Anti-Trust Regulation: Change in the Rules

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Assuming the parties to a deal are of sufficient size prior to the deal itself, the FTC requires filing and clearance of all M&A deals above a certain size under the infamous Hart-Scott-Rodino Act.  That size of deal trigger is now $92M (it is updated regularly, which means it is increased).

It has long been established that the size of a deal can be reduced as follows: from the deal consideration in an acquisition of equity, if any debt of the target to third parties is paid at closing then the amount of that payment is deducted from the deal size.

Last week, advice from the FTC website has reversed this practice if the selling equity holders will benefit from the retirement of that debt.   While one can appreciate a certain symmetry to cash deals (where assumption of target debt always was counted in determining deal size), parties to equity M&A transactions now will need to calculate FTC reporting requirements utilizing this new metric.

Harvard Study: Failure of Corporations to Benefit Stakeholders

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On the second anniversary of the signing by many major corporations of the Business Roundtable Statement calling on business to operate for the benefit of all stakeholders, the Harvard Governance Program accuses corporate America of, in effect, intending to con the American public.

The Roundtable Statement admonishes companies to work to benefit not only shareholders but also customers, employees, suppliers and communities.  After a survey of over 130 signatory companies, the Harvard Program concludes that “signatory companies did not intend or expect their endorsement to be followed by changes in how they treat stakeholders.”  Details of study results follow.

Signatory CEOs did not bring the signing to their boards, evidence of lack of serious intent.

Almost 100 signatories updated their governance guidelines and failed to elevate status of stakeholders other than shareholders.

Forty shareholder proxy proposals were presented to various companies based on the Statement and every one of them was opposed by managements.

Corporate by-laws continue to emphasize shareholder return.

About 85% of proxy statements do not even mention joining the Statement.

Director compensation remains tied to shareholder return and typically is paid in company stock.  No comp program links director compensation with other stakeholder interests.

The Program’s report ascribes all sorts of cynical motives to what it seemingly considers to be management duplicity.  Putting aside the accuracy of such accusations, it is hard to parse the results of the Program’s report with the professed growing corporate focus on ESG, DEI, climate change, etc.  The Harvard study was headed by Professor Lucien Bebchuk, long a sharp critic of corporate management, who expressed suspicion at the beginning of the favorable press surrounding the Roundtable pronouncement based in part on lack of Board involvement.

Radio Silence for Two Weeks

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I am off to install my youngest in Reed College in Portland, OR and thus it is unlikely I will post for the next two weeks; this hiatus is temporary and I look forward to again posting on corporate, SEC and other legal matters on my return.  Meanwhile, I wish a pleasant and vacation-ful August to all.

SEC: NASDAQ, DEI A-OK

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Last Friday the SEC approved changes to the NASDAQ Rules designed to push NASDAQ-listed companies down the DEI path to more diverse boards of directors.  (Sorry about the headline above, by the way; I could not resist.)

The Rule changes are simple: companies must disclose self-identified gender, racial and LGBTQ+ board data, and to explain why, if true, a given company does not have at least two “Diverse” board members (meaning at least one female and one minority or LGBTQ+ person).  The Rules also make available a complimentary recruiting service to assist members with hiring compliance.

Two aspects of this action are interesting.

Although the intent of the Rule is admirable, how did the SEC parse approval within the context of the Commission’s obligation to monitor rules of SROs (self-regulatory organizations, such as exchanges) as part of regulating securities market operations.?  Without express statutory mandate, the Commission reverted to a list of consistent, if not specific, analogies: prevent fraud, prevent manipulation, promote just trade, perfect a free and open market, protect investors and the public interest, encourage equitable fees for members and  issuer companies and investors. Such tenuous bases indicate the degree to which the SEC over the years has broadly interpreted its regulatory mandate within the content of social trends and pressure.

