Category: Corporate law

CFTC Wades Into Climate Regulation

On June 2, 2022, the Commodities Futures Trading Commission (CFTC) issued a Request for Information (“RFI”) for “public comment on climate-related financial risk to better inform its understanding and oversight of climate-related financial risk as pertinent to the derivatives markets and underlying commodities markets.”  According to the RFI, the CFTC is contemplating “potential future actions including, but not limited to, issuing new or amended guidance, interpretations, policy statements, regulations, or other potential Commission action within its authority under the Commodity Exchange Act as well as its participation in any domestic or international fora.”

Specifically, the RFI issued by the CFTC is quite wide-ranging, and engages with numerous aspects of the CFTC’s authority, focusing on both systemic and narrow issues.  For example, the CFTC has, among other things, issued a broad request for comment on how “its existing regulatory framework and market oversight . . . may be affected by climate-related financial risk” and “how climate-related financial risk may affect any of its registered entities, registrants, or other market participants, and the soundness of the derivatives markets.”  It is hard to imagine a broader request by the CFTC–it is effectively asking for input on how “climate-related financial risk” may impact any portion of its regulatory purview.  Conversely, the CFTC has also posed very specific questions, including as to how the CFTC “could enhance the integrity of voluntary carbon markets and foster transparency, fairness, and liquidity in those markets,” and how it could “adapt its oversight of the derivatives markets, including any new or amended derivative products created to hedge-climate-related financial risk.”  In short, based upon the RFI, the CFTC could conceivably adopt a narrow or broad view of how it should adjust its regulations to account for climate-related financial risk.  Notably, however, the CFTC also asked if there were “ways in which updated disclosure requirements could aid market participants in better assessing climate-related risks,” which suggests that the CFTC may echo the SEC’s recent proposed rule for mandatory climate disclosures.

Most significantly, the fact that yet another financial regulatory agency is focused on “climate-related financial risk” suggests that the Biden Administration is willing to expend significant resources and energy in engaging in this type of regulation to advance its climate agenda.  When considered in tandem with the SEC’s recent proposed rules for mandatory climate disclosures and to combat greenwashing, it is apparent that there is a significant regulatory focus on climate issues and the financial markets.  This move by the CFTC also suggests that the Biden Administration will fully support the SEC’s proposed rules against the inevitable legal challenge.  (And, based upon the concurrences of the Republican CFTC commissioners to this RFI, it is likely that any climate-related regulation proposed by the CFTC will also be subject to legal challenge, likely on the grounds that such a regulation exceeded the CFTC’s authority.)  Most importantly, this move by the CFTC–that seeks to “understand how market participants use the derivative markets to hedge and speculate on various aspects of physical and transition [climate] risk”–demonstrates that the regulatory focus on climate and the financial markets will remain a top priority for the foreseeable future.

The Commodity Futures Trading Commission today unanimously voted to release a Request for Information (RFI) to seek public comment on climate-related financial risk to better inform its understanding and oversight of climate-related financial risk as pertinent to the derivatives markets and underlying commodities markets.

Article By Jacob H. Hupart of Mintz

For more environmental legal news, click here to visit the National Law Review.

©1994-2022 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

Inflation Woes: Four Key Ways for Companies to Address Inflation in the Supply Chain

The U.S. economy is grappling with the highest inflation in decades, with extensive inflation in the supply chain affecting companies worldwide. Supply chain disruptions undoubtedly have contributed to rising inflation, as extensive delays and skyrocketing costs continue to plague the industry.

In March 2022, the consumer-price index (or CPI) — a measure of the prices consumers pay for products — rose at an annual rate of 8.5%, which is the highest increase in 47 years.1 Meanwhile, the producer-price index (or PPI) — a measure of inflation meant to gauge the impact on suppliers — similarly rose significantly at an annual rate of 11.2%.2 Finally, the employer cost index (or ECI) demonstrates that, from March 2021 to March 2022, total compensation rose 4.5%, wages and salaries rose 4.7%, and benefit costs rose 4.1%.3

Because inflation increases the prices of goods or services, negotiations about who bears that risk in business partner relationships and the consequences of that risk allocation will have significantly greater financial impacts than we have seen in recent memory. As a result, ensuring your business teams are well versed on the impacts of and means of mitigating inflation in new contracts has a direct impact on your bottom line.

In this article, we provide ways for companies in the supply chain to address high inflation and alleviate associated pressures, including (1) how to revisit and use existing agreement provisions to address inflation risk, (2) approaches to negotiating new agreements and amendments to existing agreements, (3) approaches to limit inflationary exposure, and (4) strategies for cost reduction.

Figure 1:

Percent Change in CPI March 2021 versus March 2022

CPI March Chart

Bureau of Labor Statistics, U.S. Department of Labor, Consumer Price Index – March 2022, issued April 12, 2022

Four Key Ways to Mitigate the Effects of Increasing Inflation in the Supply Chain

1. Revisit and Use Provisions in Existing Agreements

Companies faced with rising costs must review their supply agreements to determine if they already contain mechanisms the company can use to address inflation. On the buy side, companies should look in their agreements for terms relating to fixed prices. On the sell side, companies should investigate ways to pass increased costs on to customers. Most supply contracts contain a variety of provisions that may assist in combatting inflationary pressures.

(a) Pricing Provisions

From a seller’s perspective, a contract may include index-based price escalation provisions, which tie contract prices to one or more indices. The underlying indices may be (i) broad economic indices such as the PPI or “market basket” indices tied to all items and all urban consumers, (ii) targeted indices such as ECI for a specific location, or (iii) tied to the cost of a specific commodity used in the underlying product. Contracts will sometimes incorporate several commodity indices based on the percentage those commodities are used in the product that is the subject of the agreement, in order to accurately reflect the costs associated with producing the good.

Allocations under these pricing provisions vary depending on negotiation power. They could put all of the risk on one party, share the risk equally, or share the risk according to particular percentages. The latter two options represent ways to avoid a “win/lose” approach.

Sellers will want to see whether their agreements allow for periodic negotiations for updated prices and take advantage of those opportunities. A buyer, meanwhile, may look for provisions that allow it the flexibility to limit the quantities ordered, enabling it to reduce costs as necessary or to seek a more cost efficient alternative. A buyer also will want to determine if the contract prohibits the seller from changing prices.

Regardless of the existing provisions, the real impact of inflation is likely to trigger commercial discussions to address rising costs; this is true both for hard goods supply agreements and indirect services agreements with longer terms such as outsourcing and managed services relationships.

(b) Force Majeure as a Mechanism to Adjust Price?

Outside of pricing provisions such as the above, however, a party may look to other contract provisions, such as force majeure, to see if its performance under the contract could be excused; increased costs alone are not enough to constitute a force majeure event. In order for a force majeure to arguably apply, the increase in costs must be caused by an event that itself is a qualifying force majeure event under the terms of the applicable contract (which may include events like a labor strike or pandemic).

