Category: Corporate law

State Treasurers Call on SEC to Investigate Apple’s Nondisclosure Agreements

In a January 30, 2022 letter to SEC Chair Gensler, eight State treasurers requested that the SEC investigate Apple’s nondisclosure agreements and whether Apple misled the SEC about their use of nondisclosure provisions in employment and post-employment agreements.  According to the January 30th letter, “multiple news reports have stated that whistleblower documents demonstrate Apple uses the very concealment clauses it repeatedly claimed it does not use . . .”  The January 30th letter also points out the importance of permitting employees to report unlawful conduct and the need for shareholders to have accurate information about workplace culture.

The SEC can investigate whether Apple’s alleged use of concealment clauses in agreement and policies violates the SEC’s anti-gag rule, which prohibits any “person” from taking “any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . .”  Exchange Act Rule 21F-17, 17 C.F.R. § 240.21F-17.

The purpose of the anti-gag rule is to facilitate the disclosure of information to the SEC relating to possible securities law violations.  As explained in the release adopting the SEC’s whistleblower rules, “an attempt to enforce a confidentiality agreement against an individual to prevent his or her communications with Commission staff about a possible securities law violation could inhibit those communications . . . and would undermine the effectiveness of the countervailing incentives that Congress established to encourage individuals to disclose possible violations to the Commission.”  Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, Release no. 34-64545 (May 25, 2011).

The SEC has taken enforcement actions for violations of Rule 21F-17, most of which are focused on employer agreements and policies that have the effect of impeding whistleblowing to the SEC.  These enforcement actions have strengthened the SEC’s whistleblower program by encouraging whistleblowers to report fraud and encouraging employers to revise their NDAs and policies to clarify that such agreements and policies do not bar lawful whistleblowing.

Apple’s market capitalization of approximately $2.8 trillion renders it the world’s most valuable company.  If Apple is using concealment clauses and unlawful NDAs to silence whistleblowers, then Apple shareholders may not have an accurate and complete picture of the company’s financial condition and risks, including Apple’s ESG-related risks and risks stemming from its potential violations of anti-trust laws.  Accordingly, it will be critical for the SEC to take enforcement action if it finds that Apple has violated the SEC’s anti-gag rule.

By some estimates, fraud and other white-collar crime costs the US economy $300 billion to $800 billion per year.  To combat fraud, regulators and law enforcement need the assistance and cooperation of whistleblowers to detect and effectively prosecute fraud.  But there are many substantial risks that deter whistleblowers from coming forward, including the risk of being sued for breaching a confidentiality agreement.  The continued success of whistleblower reward programs will hinge in part on regulators taking a firm stand against agreements and policies that impede whistleblowing.

For more information on unlawful restrictions on whistleblowing, see the article De Facto Gag Clauses: The Legality of Employment Agreements That Undermine Dodd-Frank’s Whistleblower Provisions.

This article was written by Jason Zuckerman and Matthew Stock of Zuckerman Law. For more articles relating to NDAs, please click here.

WEBSITE LAYOUT PASSES MUSTER: Court Enforces Cruise Line’s TCPA and Arbitration Disclosures Over Objection

Those of you who attended Lead Generation World heard me discuss the big trend from back in 2020 in which Courts were refusing to enforce online disclosures owing to perceived problems with website layout.

Things like “below the button” disclosures and distracting visual elements were often described as defeating a manifestation of assent to disclosure terms in that unfortunate line of cases.

Well, 2022 has brought a couple of cases that have determined website disclosures to be just fine. Yesterday I reported on a big win by Efinancial, and today we have a nice victory by a cruise ship company.

In Barney v. Grand Caribbean Cruises, Inc., CASE NO. 21-CV-61560-RAR, 2022 U.S. Dist. LEXIS 8263 (S.D. Fl. January 17, 2022) the Defendant moved to enforce an arbitration provision on its website arguing that the Plaintiff had agreed to the terms and conditions by submitting a sweepstakes entry form.

Predictably, the Plaintiff argued that the disclosures were not enforceable because the website layout was insufficient–specifically that the font was too small and the terms excessively lengthy.

The Court was not impressed.

Noting that the disclosure was plainly readable and above the button–and it required a check box–the Court simply refused to heed the Plaintiff’s argument that he didn’t know he was agreeing to consent and arbitration. Here’s the analysis:

First, in terms of placement, the Website does not tuck away its statement regarding the Terms & Conditions in an obscure corner of the page where a user is unlikely to encounter it. Rather, the statement is located directly between the contact information fields and the “Submit Entry” button. The user is required to check the box indicating assent to the Terms & Conditions before any information is submitted. Id. ¶ 14. Thus, it is impossible that a user would miss seeing the statement regarding the Terms & Conditions or—at the very least—the checkbox indicating assent to them. Second, rather than merely informing the user that the Terms & Conditions exist, the statement directs the user to the precise location where the Terms & Conditions can be accessed—namely, at the “bottom of the page.” Finally, and most significantly, the user is required to check an acknowledgement box to accept the Terms & Conditions before any information is submitted through the Website—an affirmative act indicating [*14] assent. The checkbox accompanies the statement, which specifically includes language indicating that the user “agree[s] to the Privacy Policy and Terms & Conditions.” Thus, there is an explicit textual notice that checking the box will act as a manifestation of an intent to be bound. A reasonable user confronting a statement that “I consent to receive e-mail, SMS/Text messages, and calls about offers and deals from an automatic dialing system and/or pre-recorded voice technology” and “confirm that I am over age 25 [and] agree to the Privacy Policy and Terms & Conditions that are hyperlinked at the bottom of the page” would understand that he or she is assenting to the linked terms, including those pertaining to mandatory arbitration. And the record shows that Plaintiff indeed checked the box before clicking “Submit Entry.” Connolly Decl. ¶ 20. Plaintiff’s objections to the design of the Website hold no water. Plaintiff assails the statement regarding the Website’s Terms & Conditions as “lengthy” with “extremely small font that blends into the background.” Resp. at 9. But as seen in the screenshot of the Website on the day of Plaintiff’s visit, the statement’s text is clearly legible [*15] and not overly long. Indeed, it is roughly the same size and color as the text indicating the fields for “First Name,” “Last Name,” “Email,” and “Phone Number.” Plaintiff also objects to the placement of the link to the Terms & Conditions at the bottom of the page. Id. at 10. But, as discussed supra, that is precisely where the statement directed the user to view them.

