]   Id. at *4.    [6]   Id. at *1.    [7]   Id. at *2.    [8]   Id. at *8.    [9]   Id. at *4 (quoting Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 358 (1985)). [10]   In re BCE W., L.P., 2000 WL 1239117, at *3 (S.D.N.Y. Aug. 31, 2000). [11]   Id. at *2. [12]   Id. [13]   See Krys v. Paul, Weiss, Rifkind, Wharton, & Garrison LLP (In re China Med. Techs.), 539 B.R. 643, 654-55 (S.D.N.Y. 2015). [14]   Id. at 646. [15]   Id. at 655. [16]   Id. at 656. [17]   In re Old BPSUSH Inc., 2019 WL 2563442, at *6. [18]   Id. at *7. The court recognized that an exception applies to “documents intended for internal law office review and use” because lawyers must “be able to set down their thoughts privately in order to assure effective and appropriate representation,” and such documents “are unlikely to be of any significant usefulness to the client or to a successor attorney.” Id. (quoting Sage Realty Corp. v. Proskauer Rose Goetz & Mendelsohn, L.L.P., 91 N.Y.2d 30, 37-38 (1997)). Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Business Restructuring and Reorganization or Securities Regulation and Corporate Governance practice groups, or the following authors: Michael A. Rosenthal – New York (+1 212-351-3969, mrosenthal@gibsondunn.com) Robert B. Little – Dallas (+1 214-698-3260, rlittle@gibsondunn.com) Matthew G. Bouslog – Orange County, CA (+1 949-451-4030, mbouslog@gibsondunn.com) Please also feel free to contact the following practice group leaders: Business Restructuring and Reorganization Group: David M. Feldman – New York (+1 212-351-2366, dfeldman@gibsondunn.com) Robert A. Klyman – Los Angeles (+1 213-229-7562, rklyman@gibsondunn.com) Jeffrey C. Krause – Los Angeles (+1 213-229-7995, jkrause@gibsondunn.com) Michael A. Rosenthal – New York (+1 212-351-3969, mrosenthal@gibsondunn.com) Securities Regulation and Corporate Governance Group: Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) James J. Moloney – Orange County, CA (+1 949-451-4343, jmoloney@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 29, 2019 |
Delaware Supreme Court Revisits Oversight Liability

Click for PDF In a recent decision applying the famous Caremark doctrine, the Delaware Supreme Court confirmed several important legal principles that we expect will play a central role in the future of derivative litigation and that serve as important reminders for boards of directors in performing their oversight responsibilities.  In particular, the Delaware Supreme Court held that a claim for breach of the duty of loyalty is stated where the allegations plead that “a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company’s business operation.”[1] Although the case addressed extreme facts that will have no application to most mature corporations, the plaintiffs’ bar can be expected to attempt to weaponize the decision.  With all the benefits that hindsight provides, derivative plaintiffs will more frequently contend that a board lacked procedures to monitor “central compliance risks” that were “essential and mission critical.”[2]  The Supreme Court’s decision reinforces that directors need to implement controls that enable them to monitor the most serious sources of risk, and may even caution in favor of a special discussion each year around critical risks. The Decision Marchand involved problems at Blue Bell Creameries USA, Inc., “a monoline company that makes a single product—ice cream.”[3] After several years of food-safety issues known by management, the company suffered a listeria outbreak. This outbreak led to a product recall, a complete operational shutdown, the layoff of one-third of employees, and three deaths.[4] The operational shutdown, in turn, caused the company to accept a dilutive investment to meet its liquidity needs.[5] After obtaining books and records, a stockholder sued derivatively alleging breach of fiduciary duties under Caremark.[6] That theory requires sufficiently pleading that “the directors utterly failed to implement any reporting or information system or controls” or “having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of the risks or problems requiring their attention.”[7] The plaintiff, though, chose not to make a demand on the board before suing on behalf of the company, so he was subject to the burden of pleading that making a demand would have been futile. In an effort to do so, he tried to allege that a majority of the board was not independent because it could not act impartially in considering a demand and that the directors also faced liability under Caremark. The Delaware Court of Chancery rejected both arguments, holding that the plaintiff came up one director short on his independence theory and that the plaintiff failed to plead liability under Caremark.[8] The Delaware Supreme Court reversed both holdings.[9] On independence, Chief Justice Strine continued his instruction from Delaware County Employees Retirement Fund v. Sanchez, 124 A.3d 1017 (Del. 2015) and Sandys v. Pincus, 152 A.3d 124 (Del. 2016) that Delaware law “cannot ignore the social nature of humans or that they are motivated by things other than money, such as love, friendship, and collegiality.”[10] “[D]eep and long-standing friendships are meaningful to human beings,” the Chief Justice reasoned, and “any realistic consideration of the question of independence must give weight to these important relationships and their natural effect on the ability of parties to act impartially towards each other.”[11] The director at issue, although recently retired from his role as CFO at the company, owed his “successful career” of 28 years at the company to the family of the CEO whom the director would be asked to sue.[12] And that family “spearheaded” an effort to donate to a local college that resulted in the college naming a new facility after the director.[13] These facts “support[ed] a pleading-stage inference” that the director could not act independently.[14] This was so despite the director’s previously voting against the CEO on whether to split the company’s CEO and Chairman position. Although the Court of Chancery reasoned that this militated against holding that the director was not independent, the Delaware Supreme Court held it was irrelevant to the demand futility analysis.[15] Voting to sue someone, the Supreme Court explained, is “materially different” than voting on corporate-governance issues.[16] The Supreme Court thus held that the number of directors incapable of acting impartially was sufficient to excuse demand. On Caremark liability, the Court focused on the first prong of the Caremark test: whether the board had made any effort to implement a reporting system. It explained that a director “must make a good faith effort” to oversee the company’s operations. “Fail[ing] to make that effort constitutes a breach of the duty of loyalty”[17] and can expose a director to liability. To meet this standard, the board must “try”[18] “to put in place a reasonable system of monitoring and reporting about the corporation’s central compliance risks.”[19] For Blue Bell, food safety was “essential and mission critical”[20] and “the obviously most central consumer safety and legal compliance issue facing the company.”[21] Despite its importance, the complaint contained sufficient facts to infer that no system of board-level compliance monitoring and reporting over food safety existed at the company. For example: “no board committee that addressed food safety existed”; “no regular process or protocols that required management to keep the board apprised of food safety compliance practices, risks, or reports existed”; “no schedule for the board to consider on a regular basis, such as quarterly or biannually, any key food safety risks existed”; “during a key period leading up to the deaths of three customers, management received reports that contained what could be considered red, or at least yellow, flags, and the board minutes of the relevant period revealed no evidence that these were disclosed to the board”; “the board was given certain favorable information about food safety by management, but was not given important reports that presented a much different picture”; and “the board meetings [we]re devoid of any suggestion that there was any regular discussion of food safety issues.”[22] These shortcomings convinced the Delaware Supreme Court that the plaintiff had pleaded sufficient allegations that Blue Bell’s “board ha[d] undertaken no efforts to make sure it [wa]s informed of a compliance issue intrinsically critical to the company’s business operation.” Id. at 33. So the Court could infer that the board “ha[d] not made the good faith effort that Caremark requires.”[23] That management “regularly reported” to the board on “operational issues” was insufficient to demonstrate that the board had made a good faith effort to put in place a reasonable system of monitoring and reporting about Blue Bell’s central compliance risks.[24] So, too, was “the fact that Blue Bell nominally complied with FDA regulations.”[25] Neither of these facts showed that “the board implemented a system to monitor food safety at the board level.”[26] In light of these facts, the Supreme Court held that the plaintiff met his “onerous pleading burden” and was entitled to discovery to prove out his Caremark claim.[27] Key Takeaways Independence: Close Personal Ties Increase Litigation Risk Directors should be aware that the greater the level of close personal or business relationships amongst themselves, management, and even each other’s families, the greater risk they face of being held incapable of exercising their business judgment in a demand futility analysis, even in circumstances where they have plainly demonstrated independent or dissenting judgment on corporate-governance matters. Caremark Increased Litigation Risk over Compliance Efforts Derivative Litigation. Although Caremark claims will remain “the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,”[28] we expect an increase in attempted derivative litigation over a purported lack of board-level monitoring systems for specific risks as plaintiffs try to shoehorn as many standard business and non-business risks as possible into Marchand’s “essential and mission critical” risk category. Whereas to date many Caremark claims have focused on the second prong of the standard—alleging that a board consciously failed to monitor or oversee the operation of its reporting system or controls and by ignoring red flags disabled themselves from being informed of risks or problems requiring their attention—Marchand likely will focus plaintiffs on the first prong: whether in particular areas a board failed to implement any reporting or information system or controls. The plaintiffs’ bar is bound to focus on the full array of corporate risks, including many that are not correctly characterized as “central compliance risks” for most companies. These areas could range from risks disclosed in the company’s SEC filings to cultural issues, like harassment or bullying, and more broader environmental, social, and governance (“ESG”) issues. Books and Records Litigation. Similarly, we expect a rise in Section 220 books and records demands seeking to investigate a board’s specific oversight of central compliance risks. Assessing Central Compliance Risks Marchand does not change the core principle that a company’s board of directors is responsible for seeing that the company has systems in place to provide the board with information that is sufficient to allow directors to perform their oversight responsibilities. This includes information about major risks facing the company. The Delaware Supreme Court emphasized in Marchand that these systems can be “context- and industry-specific approaches tailored to . . . companies’ business and resources.”[29] Accordingly, boards have wide latitude in designing systems that work for them. In light of this, boards should be comfortable that they understand the “central compliance risks” facing their companies. They should satisfy themselves that they are receiving, on an appropriate schedule, reports from management and elsewhere on these central risks and what management is doing to manage those risks. In recent years, many boards have devoted significant time to thinking about how best to allocate responsibility for risk oversight at the board level. Boards should be comfortable that there is adequate coverage, among the full board and its committees, of the major compliance and other risks facing the corporation, and that the full board is receiving appropriate reports from responsible committees, as well as from management. They also should periodically evaluate the most effective methods for monitoring “essential and mission critical” risk to their companies, even where these risks do not relate directly to operational issues, and whether the current committee structure, charters, and meeting schedules are appropriate. These efforts, reports, and discussions should be documented. Boards should establish systems so that management provides them with an adequate picture of compliance risks. In Marchand, although management received many reports about food-safety issues, “this information never made its way to the board.”[30] Boards should remain mindful of the second prong in Caremark by overseeing the company’s response when they are informed of risks or problems requiring their attention. When reporting systems or other developments demonstrate that risks are becoming manifest, directors should assess whether a need exists to implement a heightened system of monitoring, such as setting additional meetings and requiring additional reports from management about the steps the company is taking to address the risk. Boards should hesitate to leave the response entirely to management. Documenting the Board’s Work Minutes of board meetings, and board materials, should not just reflect the “good news.” Instead, they should demonstrate that the board received appropriate information about issues and challenges facing the company, and that the board spent time discussing those issues and challenges. The goal should be to create a balanced record demonstrating diligent oversight by the board, while recognizing that those minutes could be produced in litigation. ________________________    [1]   Marchand v. Barnhill, No. 533, 2018, slip op. at 33 (Del. June 18, 2019).    [2]   Id. at 36.    [3]   Id. at 5.    [4]   Id. at 1.    [5]   Id.    [6]   Id. at 19.    [7]   Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).    [8]   Marchand, No. 533, 2018, slip op. at 20-23.    [9]   Id. at 3. [10]   Id. at 25. [11]   Id. at 28. [12]   Id. at 26. [13]   Id. [14]   Id. at 29. [15]   Id. at 27. [16]   Id. [17]   Id. at 37. [18]   Id. at 30. [19]   Id. at 36 (emphasis added). [20]   Id. [21]   Id. at 37. [22]   Id. at 32-33. [23]   Id. [24]   Id. at 35-36. [25]   Id. at 34. [26]   Id. [27]   Id. at 37. [28]   Stone v. Ritter, 911 A.2d 362, 372 (Del. 2006). [29]   Marchand, No. 533, 2018, slip op. at 30. [30]   Id. at 12. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Securities Litigation or Securities Regulation and Corporate Governance practice groups, or the authors in Washington, D.C.: Securities Litigation Group: Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Jason J. Mendro (+1 202-887-3726, jmendro@gibsondunn.com) Jason H. Hilborn (+1 202-955-8276, jhilborn@gibsondunn.com) Securities Regulation and Corporate Governance Group: Elizabeth Ising (+1 202-955-8287, eising@gibsondunn.com) Ronald O. Mueller (+1 202-955-8671, rmueller@gibsondunn.com) Gillian McPhee (+1 202-955-8201, gmcphee@gibsondunn.com) Please also feel free to contact any of the following leaders of the Securities Litigation group: Brian M. Lutz – Co-Chair, San Francisco/New York (+1 415-393-8379/+1 212-351-3881, blutz@gibsondunn.com) Robert F. Serio – Co-Chair, New York (+1 212-351-3917, rserio@gibsondunn.com) Meryl L. Young – Co-Chair, Orange County (+1 949-451-4229, myoung@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 18, 2019 |
2019 Mid-Year Securities Enforcement Update

