Securities Mosaic® Blogwatch
February 10, 2016
Rethinking Limited Liability of Parent Corporations for their Subsidiaries' Extraterritorial Violations of Human Rights Law
by Gwynne Skinner

In order to ensure that victims of business-related human rights and gross environmental abuses in countries that host transnational business (host countries) are able to have the ability to seek and obtaining a remedy for their harm, courts should ignore the separate legal personality of parent corporations operating in countries with weak or corrupt judicial systems where the victims cannot otherwise obtain a remedy against the subsidiary, allowing corporate parents to be held liable for such harm. In such situations, the corporate parents are the entities that can best, and normatively should, remedy the victims' harm, even if they do not "control" the subsidiary or are directly responsible for the harm. This is because the parent corporations inure great financial benefits through the operation of such subsidiaries often at the expense of nonconsenting, third-parties by externalizing the risks and harms. Moreover, the corporate parents are well aware of human rights risks in these countries, and of the difficulties victims will have in obtaining a remedy if they are harmed.

The doctrine of limited liability of shareholders, deeply ingrained into the law of the United States and many other countries, limits liability of corporate parents just as it does individual shareholders. The only exception is the rare situation where a plaintiff can establish the subsidiary was a mere alter ego of the corporate parent and thus pierce corporate the veil, or where the plaintiff can otherwise establish that the parent is directly liable through the parent’s own action. The doctrine of limited liability applies no matter how egregious the harm, and no matter how much financial benefit the parent receives from the operations of the subsidiary. Such limits on parent liability for a subsidiary's illegal and harmful actions are not problematic as long as victims can identify the subsidiary causing the harm and can obtain a remedy in the host country. Unfortunately, many victims of business-related tortious conduct that violate international human rights norms live in host countries with ineffectual and/or corrupt government and judicial systems, and often face many additional obstacles in obtaining a remedy against the subsidiary in the host country. Often in these countries, there are no mechanism for victims harmed by businesses' actions to seek or obtain redress or no statutory or common law basis to bring a claim; victims are unable to collect even if there is a judgment due to lack of funds, underfunding, or bankruptcy; and victims are often unable to identify the subsidiary against which to bring a claim due to the complexity of corporate structure.

Given this juxtaposition, there is increasing recognition that it is unfair that parent corporations receive tax and other benefits from their use of wholly-owned subsidiaries while being able to avoid liability when those wholly-owned subsidiaries engage in human rights violations, even where the parent corporation is not at fault.

Due to this unfairness, a few scholars have argued for various approaches, such as unlimited liability of shareholders or for an "enterprise theory" of liability. Still others have recently argued for a slightly different approach that I term the "due diligence approach": that there should be a presumption of liability on the part of a parent corporation for extraterritorial acts of its wholly-owned subsidiary, but that the parent can overcome the presumption by showing that it had engaged in "due diligence" efforts to ensure that its subsidiary operated consistently with human rights and environmental standards and was otherwise unaware of the abuses. At least one country, France, has pending legislation that takes a similar approach.

However, while some of these approaches are viable, they each have serious limitations. Unlimited liability, and enterprise liability based on financial control, go too far. Similar to piercing the veil, control-based enterprise liability (to which nearly all enterprise liability theories adhere), and even aspects of the "due diligence" approach, rely on notions of the parent "controlling" the subsidiary in order for victims to obtain a remedy. Additionally, the due diligence approach, in addition to uncertainty about what constitutes "due diligence," might be too easy to "game," with compliance officers simply "checking off" boxes. Moreover, similar to veil piercing, the more feasible approaches do not address the underlying inequality and unfairness created by the great financial and tax benefits inuring to the parent at the expense of harm absorbed by these non-consenting third parties. Whether a parent corporation is liable should not depend on whether it controls the subsidiary or whether it has met certain "due diligence standards"; rather, developed countries should be moving toward a system, at least for the most egregious harms, where the entity that receives the greatest economic benefit from subsidiary’s operation is ultimately accountable for the harm when the victims are not otherwise able to obtain a remedy from the subsidiary in the host country.

Finally, with regard to U.S. parent corporations, none of the suggested approaches takes into account the additional barrier created by the 2013 Supreme Court decision of Kiobel v. Dutch Royal Shell.[1] In that case, the Court held that the presumption against a statute's extraterritorial application, in the absence of Congress stating otherwise, applies to claims of customary international law violations brought under the Alien Tort Statute[2] (under which most torts for violations of international human rights law have been brought). Thus, even if limited liability can be overcome, such as through piercing the corporate veil or through these other suggested approaches, victims of extraterritorial human rights violations still are likely to be unable to hold the parent corporation accountable for a remedy in U.S. courts. Therefore, any solution to the problem of barriers to remedy created by the doctrine of limited liability must also address the barrier created by Kiobel. The solution I advocate does so because it creates a cause of action of sorts that would apply to extraterritorial conduct. This is what I propose:

In order to ensure victims of egregious harms have the ability to obtain a remedy for harm, I propose that for in claims involving customary international human rights violations (such as those brought in the United States under the ATS) and serious environmental torts, limited liability of parent corporations for should be disregarded where that parent takes a majority interest in or creates a subsidiary as part of unified economic enterprise that operates in a "high-risk host country," i.e., one that has a weak, ineffective, or corrupt judicial system;[3] and (a) victims cannot obtain an adequate judicial remedy in the country due to such corruption, lack of a cause of action, or other judicial or law-related reasons; (b) victims cannot determine what entity is responsible, and thus what entity to hold accountable, given the enterprises' complex corporate structure; or (c) a subsidiary is underfunded and thus cannot pay any damages resulting from the violations.