Force majeure provisions are intended to excuse performance under a contract but not to act as a pricing adjustment mechanism. However, force majeure and its extra-contractual cousin, commercial impracticability, can be used as tools to bring the parties to the negotiating table where events beyond either party’s reasonable control are impacting the ability to produce and deliver products.

2. Negotiate Amendments to Existing Agreements

To the extent sellers have fixed-price contracts with their customers, sellers should consider negotiating with such customers to adjust these contracts in order to keep the prices they charge their customers in line with their input costs. When entering these discussions, companies that wish to implement a price adjustment, or eliminate fixed pricing entirely, should consider meaningful ways to incentivize their customers to agree to such changes. Would the customer be willing to agree to a price adjustment in order extend the agreement or adjust the quantity? Any items that maintain the relationship between the parties while also allocating cost increases in an equitable way should be considered.

Conversely, buyers faced with price-increase requests should carefully consider their options:

  • First, a customer receiving a price-adjustment request should confirm the request is actually tied to inflation and not just an attempt by a supplier to increase its bottom line. Seek detailed calculations supporting the price adjustments, and require suppliers to demonstrate how much their costs have increased above expectations.
  • Second, customers should consider what items they would like to request in return for accepting a given price-adjustment request, such as whether they would like to adjust their quantity or timing of delivery.
  • Third, a customer faced with a price increase request should consider whether the request should include the opportunity for the customer to obtain pricedowns in the future, in the event there are changes in the pricing environment.

3. Pricing Tied to Indexing and Other Ways to Limit Future Inflationary Exposure when Drafting New Agreements

When drafting new agreements, companies should consider how best to mitigate the effects of inflation.

For nearly 40 years, we have enjoyed relatively low and steady levels of inflation, which explains why existing agreements may not adequately address the allocation of significant and unexpected economic change.

Many of those at the upper echelons of leadership today have never dealt with a high inflationary environment. To put it in perspective, the CEO of Walmart, the No. 1 company on the Fortune 500 list for 2021, was 19 years old when inflation was last a newsworthy topic.

In the future, however, we expect far fewer agreements to have long-term fixed prices, as sellers negotiating agreements will want to incorporate a variety of strategies that allow for pricing flexibility and avoid longstanding, fixed prices. One such strategy is tying prices to an index. As discussed above, this could be a general index such as the CPI or PPI or be much more specific depending on the item sold. There are numerous indices for various products and commodities that parties may use to reflect accurately the costs of producing the goods that are the subject of their agreement. Parties may consider incorporating a mechanism for revisiting these provisions, especially in the event that inflation slows. Caps on inflation risk also may be incorporated as a backstop.

If not tying prices to an index, selling parties will want to shorten the term of their agreements or require the parties to renegotiate prices at set points throughout the duration of their agreements. Alternatively, parties may consider price increases of a certain percentage that are automatically implemented periodically. The seller may even want to leave the pricing open and establish pricing at the time the order is placed.

On the other hand, customers will want to incorporate provisions that cause the supplier to bear the inflationary risk. Principally, this means locking in prices for as long of a period as the seller will agree to and ensuring prices are fixed upon the issuance of purchase orders.

If and when sellers push back on extended fixed-pricing provisions, there are a variety of methods parties may use to meet in the middle:

  • Pricing arrangements that are tied to one or more indices may be capped to a certain percentage, ensuring the customer will know its upward exposure.
  • Include thresholds of index movement such that the price remains static unless and until the percentage threshold is exceeded.
  • Allocate increased cost exposure so a certain percentage range of index movement is allocated to one party and then the next percentage range is allocated to the other party. Parties then may share any exposure above those ranges.
  • Additionally, index-based pricing can be clarified to include both upward and downward movement, ensuring that customers, while risking inflationary costs, may also receive the benefits of deflationary environments.

4. Think Strategically to Reduce Costs

Aside from considering purely contractual methods to combat inflation, companies should think strategically about ways to reduce costs more efficiently.

  • Streamlining. In order to pursue this strategy, companies need to determine which areas are driving increased spending and consider ways those areas may be managed differently. For example, companies may consider whether there are different inputs that can be used to lower costs or processes that may be streamlined. Companies can review their inventory management, labor inputs, and other areas to determine where cost cutting may be an option without sacrificing product or service quality. This streamlining might include ending product lines with lower levels of profitability.
  • Technology & Innovation. In addition, with labor constituting such a high percentage of the cost increases companies are experiencing, a company may want to double down on technology and innovation that reduces headcount. Or, as prices rise, a company may pursue other pricing models. For example, a heavy equipment manufacturer may opt for a pay-per-use model in lieu of the traditional sale model.
  • Diversification of the Supply Chain. Another method companies may use is diversifying their supply chains, ensuring they provide the flexibility and sustainability needed to weather turbulent periods. Though adding links to supply chains will not lower costs in the near term, it can help ensure a business continues to function smoothly even in the event of price shocks, material shortages, or other disruptions.

The stressors driving inflation are unlikely to be relieved any time soon. Companies should use every resource available to leverage their current contracts and negotiate new terms to address inflation’s serious repercussions on their bottom line.

FOOTNOTES

1 How High Is Inflation and What Causes It? What to Know, Wall Street Journal (April 12, 2022).

2 Supplier Prices Rose Sharply in March, Keeping Upward Pressure on U.S. Inflation, Wall Street Journal (April 13, 2022).

3  Employment Cost Index – March 2022, U.S. Department of Labor, Bureau of Labor Statistics (April 29, 2022).

Article By Vanessa L. Miller, Kathleen E. Wegrzyn, Leah R. Imbrogno, James R. Kalyvas, and Austin R. Kissinger of Foley & Lardner LLP

For more financial institutions and banking news, click here to visit the National Law Review.

© 2022 Foley & Lardner LLP

L.A. Jury Delivers Mother of All Verdicts – $464 Million to Two Employees!

As we have previously reported, jury verdicts in employment cases have continued to skyrocket in recent months, and there is no sign they are leveling off. Late last week, a Los Angeles Superior Court jury awarded a total of over $464 million ($440 million of which was in punitive damages) in a two-plaintiff retaliation case. This verdict is more than double any previous amount ever awarded and clearly qualifies as the largest verdict of its kind since the Fall of the Roman Empire.

The plaintiffs alleged they were retaliated against for making complaints about sexual and racial harassment in the workplace, directed at them and other coworkers, leading to their being pushed out of the company.

One plaintiff brought complaints to management about the alleged sexual harassment of two female employees and claimed he was constructively discharged after being subjected to retaliatory complaints and investigations from other supervisors.  The other plaintiff made anonymous complaints to the internal ethics hotline about the racial and sexual harassment of both himself and other coworkers.