Click for PDF I.  Introduction: Themes and Notable Developments A.  Continued Focus on Protection of Main Street Investors The first half of 2019 has seen a continuation of the Commission’s emphasis on protecting the interests of Main Street investors. Chairman Clayton reiterated these themes in his testimony in May before the Financial Services and General Government Subcommittee of the U.S. Senate Committee on Appropriations.[1] In addition to the no less than 43 references to Main Street investors, the Chairman’s testimony highlighted: (1) the Retail Strategy Task Force, formed in 2017, to use data-driven strategies to generate leads for investigation of industry practices that could harm retail investors, as well as (2) the mutual fund share class initiative as an example of returning funds to retail investors through a program to incentivize self-reporting and cooperation. To be sure, the Commission brought a number of enforcement actions focusing on various offering frauds, often with themes related to some form of cryptocurrency or digital asset.[2] The Chairman also noted in his Congressional testimony that the Commission’s FY 2020 budget request contemplates adding add six positions to the Commission’s investigations of conduct affecting Main Street investors. On June 5, 2019, the SEC adopted a set of rules intended to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers.[3] The new “Regulation Best Interest” requires broker-dealers to act in the best interest of a customer when making recommendations for securities transactions or investment strategies to a retail consumer. This means broker-dealers may not place the financial or other interests of the broker-dealer ahead of the customer. In order to satisfy the fiduciary obligations required by Regulation Best Interest, broker-dealers must: (1) make certain disclosures regarding any conflicts of interest; (2) exercise reasonable diligence, care, and skill in making recommendations; (3) maintain policies and procedures designed to address conflicts of interest; and (4) maintain policies designed to achieve compliance with the regulation.[4] Regulation Best Interest takes effect on September 10, 2019. Firms will have until June 30, 2020 to comply with the regulation. B.  Full Commission and other Senior Staffing Updates During the first six months of this year, there were a number of leadership changes, several of which reflect the advancement of lawyers with many years of experience in the Division of Enforcement to positions of senior leadership. On June 20, the U.S. Senate confirmed Allison Lee to serve as the fifth Commissioner with a term ending in 2022. Commissioner Lee was sworn in on July 8, bringing the Commission back to its full complement of Commissioners. Commissioner Lee replaces prior Democratic Commissioner Kara Stein. Commissioner Lee previously served at the Commission for over a decade, including as counsel to Commissioner Stein, as well as a Senior Counsel in the Complex Financial Instruments Unit of the Division of Enforcement. How long the full Commission will last is uncertain as there have been reports that Commissioner Robert Jackson, the only other Democratic Commissioner, may be stepping down in the near future to return to teaching and NYU Law School. Commissioner Jackson has not commented on his plans. Other changes in the senior staffing of the Commission include: In June, David Peavler was appointed Director of the Fort Worth Regional Office. Mr. Peavler rejoined the SEC after serving two years as the General Counsel of HD Vest Inc. He previously worked for 15 years in the Division of Enforcement in the SEC’s Fort Worth Regional Office. In May, Erin Schneider was appointed Director of the San Francisco Regional Office. Ms. Schneider joined the Commission in 2005 as a Staff Attorney in the Division of Enforcement in the San Francisco Office, became an Assistant Director in the Asset Management Unit in 2012 and an Associate Director in the San Francisco Office in 2015. Also in May, Adam Aderton was appointed Co-Chief of the Asset Management Unit of the Division of Enforcement. Mr. Aderton joined the Commission as a staff attorney in the Division of Enforcement in 2008, joined the Asset Management Unit in 2010, and became an assistant Director of the Unit in 2013. More broadly, until recently, the Commission had been subject to a hiring freeze which led to an approximately 10% decline in staffing both in the Enforcement Division and the Commission overall. Under its FY 2019 budget, the Commission has been able to resume some hiring, but not sufficient to restore staffing levels to their prior levels. Accordingly, the Enforcement Division will continue to endeavor to accomplish more with less for the foreseeable future. C.  Change to Commission Practice on Consideration of Settlement Offers with Waiver Requests On July 3, Chairman Jay Clayton announced a change in the process by which the Commission will consider settlement offers from prospective defendants who are also seeking a waiver from a regulatory disqualification that would be triggered by the settlement.[5]  In effect, the new policy actually restores Commission practice to what it had been historically, prior to a change under the last administration, and represents a much-needed, common sense improvement to the Commission’s settlement process. The issue arises when negotiating a settlement that triggers a regulatory disqualification.  The client can request a waiver from the disqualification.  However, the last administration had revoked the authority previously delegated to the regulatory divisions to decide waivers and required a party to make an unconditional offer of settlement without assurance as to whether the Commission would grant the waiver.  This meant that a party could be bound to a settlement that triggered a disqualification without assurance of receiving a waiver.  In some cases, the risk was significant. Under the new policy, the Commission will still be the decision-maker on waivers, but will consider the settlement offer and waiver request simultaneously and as a single recommendation.  Most important, if the Commission approves the settlement offer, but not the waiver, the party could withdraw the settlement offer and will not be bound by the offer. As the Chairman’s statement explains: … an offer of settlement that includes a simultaneous waiver request negotiated with all relevant divisions . . . will be presented to, and considered by, the Commission as a single recommendation from the staff. . . . [I]n a matter where a simultaneous settlement offer and waiver request are made and the settlement offer is accepted but the waiver request is not approved in whole or in part, the prospective defendant would need to promptly notify the staff (typically within a matter of five business days) of its agreement to move forward with that portion of the settlement offer that the Commission accepted. In the event a prospective defendant does not promptly notify the staff that it agrees to move forward with that portion of the settlement offer that was accepted (or the defendant otherwise withdraws its offer of settlement), the negotiated settlement terms that would have resolved the underlying enforcement action may no longer be available and a litigated proceeding may follow. In sum, under the new procedure, parties will simply receive the same benefit as any settling party – certainty, finality and the clarity of knowing the full consequences of their offer to settle. D.  Whistleblower Awards Continue The Commission continued to issue significant awards to whistleblowers for providing information that led to financial recoveries in enforcement actions. As of June 2019, the SEC has awarded over $384 million to 64 whistleblowers since the program began in 2012.[6] In March, the Commission announced a pair of awards totaling $50 million to two whistleblowers (one for $37 million and another for $13 million).[7] The $37 million award was the Commission’s third highest award. One of the awards was notable because the Commission finding in its order that the claimant had “unreasonably delayed in reporting the information to the commission,” and had “passively financially benefitted from the underlying misconduct during a portion of the period of delay.”[8] In May, for the first time, the SEC issued an award under a provision of the whistleblower rules which permits claims by whistleblowers who first report a tip to a company if the whistleblower also reports the same tip to the SEC within 120 days.[9] In this case, the whistleblower sent an anonymous tip to the company, as well as to the SEC. The whistleblower’s report triggered an internal investigation by the company, which resulted in the company reporting its findings to the SEC, resulting in an SEC investigation and action. In calculating the award, the SEC credited the whistleblower “for the company’s internal investigation, because the allegations were reported to the Commission within 120 days of the report to the company.” The whistleblower was awarded more than $4.5 million. In June, the SEC announced an award of $3 million to whistleblowers for a tip that led to the successful enforcement action related to “an alleged securities law violation that impacted retail investors.”[10] The key takeaway from these awards is that they provide powerful financial incentives to would be whistleblowers to report suspicions of misconduct – real or perceived – to the Commission staff. The financial incentives and anti-retaliation protections for whistleblowers put a premium on companies implementing a rigorous, proactive and documented response to internal complaints to protect against second-guessing by regulators and prosecutors. Last year, in Digital Realty Trust v. Somers, the Supreme Court held that Dodd-Frank’s anti-retaliation measures protect only whistleblowers who report their concerns to the SEC and not those who only report internally.[11] In response to the Supreme Court’s decision, on May 8, 2019, the House Committee on Financial Services passed the Whistleblower Protection Reform Act of 2019, H.R. 2515, which would extend the anti-retaliation protections in Dodd-Frank to whistleblowers who report alleged misconduct to a superior.[12] E.  Notable Litigation Developments There were a number of litigation developments of note during the first half of this year. In Lorenzo v. SEC, the Supreme Court held that an individual who is not a “maker” of a misstatement may nonetheless be held primarily liable under Rule 10b-5(a) and (c) for knowingly “disseminating” a misstatement made by another person.[13]  The decision refines the Court’s 2011 decision in Janus v. First Derivative Traders, in which the Court held that liability under Rule 10b-5(b) for a misstatement only extent to the “maker” of a statement which is the “person or entity with ultimate authority over the statement.” The impact of the Lorenzo decision for Commission enforcement actions may be more academic than practical because the Commission has the ability to bring actions for secondary liability for aiding and abetting or causing a violation by another party.  Nevertheless, Commissioner Hester Peirce has cautioned against the Commission’s use of Lorenzo to expand so-called “scheme” liability beyond the bounds of secondary liability.[14]  The practical import of the decision for private civil litigation may be more significant, since, in the absence of secondary liability, private plaintiffs may be able to craft broader allegations of primary liability against defendants based on their participation in a “device, scheme, or artifice to defraud” under Rule 10b-5(a) or an “act, practice or course of business” that “operates … as a fraud or deceit” under Rule 10b-5(c). In Robare Group, Ltd. v. SEC, the U.S. Court of Appeals for the D.C. held that a “willful” violation of Section 207 of the Investment Advisers Act of 1940 requires more than proof of mere negligence, even though negligence may be sufficient to establish a violation under Section 206(2) of the Advisers Act.  The decision represents a change from the holding in a 2000 decision by the same court in Wonsover v. SEC, which held that “willfully” means “intentionally committed the act with constitutes the violation” but does not require that “the actor…be aware that he is violating” the law.  In Robare, the court clarified that the willfulness standard could not be met by proof of merely negligent conduct. Historically, in cases in which parties settle to Commission orders finding willful violations, the settled order often contained a footnote articulating the Wonsover standard of willfulness.  Notably, despite the decision in Robare, the Commission has continued to use the Wonsover formulation.[15]  In the long term, the Commission will likely seek to reconcile the Robare and Wonsover decisions.  In the near term, the Robare decision potentially provides prospective defendants with additional arguments to oppose alleged violations of statutory provisions that require proof of willfulness, and as a consequence, to avoid forms of relief that turn on findings of willful violations. Finally, over the years, the Commission been continually challenged to conduct investigations and either resolve or commence actions in a timely manner.  In addition, all investigative and prosecutorial agencies have been subject to criticism at various times for “piling on” with seemingly duplicative investigations and enforcement actions in high profile matters.  This year, the Commission’s late arrival to an already crowded regulatory party has become the subject of an unusually pointed judicial inquiry in the Commission’s litigation against Volkswagen.  The Commission filed the action in March 2019, years after the company had already resolved actions by other federal and state governments as well as private civil actions.  In a quote that will likely resonate for some time to come, the court questioned the Commission’s delay in bringing the action and reminded counsel that “the symbol of the SEC is the symbol … of the eagle, not a carrion hawk that simply descends when everything is all over and sees what it can get from the defendant.”  In an unusual step, the court order the Commission to file a declaration stating when the Commission learned of the facts alleged in each paragraph of the 69-page complaint.  On July 8, the Commission filed its submission which seeks to explain the various challenges the Commission faced in its investigation, including delays in obtaining evidence from abroad, that led to the timing of the agency’s action.  Regardless of the outcome of this particular case, perhaps the court’s commentary will lead investigative agencies to undertake a more thoughtful approach to the need to add to multi-agency investigations. F.  Legislative Response to Supreme Court’s Kokesh Decision In 2018, in Kokesh v. SEC, the Supreme Court held that a 5-year statute of limitations applies to the Commission’s ability to recover disgorgement of ill-gotten gains from defendants.  In a footnote to the unanimous decision, the Court somewhat cryptically suggested that the Commission’s authority to obtain disgorgement may not be entirely without question.  In particular the Court stated that the decision was limited to the applicability of the statute of limitations, and not reaching the issue of “whether courts possess authority to order disgorgement in SEC enforcement proceedings….”  In its 2018 annual report, the Enforcement Division estimated the Kokesh decision may cause the Commission may forego up to $900 million in disgorgement claims. The issue of the SEC’s ability to obtain disgorgement is a question that continues to play out in lower courts.  Thus far, the Second Circuit and district courts within the Second Circuit have upheld disgorgement awards post-Kokesh, finding disgorgement to be a proper equitable remedy.[16]  The meaning of Kokesh is also being hashed out in cases involving regulators other than the SEC, such as the CFTC.  For example, in a case from May of this year, a district court found that, contrary to the defendants’ reading of Kokesh, the amount of disgorgement to be paid to the CFTC did not need to be reduced based on costs incurred by the defendants in the commission of their violations.[17] In March of this year, Senators Mark Warner (D-Va) and John Kennedy (R-La) introduced a bipartisan bill designed to address the concerns sounded by the Commission in the wake of Kokesh.  Titled the Securities Fraud and Investor Compensation Act, the bill would provide explicit statutory authority for the Commission to obtain disgorgement for gains actually received or obtained by a defendant, subject to a 5-year statute of limitations.  Of potentially greater consequence, however, the bill would also authorize the Commission to obtain restitution of losses sustained by investors caused by defendants in the securities industry, such as broker-dealers and investment advisers, and create a 10-year statute of limitations for equitable relief, including restitution, injunctions, bars and suspensions. Historically, the Commission has not sought to advance an argument for restitution in court.  It is not uncommon for the financial benefit to a defendant to be far less that the alleged harm incurred by an arguable class of victims.  Consequently, for many defendants, the risk of restitution could represent a substantial increase in the potential exposure created by an enforcement action.  As of this writing, the bill has not advanced. G.  Litigation Challenge to the “Neither-Admit-Nor-Deny” Settlement The “neither admit nor deny” settlement has long been a staple of the Commission’s enforcement program.  Specifically, prospective defendants typically settle enforcement actions by consenting to either issuance of a Commission order containing findings, or the entry of a civil judgment based on a complaint containing allegations, to which the proposed defendant neither admits nor denies.  Under the prior administration, the Commission had adopted a policy of requiring admissions in certain exceptional cases.  Nevertheless, the neither admit nor deny formulation remained the predominant settlement formulation. Importantly, as a corollary to not being required to admit to any findings or allegations, parties are also prohibited from denying the findings or allegations.  The requirement is spelled out in a regulation adopted in 1972: The Commission has adopted the policy that in any civil lawsuit brought by it or in any administrative proceeding of an accusatory nature pending before it, it is important to avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur. Accordingly, it hereby announces its policy not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings. In this regard, the Commission believes that a refusal to admit the allegations is equivalent to a denial, unless the defendant or respondent states that he neither admits nor denies the allegations. 17 C.F.R. § 202.5(e). The requirement is also contained in the form of settlement offer executed by a settling party: Defendant understands and agrees to comply with the Commission’s policy “not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegation in the complaint or order for proceedings.” 17 C.F.R. § 202.5. In compliance with this policy, Defendant agrees not to take any action or to make or cause to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis. . . . .  If Defendant breaches this agreement, the Commission may petition the Court to vacate the Final Judgment and restore this action to its active docket. In a lawsuit filed in January of this year, the Cato Institute is challenging the constitutionality of the so-called “gag rule” as a violation of a defendant’s right to free speech under the First Amendment.[18]  The Cato Institute’s interest in the issue is grounded on its desire to publish a manuscript by a party who settled a Commission enforcement action.  According to the Cato Institute’s complaint, the manuscript describes what the author believes to be the Commission’s overreach in coercing the author into a settlement despite the author’s belief that the charges were without merit in order to avoid crippling litigation expenses.  The complaint alleges that the regulation and policy constitutes an unconstitutional content-based restriction on speech. Not surprisingly, the Commission filed a motion to dismiss the complaint in May, arguing, among other things, that the plaintiff’s action was flawed in three key ways: (1) the Cato Institute lacked standing under Article III because it was challenging a contract reviewed, approved and entered by a district court—a contract to which the plaintiff was neither a party nor an intended beneficiary; (2) the court lacked jurisdiction on ripeness grounds because the plaintiff’s claims were premised upon speculation about future events that would implicate other courts’ authority, in effect asking the court to invalidate no-deny provisions in every single past consent judgment, regardless of whether all past settling defendants wanted this outcome;  and (3) the Cato Institute did not state a First Amendment claim because the no-deny provisions were negotiated provisions and were not imposed against a defendant’s free will.  The Commission further asserted that there were compelling interests that would justify these no-deny provisions, such as avoiding investor and market confusion and deterring future defendants. The Cato Institute opposed the Commission’s motion to dismiss, arguing that the Commission’s no-deny provisions amounted to a lifetime ban on speech, and former SEC defendants who want to complain about the SEC’s conduct in their cases are unable to do so because of these provisions.  The Cato Institute asserted three main arguments in response to the Commission’s motion to dismiss: (1) the Cato Institute has standing as a would-be publisher because it is currently required to abstain from constitutionally protected speech; (2)  the court could adjudicate the instant claims without invading the jurisdiction of any other court; and (3) the unconstitutional-conditions doctrine applies to this matter and therefore the Cato Institute has properly pleaded a justiciable claim under the First Amendment. Needless to say, the lawsuit has had no impact whatsoever on the Commission’s continued practice of settling actions on a neither-admit-nor-deny basis. II.  Public Company Disclosure, Accounting and Audit Cases A.  Internal Controls In late January, the SEC announced a settlement with four public companies based on the companies’ alleged failure to maintain adequate internal controls over financial reporting (“ICFR”).[19]  The SEC alleged that, although the companies disclosed material weaknesses in their ICFR, the took months or years to remedy the issues, including after SEC staff notified the companies of the issues.  Without admitting or denying the allegations, all four companies agreed to a cease and desist order and to pay civil penalties Ranging from $35,000 to $200,000.  One company, a Mexican steel manufacturer and processor, continues to remediate material weaknesses and, as part of the settlement, has undertaken to have an independent consultant to review the remediation. B.  Company Disclosures Concerning the Business In March, the SEC instituted a settled action against a U.S. home improvement company based on allegations that the company made misstatements regarding its products’ compliance with regulatory standards.[20]  Following a media report on certain of the company’s products in 2015, the company stated that third-party test results demonstrated its products were in compliance with regulatory standards.  The company also stated that individuals featured in the media reporting were not employees of the company’s suppliers.  The SEC alleges that the company knew that one of its Chinese suppliers had failed third-party testing and had evidence that the individuals featured in the media reporting were employees of the company’s suppliers.  Without admitting or denying the findings in the SEC’s order, the company agreed to pay a $6 million penalty.  On the same day the SEC instituted its settled action, the Department of Justice announced that the company entered into a deferred prosecution agreement and agreed to pay $33 million in forfeiture and criminal fines. As discussed above in our introductory section, in March of this year, the SEC filed an unsettled complaint against a car manufacturer, two of its subsidiaries, and its former CEO for alleged misstatements concerning the compliance of the company’s vehicles with emissions standards at a times when the company issues bonds and asset backed securities.[21]  The complaint alleges that the misstatements enabled the company to issue bonds as a lower interest rate than otherwise.  As discussed above, the litigation remains pending. C.  Financial Reporting Cases In early April, the SEC brought a settled action against the founder and former CEO of a Silicon Valley mobile payment startup based on allegations that he overstated the company’s revenues and then sold shares he owned to investors in the secondary market.[22]  The former CEO agreed to settle the charges without admitting wrongdoing, agreeing to pay more than $17 million in disgorgement and penalties and to be barred from serving as an officer or director of a publicly traded U.S. company.  The SEC instituted a separate settled administrative action against the company’s former CFO for based on allegations that he failed to exercise reasonable care in the company’s financial statements and signed stock transfer agreements that inaccurately implied that the company’s board of directors had approved the CEO’s stock sales.  The CFO, who had also sold some of his shares in the company, entered into a cooperation agreement with the SEC and, in connection with his settlement, agreed to pay approximately $420,000 in disgorgement and prejudgment interest. Also in April, the SEC filed an unsettled action against the former CFO and two former employees of a publicly traded transportation company.[23]  The SEC’s complaint alleges that the former CFO hid expenses and manipulated the company’s finances, while the other two employees failed to write-off overvalued assets and overstated receivables at one of the company’s operating companies.  The complaint also alleges that the defendants misled the company’s outside auditor, causing the company to misstate financial results in periodic reports filed with the SECs.  The U.S. Department of Justice’s Fraud Section also filed parallel criminal charges against the three individuals. Later in April, the SEC instituted a settled proceeding against a Silicon Valley market place lender that, through its website, sold securities linked to performance of its consumer credit loans.[24]  According to the SEC’s administrative order, the company excluded certain non-performing charged off loans from its performance calculations reported to investors, and as a result, overstated its net returns.  Pursuant to the settlement, the company agreed to pay $3 million. Also in April, the SEC filed a settled action against a U.S. truckload carrier with accounting fraud, books and records, and internal control violations.[25]  The SEC’s complaint alleges that the company avoided recognizing impairment charges and losses by selling and buying used trucks at inflated prices from third-parties, which enabled the company to overstate its pre-tax and net income and earnings per share in one annual and two quarterly reports.  In the settlement, the company agreed to pay $7 million in disgorgement, which is deemed satisfied by the company’s payment of restitution in settlement of a parallel action brought by the Department of Justice.  This is also one of the few settled SEC actions under this administration in which the defendant admitted to the violations alleged in the SEC’s complaint. In May, the SEC instituted settled administrative proceedings against a New Hampshire-based manufacturer and its former CEO based on allegations that the company misled investors regarding the company’s ability to supply “sapphire glass” for Apple’s iPhones.[26]  According to the SEC’s orders, the company entered into an agreement with Apple to provide sapphire glass that met certain standards, but that the company failed to meet the standards required by the Apple contract, which triggered Apple’s right to withhold payment and accelerate a large repayment from the New Hampshire company.  Despite Apple’s exercise of this withholding and repayment, the company reported that it expected to meet performance targets and receive payment from Apple.  In settlement, the former CEO agreed to pay approximately $140,000 in disgorgement and penalties.  The company, which had since filed for, and exited from, bankruptcy as a private company, was not assessed a penalty. D.  Cases Against Audit Firms In February, the SEC instituted a settled administrative proceeding against a large Japanese accounting firm and two of the firm’s former executives (the former CEO and the former Reputation and Risk Leader and Director of Independence) based on allegations that the firm violated certain provisions of the SEC’s audit independence rules.[27]  The SEC’s order alleges that the firm issued audit reports for a client notwithstanding that certain personnel within the accounting firm were aware that the client’s subsidiary maintained dozens of bank accounts for employees of the accounting firm with balances that exceeded depositary insurance limits.  The SEC’s order alleges that the firm’s quality control system did not provide reasonable measures to help ensure the firm was independent from its audit clients.  Without admitting or denying the allegations, the firm agreed to pay a $2 million penalty.  The former executives agreed to be suspended from appearing or practicing before the SEC as accountants with a right to apply for reinstatement after two years in the case of the former CEO and one year in the case of the former Reputation Risk Leader and director of Independence, In June, the SEC instituted a settled administrative proceeding against an international accounting firm based on allegations that certain former firm personnel obtained confidential lists of inspection targets from a now former employee of the Public Company Accounting Oversight Board (PCAOB) and used the information to alter past audit work papers to reduce the likelihood of deficiencies being found during the PCAOB inspections.[28]  Last year, the SEC had previously instituted enforcement actions against the former personnel of the audit firm and the PCAOB.  The SEC’s settled order against the firm also alleges that a number of the firm’s audit professionals engaged in misconduct in connection with internal training exams.  Pursuant to the settlement, the firm agreed to pay a $50 million penalty, to retain an independent consultant to review and evaluate the firm’s quality controls relating to ethics and integrity, and other remedial measures.  The firm also admitted the facts in the SEC’s order and acknowledged that its actions violated a PCAOB rule requiring integrity. III.  Cases Against Investment Advisers A.  Representation Concerning Brokerage Commissions In March, the SEC instituted a settled action against a dually registered broker-dealer and investment adviser in connection with the activity of a firm it had acquired.[29]  According to the SEC, the firm represented to advisory clients that they were receiving a discount off the firm’s retail commission rates.  However, according the SEC’s order, the firm did not adequately disclose that clients could have chosen other outside brokerage options at lower commission rates.  The SEC alleged that the firm charged commissions on average 4.5 times more than what clients would have paid using other brokerage options, but did not provide any additional services to advisory clients using its in-house brokerage than it did to advisory clients who chose other brokerages with considerably lower commission rates.  Without admitting or denying the findings, the firm agreed to pay approximately $5.2 million in disgorgement and prejudgment interest, and a $500,000 civil penalty. B.  Conflicts of Interest In March, the SEC instituted settled proceedings against a registered investment adviser and its former Chief Operating Officer, alleging they manipulated the auction of a commercial real estate asset on behalf of one client for the benefit of another client.[30]  According to the SEC, instead of identifying bona fide bidders, the COO used the firm’s affiliated private fund client for one bid and assured two other bidders that they would not win if they participated.  According to the SEC, the selling client was thereby deprived of the ability to receive multiple genuine offers which could maximize its profit.  Without admitting or denying the findings in the order, the investment adviser agreed to pay approximately $83,000 in disgorgement and prejudgment interest, and a $325,000 civil penalty.  The former COO, without admitting or denying the findings in the order, agreed to pay a $65,000 civil penalty and a 12-month industry suspension. C.  Advisory Fees In March, the SEC filed an unsettled complaint against the former Chief Operating Officer of an investment adviser for allegedly aiding and abetting the advisory firm’s overbilling of advisory clients in order to generate additional revenue and improperly inflate his own pay.[31]  The U.S. Attorney’s Office for the Southern District of New York brought accompanying criminal charges on the same day the SEC action was announced. In May, the SEC announced a settled action against a now-defunct registered investment adviser in North Carolina alleging that the adviser overcharged clients for advisory fees, misrepresented the reason the adviser’s custodian arrangement ended (the custodian observed irregular billing practices), and overstated assets under management in Commission filings.[32]  Without admitting or denying the findings in the SEC’s order, the owner agreed to pay approximately $400,000 in disgorgement and prejudgment interest, and a $100,000 civil penalty. D.  Misuse of Client Funds In March, the SEC instituted a settled administrative proceeding against a Seattle-based registered investment adviser and its principal.[33]  According to the SEC, the company’s principal misused more than $3 million from a private client fund to pay business and personal expenses, sent fraudulent account statements and tax documents to investors, overstated assets in the fund and falsely represented that the fund had undergone an independent audit.  The settled order provides that the investment adviser’s registration is revoked, the principal is barred from the securities industry, and the company and owner are liable jointly and severally for disgorgement and prejudgment interest of approximately $1.2 million, but with an allowance for offset as to the principal by the amount of any restitution ordered against him in a parallel criminal action in which he agreed to plead guilty. E.  Compliance Policies and Procedures In June, the SEC instituted a settled administrative proceeding against a private fund manager and its Chief Investment Officer alleging that the manager failed to adopt and implement policies and procedures to address the risk that the traders’ pricing of illiquid mortgage-backed bonds may not conform to generally accepted accounting principles.[34]    Without admitting or denying the findings in the SEC’s order, the fund manager agreed to a civil penalty of $5,000,000 and the CIO agreed to pay a civil penalty of $250,000. IV.  Cases Against Broker-Dealers A.  Cases Concerning ADRs The SEC continued a 2018 initiative focused on investigating practices related to American Depositary Receipts (“ADR”)—U.S. securities that represent foreign shares of a foreign company and that require foreign shares in the same quantity to be held in custody at a depositary bank.  Pre-released ADRs are issued without the deposit of foreign shares, but require that either a customer owns the number of foreign shares in equal amounts to the number of shares represented by the ADRs, or that the broker receiving the shares has an agreement with a depository bank.  The SEC settled three cases involving pre-released ADRs in the first half of 2019—one in March and two in June. In March, a broker-dealer agreed to pay more than $8 million in disgorgement and penalties to settle charges of improperly handling pre-released ADRs.[35]  According to the SEC’s order, the broker-dealer improperly borrowed pre-released ADRs from other brokers when it should have known that the middlemen did not own the foreign shares required to support the ADRs.  As a result of borrowing these pre-released ADRs, there was inappropriate short selling and other improper trading activity. In June, the SEC settled with a broker-dealer subsidiary of a large bank, and the $42 million that the broker-dealer agreed to pay in disgorgement and penalties resulted in the largest recovery against a broker in connection with ADRs to date.[36]  In that matter, the broker-dealer improperly bought pre-released ADRs.  The SEC alleged that the broker-dealer falsely represented that the company or its customers owned the requisite number of foreign shares to justify pre-release transactions. A few days later in June, the SEC instituted settled proceedings against a broker-dealer.  The SEC Order alleged that, for approximately two years, the firm failed to take reasonable steps to ensure that the parties who received pre-released ADRs owned the corresponding shares.  Without admitting or denying the charges, the broker-dealer agreed to pay $7.3 million in disgorgement and penalties.[37]  The Commission noted that the firm undertook voluntary remediation efforts by discontinuing pre-release activity even before the staff began its investigation. B.  Other Broker-Dealer Cases The SEC also instituted several proceedings against broker-dealers unrelated to ADRs in the first half of 2019.  The SEC has filed a number of enforcement actions relating to “blank check” companies, the most recent of which was in February.  In February, the SEC announced charges against a broker-dealer, three of the firm’s principals, and a transfer agent, alleging that the firm and transfer agent helped create and sell at least 19 sham companies, and that the individuals signed the false applications and failed to investigate.[38]  According to the SEC, those charged created these “blank check” companies from 2009 to 2014. In March, the SEC settled charges with a broker-dealer headquartered in California for allegedly failing to take appropriate measures to supervise one of its registered representatives, who was found to be involved in a pump-and-dump scheme.[39]  The SEC instituted proceedings in March 2018, since which time the firm undertook remedial measures such as revising its policies and procedures, and changes to senior leadership.  Without admitting or denying the charges, to settle the pending administrative proceeding, the firm agreed to pay a $250,000 penalty and be censured. In May, a Manhattan jury ruled in favor of the SEC in a case in which the SEC had charged a brokerage firm and its indirect owner and president with fraud and related charges for making material misrepresentations and omissions in a financial company’s private placement offering and continuing to use the offering documents to solicit sales despite knowing they were inaccurate.[40]  The jury found the firm and individuals liable on all counts. V.  Insider Trading Cases A. Cases Involving Lawyers In the first half of 2019, the SEC and Department of Justice twice brought insider trading charges against attorneys who traded on nonpublic information regarding upcoming financial disclosures.  In February, the SEC filed an unsettled insider trading action against a former senior attorney at a major technology company, alleging that he traded securities in the company after reviewing confidential information regarding upcoming earnings announcements.[41]  The SEC characterized the alleged conduct as particularly serious because the attorney’s prior responsibilities included executing the company’s insider trading compliance program.  The U.S. Attorney’s Office for the District of New Jersey announced a parallel criminal complaint on the same day. In April, the SEC filed a partially-settled insider trading action against a former senior attorney of an entertainment company, for allegedly trading on nonpublic information after reviewing confidential drafts of an earnings release showing better than expected revenues.[42]  The attorney consented to a permanent injunction, with penalties and disgorgement to be determined by the district court.  The Department of Justice filed a parallel criminal complaint on the same day. In May, the SEC filed a settled insider trading action against a defendant who had been a houseguest of the general counsel of a company.  According to the complaint, the defendant misappropriated nonpublic information, misappropriated from the general counsel’s home office, concerning a pending merger involving the general counsel’s company, and then traded on the basis of that information in accounts in the name of his ex-wife and an ex-girlfriend.[43]  The defendant agreed to a settlement including a penalty of $253,000.  The SEC also named as relief defendants the defendant’s ex-wife and ex-girlfriend in whose accounts he had traded.  They agreed to disgorge the alleged profits of $250,000, along with prejudgment interest. B.  Continued Fallout from Newman Decision In criminal insider trading cases, the impact of the Second Circuit’s 2014 ruling in United States v. Newman,[44] since abrogated in part by the Supreme Court in United States v. Salman,[45] continues to have an impact.  In Newman, the Court held that, in cases against a defendant who is a downstream tippee, the government must prove the defendant knew the insider source of the information received a personal benefit in exchange for the tip in breach of their duty of confidentiality.  In June of this year, the District Court for the Southern District of New York overturned the 2012 guilty plea and conviction of a tippee in light of Newman, finding the record plea factually insufficient because “nothing in the record . . . speaks directly or indirectly to [the defendant’s] knowledge of any personal benefit the corporate insiders received as a result of divulging confidential information.”[46]  By contrast, in January of this year, the Second Circuit upheld the 2012 conviction of a former executive, finding inter alia that he was not prejudiced by the pre-Newman jury instructions in that case.[47] C.  Other Cases Involving Tipper and Tippee Liability The SEC filed several other insider trading actions involving tipper/tippee liability.  In April, the SEC instituted a settled administrative proceedings against a respondent who purchased options in a grocery store chain after learning about its impending acquisition from his wife, who had in turn learned about it from a family member who was a corporate insider.[48]  In the settlement, the respondent agreed to pay approximately $57,000 in disgorgement and prejudgment interest. In June, the SEC obtained final judgments by consent against three defendants — an executive and two of his friends.[49]  The executive had been entrusted by a friend, an employee at Concur Technologies, with confidential information of a forthcoming merger.  The executive then tipped one of his friends, who then tipped his brother.  The two brothers and other family members then placed short-term trades in call options in Concur, resulting in over $500,000 in profits, a portion of which they gave to their executive friend.  The three defendants agreed to pay disgorgement and prejudgment interest all of which was deemed satisfied by orders of forfeiture entered against each of the three individuals in parallel criminal actions in which they pleaded guilty and were sentenced to prison terms ranging from six to twenty-four months. Also in June, the SEC obtained consent judgments against two defendants, an executive at a pharmaceutical company and a business associate of the executive, in an insider trading case filed last year.[50]  The SEC’s complaint alleged that the executive tipped the business associate regarding nonpublic negotiations of a licensing agreement, and that the business associate then tipped other defendants who traded on the information, resulting in $1.5 million in gains.  Without admitting or denying the allegations in the complaint, the pharmaceutical executive consented to a civil monetary penalty of $750,000 and a five-year officer and director bar.  The amount of monetary relief as to the business associate remains to be determined by the court.  All but one of other defendants have agreed to partial settlements with the SEC. Also in June, the SEC filed an amended complaint adding a Swiss businessman as a defendant to an insider trading case filed last year.[51]  The defendant allegedly purchased out of the money call options in the target company based on a tip regarding a pending merger from the son of a senior executive of the acquirer.  The proceeds of the transaction were previously frozen in the United States and Switzerland.  The U.S. Attorney’s Office for the Southern District of New York announced a parallel criminal action against the defendant on the same day the SEC filed the amended complaint. Also in June, the SEC filed a settled insider trading action against a defendant who allegedly sold shares in an energy company after learning about a proposed secondary offering from individuals either at the company or affiliated with an investment bank that endeavored to participate in the offering.[52]  According to the complaint, after acquiring the information and before the public announcement, the defendant sold over 9,000 shares of company stock, avoiding approximately $46,000 in losses.  The defendant, without admitting or denying the allegations, agreed to pay disgorgement, prejudgment interest, and a one-time civil penalty. D.  Trading by Insiders In February, the SEC filed a settled insider trading action against a former employee of a biotech company, alleging he sold stock in the company after learning the FDA had recommended withdrawal of two of the company’s products, thereby avoiding a loss of approximately $70,000.[53]  In the settlement, the defendant agreed to pay approximately $146,000 in disgorgement, prejudgment interest, and a civil penalty. VI.  Cases Concerning Cryptocurrency and Cybersecurity The SEC has focused on cybersecurity and cryptocurrency issues throughout the first half of the year.  In addition to bringing enforcement actions, in May, the SEC’s Strategic Hub for Innovation and Financial Technology (“FinHub”)[54] hosted a public forum on distributed ledger technology and digital assets.[55]  The forum focused on engagement with market participants on new financial technologies, including initial coin offerings. A.  Cybersecurity In January, the SEC brought its first enforcement action of the year alleging that a Ukrainian hacker along with eight persons and entities engaged in a scheme to extract nonpublic information from the SEC’s EDGAR filing system.[56]  The SEC alleged that by hacking into the EDGAR system, the accused were able to access documents that had been filed with the SEC, but that had not yet been released publicly, and pass the documents to traders who traded on the nonpublic information to the benefit of $4.1 million.  This action follows 2015 charges against the same hacker and other traders for engaging in a similar scheme involving hacking into newswire services for nonpublic information about impending corporate earnings announcements.  The U.S. Attorney’s Office for the District of New Jersey brought accompanying criminal charges on the same day the SEC action was announced. B.  Failure to Register Initial Coin Offerings In February, the SEC continued its recent trend of enforcement actions against companies who fail to register an initial coin offering (“ICO”) pursuant to federal securities law.[57]  Unlike the two ICO-related actions the SEC settled last year,[58] the company at issue in February self-reported its late-2017 unregistered ICO.  The company had raised $12.7 million from the sale of these instruments after the Commission had publicly articulated its position that ICOs can constitute securities offerings.  The company agreed to fully cooperate with the investigation, to register the token offering, and to compensate any investors who request a return of funds.  Because of its self-reporting and remediation measures, the SEC did not impose a penalty. C.  Other Offerings Involving Digital Assets In May, the SEC obtained a temporary restraining order, asset freeze, and appointment of a receiver against several related companies engaged in an alleged international Ponzi scheme involving cryptocurrency and diamond mines.[59]  The principal is accused of using $10 million of the proceeds from an unregistered cryptocurrency offering by one of his companies to repay the investors in his previous diamond company and to fund his personal expenses. Also in May, the SEC filed a civil injunctive action charging an individual with operating a $26 million pyramid scheme.[60]  The complaint alleges that for over a year the individual conducted an unregistered securities offering where investors purchased instructional business packages as well as “points” that could be converted into a digital asset.  Investors earned more of these points through cash investments and by recruiting new investors to purchase digital assets and join the pyramid scheme. In June, the SEC filed a complaint alleging the defendant company raised $55 million from U.S. investors through an unregistered offering of a digital currency.[61]  Investors were allegedly told that the currency’s value would increase when the company created a transaction service based on the currency that would be available within and without the company.  The SEC alleges these services were never offered and that the value of the currency has decreased by nearly half since it was initially offered. In June, the SEC filed an amended complaint against a company and its CEO for allegedly conducting a fraudulent IPO and for engaging in accounting fraud by recording more than $66 million in excess revenue.[62]  In connection with the original complaint filed last year, the court granted the SEC’s request for preliminary relief freezing more than $27 million raised from the allegedly fraudulent offering.[63]  Also in June, the U.S. Attorney’s Office for the District of New Jersey brought parallel criminal charges against the CEO. VII.  Municipal Securities Cases A.  New Actions In March, the SEC filed a settled action against a former County Manager, alleging that he provided an unfair advantage to an investment adviser who was selected to manage county pension funds.[64]  The complaint alleges the County Manger, who allegedly had a romantic interest in an associate of the adviser, provided access to competitor’s proposals, and also failed to disclose the conflict of interest in selecting the adviser.  The County Manager consented to a judgment enjoining him from further violations of the Investment Advisers Act and from involvement with the management of public pensions, the selection of underwriters and municipal advisers, and the offering of municipal securities, as well as a $10,000 civil penalty. Also in March, the SEC announced partially settled charges against the former controller of a not-for-profit college, alleging he misrepresented the college’s finances in statements published in connection with its continuing disclosure obligations to investors pursuant to a bond issuance in 1999.[65]  According to the SEC’s complaint, the former controller created false financial records, and his actions resulted in overstating the college’s net assets by almost $34 million in the 2015 fiscal year.  The former controller agreed to a permanent injunction, with monetary relief to be determined at a later date.  In a parallel criminal action, the former controller agreed to plead guilty.  The college was not charged, in light of its cooperation and efforts to remediate the misconduct. In June, the SEC filed an unsettled action against a municipal adviser and managing partner based on allegations of breach of fiduciary duty in connection with a municipal bond offering for a public library.[66]  The complaint alleges the adviser failed to provide sufficient advice on selecting the underwriter for the offering and on pricing bonds, resulting in mispriced bonds which will cost the library additional interest over the life of the bonds.  In a related action, the SEC also instituted a settled administrative proceeding against the broker-dealer that underwrote the bonds based on allegations of a failure to act with reasonable care in underwriting the offering.  The broker-dealer agreed to a $50,000 civil penalty and to engage an independent compliance consultant. B.  Settlements in Previously Filed Actions In March, in an action previously filed in 2016, the SEC resolved litigation against a financial institution that had been the placement agent for a municipal bond offering intended to finance a finance startup video game company.[67]  The SEC alleged that the institution had failed to disclose that the project faced a shortfall in financing and that the institution was receiving compensation tied to the issuance of the bonds from the startup.  Pursuant to the settlement, without admitting or denying the allegations in the complaint, the financial institution agreed to pay approximately $800,000 in civil penalties.  The SEC’s litigation against the lead banker on the deal is ongoing. In June, the SEC announced a settlement of a 2017 action against the Town of Oyster Bay, New York for allegedly failing to disclose an agreement to guarantee $20 million of loans to a third-party restaurant and concession stand operator in connection with certain municipal securities offerings.[68]  In addition to consenting to an injunction, the Town agreed to retain an independent compliance consultant to advise on its disclosures for securities offerings.  The litigation against the former town supervisor is continuing. __________________________     [1]  Testimony of Chairman Jay Clayton before the Financial Services and General Government Subcommittee of the U.S. Senate Committee on Appropriations, (May 8, 2019), available at https://www.sec.gov/news/testimony/testimony-financial-services-and-general-government-subcommittee-us-senate-committee.    [2]   See, e.g., SEC Charges Issuer With Conducting $100 Million Unregistered ICO, Press Rel. No. 2019-87 (June 4, 2019), available at https://www.sec.gov/news/press-release/2019-87; SEC Sues alleged Perpetrator of Fraudulent Pyramid Scheme Promising investors Cryptocurrency Riches, Press Rel. No. 2019-74 (May 23, 2019), available at https://www.sec.gov/news/press-release/2019-74; SEC Obtains Emergency Order Halting Alleged Diamond Related ICO Scheme Targeting Hundreds of Investors, Press Rel. No. 2019-72 (May 21, 2019), available at https://www.sec.gov/news/press-release/2019-72.    [3]   SEC Press Release, SEC Adopts Rules and Interpretations to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships with Financial Professionals (June 5, 2019), available at https://www.sec.gov/news/press-release/2019-89.    [4]   SECURITIES AND EXCHANGE COMMISSION, Regulation Best Interest: The Broker-Dealer Standard of Conduct, Rel. No. 34-86031 (June 5, 2019) (to be codified at 17 CFR §§ 240.15l-1, 240.17a-3, and 240.17a-4), available at https://www.sec.gov/rules/final/2019/34-86031.pdf (“Final Rule”). [5] See Statement by Chairman Jay Clayton Regarding Offers of Settlement (July 3, 2019), available at https://www.sec.gov/news/public-statement/clayton-statement-regarding-offers-settlement.    [6]   SEC Press Release, SEC Awards $3 Million to Joint Whistleblowers (June 3, 2019), available at https://www.sec.gov/news/press-release/2019-81.    [7]   SEC Awards $50 Million to Two Whistleblowers, Press Rel. 2019-42 (Mar. 26, 2019), available at https://www.sec.gov/news/press-release/2019-42.    [8]   In the Matter of the Claims for Award in connection with [redacted] Notice of Covered Action [redacted], Order Determining Whistleblower Award Claims, Rel. No. 85412 (Mar. 26, 2019), available at https://www.sec.gov/rules/other/2019/34-85412.pdf.    [9]   SEC Press Release, SEC Awards $4.5 Million to Whistleblower Whose Internal Reporting Led to Successful SEC Case and Related Action (May 24, 2019), available at https://www.sec.gov/news/press-release/2019-76. [10]   SEC Press Release, SEC Awards $3 Million to Joint Whistleblowers (June 3, 2019), available at https://www.sec.gov/news/press-release/2019-81. [11]   See Gibson, Dunn & Crutcher LLP 2018 Mid-Year Securities Enforcement Update (July 30, 2018), available at https://www.gibsondunn.com/2018-mid-year-securities-enforcement-update/. [12]   House Financial Services Committee Passes Bill to Expand Dodd-Frank Whistleblower Protection to Internal Whistleblowers (May 30, 2019), available at https://www.jdsupra.com/legalnews/house-financial-services-committee-88658/. [13]   Lorenzo v. SEC, 587 U.S. ___, No. 17-1077 (U.S. Mar. 27, 2019). [14]   See Speech by Commissioner Hester M. Peirce, “Reasonableness Pants,” (May 8, 2019), available at https://www.sec.gov/news/speech/speech-peirce-050819 (“Congress defined aiding and abetting liability to be the provision of ‘substantial assistance’ to a securities law violator. It is important for us and the courts not to ascribe primary liability to every violation and thus write aiding and abetting out of the statute.”) (footnote omitted). [15]   See, e.g., Matter of Deer Park Road Management Company, LP, Rel. No. 5245 (June 4, 2019), n. 7 (“A willful violation of the securities laws means merely ‘that the person charged with the duty knows what he is doing…. There is no requirement that the actor ‘also be aware that he is violating one of the Rules or Acts.’”) (citations omitted). [16]   See, e.g., SEC v. Rio Tinto plc and Rio Tinto Limited, Thomas Albanese, and Guy Robert Elliott, No. 17 Civ. 7994 (AT), 2019 WL 1244933, at *22 (S.D.N.Y. Mar. 18, 2019) (collecting cases). [17]   CFTC v. Southern Trust Metals, Inc., 2019 WL 2295488, at *4-5 (S.D. Fla. May, 30, 2019). [18]   Cato Institute v. SEC, et al., Case 1:19-cv-00047 (D.D.C. Jan. 9, 2019). [19]   SEC Press Release, SEC Charges Four Public Companies with Longstanding ICFR Failures (Jan. 29, 2019), available at https://www.sec.gov/news/press-release/2019-6. [20]   SEC Press Release, SEC Charges Lumber Liquidators with Fraud (Mar. 12, 2019), available at https://www.sec.gov/news/press-release/2019-29. [21]   SEC Press Release, SEC Charges Volkswagen, Former CEO with Defrauding Bond Investors During “Clean Diesel” Emissions Fraud (Mar. 14, 2019), available at https://www.sec.gov/news/press-release/2019-34. [22]   SEC Press Release, SEC Charges Former CEO of Silicon Valley Startup with Defrauding Investors (Apr. 2, 2019), available at https://www.sec.gov/news/press-release/2019-50. [23]   SEC Press Release, SEC Charges Transportation Company Executives with Accounting Fraud (Apr. 3, 2019), available at https://www.sec.gov/news/press-release/2019-51. [24]   SEC Press Release, Silicon Valley Company Settles Fraud Charge for Misstating Returns to Investors (Apr. 19, 2019), available at https://www.sec.gov/news/press-release/2019-58. [25]   SEC Press Release, SEC Charges Truckload Freight Company with Accounting Fraud (Apr. 25, 2019), available at https://www.sec.gov/news/press-release/2019-60. [26]   SEC Press Release, SEC Charges Sapphire Glass Manufacturer and Former CEO with Fraud (May 2, 2019), available at https://www.sec.gov/news/press-release/2019-66. [27]   SEC Press Release, Deloitte Japan Charged with Violating Auditor Independence Rules (Feb. 13, 2019), available at https://www.sec.gov/news/press-release/2019-9. [28]   SEC Press Release, KPMG Paying $50 Million Penalty for Illicit Use of PCAOB Data and Cheating on Training Exams (June 17, 2019), available at https://www.sec.gov/news/press-release/2019-95. [29]   SEC Press Release, BB&T to Return More Than $5 Million to Retail Investors and Pay Penalty Relating to Directed Brokerage Arrangements (Mar. 5, 2019), available at www.sec.gov/news/press-release/2019-26. [30]   SEC Press Release, SEC Charges Registered Investment Adviser and Former Chief Operating Officer With Defrauding Client (Mar. 15, 2019), available at www.sec.gov/news/press-release/2019-36. [31]   SEC Press Release, SEC Charges New Jersey Man With Fraudulently Causing Advisory Firm to Overbill Clients (Mar. 28, 2019), available at www.sec.gov/news/press-release/2019-44. [32]   SEC Press Release, SEC Charges Investment Adviser With Fraud (May 28, 2019), available at www.sec.gov/news/press-release/2019-77. [33]   SEC Press Release, Investment Adviser Charged With Stealing Millions From Private Fund (Mar. 28, 2019), available at www.sec.gov/news/press-release/2019-45. [34]   SEC Press Release, Hedge Fund Adviser to Pay $5 Million for Compliance Failures Related to Valuation of Fund Assets (June 4, 2019), available at www.sec.gov/news/press-release/2019-86. [35]   SEC Press Release, Merrill Lynch to Pay Over $8 Million for Improper Handling of ADRs (Mar. 22, 2019), available at https://www.sec.gov/news/press-release/2019-40. [36]   SEC Press Release, Industrial and Commercial Bank of China Affiliate to Pay More Than $42 Million for Improper Handling of ADRs (June 14, 2019), available at https://www.sec.gov/news/press-release/2019-94. [37]   Admin. Proc. File No. 3-19205, In re Wedbush Securities, Inc. (June 18, 2019), available at https://www.sec.gov/litigation/admin/2019/33-10650.pdf. [38]   SEC Press Release, SEC Charges Broker-Dealer and Transfer Agent in Microcap Shell Factory Fraud (Feb. 20, 2019), available at https://www.sec.gov/news/press-release/2019-16. [39]   SEC Press Release, Wedbush Settles Failure to Supervise Charge (Mar. 13, 2019), available at https://www.sec.gov/news/press-release/2019-32. [40]   SEC Press Release, Jury Rules in SEC’s Favor, Finds Brokerage Firm and Two of Its Executives Liable for Fraud (May 15, 2019), available at https://www.sec.gov/news/press-release/2019-70. [41]   SEC Press Release, SEC Charges Former Senior Attorney at Apple with Insider Trading (Feb. 13, 2019), available at https://www.sec.gov/news/press-release/2019-10. [42]   SEC Press Release, SEC Charges Former SeaWorld Associate General Counsel with Insider Trading (Apr. 9, 2019) available at https://www.sec.gov/news/press-release/2019-53. [43]   SEC Press Release, SEC Charges Nevada Man Who Traded on Confidential Information Taken from Lifetime Friend (May 7, 2019), available at https://www.sec.gov/news/press-release/2019-67. [44]   773 F.3d 438 (2d Cir. 2014). [45]   137 S. Ct. 420 (2016). [46]   United States v. Lee, No. 13-cr-539 (S.D.N.Y. June 21, 2019); see also Jody Godoy, Newman Cited in Tossing Ex-SAC Capital Exec’s Guilty Plea, Law 360 (June 21, 2019), available at https://www.law360.com/articles/1171838/newman-cited-in-tossing-ex-sac-capital-exec-s-guilty-plea. [47]   Gupta v. United States, No. 15-2707 (2d. Cir. Jan 7, 2019) (affirming district court denial of motion to vacate conviction). [48]   Admin. Proc. File No. 3-19134, In re Yang, (Apr. 5, 2019), available at https://www.sec.gov/litigation/admin/2019/34-85525.pdf. [49]   SEC Litigation Release, SEC Obtains Final Judgments in Insider Trading Case Against Former Software Executive and Two Friends (June 12, 2019), available at https://www.sec.gov/litigation/litreleases/2019/lr24499.htm. [50]   SEC Litigation Release, SEC Obtains Judgements Against Insider Trading Ring Defendants (June 11, 2019), available at https://www.sec.gov/litigation/litreleases/2019/lr24498.htm. [51]   SEC Litigation Release, SEC Charges Swiss Resident in Insider Trading Case Involving Bioverativ Acquisition (June 13, 2019), available at https://www.sec.gov/litigation/litreleases/2019/lr24500.htm. [52]   SEC Litigation Release, SEC Charges New Jersey Investor with Insider Trading (June 18, 2019), available at https://www.sec.gov/litigation/litreleases/2019/lr24503.htm. [53]   SEC Litigation Release, SEC Settles with Biotech Insider Trader (Feb. 21, 2019), available at https://www.sec.gov/litigation/litreleases/2019/lr24406.htm. [54]   SEC Press Release, FINHUB Strategic Hub for Innovation and Financial Technology (last modified June 13, 2019), available at https://www.sec.gov/finhub. [55]   SEC Press Release, SEC Staff to Hold Fintech Forum to Discuss Distributed Ledger Technology and Digital Assets (Mar. 15, 2019), available at https://www.sec.gov/news/press-release/2019-35; SEC Press Release, SEC Staff Announces Agenda for May 31 FinTech Forum (April 24, 2019), available at https://www.sec.gov/news/press-release/2019-59. [56]   SEC Press Release, SEC Brings Charges in EDGAR Hacking Case (Jan. 15, 2019), available at https://www.sec.gov/news/press-release/2019-1. [57]   SEC Press Release, Company Settles Unregistered ICO Charges After Self-Reporting to SEC, available at https://www.sec.gov/news/press-release/2019-15. [58]   See Gibson Dunn 2018 Year-End Review (Jan. 15, 2019), available at https://www.gibsondunn.com/2018-year-end-securities-enforcement-update/#_edn1; SEC Press Release, Two ICO Issuers Settle SEC Registration Charges, Agree to Register Tokens as Securities (Nov. 16, 2018), available at https://www.sec.gov/news/press-release/2018-264. [59]   SEC Press Release, SEC Obtains Emergency Order Halting Alleged Diamond-Related ICO Scheme Targeting Hundreds of Investors (May 21, 2019), available at https://www.sec.gov/news/press-release/2019-72. [60]   SEC Press Release, SEC Sues Alleged Perpetrator of Fraudulent Pyramid Scheme Promising Investors Cryptocurrency Riches (May 23, 2019), available at https://www.sec.gov/news/press-release/2019-74. [61]   SEC Press Release, SEC Charges Issuer With Conducting $100 Million Unregistered ICO (June 4, 2019), available at https://www.sec.gov/news/press-release/2019-87. [62]   SEC Press Release, SEC Adds Fraud Charges Against Purported Cryptocurrency Company Longfin, CEO, and Consultant (June 5, 2019), available at https://www.sec.gov/news/press-release/2019-90. [63]   SEC Litigation Release, SEC Obtains Emergency Freeze of $27 Million in Stock Sales of Purported Cryptocurrency Company Longfin (May 2, 2018), available at https://www.sec.gov/litigation/litreleases/2018/lr24130.htm. See also Gibson Dunn 2018 Mid-Year Review (July 30, 2018), available at https://www.gibsondunn.com/2018-mid-year-securities-enforcement-update/; SEC Press Release, SEC Obtains Emergency Freeze of $27 Million in Stock Sales of Purported Cryptocurrency Company Longfin (Apr. 6, 2018), available at https://www.sec.gov/news/press-release/2018-61. [64]   SEC Press Release, SEC Charges Former Municipal Officer with Fraud in Connection with Public Pension Funds (Mar. 15, 2019), available at https://www.sec.gov/litigation/litreleases/2019/lr24424.htm. [65]   SEC Press Release, SEC Charges College Official for Fraudulently Concealing Financial Troubles from Municipal Bond Investors (Mar. 28, 2019), available at https://www.sec.gov/news/press-release/2019-46. [66]   SEC Litigation Release, SEC Charges Municipal Advisor with Breaching Fiduciary Duty (June 27, 2019), available at https://www.sec.gov/litigation/litreleases/2019/lr24520.htm. [67]   SEC Press Release, Court Penalizes Wells Fargo Securities for Disclosure Failures in 38 Studios Bond Offering (Mar. 20, 2019), available at https://www.sec.gov/litigation/litreleases/2019/lr24428.htm. [68]   SEC Litigation Release, Town of Oyster Bay, New York, Agrees to Settle SEC Charges (June 7, 2019), available at https://www.sec.gov/litigation/litreleases/2019/lr24494.htm. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Mark Schonfeld, Amy Mayer, Lindsey Geher, Alyssa Ogden, Zoey Goldnick, Erin Galliher and Trevor Gopnik. Gibson Dunn is one of the nation’s leading law firms in representing companies and individuals who face enforcement investigations by the Securities and Exchange Commission, the Department of Justice, the Commodities Futures Trading Commission, the New York and other state attorneys general and regulators, the Public Company Accounting Oversight Board (PCAOB), the Financial Industry Regulatory Authority (FINRA), the New York Stock Exchange, and federal and state banking regulators. Our Securities Enforcement Group offers broad and deep experience.  Our partners include the former Directors of the SEC’s New York and San Francisco Regional Offices, the former head of FINRA’s Department of Enforcement, the former United States Attorneys for the Central and Eastern Districts of California, and former Assistant United States Attorneys from federal prosecutors’ offices in New York, Los Angeles, San Francisco and Washington, D.C., including the Securities and Commodities Fraud Task Force. Securities enforcement investigations are often one aspect of a problem facing our clients. Our securities enforcement lawyers work closely with lawyers from our Securities Regulation and Corporate Governance Group to provide expertise regarding parallel corporate governance, securities regulation, and securities trading issues, our Securities Litigation Group, and our White Collar Defense Group. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work or any of the following: New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com) Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com) Barry R. Goldsmith (+1 212-351-2440, bgoldsmith@gibsondunn.com) Laura Kathryn O’Boyle (+1 212-351-2304, loboyle@gibsondunn.com) Mark K. Schonfeld (+1 212-351-2433, mschonfeld@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Avi Weitzman (+1 212-351-2465, aweitzman@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Tina Samanta (+1 212-351-2469, tsamanta@gibsondunn.com) Washington, D.C. Stephanie L. Brooker (+1 202-887-3502, sbrooker@gibsondunn.com) Daniel P. Chung(+1 202-887-3729, dchung@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Richard W. Grime (+1 202-955-8219, rgrime@gibsondunn.com) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) San Francisco Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) Thad A. Davis (+1 415-393-8251, tadavis@gibsondunn.com) Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Michael Li-Ming Wong (+1 415-393-8234, mwong@gibsondunn.com) Palo Alto Michael D. Celio (+1 650-849-5326, mcelio@gibsondunn.com) Paul J. Collins (+1 650-849-5309, pcollins@gibsondunn.com) Benjamin B. Wagner (+1 650-849-5395, bwagner@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) Los Angeles Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com) Douglas M. Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 23, 2019 |
With Enactment of The Pacte Statute, All French Companies Must Be Managed in Their Corporate Interest and Management Must Consider Social and Environmental Issues Deriving from Their Activities