As you can see the Court found the layout to be perfectly appropriate and was particularly moved by the presence of the opt in check box. Although many cases have recently enforced disclosures WITHOUT checkboxes, they do remain favored by the Courts.

I think Barney represents a case of a pretty clearly enforceable provision. The above-the-button text coupled with the radial button and the clear articulation of the terms being accepted made this an easy case for the court.

I will note that the TCPA consent is connected to the terms and conditions lingo–I don’t love that since the TCPA disclosure should be “separately signed”. But the agreement by the consumer that they are over 25 is a nice touch–helps to protect against claims that minors are supplying consent illegally.

© Copyright 2022 Squire Patton Boggs (US) LLP
For more articles about TCPA litigation, visit the NLR Litigation section.

SEC Report Details Record-Shattering Year for Whistleblower Program

On November 15, the U.S. Securities and Exchange Commission (SEC) Whistleblower Program released its Annual Report to Congress for the 2021 fiscal year. The report details a record-shattering fiscal year for the agency’s highly successful whistleblower program. During the 2021 fiscal year, the SEC Whistleblower Program received a record 12,200 whistleblower tips and issued a record $564 million in whistleblower awards to a record 108 individuals. Over the course of the year, the whistleblower program issued more awards than in all previous years combined.

“The SEC’s Dodd-Frank Act whistleblower program has revolutionized the detection and enforcement of securities law violations,” said whistleblower attorney Stephen M. Kohn. “Congress needs to pay attention to this highly effective anti-corruption program and enact similar laws to fight money laundering committed by the Big Banks, antitrust violations committed by Big Tech, and the widespread consumer frauds often impacting low income and middle class families who are taken advantage of by illegal lending practices, redlining, and credit card frauds.”

“The report documents that whistleblowing works, and works remarkably well, both in the United States and worldwide,” continued Kohn. “The successful efforts of the SEC to use whistleblower-information to police Wall Street frauds is a milestone in the fight against corruption. Every American benefits from this program.”

In the report, Acting Chief of the Office of the Whistleblower Emily Pasquinelli states “[t]he success of the Commission’s whistleblower program in landmark FY 2021 demonstrates that it is a vital component of the Commission’s enforcement efforts. We hope the awards made this year continue to encourage whistleblowers to report specific, timely, and credible information to the Commission, which will enhance the agency’s ability to detect wrongdoing and protect investors and the marketplace.”

Read the SEC Whistleblower Program’s full report.

Geoff Schweller also contributed to this article.

Copyright Kohn, Kohn & Colapinto, LLP 2021. All Rights Reserved.
For more on SEC Whistleblower Rewards, visit the NLR White Collar Crime & Consumer Rights section.

The Confidentially Marketed Public Offering for the Smaller Reporting Company

What is it?

A Confidentially Marketed Public Offering (“CMPO”) is an offering of securities registered on a shelf registration statement on Form S-3 where securities are taken “off the shelf” and sold when favorable market opportunities arise, such as an increase in the issuer’s price and trading volume resulting from positive news pertaining to the issuer.  In a CMPO, an underwriter will confidentially contact a select group of institutional investors to gauge their interest in an offering by the issuer, without divulging the name of the issuer.  If an institutional investor indicates its firm interest in a potential offering and agrees not to trade in the issuer’s securities until either the CMPO is completed or abandoned, the institutional investor will be “brought over the wall” and informed on a confidential basis of the name of the issuer and provided with other offering materials.  The offering materials made available to investors are typically limited to the issuer’s public filings, and do not include material non-public information (“MNPI”).  By avoiding the disclosure of MNPI, the issuer mitigates the risk of being required to publicly disclose the MNPI in the event the offering is terminated.  Once brought over the wall, the issuer, underwriter and institutional investors will negotiate the terms of the offering, including the price (which is usually a discount to the market price) and size of the offering.  Once the offering terms are determined, the issuer turns the confidentially marketed offering into a public offering by filing a prospectus supplement with the Securities and Exchange Commission (“SEC”) and issuing a press release informing the public of the offering.  Typically, this occurs after the close of markets.  Once public, the underwriters then market the offering broadly to other investors, typically overnight, which is necessary for the offering to be a “public” offering as defined by NASDAQ and the NYSE (as discussed further below).  Customarily, before markets open on the next trading day, the issuer informs the market of the final terms of the offering, including the sale price of the securities to the public, the underwriting discount per share and the proceeds of the offering to the issuer, by issuing a press release and filing a prospectus supplement and Current Report on Form 8-K with the SEC.  The offering then closes and shares are delivered to investors and funds to the issuer, typically two or three trading days later.

