Corporate Alert

May 2014

The Herrick Advantage

We are pleased to announce that Herrick's Sports Law Group has been ranked by Chambers USA. Clients noted that Herrick's Sports Law Group practitioners are "... firm but fair client advocates who provide not just excellent legal advice but also trusted business opinions." Chambers highlighted the Herrick Sports Law Group's representation of Yankee Global Enterprises LLC in its joint venture with Manchester City FC to franchise a new Major League Soccer team in New York City.

Second Circuit Limits Extraterritorial Application of U.S. Securities Laws

Ruling on a matter of first impression, the Second Circuit recently held that the bar on the extraterritorial application of the U.S. securities laws blocks claims arising out of non-U.S.-issued securities listed on non-U.S. exchanges, even if those securities are cross-listed on a domestic exchange.

The plaintiffs, a group of foreign and domestic institutional investors, brought a class action suit against UBS AG in connection with the purchase of UBS "ordinary shares" listed on non-U.S. exchanges and the New York Stock Exchange. Plaintiffs alleged that UBS made fraudulent statements regarding its portfolio of mortgage-related assets, its compliance with U.S. tax laws and compliance by its private banking business with U.S. securities laws. The foreign plaintiffs, who purchased UBS shares on a non-U.S. exchange, argued that because the UBS shares were also listed on a U.S. exchange, the transaction was within the purview of Rule 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Second Circuit applied the test set forth by the Supreme Court in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), which held that Rule 10(b) only provides a private cause of action arising out of (1) transactions in securities listed on domestic exchanges and (2) domestic transactions in other securities. The Second Circuit noted that while the first prong of the Morrison test appears to support Plaintiffs' cause of action in isolation, it is "irreconcilable with Morrison read as a whole". In so holding, the Court rejected the "listing theory", pursuant to which the mere act of listing a security on a domestic exchange, absent a transaction on that exchange, provides a private cause of action under Section 10(b) of the Exchange Act.

The domestic plaintiff, in addition to invoking the "listing theory", argued that placing a purchase order in the U.S. for foreign securities on a foreign exchange meets the second Morrison prong. Again, the Court rejected the plaintiff's argument and held that U.S. securities laws do not necessarily govern a transaction even though the purchaser is a U.S. entity and the buy order is placed in the U.S. if a foreign security is purchased on a foreign exchange. The Court noted that it has never held that "placement of a purchase order, without more, is sufficient to incur irrevocable liability, particularly in the context of transactions in non-U.S. securities on a non-U.S. exchange."

The Second Circuit's decision should provide some comfort to non-U.S. issuers concerned about the application of U.S. securities laws to their non-U.S.-listed securities, particularly if such securities are cross-listed on U.S. exchanges.

City of Pontiac Policemen's & Firemen's Ret. Sys. v. UBS AG, 12-4355-CV, 2014 WL 1778041 (2d Cir. May 6, 2014).

Delaware Court of Chancery Holds that Sotheby's Stockholder Rights Plan is Reasonable Response to Threat Posed by Activist Stockholder

The Delaware Court of Chancery declined to enjoin Sotheby's Board of Directors (the "Board") from holding its annual meeting based on Third Point LLC's allegation that the two-tiered stockholder rights plan recently adopted by the Board acted as a "poison pill." Third Point LLC argued that the poison pill was unreasonable in relation to the threat posed by Third Point's stock accumulation. Sotheby's stockholders rights plan provided that in order to avoid triggering the poison pill, investors who reported their ownership pursuant to Schedule 13G filings (e.g. passive institutional investors) were permitted to acquire up to 20% of the company's stock, whereas all other stockholders were permitted to acquire only up to 10% of the company's stock. Third Point, which had acquired nearly 10% of the company's stock by the fall of 2013, asked Sotheby's Board to waive the poison pill's trigger and allow it to acquire up to 20% of the company's stock. When the Board denied Third Point's request, Third Point sued to enjoin Sotheby's annual Board meeting, arguing that Sotheby's Board breached its fiduciary duties and failed both the Unocal and Blasius standards of review.

The Court, however, disagreed, finding that the Board acted reasonably in adopting the stockholders rights plan in response to the threat posed by the "creeping control" and potential "negative control" that Third Point would have possessed had it accumulated a 20% ownership stake in Sotheby's. Therefore, the Court reasoned, the Board's actions passed Unocal scrutiny. Further, despite the fact that the stockholders rights plan was "discriminatory" in its two-tiered approach, the Court held that this feature was a "closer fit" than a typical one-tier poison pill in addressing the Board's concern of preventing an activist stockholder from taking control of the company. The Court also found that the Blasius standard, which is invoked when a board takes action with the primary purpose of interfering with the voting rights of stockholders, did not apply because it was reasonable to conclude that the Board's stockholder rights plan was adopted primarily to thwart a Third Point takeover, rather than to interfere with stockholder voting rights.

Third Point LLC v. William F. Ruprecht, et al., and Sotheby's, C.A. No. 9469-VCP (Del. Ch. May 2, 2014)

SEC Staff Clarifies Permissible Use of Social Media Commentary in Investment Adviser Advertising

The staff of the Division of Investment Management of the Securities and Exchange Commission (the "SEC") recently published a guidance update (the "Guidance Update") clarifying the circumstances in which investment advisers may highlight reviews and commentary published on social media websites, on their own websites and in their advertising materials. The Investment Advisers Act of 1940 (the "Advisers Act") broadly defines the term "advertisement," which includes an investment adviser's website and social media profiles maintained by the adviser. Rules promulgated under the Advisers Act prohibit the use of client testimonials in investment adviser advertising, and earlier SEC guidance has suggested that many common forms of social media interaction including even a Facebook "like" on an investment adviser's profile may constitute an impermissible testimonial.