Click for PDF The French Civil Code provides as a general principle that every company must have a lawful corporate purpose and be constituted in the common interest of its partners.[1]  These provisions, which are applicable to all forms of partnership or public or private corporations, have been supplemented by the so-called “Pacte Statute” on the Development and Transformation of Businesses.  Each French company must now be managed “in furtherance of its corporate interest” and “while taking into consideration the social and environmental issues arising from its activity”.[2] These changes, which affect millions of legal entities from the smallest partnership to the largest public corporation, are a direct consequence of the recommendations of the so-called Notat-Senard Report (“l’entreprise, objet d’intérêt collectif”, available at https://www.ladocumentationfrancaise.fr/var/storage/rapports-publics/184000133.pdf).  Lawyers of Gibson Dunn’s Paris office have been heavily involved in the work having led to this Report. The Pacte Statute provides that non-compliance with these new obligations is not sanctioned by the nullity of the company.[3]  The intent is to protect companies from the most adverse consequences of a breach of what may appear as a loose obligation. The Pacte Statute enshrines for the first time in statutory law the concept of “corporate interest” which, until now, had only been set forth by case law.  The Pacte Statute, however, does not define the notion of “corporate interest” because “its practical interest rests on its great flexibility, which makes it restive to any confinement in pre-established criteria.  The elements necessary to determine whether or not a decision is contrary to the corporate interest are too closely dependent on the multifaceted and changing characteristics of the activity and environment of each company.”(Explanatory Memorandum) In the minds of the promoters of the Pacte Statute, the acknowledgement of the concept of “corporate interest” implies the endorsement at the legislative level of a fundamental goal in the management of companies, i.e. “the fact that these are not managed in the interest of particular persons, but in their self-interest and in pursuit of their own ends.” (Explanatory Memorandum) The introduction of social and environmental issues in the management of companies is the most striking innovation.  Measuring social and environmental issues in decision-making is meant to force company managers to question themselves about these issues and to “consider them carefully” (Explanatory Memorandum).  This consideration must of course be adapted to each company, including in particular depending on its size and activity. Ignoring social and environmental issues is not sanctioned by a specific regime of liability.  Any court action seeking damages for failure to take into account these matters continues to require the meeting of the standard conditions of liability (existence of a fault, a damage and a causal link between the two).  The mere finding of social or environmental damage will therefore not suffice to bring into play the liability of a company or a corporate executive if it is not established that the damage resulted from the misconstruction of such issues. Ignoring these matters, however, could be a ground for dismissal of the company executive. The Pacte Statute also provides the possibility for companies to introduce in their by-laws (statuts) the pursuit of a raison d’être (which conveys, inter alia, the notions of founding principles and core values). The by-laws “may specify a raison d’être, constituted of the principles which the company is endowed with and for the respect of which it intends to allocate means in the performance of its activity”.[4] According to the promoters of the Pacte Statute, the raison d’être “aims to bring entrepreneurs and businesses closer to their long-term environment”.  The formulation of a raison d’être is to be strategically used, providing a framework of reference for the most important decisions. Numerous alternative phrasings have been considered in the formulation of these new principles, and Gibson Dunn has been privy to most of the debates on these alternatives and their legal consequences.  They do enlighten the legislative intent behind these very significant legislative evolutions and can usefully guide the practical implementation of these new rules. Several large French multinationals already had adopted a raison d’être (like Michelin – “A Better Way Forward”[5]) and since the parliamentary discussions around the Pacte Statute, many more (like Veolia, Atos or Alstom) have publicly stated their intent to do so.    [1]   Article 1833 of the French Civil Code.    [2]   “dans son intérêt social et en prenant en considération les enjeux sociaux et environnementaux de son activité”.  Identical provisions have been introduced in the Commercial Code regarding the powers of the Board of Directors and of the Management Board [directoire] of a corporation [société anonyme],  both of which must determine the orientations of the corporation’s activity in accordance with its corporate interest and taking into consideration social and environmental issues.    [3]   Civil Code, Article 1844-10, amended Paragraph 1.    [4]   Article 1835 of the French Civil Code.  The Pacte Statute also complements the Commercial Code in this respcet.  When a raison d’être is provided for by the by-laws, the Board of Directors and the Management Board of a corporation [société anonyme] must “consider, where appropriate, the raison d’être of the company defined in compliance with Article 1835 of the Civil Code”.  Articles L 225-35, paragraph 1 and L 225-64, paragraph 1 of the French Commercial Code.    [5]   “Offrir à chacun une meilleure façon d’avancer”. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. For further information, please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the Paris office by phone (+33 1 56 43 13 00) or by email (see below): Jean-Philippe Robé – jrobe@gibsondunn.com Bertrand Delaunay – bdelaunay@gibsondunn.com Benoît Fleury – bfleury@gibsondunn.com © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 25, 2019 |
Gibson Dunn Earns 79 Top-Tier Rankings in Chambers USA 2019