What Type of Issuer Can Conduct a CMPO and How Much Can an Issuer Raise?

To be eligible to conduct a CMPO, an issuer needs to have an effective registration statement on Form S-3, and is therefore only available to companies that satisfy the criteria to use such form.  For issuers that have an aggregate market value of voting and non-voting common stock held by non-affiliates of the issuer (“public float”) of $75M or more, the issuer can offer the full amount of securities remaining available for issuance under the registration statement.  Issuers that have a public float of less than $75M will be subject to the “baby shelf rules”.   In a CMPO, issuers subject to the baby shelf rules can offer up to one-third of their public float, less amounts sold under the baby shelf rules in the trailing twelve month period prior to the offering.  To determine the public float, the issuer may look back sixty days from the date of the offering, and select the highest of the last sales prices or the average of the bid and ask prices on the exchange where the issuer’s stock is listed.  For an issuer subject to the baby shelf rules, the amount of capital that the issuer can raise will continually fluctuate based on the issuer’s trading price.

What Exchange Rules Does an Issuer Need to Consider?

The public offering period of a CMPO must be structured to satisfy the applicable NASDAQ or New York Stock Exchange criteria for a “public offering”.  In the event that the criteria are not satisfied, rules requiring advance shareholder approval for private placements where the offering could equal 20% or more of the pre-offering outstanding shares may be implicated.  Moreover, a sale of securities in a transaction other than a public offering at a discount to the market value of the stock to insiders of the issuer is considered a form of equity compensation and requires stockholder approval.  Nasdaq also requires issuers to file a “listing of additional shares” in connection with a CMPO.

Advantages and Disadvantages of CMPOs

There are a number of advantages of a CMPO compared to a traditional public offering, including the following:

  • A CMPO offers an issuer the ability to raise capital on an as needed basis as favorable market conditions arise through a process that is much faster than a traditional public offering.
  • The shares issued to investors in a CMPO are freely tradeable, resulting in more favorable pricing for the issuer.
  • In a CMPO, the issuer can determine the demand for its securities on a confidential basis without market knowledge.  If terms sought by investors are not agreeable to the issuer, the issuer can abandon the CMPO, generally without adverse consequences on its stock price.
  • If properly structured as a public offering, a CMPO will negate the requirement to obtain stockholder approval for the transaction under applicable Nasdaq and NYSE rules.

Disadvantages of conducting a CMPO include:

  • To conduct a CMPO, an issuer must be eligible to use Form S-3 and have an effective registration statement on file with the SEC.
  • Issuers subject to the baby shelf rules may be limited in the amount of capital they can raise in a CMPO.
  • In the event a CMPO is abandoned, investors that have been “brough over the wall” and received MNPI concerning the issuer may insist that the issuer publicly disclose such information to enable such investors to publicly trade the issuer’s securities.

This article is for general information only and may not be relied upon as legal advice.  Any company exploring the possibility of a CMPO should engage directly with legal counsel.

© Copyright 2021 Stubbs Alderton & Markiles, LLP
For more articles on the NASDAQ and NYSE, visit the NLR Financial, Securities & Banking section.

My Mother Wants to Invest in My Startup: Raising Funds With Non-Accredited Investors

Emerging companies are filled with potential, and the entrepreneurs running them have countless great ideas that may one day change the world. These owners typically fund their startup companies with money from their own pockets at first. But eventually, as the company grows, the company needs more capital to fuel that growth. This is when entrepreneurs often turn to outside sources for funds. It may seem innocuous to ask family and friends to contribute to your growing, high-potential business. Of course, they want to support you and the work you are doing.

But don’t be too quick to accept money from your biggest fans. The securities laws in the United States regulate capital raising, and entrepreneurs need to know how to raise funds within the boundaries of the securities laws before taking money from anyone, including family and friends, so as to avoid potential issues after taking that much-needed capital.

Under United States securities laws, and the securities laws of each individual state (or “blue sky” laws), offers and sales of securities have to be either registered or exempt from registration. Generally, registered offerings are too cost prohibitive for startup companies. This means a startup needs to issue securities pursuant to an exemption from registration. The most widely available and used exemptions depend entirely or mostly on limiting the offering to only “accredited” investors, but not every entrepreneur has a rich aunt or uncle in the family who qualifies as an accredited investor. Some exemptions permit offering to non-accredited investors, but depend on those investors still being  “sophisticated.” An investor can qualify as a non-accredited but “sophisticated” investor if the investor, either alone or with a “purchaser representative,” (as defined by the SEC) has sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment. While your mother and best friend and second cousin may be very smart and may even run their own businesses, they may lack the sophistication the SEC requires to satisfy exemption requirements. Determining whether to include non-accredited investors, whether sophisticated or not, in the offering at the outset is important because it will affect which exemptions from registration are available for the offering and on what basis.

A brief description of some of the more typical exemptions that contemplate inclusion of non-accredited investors in the offering is below. Depending on which exemption is used, the cost and time it takes to get to the offering may vary dramatically.