Second, without negative implication, I am intrigued with the conflation and designation of desired board member categories; the designation assumes sufficient management value and contribution from only two members off a robust list of those societal populations under greatest mistreatment, an assumption which  must be questionable.  Indeed, a better argument could be made, by asking why every category is not in fact included, as each category is disadvantaged but in different ways for different reasons.  Is it assumed that each woman, together with a given member from a very diverse list of other disadvantaged populations, will inject sufficient sensitivity as to be beneficial in board management.  Perhaps pressing for a greater number of new board members was thought to be a bridge too far?

Since I adopt the view that the desire for the perfect should not prevent achieving the good, I have no quarrel with the SEC from a policy standpoint.  But it is interesting that we reached this point based on unclear statutory authority and with a very generalized assumption about human behavior.

SEC Upends its Own Whistleblower Regulations

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The SEC hands out millions of dollars each year to individuals who alert the Commission (or sometimes other regulatory agencies) of ultimately proven securities fraud.  During the Trump years, the Commission underwent formal procedures under the Administrative Procedures Act (“APA”) to limit these awards in two regards: to give discretion to the SEC to reduce the formula pay-outs in very large cases, and to decline to provide pay-outs where other agencies have similar whistleblower payment programs.

The new Democratic majority intends to reverse these limitations, but also has this week announced that in the interim they will ignore the rules revisions.  This announcement has been criticized by the two remaining Trump-appointed (and now minority) Commissioners as bad policy, creating uncertainty and the precedent that the marketplace can no longer rely on formally adopted rules as governing regulatory action.

However correct that the majority may be, in claiming that the Trump era changes weakened the attractiveness of blowing the whistle against wrongdoing, the dissenting Trump Commissioners seen correct in their criticism.  The APA process for rulemaking is statutory, robust and designed to create knowable, actionable and clear guidance.  Politics aside, seems to me that “the law is the law.”  The SEC always has been politicized at its core, at least at the Commissioner level, where the party in the White House names 3 of the 5 members; but the job of the staff is to enforce what’s on the books today, not what the majority party intends to do in the future.

The professional qualifications of the minority Commissioners are excellent, and so is their argument against the recent policy statement abandoning the law.

Finally, although I readily confess that there is no substantive link between the above legal observations and famous lines by Lauren Bacall in the classic film To Have and Have Not.  I confess that every time “whistleblowing” arises in a professional context, those lines spring inappropriately to mind: “If you want me, all you have to do is whistle. … You know how to whistle, don’t you, Harry?  You just put your lips together and blow.”

Suing Victims over Cyber Attacks

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Monday of this week, in a Texas Federal court, SolarWinds sought to have dismissed a shareholder suit alleging that the company tricked investors by not disclosing in advance company vulnerability to cyber attacks of its software product Orion.  Plaintiffs claimed SolarWinds misled investors by not warning them of the risk; the company replied that there was no suggestion of an intent to mislead, nor of recklessness (which would be the legal equivalent of intent), pointing out that the SolarWinds hack has been generally recognized as highly sophisticated.

The company does make a general observation about the direction of litigation that is worthy of note: any time something bad happens to a public company, a class action is filed against the company for a securities law misstatement harming stockholders.

Interestingly, plaintiffs also claimed against two PE firms because those firms held a large stake in SolarWinds equity.  Seemingly, the PE firms were major investors but not involved in operations.  We do not know all the facts, but mere stockholdings, however large the holdings, better not create liability for actions of the company (absent actual exercise of management control) or else the legal separation between investors and the company in which they invest will be destroyed by mere stock ownership.  That is not the current law,  today the “veil is not pierced” by stock ownership alone, and any change in the law in this regard would have massive market, litigation and insurance consequences.

Finally, while law firms that bring shareholder derivative suits under the securities laws are the traffic cops of the market-place and sometimes do uncover problematic action, the addition of ancillary defendants in litigation, to increase the chances of monetary recovery even on a nuisance suit basis, is unfortunate.