In its 2019 edition, Chambers USA: America’s Leading Lawyers for Business awarded Gibson Dunn 79 first-tier rankings, of which 27 were firm practice group rankings and 52 were individual lawyer rankings. Overall, the firm earned 276 rankings – 80 firm practice group rankings and 196 individual lawyer rankings. Gibson Dunn earned top-tier rankings in the following practice group categories: National – Antitrust National – Antitrust: Cartel National – Appellate Law National – Corporate Crime & Investigations National – FCPA National – Outsourcing National – Real Estate National – Retail National – Securities: Regulation CA – Antitrust CA – Environment CA – IT & Outsourcing CA – Litigation: Appellate CA – Litigation: General Commercial CA – Litigation: Securities CA – Litigation: White-Collar Crime & Government Investigations CA – Real Estate: Southern California CO – Litigation: White-Collar Crime & Government Investigations CO – Natural Resources & Energy DC – Corporate/M&A & Private Equity DC – Labor & Employment DC – Litigation: General Commercial DC – Litigation: White-Collar Crime & Government Investigations NY – Litigation: General Commercial: The Elite NY – Media & Entertainment: Litigation NY – Technology & Outsourcing TX – Antitrust This year, 155 Gibson Dunn attorneys were identified as leading lawyers in their respective practice areas, with some ranked in more than one category. The following lawyers achieved top-tier rankings:  D. Jarrett Arp, Theodore Boutrous, Jessica Brown, Jeffrey Chapman, Linda Curtis, Michael Darden, William Dawson, Patrick Dennis, Mark Director, Scott Edelman, Miguel Estrada, Stephen Fackler, Sean Feller, Eric Feuerstein, Amy Forbes, Stephen Glover, Richard Grime, Daniel Kolkey, Brian Lane, Jonathan Layne, Karen Manos, Randy Mastro, Cromwell Montgomery, Daniel Mummery, Stephen Nordahl, Theodore Olson, Richard Parker, William Peters, Tomer Pinkusiewicz, Sean Royall, Eugene Scalia, Jesse Sharf, Orin Snyder, George Stamas, Beau Stark, Charles Stevens, Daniel Swanson, Steven Talley, Helgi Walker, Robert Walters, F. Joseph Warin and Debra Wong Yang.