Regulation Crowdfunding

Regulation Crowdfunding came about via the Jumpstart Our Business Startups Act of 2012, more commonly referred to as the “JOBS Act.” Regulation Crowdfunding is similar to the popular platform Kickstarter except, instead of giving out a t-shirt to investors, the entity raising capital can give out equity. A capital raise through Regulation Crowdfunding must meet the following requirements, among others:

  1. all transactions must take place through a registered broker-dealer or an online, SEC-registered funding platform;
  2. the company can raise a maximum aggregate amount of $5 million in a 12-month period;
  3. non-accredited investors may invest in the offering, but the amounts in which they can invest are limited; and
  4. the company must disclose certain information by filing a Form C with the SEC.

Generally, securities issued through Regulation Crowdfunding may not be resold for at least one year. An offering under Regulation Crowdfunding is not subject to state securities regulations.

Although non-accredited investors can invest in a Regulation Crowdfunding offering, the amount of securities that can be sold to a non-accredited investor is limited:

  • If the investor’s annual income or net worth is less than $107,000, the investor can invest the greater of $2,200 or 5 percent of the greater of the investor’s annual income or net worth.
  • If the investor’s annual income or net worth is equal to or greater than $107,000, the investor can invest 10 percent of the greater of the investor’s annual income or net worth, not to exceed an amount invested of $107,000.

Accredited investors may invest an unlimited amount in an offering under Regulation Crowdfunding (subject to the maximum amount a company can raise each year).

While the ability to raise a respectable amount of capital from any investor may seem appealing, there are some negatives to consider when thinking of conducting an offering pursuant to Regulation Crowdfunding. First, the Form C that is required to be filed at the outset of the offering requires the company to disclose a significant amount of information. A higher information requirement almost always leads to higher legal and other advisor costs. Second, the company must make annual filings, which include either audited financial statements or financial statements certified by the company’s principal executive officer. Finally, the company has no control over who actually invests. When it comes time to sell the company, the lack of relationship with a potentially large portion of investors may lead to challenges. And if the company is not as successful as planned, these investors could be prime plaintiffs in a securities action.

Regulation D

Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) sets forth safe harbors providing for exemption from registration under Section 4(a)(2) of the Securities Act. Some of these safe harbors are available even if offering to non-accredited investors, including Rule 504 and Rule 506(b) of Regulation D.

Rule 504

Under Rule 504, a company can offer to sell up to $10,000,000 of securities in a 12-month period. A company utilizing this exemption may not be a reporting company, an investment company, or a blank check company. The company may use general solicitation so long as certain state securities disclosure conditions are met, and securities generally may be sold to non-accredited investors, depending on state law. Because Rule 504 does not pre-empt state law, a company issuing securities pursuant to Rule 504 must comply with state securities laws, in addition to the federal securities laws, which requires the issuer to qualify or register the offering in every state in which the company plans to offer the securities, or requires the issuance to be subject to an exemption. Compliance with state securities laws is time-consuming and costly, especially if the company is issuing securities in multiple states.

Rule 506(b)

Under Rule 506(b), a company can raise an unlimited amount of capital and can sell securities to an unlimited number of accredited investors. A company also can sell securities to up to 35 non-accredited but sophisticated investors. However, selling to non-accredited investors, no matter how sophisticated they are, requires the company to provide substantially more disclosure, including financial statements, to such non-accredited investors. A higher information requirement almost always leads to higher legal and other advisor costs. The company also must make itself available to answer questions from non-accredited investors. Rule 506(b) also prohibits the use of general solicitation in an offering.

Regulation A

Another product of the JOBS Act, the amended version of Regulation A (referred to herein as simply “Regulation A”) is sometimes referred to as a “mini public offering.” Companies may sell securities to investors under two tiers, each of which has different requirements. Under either tier, the company must file with the SEC an offering statement on Form 1-A, which must be qualified by the SEC before the company may take any funds from investors. Before the SEC qualifies the offering, the SEC will review and provide comments to the company’s Form 1-A, and the company will have to amend the Form 1-A based on the SEC’s comments to the SEC’s satisfaction.

Tier 1

  • A company can raise up to $20 million in a 12-month period.
  • The company must include in its disclosure documents financial statements that have been reviewed by an independent accounting firm.
  • There is no individual investment limit.
  • The company must file a Form 1-Z exit report.

Tier 2

  • A company can raise up to $75 million in a 12-month period.
  • The company must include in its disclosure documents financial statements that have been audited by an independent accounting firm.
  • Investors in a Tier 2 Regulation A offering that are not accredited investors are subject to an investment limit equal to 10 percent of the greater of the investor’s annual income or net worth if the investor is a natural person or 10 percent of the greater of the investor’s annual revenue or net assets if the investor is not a natural person.
  • The company is required to file with the SEC annual reports on Form 1-K, with audited financial statements, semiannual reports on Form 1-SA, current reports on Form 1-U, and an exit report on Form 1-Z.

A company selling securities under Regulation A may use general solicitation, though any general solicitation before the Form 1-A has been filed must comply with the requirements for “test the waters” communications. An offering conducted under Tier 1 is subject to state blue sky laws, but an offering under Tier 2 is not. Securities sold in reliance on Regulation A are not restricted securities, meaning they generally can be freely resold, subject to applicable state blue sky laws. As mentioned above, complying with state blue sky laws is time-consuming and costly.