Ideally, this should be done through a statutory enactment noting that parent corporations would be liable in the above situations. In the alternative, courts could incorporate this approach in "piercing the corporate veil" analyses, or when considering other theories of liability, such as enterprise liability. Regardless of the exact mechanism, it is time we hold parent corporations, which are well aware of the barriers victims face in obtaining a remedy in many host countries where they operate, and are well aware of the human rights risks in such countries, ultimately accountable for remedying victims’ harms when their subsidiaries engage in, or are vicariously responsible, for violations of international human rights law and gross environmental abuses.

ENDNOTES

[1] 133 S. Ct. 1659 (2013).

[2] 28 U.S.C. § 1350.

[3] The question of whether the country is an-risk country would be a question of fact.

REFERENCES:

William Douglas & Carol Shanks, Insulation from Liability Through Subsidiary Corporations, 39 Yale L.J. 193 (1929)

Meredith Dearborn, Enterprise Liability: Reviewing and Revitalizing Liability for Corporate Groups, 97 Cal. L. Rev. 195 (2009)

Robert B. Thompson, Unpacking Limited Liability: Direct and Vicarious Liability of Corporate Participants for Torts of the Enterprise, 47 Vand. L. Rev. 1 (1994)

Phillip I. Blumberg, Limited Liability and Corporate Groups, 11 J. Corp. L. 573 (1986)

Kiarie Mwaura, Internalization of Costs to Corporate Groups: Part-Whole Relationships, Human Rights Norms and the Futility of the Corporate Veil, 11 J. Int’l Bus. & L. 85 (2012)

The preceding post comes to us from Gwynne Skinner, Associate Professor of Law, Willamette University College of Law. An expanded argument for parent company liability for subsidiaries' actions can be found in Professor Skinner’s recently published law review article, Rethinking Limited Liability of Parent Corporations for Foreign Subsidiaries’ Violations of International Human Rights Law, 72 Wash. & Lee L. Rev. 1769 (December 2015) available here; and in her expert report for the International Corporate Accountability Roundtable, Parent Company Accountability: Overcoming Obstacles to Justice for Human Rights Violations, (September 2015), found here.

February 9, 2016
Chancery Court Continues to Close the Door on Disclosure-Only Settlements and Fees (But Opens a Window for “Mootness Dismissals”)
by William Foley, Kevin Askew and Michael Tu

As previously discussed here, in 2015, the Delaware Court of Chancery issued a number of decisions calling for enhanced scrutiny of "disclosure-only" M&A settlements that involve no monetary benefits to a shareholder class. For example, the recent decision in In re Riverbed Technology, Inc. Stockholders Litigation expressly eliminated the "reasonable expectation" that a merger case can be settled by exchanging insignificant supplemental disclosures (and nothing more) for a broad release of claims. In In re Trulia, Inc. Stockholder Litigation, the Chancery Court demonstrated that its "increase[ed] vigilance" in this area is genuine, rejecting a disclosure-only M&A settlement and finding that the supplemental disclosures did not warrant the broad release of claims.

In re Trulia arose out of the acquisition of Trulia, Inc., an online real estate database, by Zillow, Inc. After the merger was announced in July 2014, several Trulia shareholders filed suit, alleging that, among other things, the Trulia board breached its fiduciary duties by failing to properly value the company and disseminating "false and misleading disclosures" in Trulia’s proxy statement. As is typical in M&A cases, the parties quickly agreed-in-principle to settle the litigation on a disclosure-only basis, and on November 19, 2014, Trulia filed a Form 8-K containing the supplemental disclosures sought by plaintiffs. A month later, the acquisition was overwhelmingly approved by Trulia shareholders.

The settlement stipulation included "an extremely broad release" (which was later narrowed somewhat in response to concerns articulated by the court at an initial settlement hearing) and a statement that plaintiffs intended to seek a fee award "not to exceed $375,000."