March 27, 2019 |
Supreme Court Holds That Securities Fraud Liability Extends Beyond “Maker” Of False Statements

Click for PDF Decided March 27, 2019 Lorenzo v. SEC, No. 17-1077 Today, the Supreme Court held 6-2 that an individual who knowingly disseminates false statements, even if the individual did not “make” the statements under SEC Rule 10b-5(b), can be held liable under other subdivisions of Rule 10b-5 and related securities laws. Background: Francis Lorenzo sent emails to prospective investors containing false statements about the sale of securities.  He sent the emails at the direction of his boss, who wrote their content.  Under Janus Capital v. First Derivative Traders, 564 U.S. 135 (2011), Lorenzo could not be held liable for making false statements under Rule 10b-5(b) because he was not the “maker” of the statements—his boss retained “ultimate authority” over their content.  Id. at 142.  The SEC nonetheless charged Lorenzo with violating other parts of Rule 10b-5 and related statutes.  For example, the SEC alleged that Lorenzo had “employ[ed] any device, scheme, or artifice to defraud” under Rule 10b-5(a), and also had “engage[d] in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person” under Rule 10b-5(c).  The D.C. Circuit rejected Lorenzo’s contention that, because he was not the “maker” of the misstatements, he could not be held liable under Rule 10b-5(a) and (c) and related statutes. Issue:  Whether someone who is not a “maker” of a misstatement under Rule 10b-5(b) can nevertheless be held liable for dissemination of misstatements under other subsections of Rule 10b-5 and related securities laws. Court’s Holding:  Yes.  The prohibitions of fraudulent schemes and fraudulent practices in Rule 10b-5(a) and (c), as well as related prohibitions in securities laws, are broad enough to encompass the knowing dissemination of false or misleading statements directly to investors with the intent to defraud, even if the person who disseminates them did not “make” them under Rule 10b-5(b). “[W]e conclude that . . . dissemination of false or misleading statements with intent to defraud can fall within the scope of subsections (a) and (c) of Rule 10b-5 . . . even if the disseminator did not ‘make’ the statements and consequently falls outside subsection (b) of the Rule.” Justice Breyer, writing for the majority What It Means: The Court read the language of Rule 10b-5 broadly, relying on dictionary definitions to hold that an individual need not “make” false statements in order to be liable for “employ[ing]” a scheme to defraud under Rule 10b-5(a) or for “engag[ing]” in an act that operates as a fraud under Rule 10b-5(c) based on the individual’s knowing dissemination of false statements with intent to deceive. The Court declined to read the subdivisions of Rule 10b-5 as mutually exclusive, reasoning that their prohibitions involve “considerable overlap” to ensure coverage for multiple forms of fraud. The Court suggested some limits to its broad reading of Rule 10b-5, observing that “liability would typically be inappropriate” for individuals “tangentially involved” in disseminating false statements, such as “a mailroom clerk.” The Court reaffirmed its precedent holding that private suits are not permitted against secondary violators of Section 10(b), 15 U.S.C. § 78j(b).  For example, private plaintiffs cannot sue defendants for undisclosed actions that investors could not have relied upon.  Therefore, the Court’s ruling should be limited to claims involving the dissemination of false information directly to investors. The Court did not address what intent (scienter) is required to establish violations of Rule 10b-5 and related securities laws, as Lorenzo did not challenge the D.C. Circuit’s holding that he had the requisite scienter.  The Court also reaffirmed that the SEC, “unlike private parties, need not show reliance in its enforcement actions.” The decision may result in the SEC and private plaintiffs increasingly relying on provisions other than Rule 10b-5(b) when alleging violations of the securities laws. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Related Practice: Securities Litigation Brian M. Lutz +1 415.393.8379 blutz@gibsondunn.com Robert F. Serio +1 212.351.3917 rserio@gibsondunn.com Meryl L. Young +1 949.451.4229 myoung@gibsondunn.com

March 26, 2019 |
SEC Continues to Modernize and Simplify Disclosure Requirements

Click for PDF On March 20, 2019, the Securities and Exchange Commission (the “SEC”) voted to adopt amendments (available here) to modernize and simplify disclosure requirements for public companies, investment advisers, and investment companies (the “Final Rules”).[1]  The amendments, which, among other things, will change the content of Management’s Discussion and Analysis (“MD&A”) and change the process for redacting confidential information in certain exhibits, are “intended to improve the readability and navigability of disclosure documents and discourage repetition and disclosure of immaterial information.”  The Final Rules are largely consistent with the proposed amendments outlined in the SEC’s October 11, 2017 proposing release, available here (the “Proposed Rules”), with a few exceptions.  For additional information on the Proposed Rules, please see our client alert dated October 13, 2017 (available here). In connection with the adoption of the Final Rules, SEC Chairman Jay Clayton stated, “[t]he amendments adopted today demonstrate our focus on modernizing our disclosure system to meet the expectations of today’s investors while eliminating unnecessary costs and burdens.” The Final Rules are also consistent with other efforts by the SEC to simplify disclosure requirements, such as certain changes to Regulation S-K adopted by the SEC effective November 5, 2018.  For additional information on the impact of these changes, please see our client alert dated August 27, 2018 (available here). The amendments relating to the redaction of confidential information in certain exhibits will become effective upon publication in the Federal Register.  The remainder of the amendments will become effective 30 days after they are published in the Federal Register, except that the requirements to tag data on the cover pages of certain filings are subject to a three-year phase-in.  Based on the principle the SEC staff recently set forth in Question 105.09 of the Exchange Act Forms C&DIs (available here), which applied to the above-referenced set of simplification amendments, the Final Rules will apply to all filings made after the applicable effective date discussed above, unless otherwise noted by the SEC staff.  As of the date of this publication, the Final Rules have not been published in the Federal Register.  Given the expected timing of publication, it is likely that the Final Rules related to the redaction of confidential information in certain exhibits will apply to the first quarter Form 10-Q for calendar-year filers, but it is less clear whether the other changes set forth in the Final Rules will apply to the first quarter Form 10-Q. I.     Summary of Amendments Adopted A.     Management’s Discussion and Analysis (MD&A) – Item 303 of Regulation S-K The Final Rules adopt the amendments relating to Item 303 in substantially the form set forth in the Proposed Rules.  Under these amendments, registrants that provide financial statements covering three years in their filings are not required to include in MD&A a discussion of the earliest year if: (i) such discussion was already included in any other of the registrant’s prior filings that required compliance with Item 303; and (ii) registrants identify the location in the prior filing where the omitted discussion can be found.  For example, if a registrant files its 2019 Form 10-K with financial statements for fiscal years 2017, 2018, and 2019, the registrant can omit from its MD&A the discussion comparing its operating results and financial condition for fiscal years 2017 to 2018, and instead only compare its operating results and financial condition for fiscal years 2018 and 2019 and refer the reader to the MD&A in the 2018 Form 10-K where the 2017 to 2018 comparative discussion may be found. The Item 303 amendments include two modifications from the Proposed Rules.  First, registrants can rely on any prior filing that required compliance with Item 303 (e.g., Form 10-K, Form S-1, Form S-4, Form 10), rather than only the prior fiscal year’s Form 10-K.  Second, the Final Rules did not adopt the language specifically requiring that all omitted information not be material to understanding the registrant’s financial condition because the SEC recognized that such a requirement is superfluous.  The SEC did not intend to modify or alter the overarching materiality analysis management undertakes with respect to MD&A and noted, “[t]his is not to suggest, however, that materiality is not relevant to management’s judgement about what disclosure is provided in MD&A.” Additionally, these amendments eliminate the portion of Instruction 1 to Item 303(a) indicating that five-year selected financial data may be necessary where trend information is relevant because, as the SEC notes, disclosure requirements for liquidity, capital resources, and results of operations already require trend disclosure.  The SEC does not anticipate that elimination of such language will discourage trend disclosure or otherwise reduce disclosure of material information. B.     Exhibits – Item 601 of Regulation S-K Omission of Information from Material Contracts Without Confidential Treatment Request.  Under the amendments adopted under the Final Rules, which are substantially similar to the Proposed Rules amendments, registrants can omit confidential information from material contracts filed pursuant to Item 601(b)(10)—without requesting confidential treatment from the SEC—where this information is both (i) not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed.[2]  Registrants will still be required to: (i) mark the exhibit index to indicate that portions of the material contract have been omitted; (ii) include a prominent statement on the first page of the redacted material contract indicating certain information has been omitted; and (iii) indicate with brackets where this information has been omitted within the material contract. Similarly, Item 601(b)(2) was amended to allow registrants to redact immaterial provisions or terms from agreements filed under this item. Although registrants are no longer required to file confidential treatment requests with respect to exhibits filed pursuant to Item 601(b)(10) and Item 601(b)(2), they are still responsible for ensuring all material information is disclosed and limiting redactions to those portions necessary to prevent competitive harm.  The SEC staff will continue to selectively review registrants’ filings and assess whether registrants have satisfied their disclosure responsibility with respect to these redactions.  Upon request, registrants are required to provide supplemental materials similar to those currently required in confidential treatment requests.  Registrants can request confidential treatment pursuant to Rule 83 for these supplemental materials.  If the supplemental materials do not support the redactions, the SEC staff may instruct registrants to file an amendment disclosing some, or all, of the previously redacted information. Omission of Schedules and Attachments to Exhibits.  The Final Rules add new Item 601(a)(5) to allow registrants to omit entire schedules and similar attachments to exhibits, unless these schedules or attachments contain material information that is not otherwise disclosed in the exhibit or SEC filing.  This change extends the existing accommodation in Item 601(b)(2) for acquisition, reorganization, arrangement, liquidation, or succession agreements to all exhibits filed under Item 601, including material contracts.  As with Item 601(b)(2), exhibits relying on this provision must contain a list briefly identifying the contents of the omitted schedules or other attachments.  The SEC clarified, however, that registrants need not prepare a separate list if that information is already included within the exhibit in a manner that conveys the subject matter of the omitted schedules and attachments. Omission of Personally Identifiable Information (PII).  The Final Rules add new Item 601(a)(6) to allow registrants to omit PII (such as bank account numbers, social security numbers, home addresses, and similar information) from all exhibits without submitting a confidential treatment request for this information.  Registrants that use this accommodation can simply provide the exhibit with appropriate redactions and need not provide an analysis supporting the redactions at the time of filing.  This is consistent with the SEC staff’s current practice of not objecting when registrants seek confidential treatment and omission of PII. Elimination of Two-Year Look Back Period for Material Contracts.  With the exception of “newly reporting registrants,”[3] registrants will no longer be subject to the two-year look back period under Item 601(b)(10)(i), which requires the inclusion of all material contracts that were entered into during the last two years of the applicable registration statement or report.  Under the adopted amendments to Item 601(b)(10)(i), registrants need only to file as an exhibit contracts not made in the ordinary course of business that are material to the registrant and to be performed in whole or in part at or after the filing of the registration statement or report. New Requirement for Description of Securities.  The Final Rules amend Item 601(b)(4) to require that registrants provide a brief description of all securities registered under Section 12 of the Exchange Act (i.e., the information required by Item 202(a) through (d) and (f)) as an exhibit to their Form 10-K.  Previously, this disclosure was only required in registration statements. C.     Description of Property – Item 102 of Regulation S-K The Final Rules adopt the amendments to Item 102 as proposed.  Under these amendments, registrants are only required to describe a physical property to the extent the property is material to the registrant’s business, which contrasts with the previous requirement to disclose “principal” plants, mines, and other “materially important” physical properties.  However, given the significance and unique considerations of property disclosure for registrants operating in the mining, real estate, and oil and gas industries, the Final Rules did not modify the instructions to Item 102 that relate to those specific industries and as such they remain subject to their existing industry guides or other requirements of Regulation S-K.  For example, the oil and gas industry guide was replaced by Item 1200 et al. in 2008. D.     Changes to Item 405 – Compliance with Section 16(a) of the Exchange Act The Final Rules adopt amendments to Item 405 that eliminate the requirement for Section 16 persons to furnish Section 16 reports to the registrant; clarify that registrants may, but are not required to, rely only on Section 16 reports that have been filed on EDGAR (as well as any written representations from the reporting persons) to assess Section 16 delinquencies; change the disclosure heading required by Item 405(a)(1) from “Section 16(a) Beneficial Ownership Reporting Compliance” to “Delinquent Section 16(a) Reports” and encourage excluding such heading altogether if there are no reportable Section 16(a) delinquencies; and eliminate the checkbox on the cover page of Form 10-K relating to Section 16(a) delinquencies. E.     Changes to SEC Forms – Cover Page The Final Rules adopt amendments that require disclosure of a registrant’s stock ticker symbol on the cover pages of certain filings, including Form 10-K, Form 10-Q, Form 8-K, Form 20-F, and Form 40-F.  Because the cover pages of Form 10-K, Form 20-F, and Form 40-F already require disclosure of the title of each class of securities registered pursuant to Section 12(b) of the Exchange Act and each exchange on which they are registered, the amendments simply revise these cover pages to include a corresponding field for the trading symbols of any securities listed on an exchange.  Unlike Form 10-K, Form 20-F, and Form 40-F, however, the cover pages of Form 10-Q and Form 8-K do not currently require disclosure of the title of each class of securities and each exchange on which they are registered.  To maintain consistency across forms, the amendments will revise the cover pages of Form 10-Q and Form 8-K to include this disclosure (i.e., title of class and name of exchange) in addition to the trading symbol. While the text of the new cover page captions is contained in the adopting release, the release does not indicate exactly where the new text will be added to the Form 10-Q and 8-K cover pages.  It has historically taken the SEC staff several weeks or even months to incorporate updates to the PDF cover pages published on the SEC’s website. F.     Other Adopted Technical Amendments Changes to Clarify Unclear Instructions or Terms.  The Final Rules adopt amendments to Item 401 (Directors, Executive Officers, Promoters, and Control Persons), Item 407 (Corporate Governance), Item 501(b) (Outside Front Cover Page of the Prospectus), and Item 508 (Plan of Distribution) that help clarify unclear instructions or terms within these specific Items, such as clarifying when disclosure about executive officers need not be repeated in proxy or information statements if already included in Form 10-K (Item 401) or eliminating ambiguous terms discussing name change requirements and an exception to that requirement (Item 501(b)(1)). Relocation of Certain Requirements.  The Final Rules adopt amendments to Item 503(c) (Risk Factors) that relocate Item 503(c) from Subpart 500 to a new separate item under Subpart 100 of Regulation S-K (Item 105).  In particular, the SEC noted that Subpart 100 is a more appropriate location for Risk Factors because it covers a broad category of business information and, unlike Subpart 500, is not limited to offering-related disclosure.  This amendment does not change the requirements regarding content or placement of Risk Factors within Form 10-K and Form 10-Q. Elimination of Obsolete Undertakings.  The Final Rules adopt amendments to Item 512 (Undertakings) to eliminate undertakings that have become redundant and obsolete, including Item 512(c) (Warrants and rights offerings), (d) (Competitive bids), (e) (Incorporated annual and quarterly reports), and (f) (Equity offerings of nonreporting registrants). Changes to Improve Access to Information.  The Final Rules adopt amendments that aim to improve access to information by requiring data tagging for items on the cover pages of certain filings (Form 10-K, Form 10-Q, Form 8-K, Form 20-F, and Form 40-F) and the use of hyperlinks for information available on EDGAR incorporated by reference into a registration statement or prospectus. II.     Summary of Proposed Rules Not Adopted Caption and Item Numbers.  The Final Rules did not adopt proposed amendments to Form 10, Form 10-K and Form 20-F that would have allowed registrants to exclude item numbers and captions or to create their own captions tailored to their disclosure.  The proposed amendments would not have affected captions that are expressly required by the forms or Regulation S-K.  A majority of commenters who addressed this issue disfavored the proposed amendments, noting the required captions and item numbers help investors navigate filings, make it more easy to locate information important to them, and enhance their ability to compare information in different filings.  The SEC ultimately agreed and stated that any benefits that might accrue by allowing more variability in the presentation of disclosure may be “outweighed by the risk that the changes could impair an investor’s ability to use and navigate the information efficiently and effectively.” Legal Entity Identifiers (LEIs).  The Final Rules did not adopt the proposed amendments to Item 601(b)(21)(i), which would have required all registrants and subsidiaries that had LEIs to disclose such LEIs as an exhibit.  LEIs are 20-character, globally-recognized alpha-numeric codes that allow for unique identification of entities engaged in financial transactions.  However, in light of several comments disfavoring the proposal, the SEC opted not to adopt such amendment.  The comments critical of the proposal generally expressed doubts about the benefits of the information or were concerned that it would be costly and time consuming to acquire and maintain LEIs. III.     Practical Considerations for Registrants In light of the adopted Final Rules, registrants should take a fresh look at the disclosure in their Exchange Act reports, starting with the first quarter Form 10-Q.  Compliance checks will need to be updated and reviewed closely.  Even beyond the technical changes, registrants should evaluate how their reports and registration statements can be revised to improve readability and navigability and eliminate repetitive or immaterial disclosure. Specifically, in light of the amendments to Item 303 of Regulation S-K, registrants should review their MD&A and consider what revisions should be made so that the discussion of current-year-to-prior-year results addresses material aspects of both years.  Although the SEC ultimately chose not to include, as an explicit condition, a requirement that the omitted discussion must not be material to an understanding of the registrant’s financial condition, changes in financial condition, and results of operations, materiality will remain a primary consideration as registrants consider revisions to the discussion included in their MD&A.  In the adopting release, the SEC noted that, “[i]n preparing MD&A, companies should evaluate issues presented in previous periods and consider reducing or omitting discussion of those that may no longer be material or helpful, or revise discussions where a revision would make the continuing relevance of an issue more apparent.”  In determining whether to omit a discussion of the earliest year in MD&A, companies will want to consider whether changes in their business (e.g., acquisitions, dispositions, or other corporate changes; changes in the mode of conducting business; changes in management’s strategy) would cause the discussion of the earliest year, or a portion of that discussion, to continue to be material. Registrants should also review the exhibits included in their Form 10-K or Form 10-Q or registration statements and consider whether any exhibits may be eliminated as a result of the amendments to Item 601 of Regulation S-K.  In addition to eliminating any exhibits that are no longer required, following effectiveness of the Final Rules, registrants must also remember to include in their Form 10-K the exhibit relating to the description of securities required under Item 601(b)(4), as amended. Lastly, while the adopted amendments will allow companies to redact confidential information from most exhibits without filing a separate confidential treatment request, such amendments do not substantively alter a registrant’s disclosure requirements and do not prevent the SEC from scrutinizing the appropriateness of any such omissions.  At this time, it is unclear how vigilant the SEC will be in scrutinizing omissions made pursuant to the revised redaction rules set forth in the Final Rules.  Accordingly, registrants should undertake substantially the same analysis in deciding whether to omit information following the effectiveness of the applicable amendments as one would take in making a confidential treatment request and be prepared to explain such analysis and reasoning if requested to do so by the SEC staff.  For guidance relating to the SEC staff’s views on appropriate redactions, registrants can continue to look to Staff Legal Bulletins 1 and 1A (available here).    [1]   Our discussion in this client alert is limited to the Division of Corporation Finance changes impacting reporting companies.    [2]   The SEC slightly revised the language of this second prong from the proposed language to add the term “likely.”    [3]   Under the Final Rules, a “newly reporting registrant” includes: (1) registrants that are not subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act at the time of filing, (2) registrants that have not filed an annual report since the revival of a previously suspended reporting obligation, and (3) any registrant that (a) was a shell company, other than a business combination related shell company, as defined in Rule 12b-2 under the Exchange Act, immediately before completing a transaction that has the effect of causing it to cease being a shell company and (b) has not filed a registration statement or Form 8-K as required by Items 2.01 and 5.06 of that form, since the completion of such transaction (or, in the case of foreign private issuers, has not filed a Form 20-F since the completion of the transaction). Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments.  To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any lawyer in the firm’s Securities Regulation and Corporate Governance and Capital Markets practice groups, or any of the following practice leaders and members: Securities Regulation and Corporate Governance Group: Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) James J. Moloney – Orange County, CA (+1 949-451-4343, jmoloney@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Brian J. Lane – Washington, D.C. (+1 202-887-3646, blane@gibsondunn.com) Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Michael A. Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) Capital Markets Group: Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com) Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) J. Alan Bannister – New York (+1 212-351-2310, abannister@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 25, 2019 |
M&A Report – 2018 Year-End Activism Update