After a two-month trial, the jury awarded one plaintiff $22.4 million in compensatory damages and $400 million in punitive damages and awarded the other plaintiff $2 million in compensatory damages and $40 million in punitive damages.

This latest verdict comes on the heels of a judge reducing another huge December 2021 verdict from a Los Angeles Superior Court jury (which we wrote about here) that awarded $5.4 million in compensatory damages and $150 million in punitive damages to a fired insurance company executive who alleged discrimination and retaliation. The judge ordered a reduction in the verdict to $18.95 million in punitive damages (or, in the alternative, a new damages trial) on the grounds that the prior verdict involved an impermissible double recovery ($75 million each from two Farmers Insurance entities) and a presumably unconstitutional ratio of punitive damages to compensatory damages (a ratio exceeding 9 or 10-to-1 is presumed to be excessive and unconstitutional, and the ratio, in that case, was 28-to-1).

Only time will tell if this $464 million verdict stands. In the meantime, our advice to employers worried about these gargantuan verdicts remains the same: ARBITRATE!

Article By Anthony J Oncidi and Morgan J. Peterson of Proskauer Rose LLP

For more labor and employment news, click here to visit the National Law Review.

© 2022 Proskauer Rose LLP.

SEC Commissioner Signals Need to Fulfill Mandate of Sarbanes-Oxley Act and Develop “Minimum Standards” for Lawyers Practicing Before the Commission

In remarks on March 5, 2022, on PLI’s Corporate Governance webcast, Commissioner Allison Herren Lee of the Securities and Exchange Commission stated that 20 years after its enactment, it is time to revisit the “unfulfilled mandate” of Section 307 of the Sarbanes-Oxley Act of 2002 and establish minimum standards for lawyers practicing before the Commission.1  Commissioner Lee, who announced that she will not seek a second term when her current one ends this month, took issue with what she called the “goal-directed reasoning” of some securities lawyers—that is, focusing primarily on the outcome sought by executives, rather than the impact on investors and the market as a whole.  Such lawyering, Commissioner Lee observed, has a host of negative consequences, including encouraging non-disclosure of material information, harming investors and market integrity, and stymying deterrence.  The solution, Commissioner Lee opined, is to fulfill the mandate of Section 307, which empowered the Commission to “issue rules, in the public interest and for the protection of investors, setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers.”2

Over the last 20 years, the Commission has declined to adopt enhanced rules of professional conduct for lawyers appearing before the Commission.  There are good reasons for the Commission’s inaction, including the attorney-client privilege, the goal of zealous advocacy, the fact-specific nature of materiality determinations, and the traditionally state-law basis for the regulation of attorney conduct.  Commissioner Lee, moreover, did not propose specific new rules and recognized that the task was difficult and should be informed by the views of the securities bar and other stakeholders.  Nor did she say that action by the Commission was imminent; it is unclear whether the Commission has authority to promulgate new rules under Section 307 given a 180-day sunset under the statute that occurred in 2003.  Indeed, neither Commissioner Lee nor any of the other SEC commissioners have issued statements on this topic since the PLI webcast.  SEC Enforcement Director Gurbir Grewal has, however, indicated an increased emphasis on gatekeeper accountability in order to restore public trust in the market.3  Nonetheless, given the Commission’s existing authority to impose discipline under its Rules of Practice, practitioners should be mindful of the potential for increased scrutiny moving forward.

Background

In the wake of corporate accounting scandals involving Enron, Worldcom, and other companies, Congress enacted the Sarbanes-Oxley Act in 2002 “[t]o safeguard investors in public companies and restore trust in the financial markets.”4  The Act was aimed at “combating fraud, improving the reliability of financial reporting, and restoring investor confidence,”5 including by empowering the SEC with increased regulatory authority and enforcement power.6  To that end, the Act includes provisions to fortify auditor independence, promote corporate responsibility, enhance financial disclosures, and enhance corporate fraud accountability.7

The Sarbanes-Oxley Act was passed just six months after the collapse of Enron in December 2001, and neither the House nor Senate bills originally contained professional responsibility language.8  Hours before the Senate passed its version of the Act, however, the Senate amended the bill to include language that would eventually become Section 307.9  Around the same time, 40 law professors sent a letter to the SEC requesting the inclusion of a professional conduct rule governing corporate lawyers practicing before the Commission.10  The letter picked up on a 1996 article by Professor Richard Painter, then of the University of Illinois College of Law, which recommended corporate fraud disclosure obligations for attorneys similar to those imposed on accountants by the Private Securities Litigation Reform Act of 1995.11  Senator John Edwards, one of the sponsors of the Senate floor amendment of the bill, emphasized the importance of including professional conduct rules for attorneys in such a significant piece of legislation, stating that “[o]ne of the problems we have seen occurring with this sort of crisis in corporate misconduct is that some lawyers have forgotten their responsibility” is to the companies and shareholders they represent, not corporate executives.12

In its final form, Section 307 imposed a professional responsibility requirement for attorneys that represent issuers appearing before the Commission.  Specifically, Section 307 directed the Commission, within 180 days of enactment of the law, to “issue rules, in the public interest and for the protection of investors, setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers,”13 and, at minimum, promulgate “a rule requiring an attorney to report evidence of a material violation of securities laws or breach of fiduciary duty or similar violation by the issuer or any agent thereof to appropriate officers within the issuer and, thereafter, to the highest authority within the issuer, if the initial report does not result in an appropriate response.”14

Since the enactment of Section 307, however, the Commission has promulgated only one rule pursuant to its authority, commonly known as the “up-the-ladder” rule.15  The up-the-ladder rule imposes a duty on attorneys representing an issuer before the Commission to report evidence of material violations of the securities laws.  When an attorney learns of evidence of a material violation, the attorney has a duty to report it to the issuer’s chief legal officer (“CLO”) and/or the CEO.16  If the attorney believes the CLO or CEO did not take appropriate action within a reasonable time to address the violation, the attorney has a duty to report the evidence to the audit committee, another committee of independent directors, or the full board of directors until the attorney receives “an appropriate response.”17  Alternatively, attorneys can satisfy their duty by reporting the violation to a qualified legal compliance committee.18  To date, the SEC has never brought a case alleging a violation of the up-the-ladder rule.

Commissioner Lee’s Remarks

In her remarks, Commissioner Lee stated that it is time to revisit the “unfulfilled mandate” of Section 307 and consider whether the Commission should adopt and enforce minimum standards for lawyers who practice before the Commission.  Commissioner Lee criticized “goal-directed reasoning” employed by sophisticated counsel in securities matters, and cited as an example Bandera Master Fund v. Boardwalk Pipeline,19 a recent decision in which the Delaware Court of Chancery rebuked the attorneys involved for their efforts to satisfy the aims of a general partner instead of their duty to the partnership-client as a whole.  The Court, specifically, stated that counsel “knowingly made unrealistic and counterfactual assumptions, knowingly relied on an artificial factual predicate, and consistently engaged in goal-directed reasoning to get to the result that [the general partner] wanted.”20  Bandera and cases like it, according to Commissioner Lee, are emblematic of a “race to the bottom” caused by pressure on securities lawyers to compete with each other for clients, while failing to give due consideration to the potential impact on investors, market integrity, and the public interest.