Other registration exemptions may be available in specific situations that allow offering to non-accredited investors, but the above are the most readily available. As the process and requirements for qualifying for any of these exemptions makes clear, raising money from your mother is not as simple as accepting a check. Always have a plan on how and to whom you are offering securities before you start taking money. Meeting the requirements of an exemption that allows offering securities to a non-accredited investor is typically time-consuming, complicated, and costly because of the disclosure requirements.

© 2021 Varnum LLP
For more articles on startups, visit the NLRSecurities & SEC section.

More than a “Board” Game: How Companies Thrive with Diversity, Equity and Inclusion

Over the past few years, California has enacted legislation that requires public companies in California to meet certain diversity metrics with respect to their boards of directors. These board-specific requirements follow the development of empirical data that supports the following conclusions: (1) diversity in public corporations’ boards of directors was severely lacking and (2) diversity at a top level can make a company perform better. But diversity, equity and inclusion (“DE&I”) does not end at the top, though that is a great place to start.

To that end, in 2018, Senate Bill 826 was signed into law to advance equitable gender representation on California corporate boards. The law required that by the end of 2019, all domestic general corporations and foreign public corporations whose principal offices are located in California must have a minimum of one female on its board of directors. By the end of 2021, the law requires an increase to a minimum of two female directors if the corporation has five directors, or a minimum of three female directors if the corporation has six or more directors. And in order to add teeth, the California Secretary of State is authorized to impose fines for violations of these requirements: $100,000 for a first violation, or for failure to timely file board member information with the Secretary of State, and $300,000 for a second or subsequent violation. See Cal. Corp. Code Sections 301.3 and 2115.5.

In September 2020, Assembly Bill 979 was signed into law, requiring boards of California public corporations to include directors from underrepresented communities by the end of 2021. An individual from an underrepresented community is defined as “an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender.” By the end of 2022, those requirements grow to two board seats if there are five to eight board seats total, and three board seats for companies with nine or more board seats. Similar fines are available for non-compliance ($100,000/$300,000). See Cal. Corp. Code Sections 301.3, 301.4 and 2115.6.

While there is ample justification for these board-specific legislative changes, DE&I go far beyond the make-up of a board of directors and impact the entirety of a company. Recently, we spoke with Melynnie Rizvi, Deputy General Counsel and Senior Director of Employment, Inclusion and Impact at SurveyMonkey on our podcast, The Performance Review, to discuss how DE&I can make a company thrive. (Check out the episode here – where you can also get MCLE self-study credit).

Among the salient points: To thrive with DE&I, it cannot just happen in the boardroom – it’s the whole company. According to Ms. Rizvi, companies should let those initiatives permeate further into the company culture and be included in a company’s business plans. There are a number of reasons companies should focus on developing programs and policies to enrich DE&I efforts:

Reason 1: It is the right thing to do.

Though business can be cutthroat, more often than not, the right business decision is also just the right thing to do. Put simply, developing an environment that champions diversity is not only consistent with California law, it is good for your employees and good for your consumers. This dovetails with an ancillary benefit – it is good for a company’s image. Brand loyalty and awareness is more important than ever, both for recruiting solid talent, and making consumers happy. More and more employees and consumers are making choices about which company to support based on the company’s outward facing DE&I initiatives or protocols. As this data becomes clearer, we see more and more employees sharing positive sentiment toward racial justice and racial equality. According to Ms. Rizvi, a SurveyMonkey poll recently found that the majority of employees in the tech sector want to work for companies that take a stand on social issues.

Reason 2: It is good for business.

Indeed, research and data have shown that a focus on DE&I, along with other initiatives related to environmental, social and governmental programs, actually result in better financial performance for companies. Here are some examples cited in SB 826 and AB 979:

  • “According to a report by [an international consulting firm], for every 10 percent increase in racial and ethnic diversity on the senior-executive team, earnings before interest and taxes rise 0.8 percent.”
  • “A study by [a research firm] found that the high tech industry could generate an additional $300 billion to $370 billion each year if the racial or ethnic diversity of tech companies’ workforces reflected that of the talent pool.”
  • “In 2014, [a large financial institution] found that companies with at least one woman on the board had an average return on equity (ROE) of 12.2 percent, compared to 10.1 percent for companies with no female directors. Additionally, the price-to-book value of these firms was greater for those with women on their boards: 2.4 times the value in comparison to 1.8 times the value for zero-women boards.”
  • “A 2017 study by [a finance company] found that United States’ companies that began the five-year period from 2011 to 2016 with three or more female directors reported earnings per share that were 45 percent higher than those companies with no female directors at the beginning of the period.”
  • “[A large financial institution] conducted a six-year global research study from 2006 to 2012, with more than 2,000 companies worldwide, showing that women on boards improve business performance for key metrics, including stock performance. For companies with a market capitalization of more than $10 billion, those with women directors on boards outperformed shares of comparable businesses with all-male boards by 26 percent.”

There are a number of ways to measure performance but, at minimum, seeing an increase in profitability is usually top of mind. Moreover, focusing on recruiting and training a more diverse talent pool can open a company up to a wider range of backgrounds and ideas, which can lead to better products and services.

Reason 3: It may keep you out of court.

DE&I initiatives can help prevent companies from facing discrimination or pay equity lawsuits. These lawsuits can be costly, time-consuming, and an overall business distraction – not to mention – bad for publicity. By addressing any deficiencies in diversity now, you may prevent your company from litigation heartache in the future. Moreover, SB 973, another of California’s recent laws, requires covered employers (100+ employees) to file a pay data report (Form EEO-1) with the Department of Fair Housing and Employment on or before March 31, 2021, and each year thereafter, that states the number of employees by race, ethnicity, and sex for the prior calendar year in 10 covered job categories. See Gov. Code Section 12999.