Click for PDF This Client Alert provides an update on shareholder activism activity involving NYSE- and Nasdaq-listed companies with equity market capitalizations in excess of $1 billion during the second half of 2018. Shareholder activism underwent a modest decline in the second half of 2017, but accelerated again in the first half of 2018. A similar pattern emerged during the second half of 2018, with a modest decline relative to the second half of 2017 in the numbers of public activist actions (40 vs. 46), activist investors taking actions (29 vs. 36) and companies targeted by such actions (34 vs. 39). However, in light of the robustness of shareholder activism activity in the first half of 2018, full-year numbers for 2018 are virtually identical to those of 2017, including with respect to the numbers of public activist actions (98 vs. 98), activist investors taking actions (65 vs. 63) and companies targeted by such actions (82 vs. 82). During the period spanning July 1, 2018 to December 31, 2018, four of the 34 companies targeted by activists were the subject of multiple campaigns, led by Dell Technologies Inc., which was the subject of four different activist campaigns. Bunge Limited was also the subject of two simultaneous campaigns by D.E. Shaw Group and a company before settling both campaigns at the same time. As to the activists, seven out of the 29 covered in this Client Alert launched multiple campaigns. The market capitalizations of those companies reviewed in this Client Alert ranged from just above the $1 billion minimum to just under $100 billion, as of December 31, 2018 (or as of the last date of trading for those companies that were acquired and delisted). By the Numbers – 2018 Full Year Public Activism Trends Additional statistical analyses may be found in the complete Activism Update linked below.  Compared to the first half of 2018, activists focused their campaigns more squarely on M&A as compared to other rationales. In the case of 65% of campaigns, M&A, including advocacy for or against spin-offs, acquisitions and sales, was an activist motivation (as compared to 32% in the first half of 2018), followed by business strategy (50% of campaigns, as compared to 36% in the first half of 2018). Changes to board composition, which had gained prominence in the first half of 2018 as the most common rationale for activist campaigns, represented the goal of activists in 45% of campaigns in the second half of 2018 (as compared to 76% in the first half of 2018). On the other hand, advocacy for changes in governance (20% of campaigns in the second half of 2018), return of capital (15% of campaigns), managerial changes (13% of campaigns) and attempts to take corporate control (5% of campaigns) represented less-frequently cited rationales for activist campaigns. Proxy solicitation transpired in 15% of the campaigns, representing a modest decline relative to the first half of 2018, in which 20% of campaigns featured activists filing proxy materials. (Note that the above-referenced percentages sum to over 100%, as certain activist campaigns had multiple rationales.) Consistent with the heightened focus on M&A and diminished attention paid by activists in their campaigns to board composition and governance, the number of publicly filed settlement agreements declined to nine (as compared to 21 in the first half of 2018). Consistent with prior trends, certain key terms have become increasingly standard in such settlement agreements. Voting agreements and standstill periods appeared in each of the settlement agreements, and non-disparagement covenants and minimum and/or maximum share ownership covenants appeared in all but one of the settlement agreements. Expense reimbursement appeared in over half of the settlement agreements reviewed (five), continuing a trend that began in the first half of 2018, when 62% of publicly filed settlement agreements contained such a provision (as compared to an historical average of 36% from 2014 through the first of 2017). Strategic initiatives did not figure prominently in settlement agreements entered into during the second half of 2018, being included in only two settlement agreements. We delve further into the data and the details in the latter half of this edition of Gibson Dunn’s Activism Update. We hope you find Gibson Dunn’s 2018 Year-End Activism Update informative. If you have any questions, please do not hesitate to reach out to a member of your Gibson Dunn team. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this publication.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following authors in the firm’s New York office: Barbara L. Becker (+1 212.351.4062, bbecker@gibsondunn.com) Dennis J. Friedman (+1 212.351.3900, dfriedman@gibsondunn.com) Richard J. Birns (+1 212.351.4032, rbirns@gibsondunn.com) Eduardo Gallardo (+1 212.351.3847, egallardo@gibsondunn.com) Saee Muzumdar (+1 212.351.3966, smuzumdar@gibsondunn.com) Daniel Alterbaum (+1 212.351.4084, dalterbaum@gibsondunn.com) William Koch (+1 212.351.4089, wkoch@gibsondunn.com) Please also feel free to contact any of the following practice group leaders and members: Mergers and Acquisitions Group: Jeffrey A. Chapman – Dallas (+1 214.698.3120, jchapman@gibsondunn.com) Stephen I. Glover – Washington, D.C. (+1 202.955.8593, siglover@gibsondunn.com) Jonathan K. Layne – Los Angeles (+1 310.552.8641, jlayne@gibsondunn.com) Securities Regulation and Corporate Governance Group: Brian J. Lane – Washington, D.C. (+1 202.887.3646, blane@gibsondunn.com) Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, rmueller@gibsondunn.com) James J. Moloney – Orange County, CA (+1 949.451.4343, jmoloney@gibsondunn.com) Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com) Lori Zyskowski – New York (+1 212.351.2309, lzyskowski@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 11, 2019 |
Webcast: Shareholder Litigation Developments and Trends (2019)

Shareholder lawsuits are not only complicated to litigate, but due to the high financial stakes, these actions can be among the most threatening to a company and its directors and officers. It has been over twenty years since Congress enacted the Private Securities Litigation Reform Act of 1995, and since that time, private actions under the federal securities laws have continued to be filed at a steady pace. Over the last decade, the U.S. Supreme Court and the state supreme courts have issued multiple decisions impacting the way shareholder actions are litigated and decided. This One-Hour Briefing highlights recent developments and trends in this constantly evolving and complex area of the law. Faculty discuss: Shareholder actions filing and settlement trends Shareholder actions arising out of the #MeToo movement and claims of sexual harassment by senior executives Potential implications of future Supreme Court decisions in securities cases View Slides (PDF) PANELISTS: Jennifer L. Conn is a partner in the New York office of Gibson, Dunn & Crutcher.  Ms. Conn is co-editor of PLI’s Securities Litigation: A Practitioner’s Guide, Second Edition. She has extensive experience in a wide range of complex commercial litigation matters, including those involving securities, accounting malpractice, antitrust, contracts, insurance and information technology. Ms. Conn is also a member of Gibson Dunn’s General Commercial Litigation, Securities Litigation, Appellate, and Privacy, Cybersecurity and Consumer Protection Practice Groups. Marshall R. King is a partner in the New York office of Gibson, Dunn & Crutcher. Mr. King is co-author of PLI’s Securities Litigation: A Practitioner’s Guide, Second Edition.  He has extensive experience in commercial and business litigation matters, with particular focus on securities litigation and disputes arising out of acquisitions. Mr. King is also a member of Gibson Dunn’s Securities Litigation, Class Actions, International Arbitration, Litigation, Media, Entertainment and Technology and Transnational Litigation Practice Groups. Gabrielle Levin is a partner in the New York office of Gibson, Dunn & Crutcher.  Ms. Levin is co-author of PLI’s Securities Litigation: A Practitioner’s Guide, Second Edition.  Her practice focuses on representing corporate clients in securities, employment, and general litigation matters. She has extensive experience in securities class actions, shareholder derivative litigation, SOX and Dodd-Frank whistleblower litigation, and employment litigation. Ms. Levin is a member of Gibson Dunn’s Securities Litigation Practice, Labor and Employment Practice, and Media, Entertainment and Technology Practice Groups, as well as the Firm’s Diversity Committee. MCLE INFORMATION:  This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