In Commissioner Lee’s view, “goal-directed” lawyering not only falls short of ethical standards but causes harm to the market and reduces deterrence.  Commissioner Lee expressed concern that, in an effort to give management the answer it wants, lawyers may downplay or obscure material information.21  Although recognizing that materiality determinations are fact-intensive, Commissioner Lee said that should not provide blanket cover for legal advice aimed at concealing material information from the public.  Non-disclosure has a host of negative consequences, including distorting market-moving information, interfering with price discovery, misallocating capital, impairing investor decision-making, and eroding confidence in the financial markets and regulatory system.  Further, such lawyering diminishes deterrence by creating a legal cover for inadequate disclosure, making it more difficult for regulators to hold responsible individuals accountable.  This type of legal counsel, in Commissioner Lee’s view, “is merely rent-seeking masquerading as legal advice, while providing a shield against liability.”

Commissioner Lee stated that the existing framework governing professional conduct is not adequate to hold lawyers accountable for such “reckless” advice.  According to Commissioner Lee, state bars—the principal source for lawyer discipline nationwide—are not up to the task because they lack resources, expertise in securities matters, and the ability to impose adequate monetary sanctions.  Additionally, Commissioner Lee noted that state law standards focused mostly on the behavior of individual lawyers, assigning few responsibilities to the firm for quality assurance.  Indeed, state law standards are mostly drafted in a “one-size-fits-all fashion” according to Commissioner Lee, and do not take into account the different issues faced at large firms that represent public companies, which are quite different from a solo practitioner handling personal injury or estate law matters.  Likewise, although the SEC has the power under Rule 102(e) of its Rules of Practice to suspend or bar attorneys whose conduct falls below “generally recognized norms of professional conduct,” there has been little effort to define or enforce that standard.22  Nor has the SEC rigorously enforced standards of attorney conduct under the one rule it has issued under Section 307, the “up-the-ladder” rule.

Commissioner Lee stated that it was time for the Commission to fulfill its mandate under Section 307.  Although not proposing any specific rules, Commissioner Lee offered the following concepts as a starting point:

  • Greater detail on lawyers’ obligations to a corporate client, including how advice must reflect “the interests of the corporation and its shareholders rather than the executives who hire them”;
  • Requirements of “competence and expertise” (as an example, disclosure lawyers should not opine on materiality “without sufficient focus or understanding of the views of ‘reasonable’ investors”);
  • Continuing education for securities lawyers advising public companies (similar to requirements set by the Public Company Accounting Oversight Board for minimum hours of qualifying continuing professional education for audit firm personnel);
  • Oversight at the firm level (similar to quality-control measures implemented at audit firms);
  • Emphasis on the need for independence in rendering advice (similar to substantive and disclosure requirements implemented in Rule 2-01 of Regulation S-X for auditors);
  • Obligations to investigate red flags and ensure accurate predicates for legal opinions (similar to the obligations that an auditor must perform to certify to the accuracy of their client’s financial statements); and
  • Retention of contemporaneous records to support the reasonableness of legal advice.

Commissioner Lee noted that the content of any specific rules or standards will require “careful thought,” as well as assistance from the securities bar, experts on professional responsibility, and other interested parties and market participants.  She invited input from the legal community and other stakeholders and noted that she appreciated the complexity of the task and concerns of the American Bar Association and others regarding protection of the attorney-client privilege.  Indeed, outside auditors are generally regarded as “public watchdogs” and such communications between the corporation and an auditor are not entitled to the affirmative attorney-client privilege afforded to legal counsel.  Accordingly, regulating the legal profession using a similar framework to that applied to the accounting profession has sparked more controversy.  Nonetheless, in Commissioner Lee’s view, those concerns should be weighed against “the costs of there being few, if any, consequences for contrived or tortured advice.”

Implications

The Commission has declined to adopt enhanced rules of professional conduct for lawyers appearing before it in the 20 years since the enactment of the Sarbanes-Oxley Act.  Commissioner Lee’s call for minimum standards, however, potentially signals increased scrutiny by the SEC with respect to lawyers who “practice before the Commission.”  As Commissioner Lee noted, that means “counsel involved in the formulation and review of issuers’ public disclosure, including those who address the many legal questions that often arise in that context.”23  Nonetheless, Commissioner Lee cautioned that she did “not intend with these comments to address the conduct of attorneys serving as litigators or otherwise representing their client(s) in an advocacy role in an adversarial proceeding or other similar context, such as in an enforcement investigation.”24

Although framing her call for standards in terms of Section 307 of the Sarbanes-Oxley Act, it is not clear that the Commission will—or even can—promulgate any further rules under that authority.  Commissioner Lee did not state that she was speaking on behalf of the Commission or indicate that the Commission would be taking concrete, imminent steps to adopt such standards.  The Commission has not put its imprimatur on the remarks by incorporating them into a formal release or statement of policy.  Moreover, the text of Section 307 appears to foreclose the possibility of further rulemaking, as it provides that the Commission shall issue any such rules “[n]ot later than 180 days after the date of enactment of this act,” i.e., January 27, 2003.  Consistent with that constraint, the SEC proposed the up-the-ladder requirements on November 21, 2002, in Release No. 33-8150, and the rule became final on January 29, 2003.25  But the SEC has not issued any other rule under Section 307 to date.

Even if official action under Section 307 may not be forthcoming, Commissioner Lee’s call for action should not be discounted.  Setting aside the up-the-ladder requirements, the SEC has authority under Rule 102(e) of the SEC’s Rules of Practice to censure or bar a lawyer from appearing or practicing before the Commission if found, among other things, “[t]o be lacking in character or integrity or to have engaged and unethical or improper professional conduct.”26  Commissioner Lee cited prior SEC guidance to indicate that Rule 102(e) may apply to attorney conduct that falls below “generally recognized norms of professional conduct,”27 a standard that has been left undefined to date.28  In practice, the SEC “will hold attorneys who practice before it to the standards to which they are already subject, including state bar rules.”29  At a minimum, then, Commissioner Lee’s objective of greater accountability may be achieved through a more aggressive application of Rule 102(e), which, as she noted, has generally only been applied as a follow-on penalty for primary violations of the securities laws by lawyers.