So perhaps that leaves you wondering, what should my company do? Systemic changes take time and can be difficult to get started and/or sustain. They require buy-in from the top all the way down. This will typically require a multi-faceted approach, but according to Ms. Rizvi (seriously, go listen to the podcast) here are a few ideas:

  1. Integrate DE&I into your business goals/objectives. Make this a priority with specific benchmarks and deliverables, just as you would set a profit target.
  2. Hold people accountable for lack of progress, and reward achievements. Just as you would hold someone accountable for missing a sales goal, or releasing a product behind schedule, companies could consider measuring job performance, at least in part, on how DE&I initiatives are performing.
  3. Look for ways to implement across the company, not just at the top. And this should go between departments as well. For example, it is one thing if your workforce is majority female, but if they all work only in one department, have you really created the diverse environment across the company to make it thrive? Not likely.
  4. Find ways to improve DE&I advocacy. This can be within the organization, or external, such as partnering with different social justice groups, or engaging in efforts to develop new legislation.
  5. Implement policies consistent with these goals. This means fine-tuning anti-discrimination policies, developing diversity initiatives, and crafting policies related to social justice initiatives.

There are a number of ways employers can create an environment that champions DE&I. But at minimum, California has spoken and requires covered companies to start this process in the boardroom. But as data continues to show, the need for DE&I runs all the way through a company, and can drastically transform not just the public’s perceptions, but your company’s bottom line.

©2020 Greenberg Traurig, LLP. All rights reserved.

ARTICLE BY Kurt A. Kappes and Michael Wertheim of Greenberg Traurig, LLP
For more articles on corporate law, visit the NLR Corporate & Business Organizations section.

Why All Publicly Held Corporations Do Not File Corporate Disclosure Statements

California’s female and underrepresented communities quota requirements apply to “publicly-held corporations”.  California’s Corporate Disclosure Statement requirement applies to “publicly-traded corporations”.  California’s Secretary of State’s website describes publicly held corporations as a “subset of publicly traded corporations”.  This is not strictly accurate.  See Some Differences Between “Publicly Held” and “Publicly Traded” Corporations.

Moreover, not ever foreign corporation meeting the definition of a “publicly held corporation” is required to file a Corporate Disclosure Statement pursuant to California Corporations Code Section 2117.1.  Why?  A foreign publicly held corporation is required to file a Corporate Disclosure Statement only if it has registered to transact intrastate business pursuant to Section 2117.  Some publicly-held corporations do not transact intrastate business in California.  They may, for example, simply be holding companies.  Under Section 191(b) a foreign corporation is not be considered to be transacting intrastate business merely because its subsidiary transacts intrastate business or merely because of its status as, among other things, a shareholder of a domestic corporation or a foreign corporation transacting intrastate business.

A Day To Be Wary?

Today is, of course, the Ides of March.  The word “ides” is derived from the Latin word for the 15th of the month in March, May, July and October and the 13th in the other months.  The Latin word is derived from the still older Etruscan word meaning to divide.  The 15th is roughly the dividing day of the month.  The assassination of Julius Caesar in 44 BCE made the date famous.

According to the Greek historian Plutarch, a seer warned Julius Caesar of this day while Caesar was on his way to the Senate:

ὥς τις αὐτῷ μάντις ἡμέρᾳ Μαρτίου μηνὸς, ἣν Εἰδοὺς Ῥωμαῖοι καλοῦσι, προείποι μέγαν φυλάττεσθαι κίνδυνον ἐλθούσης δὲ τῆς ἡμέρας προϊὼν

(“A seer was telling Caesar on this day of the month of March, which is called the Ides by the Romans (Εἰδοὺς in Greek), a great danger was coming . . . “)

Fifteen centuries after Plutarch wrote these lines, William Shakespeare incorporated the seer’s warning into his play, Julius Caesar:

Soothsayer. Beware the ides of March.

Caesar. What man is that?

Brutus. A soothsayer bids you beware the ides of March.

In Thornton Wilder’s historical novel, The Ides of March, Caesar exclaims: “I govern innumerable men but must acknowledge that I am governed by birds and thunderclaps”.  The story, of course, ends with Caesar’s assassination and a different kind of “March madness”.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP

ARTICLE BY Keith Paul Bishop of Allen Matkins Leck Gamble Mallory & Natsis LLP
For more articles on California corporate law, visit the NLR Corporate & Business Organizations section.

7 Keys to Selecting the Best Corporate Intelligence Firm

When you need to conduct a corporate investigation or gather intelligence in order to make a strategic business decision, you need to know that you are relying on complete and accurate information. There is no tolerance for uncertainty, and there is no room for error. If the information gathered is anything less than comprehensive, you will not have the insights you need; and, while you could get lucky, what was supposed to be an informed decision could end up doing more harm than good.

With this in mind, when you need to make an informed decision on a matter with significant business implications, you need to rely on the advice of experienced investigators and advisors. In short, your choice of corporate intelligence firms matters. So, how do you choose? Here are seven key factors to consider:

1. Professional Background and Corporate Intelligence Experience

While you are choosing a corporate intelligence firm, it is ultimately the people you choose that matter most. It is the firm’s personnel who will be investigating, gathering intelligence, and providing advice, so you need to know that these individuals have the background and experience required in order to assist your company effectively.