March 5, 2019 |
2018 Year-End Securities Litigation Update

Click for PDF 2018 witnessed even more securities litigation filings than 2017, in which we saw a dramatic uptick in securities litigation as compared to previous years.  This year-end update highlights what you most need to know in securities litigation developments and trends for the latter half of 2018, including: The Supreme Court heard oral argument in Lorenzo v. Securities and Exchange Commission, and is set to answer the question of whether a securities fraud claim premised on a false statement that was not “made” by the defendant can be pursued as a “fraudulent scheme” claim even though it would not be actionable as a Rule 10b-5(b) claim under Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). The Supreme Court granted the petition for writ of certiorari in Emulex Corp. v. Varjabedian to consider whether Section 14(e) of the Exchange Act supports an inferred private right of action based on negligent (as opposed to knowing or reckless) misstatements or omissions made in connection with a tender offer. We discuss recent developments in Delaware law, including case law exploring, among other things, (1) appraisal rights, (2) the standard of review in controller transactions, (3) application of the Corwin doctrine, and (4) when a “Material Adverse Effect” permits termination of a merger agreement. We review case law implementing the Supreme Court’s decisions in Omnicare and Halliburton II. We review a decision from the Third Circuit regarding the obligation to disclose risk factors, and a decision from the Ninth Circuit regarding the utilization of judicial notice and the incorporation by reference doctrine at the motion to dismiss stage. 1. Filing and Settlement Trends Figure 1 below reflects filing rates for 2018 (all charts courtesy of NERA). Four hundred and forty-one cases were filed this past year. This figure does not include the many class suits filed in state courts or the increasing number of state court derivative suits, including many such suits filed in the Delaware Court of Chancery. Those state court cases represent a “force multiplier” of sorts in the dynamics of securities litigation today. Figure 1: As shown in Figure 2 below, over 200 “merger objection” cases were filed in federal courts in 2018. Building off a trend from 2017, this is nearly triple the number of such cases filed in 2016, and more than quadruple the number filed in 2014 and 2015. Note that this statistic only tracks cases filed in federal courts. Historically, most M&A litigation had occurred in state court, particularly the Delaware Court of Chancery. But as we have discussed in prior updates, the Delaware Court of Chancery announced in early 2016 in In re Trulia Inc. Stockholder Litigation, 29 A.3d 884 (Del. Ch. 2016) that the much-abused practice of filing an M&A case followed shortly by an agreement on “disclosure only” settlement is effectively at an end. This is likely driving an increasing number of cases to federal court. Figure 2: 2018 saw the continuation of a decline in the percentage of cases filed against healthcare companies, following the peak of such cases in 2016. The percentage of new cases involving electronics and technology companies, meanwhile, saw a significant bump, comprising 21% of all fillings in 2018. The proportion of cases in the finance sector remained roughly consistent as compared to 2017. Figure 3: As Figure 4 shows, the average settlement value was $69 million in 2018, returning to a number comparable to the average in 2016 ($77 million) after a sharp decline to $25 million in 2017. Figure 5 reflects that the median settlement value also rose from $6 million in 2017 to $13 million in 2018. In any given year, of course, median settlement statistics also can be influenced by the timing of large settlements, any one of which can skew the numbers.  The statistics are not highly predictive of the settlement value of any individual case, which is driven by a number of important factors, such as (i) the amount of D&O insurance; (ii) the presence of parallel proceedings, including government investigations and enforcement actions; (iii) the nature of the events that triggered the suit, such as the announcement of a major restatement; (iv) the range of provable damages in the case; and (v) whether the suit is brought under Section 10(b) of the Exchange Act or Section 11 of the Securities Act. Figure 4: Figure 5: Following a decline in 2017, 2018 witnessed the return of Median NERA-Defined Investor Losses and Median Ratio of Settlement to Investor Losses by Settlement Year to $479 million, a level similar to that seen in 2015 and 2016. Figure 6: 2018 also saw a greater number of settlement sizes in the $10 to $50 million range, with settlements in the $20 to $49.9 million range reaching an unprecedented 24% of all settlements. Figure 7: 2. What to Watch for in the Supreme Court A. Lorenzo Will Test the Reach of Janus on Who May Be Held Liable for False Statements In our 2018 Mid-Year Securities Litigation Update, we discussed the Supreme Court’s grant of certiorari in Lorenzo v. Securities and Exchange Commission, No. 17-1077. As readers will recall, Lorenzo involves the question of whether a securities fraud claim premised on a false statement that was not “made” by the defendant can be pursued as a “fraudulent scheme” claim under Section 17(a)(1) of the Securities Act and Exchange Act Rules 10b-5(a) and 10b-5(c) even though it would not be actionable under Rule 10b-5(b) pursuant to the Court’s ruling in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). In the decision below, the D.C. Circuit held that Lorenzo’s distribution of an email that included false statements drafted by his supervisor could not form the basis for 10b-5(b) liability under Janus, but could form the basis for “scheme” liability under 10b-5(a) and (c). Lorenzo v. Sec. & Exch. Comm’n, 872 F.3d 578, 580, 592 (D.C. Cir. 2017). Then-Judge Kavanaugh dissented from the panel opinion. In the merits brief, Petitioner (a securities broker) argued that allowing scheme liability would permit an end-run around the Court’s decision in Janus, which held that only the “maker” of a statement can face primary liability for securities fraud. Brief for Petitioner at 24. Petitioner specifically contended that the D.C. Circuit’s ruling would effectively nullify Janus, and would allow the SEC to impose liability for conduct under 10b-5(a) and (c) that is not actionable under 10b-5(b). Id. at 27-28. Petitioner also argued that the scheme liability theory adopted by the D.C. Circuit is functionally no different than aiding-and-abetting liability—a theory of liability under Section 10(b) of the Exchange Act that the Supreme Court rejected in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 177 (1994). Id. at 36. In its responsive brief on the merits, Respondent (the SEC) argued that neither Janus nor Central Bank purport to extend their holdings to claims made pursuant to Rules 10b-5(a) and (c). Brief for Respondent at 23-26, 31-33. On behalf of the SEC, the U.S. Solicitor General also argued that because the messages that contained the false statements were sent by Lorenzo, and because the transmission of the messages was necessary to the scheme, Lorenzo’s actions fall squarely within the provisions imposing scheme liability. Id. at 15-18. At oral argument on December 3, 2018, several Justices seemed troubled by Lorenzo’s argument because Janus relied on statutory text that prohibited the “making” of a false statement, but the statutory provisions under which the SEC charged Lorenzo do not include any references to the “making” of statements. Justice Alito repeatedly pressed Lorenzo’s counsel to explain why the alleged conduct did not “fall squarely within the language” of the statute. Tr. at 11. Justice Kagan expressed skepticism of Lorenzo’s theory that the various provisions of the anti-fraud statutes are “mutually exclusive,” such that misstatements can be sanctioned only under the provisions directed specifically at misstatements. Tr. at 25. Justice Gorsuch, however, appeared more accepting of Petitioner’s arguments, and pressed the government’s lawyer on how scheme liability could apply when the only fraud is the making of a false statement (a fraud claim barred by Janus on these facts). Tr. at 32-36. Justice Kavanaugh was recused because he participated in the decision below. We expect a decision in Lorenzo by the end of the 2018 Supreme Court Term in June 2019. We will continue to monitor developments in this area and report on any updates in our 2019 Mid-Year Securities Litigation Update. B. In Emulex, the Court Will Address whether Liability May Be Imposed under Section 14(e) for Negligent Conduct On January 4, 2019, the Supreme Court granted certiorari in Emulex Corp. v. Varjabedian, No. 18-459, to consider whether Section 14(e) of the Exchange Act supports an inferred private right of action based on negligent misstatements or omissions made in connection with a tender offer. The case arises out of the Ninth Circuit, which split with five of its sister circuits in holding that plaintiffs seeking to recover under Section 14(e) of the Exchange Act need only plead and prove negligence, not scienter. 888 F.3d 399, 405 (9th Cir. 2018). This case involves a joint press release announcing a merger between Avago Technologies Wireless Manufacturing, Inc. and Emulex Corp. The press release announced that Avago would pay a premium for Emulex stock. Documents filed with the SEC in support of the offer omitted a one-page “Premium Analysis” showing that while the premium fell within the normal range of merger premiums in comparable transactions, it was below average. A class of former Emulex shareholders filed a putative class action and alleged defendants had violated Section 14(e) by failing to summarize the Premium Analysis and to disclose that the premium was below the average for premiums in similar mergers. The district court dismissed the Section 14(e) claim for failure to plead that the misstatement or omission was made intentionally or with deliberate recklessness. The Ninth Circuit reversed the district court, noting that Section 14(e) contains two separate clauses, which each proscribe different conduct: (1) making or omitting an untrue statement of material fact and (2) engaging in fraudulent, deceptive or manipulative acts or practices. The Ninth Circuit reasoned that the first clause, on its face, does not include a scienter requirement. Although the Ninth Circuit acknowledged that five other circuits (the Second, Third, Fifth, Sixth, and Eleventh) have held that Section 14(e) requires that plaintiffs plead scienter, the Ninth Circuit believes those circuits ignored or misread Supreme Court precedent to import Rule 10b-5’s scienter requirement to Section 14(e) claims. Id. at 405. According to the Ninth Circuit, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976), found that Rule 10b-5 requires a showing of scienter because it was promulgated by the SEC, which only has the authority to regulate manipulative or deceptive devices that necessarily entail scienter. Varjabedian, 888 F. Supp. at 406. The Ninth Circuit also reasoned that the text of Section 14(e) is similar to that of Section 17(a)(2) of the Securities Act, which the Supreme Court held in Aaron v. SEC, 446 U.S. 680, 696-97 (1980), does not require a showing of scienter. Varjabedian, 888 F. Supp. at 406. The Ninth Circuit distinguished the contrary rulings in the other circuits by noting that they were either decided before Ernst & Ernst and Aaron or that they failed to follow the reasoning of those decisions and acknowledge the distinction between Rule 10b-5 and Section 14(e). Id. at 405. Emulex filed a petition for a writ of certiorari on October 11, 2018. Emulex argued that the Ninth Circuit’s decision “upset[] the statutory scheme enacted by Congress.” Petition for Writ of Certiorari at 15. Emulex further contended that the Supreme Court has not previously recognized a private right of action under Section 14(e) and declined to do so in Piper v. Chris-Craft Industries Inc., 430 U.S. 1, 24 (1977). While lower courts have inferred a private right of action, they have declined to create private rights of action for negligent conduct. Petition for Writ of Certiorari at 18-19. Emulex also argued that the circuit split “blew up” the consensus among circuit courts which had held that Section 14(e) does not support a private right of action or remedy based on mere negligence. Id. at 14. The Ninth Circuit’s decision, according to Petitioner, “creat[es] an expansive new regime at odds with the uniform view in the rest of the country.” Id. at 15. As noted, the Supreme Court granted certiorari in January 2019. We expect that the parties will submit their briefing to the Supreme Court in the spring of 2018, with oral argument to follow in the coming months. We will continue to monitor this appeal and provide an update in our 2019 Mid-Year Securities Litigation Update. C. Pending Certiorari Petitions There are two notable securities cases in which petitions for certiorari are pending. The first is Toshiba Corp. v. Automotive Industries Pension Trust Fund, No. 18-486, which also involves a circuit split created by the Ninth Circuit. The Ninth Circuit split from the Second Circuit in holding that the Supreme Court’s landmark decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), which held that U.S. securities laws do not apply extraterritorially, does not bar suits arising out of domestic transactions in the securities of a foreign issuer even when the foreign issuer has no role in facilitating the transaction. Also pending is First Solar Inc. v. Mineworkers’ Pension Scheme, No. 18-164, which we discussed in the 2018 Mid-Year Securities Litigation Update. Readers will recall that, in that case, the Ninth Circuit issued a per curiam opinion holding that loss causation can be established even when the corrective disclosure did not reveal the fraud on which the securities fraud claim is based. In both Toshiba and First Solar, the Supreme Court has entered orders requesting the Solicitor General to file briefs expressing the views of the United States. The government has not yet filed its brief in either case. We will continue to monitor these petitions and provide an update in our 2019 Mid-Year Securities Litigation Update if the Supreme Court grants certiorari. 3. Delaware Law Developments A. Contractual Waiver of Appraisal Rights Enforceable under Delaware Law In our 2018 Mid-Year Securities Litigation Update, we reported on two Court of Chancery decisions interpreting and applying new Delaware appraisal law set forth in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017). In the second half of 2018, the Court of Chancery continued implementing the Delaware Supreme Court’s directive by looking first—and primarily—to market factors to determine the fair value of a company’s stock when supported by appropriate facts. See Blueblade Capital Opportunities LLC v. Norcraft Cos., 2018 WL 3602940 (Del. Ch. July 27, 2018) (giving deal price no weight where stock thinly traded and sales process significantly flawed); In re Appraisal of Solera Holdings, Inc., 2018 WL 3625644 (Del. Ch. July 30, 2018) (giving deal price “dispositive” weight where sales process was “characterized by many objective indicia of reliability” and company’s actively traded stock had “a deep base of public stockholders”). Delaware courts also looked at appraisal mechanics in other contexts. In Manti Holdings, LLC v. Authentix Acquisition Co., the Court of Chancery enforced a provision in a stockholder agreement waiving stockholders’ right to pursue statutory appraisal for certain transactions. 2018 WL 4698255 (Del. Ch. Oct. 1, 2018). Stockholder-petitioners who had entered into the stockholder agreement lost their shares via merger. Id. at *1. Under the stockholder agreement, they had agreed “to refrain from the exercise of appraisal rights” if “a Company Sale [was] approved by the Board.” Id. at *2. That a “Company Sale” occurred was not disputed. In reaching its conclusion that the waiver was enforceable, the Court rejected as nonsensical the Petitioners’ argument that the waiver terminated upon consummation of the deal. Id. at *3. Importantly, the Court rejected the Petitioners’ argument that enforcing the Agreement “would impermissibly . . . impose a limitation on classes of stock by contract” in violation of DGCL Section 151(a), which, according to the Petitioners, requires such limits to derive from the corporate charter. Id. at *4. Reasoning that the Company entered into the agreement to “entice investment” and that the stockholders simply “took on contractual responsibilities in exchange for consideration,” the Court held that enforcing the stockholder agreement was “not the equivalent of imposing limitations on a class of stock under Section 151(a).” Id. B. Courts Clarify MFW’s “Ab Initio” Requirement In the second half of 2018, both the Delaware Supreme Court and the Court of Chancery clarified when the “ab initio” requirement is satisfied under Kahn v. M & F Worldwide Corp. (“MFW”), 88 A.3d 635, 644 (Del. 2014). Under MFW, a conflicted-controller transaction earns business judgment review when six elements are satisfied: (i) the procession of the transaction is conditioned ab initio on the approval of both a special committee and a majority of the minority stockholders (the “dual protections”); (ii) the special committee is independent; (iii) the special committee is empowered to freely select its own advisors and to say no definitively; (iv) the special committee meets its duty of care in negotiating a fair price; (v) the vote of the minority stockholders is informed; and (vi) there is no coercion of the minority stockholders. Id. at 645. In Olenik v. Lodzinski, the Court of Chancery held that the ab initio requirement was satisfied because the controller’s first offer, although extended after nine months of discussions, announced MFW’s dual protections “‘before any negotiations took place.’” 2018 WL 3493092, at *15 (Del. Ch. July 20, 2018) (quoting Swomley v. Schlecht, 2014 WL 4470947, at *21 (Del. Ch. 2014), aff’d, 128 A.3d 992 (Del. 2015) (TABLE)). The Court relied on settled Delaware law distinguishing between “discussions,” which were extensive in Olenik, and “negotiations,” which began only with the controller’s first offer. Id. at *16; see also Colonial Sch. Bd. v. Colonial Affiliate, NCCEA/DSEA/NEA, 449 A.2d 243, 247 (Del. 1982) (distinguishing between “negotiate,” which “means to bargain toward a desired contractual end,” and “discuss,” which “means merely to exchange thoughts and points of views on matters of mutual interest”). The Delaware Supreme Court weighed in three months later, holding in Flood v. Synutra International, Inc. that the ab initio element “require[s] the controller to self-disable before the start of substantive economic negotiations, and to have both the controller and Special Committee bargain under the pressures exerted on both of them by these protections.” 195 A.3d 754, 763 (Del. 2018). In particular, the Supreme Court affirmed the trial court’s conclusion that the controller satisfied the ab initio element by conditioning the transaction on MFW’s dual protections in “the Follow-up Letter [sent] just over two weeks after [it] first proposed the Merger, before the Special Committee ever convened and before any negotiations ever took place.” Id. at 764. Although these decisions are based on notably different facts—for example, nine months elapsed between the initial communication and the first offer in Olenik, and only two weeks passed between the initial communication and “the Follow-up Letter” in Synutra—they appear to create one rule: MFW’s “ab initio” requirement will be satisfied as long as the controller commits to MFW’s dual protections before substantive economic negotiations occur. Olenik is on appeal to the Delaware Supreme Court, which may further clarify matters. C. Inadequate Disclosures Preclude Cleansing under Corwin In two recent cases, the Court of Chancery concluded the Corwin doctrine did not apply. In re Xura, Inc. S’holder Litig., 2018 WL 6498677 (Del. Ch. Dec. 10, 2018) (denying Corwin motion based on seven alleged material omissions); In re Tangoe, Inc. S’holder Litig., 2018 WL 6074435 (Del. Ch. Nov. 20, 2018) (holding stockholders were not adequately informed for Corwin purposes where audited financials and the facts underlying a restatement were not disclosed). Under Corwin, the business judgment rule applies to judicial review of transactions that are not otherwise subject to the entire fairness standard so long as the transaction was “approved by a fully informed, uncoerced vote of the disinterested stockholders.” See id. at *9 (quoting Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304, 309 (Del. 2015)). Initially an appraisal proceeding, Xura morphed into a plenary action after appraisal discovery revealed questionable conduct primarily by a seller’s CEO. Xura, 2018 WL 6498677, at *1. The CEO, it was alleged, steered his company into a transaction with an interest that differed from other stockholders: self-preservation. Id. at *11. He stood to lose his job and a $25 million payout if the company was not sold. Id. at *13. The proxy statement for the deal failed to disclose the CEO’s actions relating to the sales process, leaving stockholders “entirely ignorant” of his influence over the transaction and “his possible self-interested motivation for pushing an allegedly undervalued [t]ransaction on the [c]ompany and its stockholders.” Id. Vice Chancellor Slights held that Corwin-cleansing was unavailable because the “stockholders could not have cleansed conduct about which they did not know.” Id. at *12. The stockholders in Tangoe similarly were found to be uninformed. Thirteen months before the transaction at issue, the SEC notified Tangoe that it would need to restate almost three years of its financials. Tangoe, 2018 WL 6074435, at *1. Tangoe took so long to do so that NASDAQ delisted its stock and the SEC threatened to deregister it. Id. at *2. After an activist stockholder increased its stake in the company and signaled to the board that “a proxy contest was coming,” the board began shifting its focus from restating the financials to selling the company. Id. at *1, 4-6. While it did so, it also altered its own compensation so that its members collectively would receive nearly $5 million in the event of a change of control. Id. at *5, 12-13. Throughout the sales process, the board failed to provide stockholders with audited financial statements. Although the Court pointed out that audited financial statements are not per se material, when combined with the misstatements in the company’s financial statements, among other things, the stockholders were left in an “information vacuum.” Id. at *10. The Court also found it significant that the board failed to disclose information related to the process of restating the company’s financials. Id. at *11. Accordingly, the Court held that Corwin-cleansing was unavailable because a reasonable inference could be drawn that the stockholders were not fully informed when they approved the transactions. Id. at *10-12. D. Delaware Supreme Court Affirms MAE Ruling On December 7, 2018, the Delaware Supreme Court affirmed the Court of Chancery’s recent post-trial ruling that a “Material Adverse Effect” (or “MAE”) permitted a buyer to terminate a merger agreement. Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018), aff’d, — A.3d —-, 2018 WL 6427137 (Del. Dec. 7, 2018). Several factors contributed to the Court of Chancery’s finding that Akorn suffered an MAE. First, after Fresenius agreed to acquire Akorn, Akorn’s business “fell off a cliff”: in three consecutive quarters, it announced year-over-year declines in quarterly revenues of 29%, 29%, and 34%; in operating income of 84%, 89%, and 292%; and in earnings per share of 96%, 105%, and 300%. Id. at *21, 24, 35. Second, whistleblower letters prompted an investigation into Akorn’s product development and quality control process. Id. at *26. This investigation revealed many flaws, including falsification of laboratory data submitted to the FDA. Id. at *30-31. Third, Akorn failed to operate its business in the ordinary course post-signing, fundamentally changing its quality control and information technology functions without Fresenius’s consent. Id. at *88. On appeal, the Delaware Supreme Court held that the record “adequately support[ed]” the Court of Chancery’s determination. Akorn, Inc., — A.3d —-, 2018 WL 6427137 (Del. Dec. 7, 2018). E. N.Y. First Department Reverses Xerox, Dissolves Injunction As we reported in our 2018 Mid-Year Securities Litigation Update, in April 2018, the New York Supreme Court enjoined a multi-billion dollar merger of Xerox Corp. and Fujifilm Holdings Corp. (“Fujifilm”) because Xerox’s CEO, who negotiated the deal, and a majority of Xerox’s board were conflicted or lacked independence because they expected to continue serving the combined entity. In re Xerox Corp. Consolidated Shareholder Litigation, 2018 WL 2054280, at *7 (N.Y. Sup. Apr. 27, 2018). Xerox and Fujifilm appealed. In October 2018, the First Department reversed the decision unanimously “on the law and the facts,” holding that the business judgment rule applied and that the plaintiffs had failed to show a likelihood of success on their breach of fiduciary duty and fraud claims. Deason v. Fujifilm Holdings Corp., 165 A.D.3d 501 (1st Dep’t 2018). In particular, the plaintiffs “failed to show bad faith or a disabling interest on the part of the majority of the directors of Xerox” because “the possibility that any one of the directors would be named to [the combined] board alone was not a material benefit such that it was a disabling interest;” any potential conflict created by Xerox’s CEO continuing as the future CEO of the new company was acknowledged by the board; and the board “engaged outside advisers,” “discussed the proposed transaction on numerous occasions,” and the deal was not “unreasonable on its face.” Id. at 501-02. As a result, the First Department dismissed the complaints against Fujifilm and dissolved the injunctions enjoining the deal. Id. On February 21, 2019, the First Department denied the class plaintiffs’ motion for reargument or, in the alternative, leave to appeal to the Court of Appeals. 4. Falsity of Opinions – Omnicare Update As discussed in our prior securities litigation updates, courts continue to define the boundaries of Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015). The Supreme Court’s Omnicare decision addressed the scope of liability for false opinion statements under Section 11 of the Securities Act. The Court held that “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong.” Id. at 1327. An opinion statement can give rise to liability only when the speaker does not “actually hold[] the stated belief,” or when the opinion statement contains “embedded statements of fact” that are untrue. Id. at 1326–27. But in the heavily debated “omission” part of the opinion, the Court held that a factual omission from a statement of opinion gives rise to liability when the omitted facts “conflict with what a reasonable investor would take from the statement itself.” Id. at 1329. The plaintiffs’ bar predicted that this omission theory of falsity would give rise to a wave of securities litigation complaints poised to survive the pleadings phase. While the theory has indeed become commonplace in complaints, it has fared little to no better in the last half of 2018 against the exacting pleading standards generally applicable to all theories of liability under the securities laws. See, e.g., Hering v. Rite Aid Corp., 331 F. Supp. 3d 412, 427 (M.D. Pa. 2018) (finding that “Plaintiff has failed to meet the exacting pleading standard of the PSLRA” where reasonable investors would understand the statements to be estimates). One district court recently emphasized that “a general allegation that ‘Defendants had knowledge of, or recklessly disregarded, omitted facts’” is insufficient. In re Under Armour Sec. Litig., 342 F. Supp. 3d 658, 676 (D. Md. 2018) (citation omitted). Another court rejected plaintiff’s claim that defendants should have conducted an inquiry into the facts underlying their opinion, finding that “[a] blanket conclusory assertion that no investigation occurred, without more, is insufficient.” Pension Tr. v. J. Jill, Inc., 2018 WL 6704751, at *8 (D. Mass. Dec. 20, 2018). Courts have specifically grappled with whether plaintiffs met the pleading standard in cases involving a company’s general opinions on its financial condition. In Frankfurt-Tr. Inv. Luxemburg AG v. United Technologies Corp., the Southern District of New York held that “omitting even significant, directly contradictory information from opinion statements is not misleading, ‘especially’ when there are countervailing disclosures.” 336 F. Supp. 3d 196, 230–31 (S.D.N.Y. 2018). Relying on Tongue v. Sanofi, 816 F.3d 199 (2d Cir. 2016) and Martin v. Quartermain, 732 F. App’x 37 (2d Cir. 2018), the court found that statements about the company’s business and projected earnings per share were not misleading even where they failed to disclose specifics regarding a “slowdown of commercial aftermarket sales” and other potentially negative factors. Id. at 230. Plaintiff’s allegations—unlike the highly detailed allegations about test data in Sanofi and Martin—were “too scant in detail and scope” and “at a high level,” meaning that they failed to show that the alleged omissions would have a meaningful impact on a reasonable investor’s understanding of the company. Id. On the other hand, the District of Delaware found that plaintiffs met their pleading burden where they alleged that particular information omitted from a proxy statement, which recommended that shareholders vote in favor of a merger, made other specific statements about the fairness of the merger misleading. Laborers’ Local #231 Pension Fund v. Cowan, 2018 WL 3243975, at *10–12 (D. Del. July 2, 2018), reargument denied, 2018 WL 3468216 (D. Del. July 18, 2018). Because the board cited a fairness opinion in its decision to approve the merger, the court held that a reasonable investor may have thought that the company “placed confidence” in the fairness opinion and believed that it “accurately analyzed [the company’s] potential financial growth,” which “conflict[ed] with undisclosed facts or knowledge held by the board,” namely that the fairness opinion “did not incorporate acquisition based growth into its projections.” Id. at *10–11. Several courts also provided guidance for companies making opinion statements about legal and compliance risks, again highlighting the importance of context. For example, the Northern District of Illinois concluded that statements about legal compliance that were accompanied by disclosures concerning an ongoing IRS investigation would not be misleading to reasonable investors “unless they ignore[d] those disclosures.” Societe Generale Sec. Servs., GbmH v. Caterpillar, Inc., 2018 WL 4616356, at *4–5 (N.D. Ill. Sept. 26, 2018). Likewise, in Jaroslawicz v. M&T Bank Corp., the Third Circuit found that a company’s statements about its due diligence, which allegedly omitted deficiencies in its anti-money laundering compliance program, were not misleading. 912 F.3d 96, 113–14 (3d Cir. 2018). Paying close attention to the context, the court held that the statements were accompanied by sufficient facts that the company conducted a shorter period of diligence than investors may have otherwise expected. See id. at 114. In addition, the plaintiffs alleged both general negligence—insufficient to plead a violation under Omnicare—as well as that “a reasonable investor would have expected the banks to conduct a sampling of customer accounts” as part of their due diligence process. Id. The court found that a single allegation that the bank could have conducted a sampling was too weak to defeat the motion to dismiss. See id. In contrast, a Southern District of New York court found that a company’s statements regarding careful management and compliance with laws regarding its credit portfolio could be misleading because plaintiffs alleged that company was aware of particular facts suggesting the falsity of those statements. See In re Signet Jewelers Ltd. Sec. Litig., 2018 WL 6167889, at *12–13 (S.D.N.Y. Nov. 26, 2018). Noting that the pleading burden is “no small task,” the court held that plaintiffs nevertheless met their burden because they alleged “particularized and material[] facts” based on the testimony of former employees who provided information to the plaintiffs. Id. at *13. In particular, specific allegations that the company was “aware that a substantial and growing portion of its credit portfolio contained subprime loans and chose to disregard internal warnings about that fact” rendered the complaint sufficient to survive a motion to dismiss. Id. In the latter half of the year, courts also dealt with the circumstances in which a pharmaceutical company’s opinions on the safety of a drug undergoing clinical trials may give rise to liability under Omnicare. In Hirtenstein v. Cempra, Inc., the court held that the company’s statements that it believed a drug was safe was an inactionable opinion. 2018 WL 5312783, at *17–18 (M.D.N.C. Oct. 26, 2018). Plaintiffs claimed that because the company’s chief executive officer “elected to speak about [the drug’s] purportedly ‘compelling’ clinical data . . . [she] had a duty to disclose that . . . safety data showed a significant and genuine signal for liver toxicity and liver injury.” Id. at *17. The court held that the company did not have a “duty to disclose adverse events, particularly where the statements [were] couched as opinion and [did] not constitute affirmative statements that there are no safety concerns associated with the drug.” Id. at *18. These types of opinions could not be actionable, where they were “little more than vague optimistic statements regarding the safety profile of the drug.” Id. at *19. On the other hand, in SEB Inv. Mgmt. AB v. Endo International, PLC, the court found that plaintiff stated a Section 11 claim where it alleged that the company had specific knowledge of “an increasing number of serious adverse events linked to injection” of the drug at issue. 2018 WL 6444237, at *21–22 (E.D. Pa. Dec. 10, 2018). Despite the fact that the company allegedly knew about the “increased rate in injection use, [it] failed to disclose to investors that it faced a serious risk of regulatory action, including removal of the drug from the market,” forming the basis for an actionable Section 11 claim. Id. 5. Courts Continue to Shape “Price Impact” Analysis at the Class Certification Stage Courts across the country continue to grapple with implementing the Supreme Court’s landmark ruling in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), although the second half of 2018 did not bring any new decisions from the federal circuit courts of appeal. In Halliburton II, the Supreme Court preserved the “fraud-on-the-market” presumption—a presumption enabling plaintiffs to maintain the common proof of reliance that is essential to class certification in a Rule 10b-5 case—but made room for defendants to rebut that presumption at the class certification stage with evidence that the alleged misrepresentation had no impact on the price of the issuer’s stock. Two key questions continue to recur. First, how should courts reconcile the Supreme Court’s explicit ruling in Halliburton II that direct and indirect evidence of price impact must be considered at the class certification stage, Halliburton II, 123 S. Ct. at 2417, with its previous decisions holding that plaintiffs need not prove loss causation or materiality until the merits stage? See Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011) (“Halliburton I”); Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 568 U.S. 455 (2013). Second, what standard of proof must defendants meet to rebut the presumption with evidence of no price impact? As we have previously reported, the Second Circuit has addressed both of these key questions in Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017) (“Barclays”) and Arkansas Teachers Retirement System v. Goldman Sachs, 879 F.3d 474 (2d Cir. 2018) (“Goldman Sachs”). Those decisions remain the most substantive interpretations of Halliburton II. Barclays addressed the standard of proof necessary to rebut the presumption of reliance and held that after a plaintiff establishes the presumption of reliance applies, defendant bears the burden of persuasion to rebut the presumption by a preponderance of the evidence. As we have previously noted, this puts the Second Circuit at odds with the Eighth Circuit, which cited Rule 301 of the Federal Rules of Evidence when reversing a trial court’s certification order on price impact grounds, see IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775, 782 (8th Cir. 2016), because Rule 301 assigns only the burden of production—i.e., producing some evidence—to the party seeking to rebut a presumption, but “does not shift the burden of persuasion, which remains on the party who had it originally.” Fed. R. Evid. 301. That inconsistency, however, was not enough to persuade the Supreme Court to review the Second Circuit’s decision. Barclays PLC v. Waggoner, 138 S.Ct. 1702 (Mem) (2018) (denying writ of certiorari). In Goldman Sachs, the Second Circuit vacated the trial court’s ruling certifying a class and remanded the action, directing that price impact evidence must be analyzed prior to certification, even if price impact “touches” on the issue of materiality. Goldman Sachs, 879 F.3d at 486. Following the Second Circuit’s decision, the district court held an evidentiary hearing and heard oral argument. In re Goldman Sachs Grp. Sec. Litig., 2018 WL 3854757, at *1-2 (Aug. 14, 2018). The court, again, certified the class. Id. On remand, plaintiffs argued that because the company’s stock price declined following the announcement of three regulatory actions related to the company’s conflicts of interest, previous misstatements about its conflicts had inflated the company’s stock price. See id. at * 2. Defendants argued the alleged misstatements could not have caused the stock price drops for two reasons, and offered expert testimony to support each. Id. at *3. First, they argued that the company’s stock price had not reacted to thirty-six prior reports commenting on company conflicts, and, therefore, the identified stock price drops could not be linked to the alleged misstatements. Id. at *3. Second, they argued that news of enforcement activities (and not a correction of earlier statements regarding conflicts and business practices) caused the identified stock price drops. Id. The court found plaintiff’s expert’s “link between the news of Goldman’s conflicts and the subsequent stock price declines . . . sufficient.” Id. at *4. The court was persuaded that the first allegedly corrective disclosure revealed new information about the conflicts, see id., and held that defendants’ expert testimony regarding alternative explanations for the stock price decline (i.e., the nature of the enforcement actions rather than the subject matter) was not sufficient to “sever” that link. Id. at *5-6. The Second Circuit has agreed to review Goldman Sachs for a second time and has ordered an expedited briefing schedule. See Order, Ark. Teachers Ret. System v. Goldman Sachs, Case No. 18-3667 (2d Cir. Jan. 31, 2019). The Third Circuit is also poised to substantively address price impact analysis at the class certification stage in the coming months in its review of Li v. Aeterna Zentaris, Inc., 324 F.R.D. 331 (D.N.J. 2018) (“Aeterna”). See Order, Vizirgianakis v. Aeterna Zentaris, Inc., No. 18-8021 (3d Cir. Mar. 30, 2018). Substantive briefing is completed in Aeterna, which invites the Third Circuit to clarify the type of evidence defendants must present, including the burden of proof they must meet to rebut the presumption of reliance and whether statistical evidence rebutting the presumption must meet a 95% confidence threshold. In certifying the class, the district court described defendants’ burden as “producing [enough] evidence . . . ‘to withstand a motion for summary judgment or judgment as a matter of law,’” Aeterna, 324 F.R.D. at 344 (quoting Lupyan v. Corinthian Colleges, Inc., 761 F.3d 314, 320 (3d Cir. 2014) and citing Best Buy, 818 F.3d at 782 and Fed. R. Evid. 301), but then observed defendants failed to prove lack of price impact with “‘scientific certainty,’” see id. at 345 (quoting Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 310 F.R.D. 69, 95 (S.D.N.Y. 2015)). The district court rejected defendants’ argument that plaintiff’s event study, which did not attribute a statistically significant price movement to the alleged misstatement, rebutted the presumption and criticized defendants for not offering their own event study. See id. at 345. We will continue to monitor developments in these and other cases. 6. The Third Circuit Explores the Requirement to Disclose Risk Factors In late December 2018, the Third Circuit issued a decision in the latest case to address the scope of disclosure requirements for proxy solicitations under Section 14(a) of the Securities Exchange Act of 1934. In Jaroslawicz v. M&T Bank Corp., 912 F.3d 96 (3d Cir. 2018), former shareholders of Hudson City Bancorp filed suit against Hudson and M&T Bank, alleging the joint proxy soliciting votes for the merger between the two entities was materially misleading because (1) it failed to disclose certain practices that did not comply with relevant regulatory requirements, which posed significant risk factors facing the merger, as required under Item 503(c) of Regulation S-K (the “Regulatory Risk Disclosures”); and (2) these omissions rendered opinion statements regarding M&T Bank’s compliance with laws materially false and misleading (the “Legal Compliance Disclosures”). Specifically, as to the Regulatory Risk Disclosures, the proxy statement was alleged to be misleading because it did not discuss M&T Bank’s past consumer violations involving switching no-fee checking accounts to fee-based accounts. As to Legal Compliance Disclosures, the proxy statement was alleged to be misleading because M&T Bank had failed to discuss deficiencies in its Bank Secrecy Act/anti-money laundering (“BSA/AML”) compliance program until it filed a supplemental disclosure six days before the shareholder vote, when it disclosed for the first time that it was the subject of a Federal Reserve Board investigation on these programs. In interpreting the scope of disclosure under Item 503(c), which requires proxy issuers to discuss “the most significant factors that make the offering speculative or risky,” the Court explained that risk disclosures, such as the Regulatory Risk Disclosures at issue, must be “company-specific” in order to insulate an issuer from liability. Jaroslawicz, 912 F.3d at 106–08. Thus, “generic disclosures which could apply across an industry are insufficient” to protect a company in the event that a risk falling under a “boilerplate” disclosure later transpires. Id. at 108, 111. For this reason, the Court concluded that M&T Bank’s generic references to being subject to regulatory oversight were not “company-specific” risk factors that would “communicate anything meaningful” to stockholders. Id. at 111. Thus, even though the bank had ceased its alleged consumer violations, the Court found it plausible that the undisclosed “high volume of past violations made the upcoming merger vulnerable to regulatory delay.” Id. at 107. With respect to the plaintiffs’ allegations regarding BSA/AML deficiencies, the Court held that the supplemental proxy statement’s disclosure that the bank was the subject of an investigation regarding these practices, which “would likely result in delay of regulatory approval,” was “likely adequate” under Section 14(a). However, because the supplemental disclosures were issued a mere six days before the stockholder vote on the transaction, the Court concluded that the plaintiffs had adequately alleged that a reasonable investor did not have enough time to digest this relevant information. Id. at 112. Further, although the Court declined to expressly decide whether a heightened standard for pleading falsity applied to the Legal Compliance Disclosures and other claims brought under Section 14(a) of the Exchange Act, it found that the stockholders failed to allege a claim under their “misleading opinion” theory. Id. at 113. In dismissing plaintiffs’ Omnicare claims alleging that the Legal Compliance Disclosures were actionably misleading, the Court reiterated the longstanding principle that an opinion statement is not rendered misleading simply because it later “proved to be false.” Id. Crucially, the Court explained that the Legal Compliance Disclosures in the proxy statement were not plausibly alleged to be misleading because the bank adequately divulged the basis for its opinion. In particular, the proxy statement made clear that the bank had concluded it was in compliance with applicable laws based on a brief period of due diligence conducted in connection with the transaction. Id. at 114. 7. The Ninth Circuit Clarifies when Courts May Consider Documents Outside of the Pleadings on Motions to Dismiss Securities Claims On August 13, 2018, the Ninth Circuit revisited the extent to which a court can properly consider materials outside of the four corners of the complaint in ruling on a motion to dismiss a securities claim. Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 994 (9th Cir. 2018). It is well settled that courts must not only accept all factual allegations in a complaint as true for purposes of deciding a motion to dismiss, but also consider “other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, [1] documents incorporated into the complaint by reference, and [2] matters of which a court may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). In the Ninth Circuit, a defendant can seek to treat a document as incorporated into the complaint “if the plaintiff refers extensively to the document or the document forms the basis of the plaintiff’s claim.” United States v. Ritchie, 342 F.3d 903, 907 (9th Cir. 2003). The incorporation by reference doctrine allows courts to treat documents as if they are part of the complaint in their entirety, which “prevents plaintiffs from selecting only portions of documents that support their claims, while omitting portions of those very documents that weaken—or doom—their claims.” Khoja, 899 F.3d at 1002. Judicial notice, on the other hand, is explicitly permitted by Federal Rule of Evidence 201, and allows a court to take notice of an adjudicative fact if it is “not subject to reasonable dispute.” Fed. R. Evid. 201(b). In Khoja, the Ninth Circuit noted the “concerning pattern” of courts improperly using these procedures in securities cases “to defeat what would otherwise constitute adequately stated claims at the pleading stage,” and “aim[ed] to clarify when it is proper to take judicial notice of facts in documents, or to incorporate by reference documents into a complaint.” 899 F.3d at 998, 999. The district court in Khoja considered twenty-one documents quoted or referenced by the complaint, and granted the defendant’s motion to dismiss the claims plaintiff filed under Sections 10 and 20 of the Exchange Act. Id. at 997. On appeal, the Ninth Circuit reversed in part, holding that the district court had abused its discretion in taking judicial notice of at least one document and in treating at least seven documents as incorporated by reference. Id. at 1018. Regarding judicial notice under FRE 201, the Court explained that just because a document is subject to judicial notice “does not mean that every assertion of fact within that document is judicially noticeable for its truth.” Id. “‘[A] court may take judicial notice of matters of public record without converting a motion to dismiss into a motion for summary judgment,’” but “‘cannot take judicial notice of disputed facts contained in such public records.’” Id. (quoting Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001)). For example, in Khoja, the district court had judicially noticed a September 11, 2014 investors’ conference call transcript that was submitted with the defendant’s SEC filings. Khoja, 899 F.3d at 999. The Ninth Circuit explained that the district court could take judicial notice of the existence of the call, but could not take judicial notice of the statements in the transcript, as “the substance of the transcript ‘is subject to varying interpretations, and there is a reasonable dispute as to what the [transcript] establishes.’” Id. at 999-1000 (quoting Reina-Rodriguez v. United States, 655 F.3d 1182, 1193 (9th Cir. 2011)). Regarding incorporation by reference, the Ninth Circuit explained that a document that “merely creates a defense to the well-pled allegations in the complaint” should not automatically be incorporated by reference. Khoja, 899 F.3d at 1002. A contrary result would enable defendants to “insert their own version of events into the complaint to defeat otherwise cognizable claims.” Id. Applying these principles, the Ninth Circuit held that the district court abused its discretion by incorporating a Wall Street Journal blog post, as the complaint had quoted the post only once in a two-sentence footnote, and the quote conveyed only basic historical facts. Id. at 1003-04. The Khoja court explained that, under its prior precedent in Ritchie, a reference is not “extensive” enough to warrant incorporation by reference when the document is only referenced once, unless that “single reference is relatively lengthy.” Id. The Ninth Circuit held that the mere mention of the Wall Street Journal blog post was insufficient, especially as the document did not form the basis of any claim in the complaint. Id. at 1003. Ultimately, the Ninth Circuit held that the district court abused its discretion by incorporating by reference at least seven documents. Id. at 1018. It remains to be seen what impact Khoja will have in the Ninth Circuit, as Khoja did not eliminate a defendant’s ability to rely on documents outside the complaint at the motion to dismiss stage. 899 F.3d at 1018 (affirming district court with respect to half of the documents challenged on appeal). Nonetheless, the case may prompt other federal courts to revisit their practices of incorporation by reference and judicial notice, particularly in securities cases where such practices are common. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Jefferson Bell, Monica Loseman, Brian Lutz, Mark Perry, Shireen Barday, Lissa Percopo, Michael Kahn, Emily Riff, Mark Mixon, Jason Hilborn, Alisha Siqueira, Andrew Bernstein, and Kaylie Springer. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following members of the Securities Litigation Practice Group Steering Committee: Brian M. Lutz – Co-Chair, San Francisco/New York (+1 415-393-8379/+1 212-351-3881, blutz@gibsondunn.com) Robert F. Serio – Co-Chair, New York (+1 212-351-3917, rserio@gibsondunn.com) Meryl L. Young – Co-Chair, Orange County (+1 949-451-4229, myoung@gibsondunn.com) Jefferson Bell – New York (+1 212-351-2395, jbell@gibsondunn.com) Jennifer L. Conn – New York (+1 212-351-4086, jconn@gibsondunn.com) Thad A. Davis – San Francisco (+1 415-393-8251, tadavis@gibsondunn.com) Ethan Dettmer – San Francisco (+1 415-393-8292, edettmer@gibsondunn.com) Barry R. Goldsmith – New York (+1 212-351-2440, bgoldsmith@gibsondunn.com) Mark A. Kirsch – New York (+1 212-351-2662, mkirsch@gibsondunn.com) Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com) Monica K. Loseman – Denver (+1 303-298-5784, mloseman@gibsondunn.com) Jason J. Mendro – Washington, D.C. (+1 202-887-3726, jmendro@gibsondunn.com) Alex Mircheff – Los Angeles (+1 213-229-7307, amircheff@gibsondunn.com) Robert C. Walters – Dallas (+1 214-698-3114, rwalters@gibsondunn.com) Aric H. Wu – New York (+1 212-351-3820, awu@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 8, 2019 |
Developments on Public Company Disclosures on Board and Executive Diversity