Commissioner Lee’s term expires on June 5, and she has announced that she intends to step down from the Commission once a successor has been confirmed.30  Should the Commission nonetheless take up her call to action in the future, it will be no easy task to adopt clear standards that can be implemented in a predictable manner.  In particular, Commissioner Lee’s focus on the role of lawyers in advising issuers on determinations of materiality and disclosure does not lend itself well to oversight or enforcement.  The well-established standard for materiality—whether “there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote”—is far from clear-cut.31  The Supreme Court, moreover, long has recognized that materiality “depends on the facts and thus is to be determined on a case-by-case basis.”32  As such, and as evidenced by the sundry cases concerning disclosure issues reversed on appeal, disagreement between litigants—as well as jurists—on matters of materiality and disclosure are par for the course.  If that is so, how can a lawyer’s advice on such matters (which will inevitably turn on the facts and the lawyer’s judgment and experience) be subject to oversight in any objective sense?

Even if lawyers’ materiality advice could be evaluated under objective standards, there are other difficulties.  First and foremost is that oversight of legal advice implicates the attorney-client privilege and the underlying benefit of candid advice from securities disclosure and corporate counsel.  As the Supreme Court has observed, the attorney-client privilege “is founded upon the necessity, in the interest and administration of justice, of the aid of persons having knowledge of the law and skilled in its practice, which assistance can only be safely and readily availed of when free from the consequences or the apprehension of disclosure.”33  Aside from situations in which the client has voluntarily waived privilege (as sometimes occurs in SEC investigations) or where another exception to the privilege applies, it is unclear how the SEC could evaluate legal advice without invading privilege.  Such attempts could have led to an increase in corporate wrongdoing as corporate executives could be more reluctant to seek expert legal advice.  In addition, it is unclear how regulators assessing materiality advice would—or could—balance an assessment of whether a lawyer has given the “correct” advice with a lawyer’s ethical obligations of zealous representation of the client.34  The divide between overreaching “goal-directed” reasoning and permissible zealous advocacy for the client is often murky, and reasonable minds can differ depending on the circumstances.  Moreover, it is already well-accepted that a corporate lawyer’s obligation is to the corporation as its client, not to any individual officer or director.35  That obligation carries with it ethical duties to “proceed as is reasonably necessary for the best interest” of the corporation, including when the lawyer is aware of violations of the law or other misconduct by senior management.36  In that sense, Commissioner Lee’s proposal could be viewed as a call for the SEC to take on enforcement of existing ethical rules, rather than for the development of novel “minimum standards.”

Ultimately, there are good reasons for the Commission’s reluctance to date to formally adopt minimum standards of professional conduct for lawyers appearing before it, including the attorney-client privilege, the goal of zealous advocacy, and the fact-specific nature of materiality inquiries.  The manipulation of facts and bad reasoning targeted by Commissioner Lee are not only the exception, and difficult if not impossible to eliminate completely, but are largely covered by existing rules and practices.  Nonetheless, Commissioner Lee’s call for lawyers to strive for higher legal and ethical standards in their counsel should be welcomed.  Sound legal advice is not only important for issuer clients, but also for the financial well-being of investors, the integrity of the markets, and public confidence in the regulatory system and capital markets.  Enhancements in ethical standards for the legal profession could also lead to reputational benefits and greater integrity in the profession.  It remains to be seen whether Commissioner Lee’s remarks will serve as an aspirational goal for securities lawyers, or translate into concrete action by the Commission.

1 Commissioner Allison Herren Lee, Send Lawyers, Guns and Money: (Over-) Zealous Representation by Corporate Lawyers Remarks at PLI’s Corporate Governance – A Master Class 2022 (Mar. 4, 2022), [hereinafter “Commissioner Lee Remarks”].

2 See Sarbanes‑Oxley Act, § 307, 15 U.S.C. § 7245 (2002).

3 Gurbir Grewal, Director, Division of Enforcement, Remarks at SEC Speaks 2021 (Oct. 13, 2021).

4 Lawson v. FMR LLC, 571 U.S. 429, 432 (2014).

5 Stephen Wagner and Lee Dittmar, The Unexpected Benefits of Sarbanes-Oxley, Harvard Bus. Rev. (Apr. 2006).

6 See Sarbanes–Oxley Act, § 3, 15 U.S.C. § 7202 (2002).

7 See Sarbanes–Oxley Act, § 1, 15 U.S.C. § 7201 (2002).

8 Jennifer Wheeler, Securities Law: Section 307 of the Sarbanes-Oxley Act: Irreconcilable Conflict with the ABA’s Model Rules and the Oklahoma Rules of Professional Conduct?, 56 Okla. L. Rev. 461, 464 (2003).

9 Id.

10 Id. at 468-69.

11 See generally Richard W. Painter & Jennifer E. Duggan, Lawyer Disclosure of Corporate Fraud: Establishing a Firm Foundation, 50 SMU L. Rev. 225 (1996).

12 Wheeler, supra note 8, at 465 (quoting 148 Cong. Rec. S6551 (daily ed. July 10, 2002) (statement of Sen. Edwards)).

13 See Sarbanes‑Oxley Act, § 307, 15 U.S.C. § 7245 (2002).

14 Final Rule: Implementation of Standards of Professional Conduct for Attorneys, Securities Act Rel. No. 8185 (Sept. 26, 2003).

15 17 C.F.R. §§ 205.1-205.7.

16 17 C.F.R. § 205.3(b)(1).

17 17 C.F.R. §§ 205.3(b)(3), (b)(4).

18 17 C.F.R. § 205.3(c).

19 Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, No. CV 2018-0372-JTL, 2021 WL 5267734, at *1 (Del. Ch. Nov. 12, 2021).  In Bandera, plaintiffs brought suit against a general partner for breach of a partnership agreement stemming from the general partner’s exercise of a call right without satisfying two requisite preconditions.  The court held for the plaintiffs and found the general partner had engaged in willful misconduct.  Id. at *51.  Contributing to the misconduct was the general partner’s outside counsel, who drafted an opinion letter justifying the general partner’s exercise of the call right.  Id.  Throughout the drafting process, the court found, that the outside counsel manipulated the facts in order to achieve the general partner’s desired conclusion.  Id. at *18-*47.

20 Id. at *51.

21 Commissioner Lee specifically cited, among other matters, environmental, social, and governance (“ESG”) disclosures.  The Commission is currently considering additional climate change-related disclosures to Regulation S-K and Regulation S-X.  See Jason Halper et al., SEC Proposes Climate-Related Changes to Regulation S-K and Regulation S-X, Cadwalader, Wickersham & Taft LLP (Mar. 23, 2022); see also Paul Kiernan, SEC Proposes More Disclosure Requirements for ESG Funds, The Wall Street Journal (May 25, 2022, 6:26 pm ET).

22 Rule 102(e) states, in relevant part:

(1) Generally. The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter:

(i) not to possess the requisite qualifications to represent others; or

(ii) to be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or

(iii) to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder.