Crypto: Money or Security?

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The problem is: it often is both.

Remarks yesterday by SEC chair Gensler called for Congress to pass legislation making clearer the regulatory powers of the SEC over certain forms of crypto-currency; to date, the SEC has regulated crypto by suing the issuers, which is not, dare I say, best practice.

Many crypto offerings have looked like securities, as they were designed and marketed to provide a thing one could sell and trade at a profit.  Some offerings were more cleverly structured. It is beyond our scope to parse the litigation history, but we can play with the anomalies here:

Clearly, people pay for things with bitcoin and other pseudo-currencies.  Just like with dollars.  Just like with checks that translate to dollars and are so denominated.  But crypto is denominated by the market and so while a check for a dollar always gets you a dollar, a bitcoin unit when issued for a dollar can get you $1.50– or, alas, 75 cents.  SO it is money and an investment.

Let’s say I go out and buy a hundred Euros worth (I am making this up) $125.  When I spend or sell those Euros, I may get $128 of credit, or $1.10 of credit.  But buying Euros, in the form of Euros, is not a securities transaction, clearly.   (What if I am an investment fund and I buy 2.3 billion Euros, in specie, on the assumption that Euros today are underpriced?)

The regulatory impetus is the use of the cryptos: if people use them as an investment vehicle then the SEC wants to and should regulate them.  But lots of fine lines need to be drawn. (I am reminded of the question as to whether a promissory note is an SEC-regulated security.  The law specifically and categorically says that a note IS a security.  But the courts and SEC have made clear that only some notes are securities: your mortgage on your house is not a security when you give it to your bank lender, nor is your IOU to your brother when he lends you a thousand dollars.

So today’s reportage quotes Gensler as asserting that a majority of digital assets are under the federal securities laws because their USAGE is speculative. He calls for Congressional power to regulate trading and lending cryptos, particularly on DeFi (decentralized finance) platforms, and seeks to have such platforms register with the SEC much as an exchange.  At the same time, he has just expressed an invitation to register with the SEC an ETF fund dealing in bitcoin trading.

Our grandchildren will open their box of antiquities to marvel at monetary coins and paper; they will do everything financial by electronic credit transfers authorized by fingerprint or iris scan.  Those systems of payment may be by either governmental or private enterprise systems.  We are at the beginning of a journey, the exact twists and turns of which are as unpredictable as the current SEC reaction to cryptos; but the end-point of all this is inevitable.

 

Burgers, Lawyers and Boards– Oh my!!

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A recent article in Law 360 (a service to attorneys) collected a covey of interesting factoids relating to a major hamburger vendor’s legal tangle relating to discrimination and harassment.  Seems Mickey D has been accused of sins in these areas, attracting litigation from shareholders that has ensnared one of the country’s major law firms and the entire board.

First, when accused of discrimination, the company did the right thing in hiring an independent law firm to investigate and report. Now the law firm itself has been sued for aiding and abetting sexual harassment by twice failing to fully uncover its scope, thereby bringing in another presumably solvent and (hopefully) insured defendant.

Second, an investor has sued based on discrimination against Black franchisees and executives, resulting in an alleged 85% decline in Black executives.

Third, another investor has sued the entire Board for breach of fiduciary duty in giving an executive a $56M separation package after termination for an improper relationship with a subordinate.

Without at all suggesting culpability on the part of any of the defendants in these varied litigations, one can nonetheless step back and admire the range of imagination exhibited by plaintiffs’ counsel in asserting various claims against a single enterprise.  It is, however, not necessarily a gravy train for all the lawyers — one firm faces major allegations of its inadequate investigation aiding and abetting its client company in failing properly to respond to harassment allegations.

LIBOR– Interesting Developments

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By now it is common knowledge that calculating commercial interest rates using LIBOR is no longer possible; the disclosure of LIBOR manipulations tolled its death knell.  The influential New York Federal Reserve Bank has proposed a replacement metric (“Term SOFR”), which will permit a transition from LIBOR to a commercially accepted replacement. .