Click for PDF On February 6, 2019, the staff (Staff) of the Division of Corporation Finance of the Securities and Exchange Commission (SEC) issued two new identical Compliance and Disclosure Interpretations (C&DIs).  The C&DIs address disclosure that the Staff expects public companies to include in their proxy statements and other SEC filings regarding “self-identified diversity characteristics” with respect to their directors and director nominees.  In addition, legislation was introduced in both the U.S. House of Representatives and the U.S. Senate that would require public companies to annually disclose the gender, race, ethnicity and veteran status of their directors, director nominees, and senior executive officers. Background The SEC already has rules requiring board diversity-related disclosure.  Item 407(c)(2)(vi) of Regulation S-K requires companies to disclose “whether, and if so how, the nominating committee (or the board) considers diversity in identifying nominees for director.”  It further requires that, “[i]f the nominating committee (or the board) has a policy with regard to the consideration of diversity in identifying director nominees, [the company must] describe how this policy is implemented, as well as how the nominating committee (or the board) assesses the effectiveness of its policy.”  Historically, it has been our understanding that the Staff takes a broad view of what qualifies as a “policy,” and that if a company considers diversity in identifying director candidates, the company has a “policy” for purposes of this requirement and is expected to provide disclosure about the implementation and effectiveness of its policy.  This disclosure requirement therefore can influence what companies report under Item 401(e) of Regulation S-K, which requires directors’ and nominees’ biographical information to “briefly discuss the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director for the registrant at the time that the disclosure is made, in light of the registrant’s business and structure.” These rules have “been subject to some criticism” that they don’t provide “enough useful disclosure,”[1] as noted by Bill Hinman, the head of the SEC’s Division of Corporation Finance, in testimony before the House Committee on Financial Services Subcommittee on Capital Markets, Securities and Investment in April 2018.  Hinman added that the Staff had been reviewing company disclosures regarding directors’ diversity and considering concerns raised about directors’ privacy issues.  As a result, the SEC’s regulatory agenda states on the long-term agenda that the Division of Corporation Finance “is considering recommending that the [SEC] propose amendments to the proxy rules to require additional disclosure about the diversity of board members and nominees.”[2] New C&DIs The two new Regulation S-K interpretations are identical and are set forth in Question 116.11 (relating to Item 401, Directors, Executive Officers, Promoters and Control Persons) and Question 133.13 (relating to Item 407, Corporate Governance).[3]  They convey the Staff’s expectation that in some situations (1) a discussion of a director or nominee’s experience would include disclosure of “self-identified diversity characteristics” and how they were considered, and (2) the description of the company’s diversity policies would include how the company considers “the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account.”  The C&DIs are framed as addressing a situation where “board members or nominees have provided for inclusion in the company’s disclosure” those characteristics and where the “individual . . . has consented to the company’s disclosure of those characteristics,” demonstrating that the Staff recognizes important considerations that companies wrestle with when addressing these disclosure requirements. In light of the new interpretations, companies should review and consider whether their disclosures appropriately reflect information provided by directors and nominees (and whether those individuals have consented to disclosure of that information), and how that information is taken into account under their board diversity policies.  In practice, there are a wide variety of approaches that companies follow in evaluating directors and nominees and, as recognized in the new CD&Is, there are often also a wide variety of factors considered.  Among the ways that companies have addressed these matters to date are:  aggregated disclosure of the specific diversity characteristics of their boards; discussions of the stage in the nomination process at which diversity characteristics are considered; skills and characteristic matrices; and individualized discussions of qualifications and characteristics.  In light of the variety of factors typically considered by boards when identifying and nominating directors, we expect that many companies will enhance their existing diversity disclosures in a variety of ways depending on their specific circumstances. Text of New C&DIs The full text of the new C&Dis is set forth below: Question 116.11 and Question 133.13 Question: In connection with preparing Item 401 disclosure relating to director qualifications, certain board members or nominees have provided for inclusion in the company’s disclosure certain self-identified specific diversity characteristics, such as their race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background. What disclosure of self-identified diversity characteristics is required under Item 401 or, with respect to nominees, under Item 407? Answer: Item 401(e) requires a brief discussion of the specific experience, qualifications, attributes, or skills that led to the conclusion that a person should serve as a director. Item 407(c)(2)(vi) requires a description of how a board implements any policies it follows with regard to the consideration of diversity in identifying director nominees. To the extent a board or nominating committee in determining the specific experience, qualifications, attributes, or skills of an individual for board membership has considered the self-identified diversity characteristics referred to above (e.g., race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background) of an individual who has consented to the company’s disclosure of those characteristics, we would expect that the company’s discussion required by Item 401 would include, but not necessarily be limited to, identifying those characteristics and how they were considered. Similarly, in these circumstances, we would expect any description of diversity policies followed by the company under Item 407 would include a discussion of how the company considers the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socio-economic or demographic characteristics. [February 6, 2019] Congressional Developments On the same day that the C&DI were issued, Representative Gregory Meeks (D-NY) – who was recently named the Chair of the House Committee on Financial Services’ Subcommittee on Consumer Protection and Financial Institutions – introduced legislation requiring public companies to provide additional diversity disclosures.[4]  The “Improving Corporate Governance Through Diversity Act of 2019,” would require public companies to disclose annually the gender, race, ethnicity, and veteran status of their directors, director nominees, and senior executive officers.  A companion bill in the Senate was simultaneously introduced by Senator Bob Menendez (D-NJ), who serves on the Senate’s Banking Committee. The bill also would involve the SEC’s Office of Minority and Women Inclusion (OMWI).  OMWI would (1) be empowered to publish triennially best practices, in consultation with an advisory council of investors and issuers, for compliance with these enhanced disclosure rules, (2) be required to create an advisory council consistent with the Federal Advisory Committee Act requiring formal reporting, public openness and accessibility, and various oversight procedures, and (3) be allowed to solicit public comment on its best practices publication consistent with the formal rulemaking process under the Administrative Procedures Act. According to a press release issued by Rep. Meeks, the bill is supported by The NAACP, the Urban League, the Council for Institutional Investors, and the U.S. Chamber of Commerce.    [1]   See https://www.congress.gov/committees/video/house-financial-services/hsba00/rNdly_FXlKs.    [2]   See https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201810&RIN=3235-AL91.    [3]   See https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.    [4]   See https://meeks.house.gov/media/press-releases/rep-meeks-and-sen-menendez-introduce-corporate-diversity-bill. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance practice group: Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Gillian McPhee – Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 29, 2019 |
Webcast: Challenges in Compliance and Corporate Governance

Every year brings new compliance challenges, and 2018 has been no exception. Join our panelists as they discuss key changes in the 2018 regulatory landscape and look forward to 2019 with insight on how to effectively navigate risks in the new year. Topics discussed include: Global Enforcement and Regulatory Developments Board Oversight of Cyber Threats and Governance Allocation How to Effectively Identify and Address Key Compliance Risks Practical Tips for Improving Corporate Compliance DOJ and SEC Priorities, Policies, and Penalties Update on Core Governance Issues and Regulatory Requirements Legislative Developments Impacting Board Governance View Slides (PDF) PANELISTS: Kendall Day, a partner in Washington, D.C., was an Acting Deputy Assistant Attorney General, the highest level of career official in the Criminal Division at DOJ. He represents financial institutions, multi-national companies, and individuals in connection with criminal, regulatory, and civil enforcement actions involving anti-money laundering (AML)/Bank Secrecy Act (BSA), sanctions, FCPA and other anti-corruption, securities, tax, wire and mail fraud, unlicensed money transmitter, and sensitive employee matters. Mr. Day’s practice also includes BSA/AML compliance counseling and due diligence, and the defense of forfeiture matters. Sacha Harber-Kelly, a partner in London, focuses his practice in global white-collar investigations. He was a Prosecutor and Case Controller at the United Kingdom’s Serious Fraud Office (SFO) where he was involved in the investigation and prosecution of international corporate corruption cases since 2007. He has worked extensively with a range of other enforcement authorities in the U.K., U.S. and beyond, including the DOJ, SEC, OFAC, the U.K. National Crime Agency, HM Revenue Commissioners, and the Financial Conduct Authority. He was awarded a Member of the Order of the British Empire (MBE) for services to the SFO. In private practice, he represents clients in criminal and regulatory investigations as well as cross-border enforcement inquiries. Stuart Delery, a partner in Washington, D.C., was the Acting Associate Attorney General, the No. 3 position in the Justice Department, where he oversaw the civil and criminal work of five litigating divisions — Antitrust, Civil, Tax, Civil Rights, and Environment and Natural Resources — as well as other components. His practice focuses on representing corporations and individuals in high-stakes litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement. Adam M. Smith, a partner in Washington, D.C., was the Senior Advisor to the Director of the U.S. Treasury Department’s OFAC and the Director for Multilateral Affairs on the National Security Council. His practice focuses on international trade compliance and white collar investigations, including with respect to federal and state economic sanctions enforcement, the FCPA, embargoes, and export controls. He routinely advises multi-national corporations regarding regulatory aspects of international business. Lori Zyskowski, a partner in New York, is Co-Chair of the firm’s Securities Regulation and Corporate Governance practice. She was previously Executive Counsel, Corporate, Securities & Finance at GE.  She advises clients, including public companies and their boards of directors, on a wide variety of corporate governance and securities disclosure issues, and provides a unique perspective gained from over 12 years working in-house at S&P 500 corporations. F. Joseph Warin, a partner in Washington, D.C., is Co-Chair of the firm’s White Collar Defense and Investigations practice and former Assistant U.S. Attorney in Washington, D.C. Mr. Warin is consistently recognized annually in the top-tier by Chambers USA, Chambers Global, and Chambers Latin America for his FCPA, fraud and corporate investigations acumen.  In 2018 Mr. Warin was selected by Chambers USAas a “Star” in FCPA, and “a “Leading Lawyer” in the nation in Securities Regulation: Enforcement.  Global Investigations Review reported that Mr. Warin has now advised on more FCPA resolutions than any other lawyer since 2008.  Who’s Who Legal and Global Investigations Review named Mr. Warin to their 2016 list of World’s Ten-Most Highly Regarded Investigations Lawyers based on a survey of clients and peers, noting that he was one of the “most highly nominated practitioners,” and a “’favourite’ of audit and special committees of public companies.”  Mr. Warin has handled cases and investigations in more than 40 states and dozens of countries.  His credibility at DOJ and the SEC is unsurpassed among private practitioners — a reputation based in large part on his experience as the only person ever to serve as a compliance monitor or counsel to the compliance monitor in three separate FCPA monitorships, pursuant to settlements with the SEC and DOJ: Statoil ASA (2007-2009); Siemens AG (2009-2012); and Alliance One International (2011-2013). MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of  3.0 credit hours, of which 3.0 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 2.50 credit hours, of which 2.50 credit hours may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 2.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

January 16, 2019 |
Law360 Names Gibson Dunn Among Its Securities 2018 Practice Groups of the Year

Law360 named Gibson Dunn one of its six Securities Practice Groups of the Year [PDF] for 2018. The practice group was recognized for “[s]ecuring a landmark U.S. Supreme Court decision that opened up potential appointments clause challenges to administrative law judges who decide enforcement cases for the U.S. Securities and Exchange Commission.” The firm’s Securities practice was profiled on January 16, 2019. Gibson Dunn’s securities practice offers comprehensive client services including in the defense and handling of securities class action litigation, derivative litigation, M&A litigation, internal investigations, and investigations and enforcement actions by the SEC, DOJ and state attorneys general.