17 C.F.R. § 201.102(e)(1).

23 Commissioner Lee Remarks, supra note 1.

24 Id.

25 Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys, Securities Act Rel. No. 8150 (Nov. 21, 2002); Final Rule: Implementation of Standards of Professional Conduct for Attorneys, Securities Act Rel. No. 8185 (Sept. 26, 2003); see also 2 Legal Malpractice § 14:114 (2022 ed.).

26 17 C.F.R. § 201.102(e).  The Rules of Practice generally “govern proceedings before the Commission under the statutes that it administers.” 17 C.F.R. § 201.100.  The SEC has the authority to administer and enforce such rules pursuant to the Administrative Procedures Act, 5 U.S.C. § 551 et. seq. See Comment to Rule 100, SEC Rules of Practice (July 2003).

27 In the Matter of William R. Carter Charles J. Johnson, 47 S.E.C. 471 (Feb. 28, 1981) (“elemental notions of fairness dictate that the Commission should not establish new rules of conduct and impose them retroactively upon professionals who acted at the time without reason to believe that their conduct was unethical or improper.  At the same time, however, we perceive no unfairness whatsoever in holding those professionals who practice before us to generally recognized norms of professional conduct, whether or not such norms had previously been explicitly adopted or endorsed by the Commission.  To do so upsets no justifiable expectations, since the professional is already subject to those norms.”).

28 In the past, the Commission has sought to discipline lawyers for violating securities laws with scienter, rendering misleading opinions used in disclosures and engaged in otherwise liable conduct, but not for giving negligent legal advice to issuers. See In the Matter of Scott G. Monson, Release No. 28323 (June 30, 2008) (collecting cases).

29 In the Matter of Steven Altman, Esq., Release No. 63306 (Nov. 10, 2010).

30 Statement of Planned Departure from the Commission (Mar. 15, 2022).

31 TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).

32 Basic Inc. v. Levinson, 485 U.S. 224, 250 (1988).

33 Upjohn Co. v. United States, 449 U.S. 383, 389 (1981) (quoting Hunt v. Blackburn, 128 U.S. 464, 470 (1888)).

34 Rule 1.3: Diligence, American Bar Association, (last visited Mar. 18, 2022) (“A lawyer shall act with reasonable diligence and promptness in representing a client.”); Rule 1.3 Diligence – Comment 1, American Bar Association,  (last visited Mar. 18, 2022) (“A lawyer must also act with commitment and dedication to the interests of the client and with zeal in advocacy upon the client’s behalf.”).

35 See, e.g., Upjohn, 449 U.S. at 389.

36 Rule 1.13: Organization As Client, American Bar Association, cmt. 2  (last visited April 19, 2022).

Article By Jason M. Halper, William P. Mills, Erica Hogan, Adam Magid, James Orth, and Jayshree Balakrishnan of Cadwalader, Wickersham & Taft LLP

For more Securities & SEC, click here to visit the National Law Review.

© Copyright 2022 Cadwalader, Wickersham & Taft LLP

New Sexual Harassment Prevention Requirements for Many Chicago Employers

Beginning July 1, 2022, Chicago employers who are licensed by or have work locations in the City of Chicago must comply with new sexual harassment prevention training and notification requirements. These requirements were formalized on April 27, when the Chicago City Counsel amended the Chicago Human Rights Ordinance.

The amendments require covered employers to:

  • Provide annual training for employees and supervisors on sexual harassment prevention and bystander intervention.

  • Adopt a written sexual harassment policy.

  • Display a poster (in English and Spanish) in a conspicuous area in the workplace on sexual harassment prohibitions.

Covered Employers

The law applies to employers with one or more employees within the City of Chicago that:

  • Are subject to one or more of the license requirements in Title 4 of the city’s municipal code; and/or

  • Maintain a business facility within the city’s geographic boundaries.

Covered Employees

A covered employee is an individual who is engaged in work within the geographical boundaries of the City of Chicago.

Requirements for Employers

Sexual harassment prevention and bystander intervention training. Employers must mandate that employees participate annually in:

  • Sexual harassment prevention training, the duration of which depends on the type of employee:

    • One hour for rank-and-file employees

    • Two hours for supervisors and managers

  • One hour of bystander intervention training.

Note that these requirements exceed those currently applicable to employers by the State of Illinois. Employers must ensure that covered employees participate in their first  required trainings by no later than June 30, 2023 (one year following the effective date of the law) and annually thereafter.

Written sexual harassment policy. Employers must adopt a written policy on sexual harassment that includes:

  • A statement that sexual harassment and retaliation for reporting sexual harassment are illegal in Chicago;

  • The meaning of “sexual harassment” as defined in the city’s municipal code (which is broader than the definition under federal or state law, as it includes sexual misconduct, which encompasses “any behavior of a sexual nature involving coercion, abuse of authority, or misuse of an individual’s employment position.”)

  • The annual training requirements for sexual harassment prevention and bystander intervention;

  • Examples of prohibited conduct that constitute sexual harassment; and

  • Details on resources available to employees, including:

    • How to report allegations of sexual harassment internally, such as instructions for confidential reporting to a manager, employer’s corporate headquarters, or human resources department; and

    • Legal services, including governmental services, available to individuals who may have experienced sexual harassment.

The written policy must be available in employees’ primary language within the first week of their employment.

Poster. Employers must conspicuously display (in English and Spanish), in at least one location in the workplace where employees commonly gather, posters designed by the Chicago Commission on Human Relations (the Commission). The posters address the prohibitions on sexual harassment.

Other Changes to Consider

The amendments give employees extra time to file complaints, give the Commission extra time to act on such complaints, impose certain recordkeeping requirements, and enhance penalties for violations. Specific issues include:

Increased statute of limitations. Employees who experience sexual harassment now have 365 days, instead of 300 days, after the violation occurs to file a complaint with the Commission.

More time for the Commission to issue a complaint. The Commission may delay issuing a sexual harassment complaint to the respondent from 10 days to up to 30 days after the complainant files such complaint.

Recordkeeping. Employers must retain for at least five years, or for the duration of any claim, civil action, or investigation pending pursuant to the ordinance, whichever is longer, records regarding their sexual harassment policy, training, and compliance with the ordinance.

Penalties. An employer that violates the policy, training, or posting requirements is subject to a fine ranging from $500 to $1,000 per violation. Every day that a violation continues will be considered a separate and distinct offense.

Recommendations

Covered employers should make sure that they adopt a written sexual harassment policy, provide training, and display posters that comply with the new requirements. Employers also should be prepared to provide their sexual harassment policy, in the employee’s primary language, to newly hired employees during onboarding. Much’s labor and employment attorneys are available to help you navigate these new requirements and implement changes to ensure compliance.

Article By Camille N. Khodadad and Charlotte F. Franklin of  Much Shelist, P.C.

For more labor and employment news, click here to visit the National Law Review.

© 2022 Much Shelist, P.C.