In most cases, companies will benefit greatly from choosing a corporate intelligence firm that employs former federal investigative agents—and ideally former federal investigative agents who spent decades in civil service. This includes not only former agents with the Federal Bureau of Investigation (FBI), but former agents with the U.S. Department of Justice (DOJ), the U.S. Postal Inspection Service (USPIS), and subject matter-specific agencies and departments such as the U.S. Department of Defense (DOD), the U.S. Drug Enforcement Administration (DEA), and the U.S. Department of Health and Human Services (DHHS). Working within these agencies in an investigative capacity offers extensive training and high-level experience, and this experience will often translate directly to the corporate intelligence sector.

Of course, there are differences between conducting a government investigation and proactively gathering corporate intelligence, so experience in the private sector is an important consideration as well. When choosing a corporate intelligence firm, you should feel free to inquire about the public and private experience of each of the individuals who will be assisting your company. There are plenty of corporate intelligence firms out there—some of which offer far more experience than others—and you should look until you find a firm with personnel who you believe have the knowledge and capabilities required to meet your company’s needs.

2. Experience in Your Company’s Specific Area of Need

In addition to general investigative and intelligence-gathering experience, it is also important to choose a firm with personnel who have experience in your company’s specific area of need. For example, conducting a routine compliance audit is a very different matter from investigating an employee’s allegations of harassment or discrimination. Likewise, investigating a possible data security breach is wholly unlike conducting an internal investigation in response to a federal target letter, civil investigative demand (CID), or subpoena.

Different investigative and intelligence-gathering needs call for different procedures, the implementation of different policies, and the utilization of different skill sets. As a result, when looking for a corporate intelligence firm, it is important to focus not only on experience in general, but experience in similar and related scenarios as well.

3. State-of-the-Art Technological Resources

In today’s world, the extraordinary amount of data that companies generate and utilize on a day-to-day basis adds a layer of complexity to corporate investigations that did not exist 20 years ago. When gathering data, it is necessary to rely on state-of-the-art technological resources that ensure both (i) comprehensive data gathering, and (ii) industry-standard (or better) data security. If any data or (any data resources) get overlooked, then not only could the investigation fail to provide necessary intelligence, but it could also potentially expose the company to greater risk as the result of failing to uncover a possible litigation threat or defense strategy.

A corporate intelligence firm should be able to quickly and seamlessly connect its technological resources with your company’s IT platform, and its personnel should be able to work with the senior members of your company’s IT department to quickly implement a systematic and effective data collection plan. Your company’s corporate intelligence firm should be able to work directly with your company’s IT, data storage, and data security vendors as well—all while maintaining strict confidentiality and absolutely preserving the integrity of your company’s sensitive and proprietary data.

4. Nationwide Capabilities

In many cases, it is difficult to tell exactly where a corporate investigation will lead. While some intelligence-gathering efforts (i.e. compliance audits) will remain entirely internal affairs, investigations spurred by government inquiries, third-party allegations, and possible data security breaches can lead to additional investigative needs and the potential for litigation across the country (if not around the world). As a result, when choosing a corporate intelligence firm, it is important to choose a firm that has nationwide capabilities. It should have sufficient personnel and technological resources to follow your company’s investigation wherever it may lead, and it should have a track record of efficiently handling corporate investigations on a nationwide scale.

Additionally, COVID-19 pandemic has changed the way that many companies do business. In some cases, these changes are likely to be permanent. In particular, the substantially increased prevalence of remote working and service delivery are likely here to stay. Not only does this mean that there will be additional challenges during the corporate investigative process, but it means that data (and paper files) will be spread across a much broader geographic area as well. This makes it imperative to choose a corporate intelligence firm with the capabilities required to quickly and effectively gather data, conduct interviews, and undertake other necessary investigative measures wherever it may be necessary to do so.

5. Preservation of the Attorney-Client Privilege

When preparing for a corporate investigation, it is important not to overlook the critical importance of preserving the attorney-client privilege. Without establishing the attorney-client privilege and ensuring that it covers the entirety of the investigation, any and all information uncovered through the investigative process could potentially become subject to disclosure during a government investigation or through discovery in civil litigation.

“When conducting a corporate investigation, it is imperative to preserve the attorney-client privilege. If your corporate intelligence firm is not able to do so, then the government or any counterparties in civil litigation may be entitled to access the data obtained during – and the records generated as the work product of – the investigation.” – Attorney Nick Oberheiden, Ph.D., Founder of Oberheiden P.C.

While some corporate intelligence firms work in conjunction with independent law firms, others utilize the services of in-house lawyers. The latter model not only streamlines the process and ensures that all individuals who are working on the investigation are able to efficiently work together, but it can also substantially reduce the costs involved. By engaging a corporate intelligence firm that can handle all aspects of your company’s investigative needs while also preserving the attorney-client privilege, you can ensure that your company is protecting its legal and financial interests to the fullest extent possible.

6. Relevant Subject Matter Knowledge

Earlier, we noted the importance of choosing a corporate intelligence firm with personnel who have specific experience with the type of inquiry that your company needs to conduct (i.e. a compliance audit, data security breach assessment, or pre-litigation internal investigation). In addition, it is important to choose a firm with personnel who have relevant subject matter as well. From data security to federal securities and antitrust law compliance, corporate intelligence needs can pertain to an extremely broad range of issues, and it is essential that the investigators and advisors working with your company are well-versed in the substantive issues at hand.

