Since the U.S. Court of Appeals for the Second Circuit decision in United States v. Newman in 2015, there has been uncertainty as to whether insider trading cases could be successfully leveled against persons who were not directly involved as corporate insiders or were several steps removed from the source of inside information. The Newman decision had seemingly severely limited the long-held insider trading standards espoused by the Supreme Court in the 1983 case, Dirks v. SEC. Continue Reading
Oftentimes in large corporate acquisitions, there is a delay period between the time the merger agreement is entered into by the parties and the time that the transaction is completed and the purchase price is paid. One effect of this delay is that if one of the parties suffers a serious financial decline or downturn in business, the deal may become unattractive to the other party. Therefore, merger agreements commonly protect parties against this possibility by including a “material adverse change” (“MAC”) clause. Under such a clause, if one party suffers a material adverse change before the conclusion of the transaction, the other party may cancel the deal without repercussion.
The standard definition of a MAC includes any event, circumstance, fact, change, development, condition, or effect that has had or could reasonably be expected to have a material adverse effect on the business. The parties to a merger agreement generally do not define the meaning of a “material adverse effect” because they want the clause to cover all unknown and unforeseen situations. Generally, the parties rely upon the courts to determine when such an event has occurred. Courts often consider the present and future earnings of the affected company to determine if a MAC has occurred. The parties may also list exclusions to a MAC clause, such as changes to the national economy or terrorist attacks. Continue Reading
As the self-regulatory organization that oversees the brokerage industry, the Financial Industry Regulatory Authority, or “FINRA,” asks this seemingly simple question on its website. Investors understand their responsibilities in pursuing an active role in the management and protection of their investment accounts. All brokerage firms and most other financial institutions provide their customers with periodic statements which contain various types of information about the holdings, activity, and value of the account at the statement ending date. There are almost as many different forms of account statements as there are brokerage firms, but certain basic information is featured in almost all of them.
Investors should first determine that the personal information is accurate: the account title (names of person, entity, trust, or company), address, and most importantly the investment objectives. While most people will look at the account value at the end of the period and compare it to the ending value of the previous statement period to see if the value has increased or decreased, the review should not stop there. It is important to look beyond the total value on the front page to determine why the value may have changed. Was it due to a deposit or withdrawal of cash or securities, or was it solely based on an increase/decrease in the securities that were already in the account? Continue Reading
The current rules are contained in FINRA Rule 3220 (Influencing or Rewarding Employees of Others).
In August, 2016, FINRA released for comment a proposal to make changes to its rules regarding gifts by member firms. See Notice to Members 16-29. FINRA is proposing two new rules, FINRA Rule 3221 (Restrictions on Non-Cash Compensation), and FINRA Rule 3222 (Business Entertainment). FINRA is proposing amendments to the gifts, gratuities, and non-cash compensation rules to, among other things: (1) consolidate the rules under a single rule series in the FINRA rulebook; (2) increase the gift limit from $100 to $175 per person per year and to include a de minimis threshold below which firms would not have to keep records of gifts given or received; (3) amend the non-cash compensation rules to cover all securities products, rather than only direct participation programs (“DPPs”), variable insurance contracts, investment company securities, and public offerings of securities; and (4) incorporate existing guidance and interpretive letters into the rules. Continue Reading
Earlier this year we wrote about new proposed rules governing FINRA’s Codes of Arbitration Procedure for Customer Disputes and Industry Disputes, respectively, to provide that absent specification to the contrary in a final arbitration award, when arbitrators order opposing parties to pay each other damages, the monetary awards shall offset, and the party that owes the larger amount shall pay the net difference. In September, FINRA published Regulatory Notice 16-36 announcing that effective October 26, 2016, amendments to Rules 12904 and 13904 will go into effect which provide for the automatic offset of competing awards, absent a specific order to the contrary by the arbitrators. Continue Reading
FINRA has released new guidance for investors regarding legitimate ways for investors to recover investment losses due to fraud or various types of mismanagement.
One way for a wronged investor to recover funds is for the investor to file an arbitration claim or request mediation through FINRA. This avenue is available to investors who have a dispute with a brokerage firm or a particular broker. FINRA rules require the act which resulted in the dispute to have occurred within the past six years. Although an investor can represent himself or herself in an arbitration or mediation, it is often advisable for the investor to hire an experienced securities attorney. Continue Reading
When shareholders bring a lawsuit following a merger or acquisition of their company, Delaware courts apply one of two standards of review—the “business judgment rule” or the “entire fairness standard.” The business judgment rule allows the court to assume that in making the business decision, the directors of the corporation acted on an informed basis, in good faith, and in the honest belief that the transaction was in the best interest of the company. Under this standard, it is much easier for a lawsuit to get dismissed because shareholders must attack this presumption. On the other hand, the entire fairness standard requires that the directors not only believed that the transaction was entirely fair, but that the transaction was actually objectively fair, independent of the board’s beliefs. Under this standard, courts scrupulously analyze whether the transaction involved both fair dealing and a fair price. Therefore, the burden falls upon the board of directors to prove that they followed a fair process and achieved a fair price. Continue Reading
Recently, the Delaware Chancery Court provided additional guidance on the evolving rules governing a shareholder’s right to inspect a corporation’s books and records. The high profile case, captioned Amalgamated Bank v. Yahoo! Inc., both clarified and expanded those rights.
In the case, Amalgamated Bank demanded to inspect Yahoo’s books and records in order to investigate potential mismanagement and corporate wrongdoing in connection with the payment of compensation to Yahoo’s officers and directors. Specifically, Amalgamated Bank sought information related to the hiring, compensation package, and subsequent termination of Henrique de Castro, Yahoo’s former Chief Operating Officer. Amalgamated Bank sought not only corporate “books and records” as provided for in Section 220 of the Delaware General Corporate Law, but also emails and other electronically stored files of Yahoo’s Chief Executive Officer, Marissa Mayer. Continue Reading
Recently, the Supreme Court of New York, Appellate Division, Second Department reversed a lower court’s ruling that a letter of intent regarding a potential joint venture created a legally binding agreement. The letter of intent provided that the parties “shall negotiate to arrive at mutually acceptable Definitive Agreements” and that “each reserve the right to withdraw from further negotiations at any time….” When the negotiations broke down, plaintiff alleged that there was a breach of contract.
Reversing the lower court’s ruling, the Appellate Division held that it is “well settled in the common law of contracts in this State that a mere agreement to agree, in which a material term is left for future negotiations, is unenforceable.” Here, the language of the letter indicated to the court that the letter was not a binding contract, but a mere “agreement to agree.” Therefore, the lower court should have granted defendants’ motion to dismiss the complaint. Continue Reading
Earlier this week, the SEC announced that it was imposing sanctions on a company that included provisions in severance agreements which would remove financial incentives in the event that the departing employees participated in whistleblowing programs. The company’s severance agreements required departing employees to waive their ability to apply for and obtain monetary awards from the SEC’s Whistleblower Program if they wanted to receive severance payments and other post-employment benefits from the company.
The company had originally added this language to its severance agreements in response to the SEC’s adoption of its Whistleblower Program.
As stated by the SEC, the purpose of the SEC’s Whistleblower Program is to encourage whistleblowers to report potential securities law violations to the SEC. The Program promises financial awards and confidentiality in exchange for whistleblowers’ information. In this case, even though the SEC was unaware of any instances in which a former employee of the company did not submit whistleblower information to the SEC, nor was it aware of any instances of actual enforcement of the waiver provision by the company, merely having the language in the severance agreements was sufficient to cause a violation of Rule 21F-17 under the Exchange Act. Continue Reading