Supreme Court Holds That Judges Can’t Invent Rules Governing Arbitration Waiver

Litigators who defend cases brought under the Fair Labor Standards Act (“FLSA”), particularly ‘collective actions” alleging wage-and-hour violations, often have been able to counter, or even sometimes support, allegations that arbitration agreements have been waived where the conduct of a party has caused prejudice to the other side. In the case of Morgan v. Sundance, Inc., a unanimous Supreme Court has now held that the determinant of waiver is solely dependent upon the nature and magnitude of the actions of the party that might be inconsistent with arbitration, without respect to alleged prejudice.

Morgan thus is an important case for any civil litigator, but it is especially significant for those who deal with employment disputes potentially governed by arbitration agreements, and for those who draw up such agreements in the first place. As is well known, the Court has, in recent years, frequently upheld the primacy of arbitration agreements pursuant to the Federal Arbitration Act (FAA). In the Morgan case, a unanimous Court does it again. Ms. Morgan was an hourly employee at a Taco Bell franchise who had signed an arbitration agreement intended to govern employment disputes. Notwithstanding the arbitration agreement, Morgan went to federal court to bring a nationwide “collective action” arguing that her employer had violated the Fair Labor Standards Act. Sundance, a franchisee of Taco Bell, initially defended against the lawsuit as if the arbitration agreement didn’t exist—filing a motion to dismiss (which the District Court denied) and engaging in mediation (which was unsuccessful). Next, Sundance moved to stay the litigation and compel arbitration under the FAA—almost eight months after Morgan filed the suit. Morgan then expectedly opposed on grounds of waiver of the right to arbitrate.

The governing precedent in the Eighth Circuit, where the case was litigated below, conditioned a finding of waiver of an arbitration agreement on whether the party knew of the right, “acted inconsistently with that right,” and—critical here– “prejudiced the other party by its inconsistent actions.” In deciding that issue, the Court below, as had eight other circuits, invoked “the strong federal policy favoring arbitration” to decide the matter of waiver. Two circuits rejected that rule, and the Supreme Court granted cert. to resolve that split. Justice Kagan, writing for all of the Justices, agreed with those two circuits.

Holding that “the FAA’s ‘policy favoring arbitration’ does not authorize federal courts to invent special, arbitration-preferring procedural rules,” and deciding no other issue with respect to the merits, the Court remanded the case for further proceedings that focus on the whether the employer relinquished its right to arbitrate by its actions that were inconsistent with it. Whatever an employer might otherwise have preferred (given the prior law in most courts of appeals), given the Supreme Court’s holding that any presumption of arbitration and the fact of prejudice are irrelevant, the Morgan case gives clear guidance in several regards, particularly demanding arbitration, if applicable, at the outset of a formal dispute, and resisting any discovery, to the extent possible, until the issue of arbitrability is decided. A defense against waiver simply based on prejudice is not going to fly.

Article By Stuart M. Gerson of Epstein Becker & Green, P.C.

For more arbitration legal news, click here to visit the National Law Review.

©2022 Epstein Becker & Green, P.C. All rights reserved.

“My Lawyer Made Me Do It” is Not an Absolute Defense to Bankruptcy Court Sanctions

Last year, we offered a lesson and a moral from a North Carolina district court decision reversing a $115,000 sanctions order by a North Carolina bankruptcy court.

The lesson from the case was that the bankruptcy court cannot sanction a creditor if there is an objectively reasonable basis for concluding that the creditor’s conduct is lawful.

The moral was that a creditor can avoid the time, expense, and risk associated with litigating contempt and sanctions issues by taking basic steps to ensure that confirmed Chapter 11 plans are clear and precise.  The moral is even more glaring now because a recent decision from the Fourth Circuit Court of Appeals reveals that the parties continue to fight in court over the easily-avoidable sanctions order.  The decision also clarifies when and why a bankruptcy court can sanction a creditor.

Factual Background

In 2009, the Beckharts filed Chapter 11.  At the time, they were almost a year behind on a loan secured by the property at Kure Beach.  The loan servicer objected to planning confirmation because it did not specify how post-petition mortgage payments would be applied to principal and interest.  The bankruptcy court confirmed the plan without clarifying the issue, but the servicer did not ask the court to reconsider its order, nor did it appeal.

The Beckharts paid for five years.  Shellpoint acquired the loan from the original servicer and treated it as in default based on unpaid accrued arrearages.  Periodically, Shellpoint sent default letters to the Beckharts, who disputed the default.  Counsel for Shellpoint advised that the confirmation order had not changed the loan contract terms and that the loan remained in default.  The matter escalated with the Beckharts filing complaints with the Consumer Financial Protection Bureau.  Shellpoint commenced foreclosure, then represented to the Beckharts that it was ceasing foreclosure, but then posted a foreclosure hearing notice on the Beckharts’ door (allegedly due to error).

Litigation

In January 2020, the Beckharts moved the bankruptcy court to find Shellpoint in contempt and award them monetary sanctions.  The court held a hearing in June and, in September 2020, found Shellpoint in contempt.  The court tagged Shellpoint with $115,000 in sanctions for lost wages, “loss of a fresh start,” attorney’s fees, and travel expenses.

Bankruptcy courts have the power to hold a party in civil contempt and to impose sanctions for violation of a confirmed plan.  The test for liability is based on a recent United States Supreme Court decision — Taggart v. Lorenzen.  The Taggart test prohibits sanctions if there was an “objectively reasonable basis for concluding that the creditor’s conduct might be lawful.” There can be contempt for violating the discharge injunction only “if there is no fair ground of doubt as to whether the order barred the creditor’s conduct.”

In reversing the bankruptcy court, the district court noted that the plan and confirmation order did not state how much the debtors would owe on confirmation, did not say how the $23,000 in arrears would be paid, and did not set the amount of the first payment.  Confusingly, the confirmation order also said that the original loan terms would remain in effect, except as modified.  Finally, the district court pointed out that Shellpoint was repeatedly advised by counsel that their behavior was authorized, and reliance on the advice of outside counsel is a sufficient defense to civil sanctions.  Based on all these facts, the district court found that Shellpoint acted in good faith and interpreted the confirmation order in a manner consistent with the contractual terms of the loan, and that was objectively reasonable.

Taggart was a Chapter 7 case involving a discharge violation, but the Fourth Circuit held that the “no fair ground of doubt” test applied broadly in bankruptcy – including in Chapter 11 cases.

But the Fourth Circuit disagreed with the district court’s decision to reverse the bankruptcy court because the creditor had requested and received legal advice from outside counsel.  The Fourth Circuit held that advice of counsel is not an absolute defense in civil contempt.   The Court suggested that, under the Taggart test, advice of counsel “may still be considered in appropriate circumstances as a relevant factor” and “a party’s reliance on guidance from outside counsel may be instructive, at least in part, when determining whether that party’s belief that she was complying with the order was objectively unreasonable.”