While a blanket prohibition on the use by advisers of client testimonials remains, the Guidance Update attempts to delineate which types of communication on social media websites would not be deemed to be impermissible testimonial. Provided an investment adviser complies with certain guidelines, the adviser may maintain social media profiles and refer to those profiles on the adviser's own website. Such activities will not violate the Advisers Act, provided that:

  • The social media website or platform must be independent of the investment adviser and its affiliates. However, the Guidance Update indicates that an investment adviser could advertise generally on the social media website, as long as it is clear that the adviser's advertisement is separate from public commentary posted on the social media website, and the social media website does not edit the public commentary in exchange for receiving advertising revenue from the adviser.
  • The third-party commentary appearing on the social media website may not be authored by the adviser, and the adviser may not, directly or indirectly, pay others to author such commentary.
  • All third-party commentary regarding the adviser on the social media website must be viewable, without any modifications or deletions by the adviser, and the social media website must allow for real-time, unrestricted commentary.

While the Guidance Update provides some assurance to investment advisers that limited uses of social media websites will not violate the Advisers Act, advisers with a social media presence should continue to focus on compliance policies and procedures that address appropriate business uses of social media by the adviser and its employees. These policies should emphasize that neither the adviser, nor its employees, may solicit social media commentary from clients or in any way manipulate third-party posts appearing on social media websites.

Proposed Amendments to Section 242 of the Delaware General Corporation Law

The Corporation Law Section of the Delaware State Bar Association proposed two amendments to Section 242 (Amendment of Certificate of Incorporation after Receipt of Payment for Stock; Nonstock Corporations) of the Delaware General Corporation Law. The first proposed amendment deals with notices for stockholder meetings; the purpose of which is to amend the certificate of incorporation. This amendment would eliminate the requirement that the notice of the meeting contain a copy of the amendment itself or a brief summary of the amendment when the notice constitutes a notice of Internet availability of proxy materials under the Securities Exchange Act of 1934.

The second proposed amendment would authorize a corporation to amend its certificate of incorporation without stockholder approval (unless otherwise expressly required by the certificate of incorporation) to (1) change the corporate name or (2) delete provisions of the original certificate of incorporation that named the incorporator, the initial board of directors and the original subscribers for shares and (3) delete provisions contained in any amendment to the certificate of incorporation as were necessary to effect a previously effected change, exchange, reclassification, subdivision, combination or cancellation of stock.

If adopted, the amendments will be effective on August 1, 2014.

The SEC Issues Risk Alert on Cybersecurity Initiative

The SEC's Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert to provide information concerning its initiative to assess cybersecurity preparedness in the securities industry. As part of the initiative, the OCIE will conduct examinations of more than 50 registered broker-dealers and registered investment advisers focusing on the following:

  • cybersecurity governance,
  • identification and assessment of cybersecurity risks,
  • protection of networks and information,
  • risks associated with remote customer access and funds transfer requests,
  • risks associated with vendors and other third parties,
  • detection of unauthorized activity, and
  • experiences with certain cybersecurity threats.

As part of the Risk Alert, the OCIE included a sample request for information and documents that it may use to conduct its examinations. Among other things, the sample document requests information regarding the policies and procedures that a firm maintains to protect its networks and information, including copies of any written policies, relating to cybersecurity. The SEC notes that the sample document is also intended to empower compliance professionals in the industry with questions and tools that they can use to assess their firm's level of preparedness and to determine whether they need to make any changes to address or strengthen their risk management systems related to cybersecurity.

Delaware Chancery Court Chooses Open-Outcry Private Auction over Sealed-Bid Public Auction

A recent Chancery Court opinion serves as a reminder to LLC members that if the operating agreement does not specify how the LLC is to be dissolved, the method for liquidating the company is largely within the trial judge's discretion (assuming that the agreement does not prohibit judicial dissolution). The dissolution proceeding of Interstate General Media Holdings, LLC -- the indirect parent company of The Philadelphia Inquirer -- was commenced by its largest member, General American. General American submitted a liquidating proposal to the court that advocated an auction in which only General American, Intertrust (the second largest member), and the union representing most of the company's employees were allowed to bid. The auction was to be conducted in open-outcry fashion, and the minimum bid had to be at least $77 million. Intertrust, which had been at loggerheads with General American for the year leading up to the dissolution proceeding, submitted a competing proposal in which it advocated a sealed-bid public auction that was open to any "qualified bidder."

After conducting an evidentiary hearing on the two proposals, the court chose the open-outcry private auction -- the method endorsed by General American -- though it did not agree with all of General American's arguments in support of this conclusion. The court based its decision entirely on the superior economics of the General American proposal, finding, among other things, that it was very unlikely that a bidder at a public auction would be able to top even the minimum bid at the private auction. The Court, however, rejected General American's argument that because the operating agreement was silent on how the LLC was to be dissolved, the court could take guidance from other provisions of the operating agreement that dealt with different subjects but could arguably be applied to the dissolution issue. The court held that "[b]ecause the LLC Agreement does not offer any meaningful guidance as to how the parties' dispute in this case should be resolved, I conclude that the Agreement is essentially irrelevant to the dispositive issue before me. Accordingly, I turn next to an evaluation of whether a public or private auction would maximize the value of the Members' ownership interests in IGM."

In re Interstate General Media Holdings, LLC, 2014 WL 1697030 (Del. Ch. Apr. 25, 2014).

For more information on the issues in this alert, or corporate matters generally, please contact:

Daniel Etna at +1 212 592 1557 or [email protected]

Copyright © 2014 Herrick, Feinstein LLP. Corporate Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.