The announced terms of use of Term SOFR, however, bar utilization in certain interest swaps.  The details of the impact of this limitation, and possible work-arounds, are beyond the scope of this post.  Borrowers seeing to hedge future interest rate exposure are going to need to resort to detailed risk analysis, guided by professional input.  To the extent hedges are important financial protections for public registrants, expect some interesting disclosures.  The good news is that it is likely that the marketplace will establish generally accepted instruments to address the present disconnect.

Greater detail is available on my firm’s website. https://duanemorris.com/alerts/libor_term_sofr_formally_recommended_all_done0721.html#start-text

I’ve Been Thinking

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After a wet and tumultuous July, I have gathered my wits again and have begun posting to this blog site on legal matters.  However, on occasion I have written about other subjects when anomalies of life have struck me as– well, anomalous.  Below, my current confusions are catalogued.

My son is off to college and has been in touch with his two future room-mates. How is it possible that an expensive private college that does not give scholarships can attract three students whose politics would suggest that the People’s Revolution is imminent?

People are beating up people requesting the wearing of masks, claiming infringement on constitutional rights.  Whatever the arguments for imperiling everyone else with illness and death, the Constitution is not one of them.  There is a philosophical continuum between the volitional acts of saying “good morning” and shooting a stranger for no reason.  Each is a personal act.  One is protected as a freedom.  One is a felony.  So somewhere in between there is a line that limits freedom, as it is not true that the Constitution does (or should) protect every behavior.

So how close is infecting someone who dies to: saying “good morning”;  and, how close to shooting a stranger for no reason?

COVID fatigue will cause offices to open more rapidly this Fall even though statistics in some areas will show, as today, greater infections than at the alleged original height of the pandemic.

I tried to commute into Boston the other day for a rare, masked visit to my office.  Although the commuter rail schedule has been slashed, that did not stop the scheduled 8:15 from Wellesley Farms to post on the screen as up to 45 minutes late due to late equipment arrival.  Can’t they get the few trains still running to run reliably, avoiding human error or sloth?

They are building a fifty story building across the street from my office in town, split between residences and offices.  Someone just bought a two-bedroom apartment on the Boston waterfront for $13M.  You cannot afford a home in a Boston suburb because everyone is moving out of the City due to a permanent change of lifestyle and work habits.  Uh, wait– let’s think about this paragraph again….

My beloved Red Sox have fallen out of first place and refused to add real strength at the just-concluded trading deadline.  I do not understand John Henry and Chiam Bloom.

I bought an on-line ticket to a Sox-Yankee game the other day, at Fenway (having deferred my season seats due to COVID for a second year).  Beautiful day.  Sox blew the game in the 8th, to the delight of the Yankee fan family sitting next to me, on tour of various big league parks as a summer vacation for their seven year old; that night they flew to Chicago.  When I was seven, my parents for summer celebration gave me a dixie cup with a wooden spoon….

Changes at Fenway.  Just about all beer is of limited choice and canned, at over $11 each; no dark.  Food choices greatly curtailed.  El Tiante Cuban treat stand reduced to selling Italian sausage.  No chowdah!  Still a sell-out with almost no masks (in fairness, was before CDC recent advice to mask up).

When the “Yankees Suck” chant arose from the bleachers near the end of the game, the seven year old did not seem to notice.  At least there were no street vendors selling anti-Yankee Ts with obscene comments.

Oh, yes.  As a local sport writer sometimes is wont to say, this is the time for a shameless personal plug.  In the last two months I have published two new non-lawyer books, each available at Amazon and Barnes and Noble.  A book of short stories entitled Noir Ain’t the Half of It.  A book of new poetry entitled Laertes in America.  Please order; I need the ego boost of a royalty check.  If Grisham can sell books, so can I.

Further deponent sayeth not.