The Fourth Circuit held that both lower courts had made mistakes and sent the case back to the bankruptcy court to “reconsider the contempt motion under the correct legal standard, including any additional fact-finding that may be necessary.”

Creditors can take some comfort in the “no fair ground of doubt” test, which is more forgiving than a strict liability standard.  But creditors can’t blame their lawyer for perilous conduct and expect the court to exonerate them.

But the most important takeaway hasn’t changed:  Creditors should insist on clear and specific plan terms.  After over two years of litigation, Shellpoint remains in peril of sanctions.  All of this could have been avoided had the loan servicer insisted the plan specify how the Beckharts’ payments would be applied to satisfy the arrearage.

Article By Lance P. Martin of Ward and Smith, P.A.

For more bankruptcy legal news, click here to visit the National Law Review.

© 2022 Ward and Smith, P.A.. All Rights Reserved.

How Changing Beneficial Ownership Reporting May Impact Activism

The SEC in February proposed amendments to Regulation 13D-G to modernize beneficial ownership reporting requirements. Adoption of the amendments as proposed will accelerate the timing – and expand the scope – of knowledge of certain activist activities. The deadline for comments on the proposed rules was April 11 and final rules are expected to be released later this year.

The current reporting timeline creates an asymmetry of information between beneficial owners on the one hand and other stockholders and issuers on the other. The SEC proposal is seeking to eliminate this asymmetry and address other concerns surrounding current beneficial ownership reporting. The accelerated beneficial ownership reporting deadlines will result in greater transparency in stock ownership, allowing market participants to receive material information in a timely manner and potentially alleviating the market manipulation and abusive tactics used by some investors.

The shortened filing deadlines should benefit a company’s overall shareholder engagement activities. The investor relations team at a company will have a more accurate and up-to-date picture of its institutional investor base throughout the year, which should result in more timely outreach to such shareholders.

INVESTOR ACCUMULATION OF SHARES BEFORE DISCLOSURE

Although issuers will likely view the proposed rules as beneficial, many commentators have predicted a negative impact on shareholder activism. Under the current reporting requirements, certain activist investors may benefit by having both additional time to accumulate shares before disclosing such activities and potentially more flexibility in strategizing with other investors.

Many commentators have argued that the proposed shorter timeline for beneficial ownership reporting will negatively impact an activist shareholder’s ability to accumulate shares of an issuer at a potentially lower price than if market participants had more timely knowledge of such activity and intent. In many cases a company’s stock price is impacted once an investor files a Schedule 13D with clear activist intent. This can even occur in some cases once a Schedule 13G is filed by a known activist investor without current activist intent.

If the shorter reporting deadlines reduce such investors’ profit, it is expected that an investor’s incentive to accumulate stock in order to initiate change at a company will also be reduced. Activists instead may be encouraged to engage more with management. In other words, the shorter reporting period may deter short-term activists and encourage more long-term focused activism.

TIMING OF ISSUER RESPONSE

The shorter reporting deadlines are also expected to result in management having earlier notice of any takeover attempt and to give a company the opportunity to react more quickly to any such attempt. There is potential for this to lead to increased use of low-threshold poison pills. But the SEC stated in the proposed rules release that it believes the risk of abundant reactionary low-threshold poison pills is overstated due to scrutiny of such poison pills from courts and academia, limitations imposed by state law and the unlikelihood that the beneficial ownership would trigger the low-threshold poison pills.

Companies that have low-threshold poison pills – such as one designed to protect a company’s net operating losses – may want to review them to confirm that the proposed rules would not be expected to have any impact. For example, such poison pills may link the definition of beneficial ownership to the SEC rules, including Schedule 13D and 13G filings.

‘GROUP’ REPORTING

Another proposed change expected to affect shareholder activism is the expanded definition of ‘group’ for the purposes of reporting under Schedule 13D. The current rules require an explicit agreement between two or more persons to establish a group for purposes of the beneficial ownership reporting thresholds.

Commentators believe that under the current rules, certain investors seeking change at a company may share the fact that they are accumulating shares of a company with other shareholders or activists, which can then act on this information before the general public is aware; in other words, before public disclosure in and market reaction to the Schedule 13D filing. This activity may result in near-term gains for the select few involved before uninformed shareholders can react.

Under the SEC’s proposed amended Rule 13d-5, persons who share information with another regarding an upcoming Schedule 13D filing are deemed to have formed a group within the meaning of Section 13(d)(3) regardless of whether an explicit agreement is in place, and such concerted action will trigger reporting requirements. This proposed change is expected to benefit companies and shareholders overall by preventing certain investors from acting in concert on information not known to a company and its other shareholders.

The full impact of the proposed rule changes on shareholder activism cannot be accurately predicted, but we believe that at a minimum, issuers will find it beneficial to have more regularly updated information on their institutional investor base for, among other things, their shareholder engagement efforts.

Article By Alexandra Clark Layfield and Rachel Solino of  Jones Walker LLP

For more Securities and SEC news, click here to visit the National Law Review.

© 2022 Jones Walker LLP

Monkeypox—Do Employers Need to Worry?

Several cases of monkeypox have now been found in the United States. We do not yet know whether employers will need to worry about monkeypox in the context of their workforces and workplace, but it may be wise to be informed.

Monkeypox is a viral illness that has symptoms including body aches, headaches, fatigue, and, notably, a bumpy skin rash. It is primarily found in Africa, most particularly in the Democratic Republic of the Congo. Monkeypox has an incubation period that generally lasts 7-14 days but can be as long as 5-21 days. It has now recently been found in the United States, according to the U.S. Centers for Disease Control and Prevention (CDC). The first case reported was in Massachusetts in a man who had been to Canada. The second was in New York City by another individual who had a virus similar to monkeypox. And the third was a “presumptive case” involving a Broward County, Florida, man who had traveled internationally, the CDC said.

Unlike what we have been through with COVID-19, wearing a mask will likely not be an issue with monkeypox. It is spread through infected animals, prolonged person-to-person contact, direct contact with lesion materials, or indirect contact through contaminated items, such as contaminated clothing. Avoiding these will help avoid the possibility of infection. Since frequent handwashing continues to be a good hygiene practice, continuing to make this an easy and frequent practice for employees is generally a good health practice, according to health officials.

Monkeypox has also recently been found in Australia, Belgium, Canada, France, Germany, Italy, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom. According to public health officials, the risk of exposure remains low although there are expected to be more cases in the United States. Health officials believe the smallpox vaccination will offer some amount of protection from monkeypox.

Employers that have employees who are soon to travel internationally, either for personal or business reasons, may want to consider educating them on the symptoms, how the virus is transmitted, and the fact that they may wish to consult with their own healthcare practitioners about the smallpox vaccination. There is no indication that travel should be avoided or prohibited.

Article By Katherine Dudley Helms of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

For more labor and employment legal news, click here to visit the National Law Review.

© 2022, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.