7. Support and Insights Beyond the Investigation

Finally, when choosing a corporate intelligence firm, you need to choose a firm that can provide support and insights beyond your company’s immediate investigative needs. Based on the intelligence that has been gathered (or that is likely to be gathered), what are your company’s next steps? If your company is facing a federal investigation or a potential lawsuit, what defensive measures are necessary, and how does this inform the investigative process? If the investigation reveals shortcomings in your company’s compliance policies and procedures, what additions or modifications are necessary? Depending upon the circumstances at hand, these are just a few of the numerous critical questions that may need to be answered.

When choosing a corporate intelligence firm, it is imperative to look beyond the firm’s investigative and intelligence-gathering capabilities to its ability to advise your company based upon the intelligence it gathers. The broader the firm’s capabilities – and the broader its investigators’, consultants’, and attorneys’ experience and subject matter knowledge – the more your company will be able to get out of the engagement. When a corporate investigation is necessary, cutting corners is not an option, and choosing a firm that cannot follow through on the intelligence it gathers can be a costly mistake.

Oberheiden P.C. © 2020
For more, visit the NLR Corporate & Business Organizations section.

Once More Into The Breach – Or Should That Be Conflict?

A common contractual representation is that the execution and delivery of the agreement does not constitute a breach of one or more other agreements or charter documents.  Sometimes, the representation is that the execution and delivery do not “conflict with” or “violate”.  Is there any difference between a “breach”, a “conflict” or a “violate”?

“Breach” is a word of Old English origin (bryce, meaning a fracture or breaking).  “Conflict” and “Violate” in contrast are of Latin origin.  At the siege of Harfleur,  King Henry V urged his troops to fill the the breach:

“Once more unto the breach, dear friends, once more;
Or close the wall up with our English dead.

W. Shakespeare, Henry V, Act III, Sc. 1.

“Conflict” is derived from conflictus which is the singular, perfect, passive participle of confligere meaning to come together in a collision.  “Violate” is derived from violatus which is the perfect, passive participle of violare meaning to injure or dishonor.  To some, these words may connote different meanings (or shades of meaning) and it is possible that a particular agreement will define what constitutes a breach, conflict or violation.  However, I am not aware of any California precedent that assigns different meanings to these terms as a general matter.

Shakespeare generally preferred to use words of Anglo Saxon origin to those of Latin origin.  This may be attributable to Shakespeare’s reportedly week knowledge of Classical languages.  As Ben Johnson, a rival remarked, Shakespeare knew “small Latin and less Greek”.  However, I believe that the power and appeal of Shakespeare’s plays is partly due to his use of Anglo Saxon and Old English words.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP

ARTICLE BY Keith Paul Bishop of Allen Matkins Leck Gamble Mallory & Natsis LLP
For more, visit the NLR Corporate & Business Organizations section.

“Gig” Workers May Become Eligible to Receive Equity Compensation

The Securities and Exchange Commission (the “SEC”) recently voted to propose temporary rules to permit companies to provide equity compensation to certain workers known as “gig” or “platform” workers.

Under the Securities Act of 1933 (the “33 Act”), every offer or sale of securities must be registered with the SEC unless the issuer relies upon an exemption to such registration. Recognizing that the offers or sales of securities in the form of equity compensation differ from the regular process of raising capital from investors, a limited exemption is provided to issuers under Rule 701 of the 33 Act. Rule 701 currently exempts certain sales of securities by private companies made to compensate employees, consultants, and advisors.

Through the proposed new Rule 701, the SEC is recognizing the existence of certain types of employment relationships in the “gig economy” that fall outside the scope of the traditional employer-employee relationship. These are the “gig” or “platform” workers who have become important to the economy with the increased use of technology. Gig workers use a company’s internet platform to find a specific type of work or “gig” to provide services to end-users. Some common examples are ride-sharing, food delivery, and dog-sitting services. These workers are generally not considered employees, consultants, or advisors, and thus have not been eligible to receive securities pursuant to compensatory arrangements under Rule 701. Under the proposed amendment to Rule 701, however, companies would be permitted to compensate these platform workers with equity compensation, subject to certain conditions.

For an issuer to compensate platform workers pursuant to the proposed new Rule 701, the platform workers will have to provide bona fide services pursuant to a written contract or arrangement by means of an internet platform or other technology-based marketplace platform or system provided by the issuer. Additionally, the issuer is required to operate and control the platform, the proposed issuance of securities to the platform worker must be pursuant to a written compensation arrangement or plan, the issuer must take reasonable steps to prohibit transfer of the securities offered to the platform worker, and the securities issued must not be subject to individual bargaining or the worker’s ability to elect between payment in securities or cash. The offering per worker must be within certain caps on the amount ($75,000) during a 36-month period and a percentage of the value of the compensation (15%) received by the platform worker during a 12-month period. This exemption, if adopted, would be available for a period of five years.

The proposal is subject to a 60-day comment period following its publication in the Federal Register.

Given the benefits that equity compensation offers to both employers and employees, this exemption should provide benefits to both issuers and platform workers in the “gig economy.”

©1994-2020 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.
ARTICLE BY Daniel I. DeWolf of Mintz
For more, visit the NLR Corporate & Business Organizations section.