The parties failed, however, to obtain the court's approval. Chancellor Bouchard rejected the proposed settlement, finding it was neither fair nor reasonable to Trulia's stockholders. At the outset of the opinion, the court lamented the "current ubiquity" of deal litigation, explaining that "far too often such litigation serves no useful purpose" other than "to generate fees for certain lawyers who are regular players in the enterprise of routinely filing hastily drafted complaints...and settling quickly on terms that yield no monetary compensation to the stockholders they represent." The decision went on to explain that it is the court's role to assess and compare the value of the "give" (the release of claims) with the "get" (the supplemental disclosures). In analyzing the four items in Trulia’s supplemental disclosures, the court found that none "were material or were even helpful in this case." Thus, Trulia’s shareholders were giving up more than they were getting, and the settlement was not fair.

While In re Trulia is likely to make it more difficult for parties to achieve a disclosure-only settlement in Delaware (particularly where the supplemental disclosures are insignificant and/or the release of claims is broad), the court noted that there is another path for plaintiffs to challenge mergers and receive an award of fees: the "mootness dismissal." In this scenario, defendants issue the supplemental disclosures sought by plaintiffs in exchange for plaintiffs’ voluntary dismissal of their claims on mootness grounds. Whereas a settlement requires court approval, a dismissal (prior to class certification) does not. This option also permits the parties to negotiate fees privately. Of course, the mootness dismissal is not as favorable to corporate defendants because it does not provide a formal release of claims. Because of this, it is conceivable that a different plaintiff could file a separate suit after the initial suit was dismissed (although Chancellor Bouchard stated his belief that such an occurrence would be "[un]likely"). In any event, it remains to be seen whether the mootness dismissal catches on as a replacement for disclosure-only settlements in M&A cases.

February 9, 2016
The President's FY 2017 Budget Contains Substantial Funding for Cybersecurity
by David S. Turetsky, Blair M. Cantfil, Jo-Ellyn Sakowitz Klein, Michelle A. Reed & Natasha G. Kohne

The president's FY 2017 budget, released today, includes cybersecurity as a national priority. The budget would invest $19 billion in overall federal resources for cybersecurity that are intended to support a broad-based cybersecurity strategy for securing the government, enhancing the security of critical infrastructure and important technologies, investing in next-generation tools and workforce, and empowering Americans. In particular, this funding would support a newly announced Cybersecurity National Action Plan (CNAP), which is intended to take near-term actions and put in place a long-term strategy to enhance cybersecurity awareness and protections; protect privacy; maintain public safety, as well as economic and national security; and empower Americans to take better control of their digital security. The awareness campaign will focus, for example, on moving beyond just passwords and adding an extra layer of "multi-factor authentication" security measures (i.e., combining a strong password with additional factors, such as a fingerprint or a single-use code delivered in a text message, Americans can make their accounts even more secure).

Highlights of the CNAP include the establishment of a Commission on Enhancing National Cybersecurity and a Federal Privacy Council, and the creation of a new $3.1 billion revolving fund, the Information Technology Modernization Fund, to retire the government's antiquated IT systems and transition to more secure and efficient modern IT systems. The Commission will make recommendations on actions that can be taken over the next decade to strengthen cybersecurity in both the public and private sectors while protecting privacy; maintaining public safety and economic and national security; fostering discovery and development of new technical solutions; and bolstering partnerships between federal, state and local government and the private sector in the development, promotion and use of cybersecurity technologies, policies, and best practices.

February 10, 2016
Shearman & Sterling explains SDNY Bankruptcy Court Holding That Avoidance Powers Can Be Applied Extraterritorially, and Resulting Split Within the SDNY
by Fredric Sosnick, Douglas P. Bartner, Joel Moss, Solomon J. Noh and Ned S. Schodek

On January 4, 2016, the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") deviated from SDNY precedent and held that, despite the absence of clear Congressional intent, the avoidance powers provided for under Section 548 of the Bankruptcy Code can be applied extraterritorially. As a result, a fraudulent transfer of property of a debtor's estate that occurs outside of the United States can be recovered under Section 550 of the Bankruptcy Code. This ruling creates a split among courts within the Southern District of New York regarding the reach of avoidance powers when it comes to the recovery of extraterritorial property.

Background

In December 2007, Basell AF S.C.A. ("Basell"), a Luxembourg entity controlled by Leonard Blavatnik ("Blavatnik"), acquired Lyondell Chemical Company ("Lyondell"), a Delaware corporation, forming a new company after a merger by means of a leveraged buyout. The LBO was 100% financed by debt, which was secured by the assets of Lyondell. Less than 13 months later, Lyondell filed a petition for chapter 11 relief in the Bankruptcy Court for the Southern District of New York. Lyondell's unsecured creditors were behind $21 billion in secured debt, with Lyondell's assets effectively depleted as a result of payments of $12.5 billion in loan proceeds to stockholders.

The trustee of the litigation trust formed under Lyondell's plan of reorganization (the "Trustee") asserted claims against Blavatnik and various other defendants for, among other things, fraudulent conveyances relating to a shareholder distribution of €100 million Basell made two weeks before the closing of the merger. The Trustee claimed that the merger, along with the highly leveraged financing of the merger, left the newly formed company, Lyondell, and many of their affiliates insolvent, inadequately capitalized and grossly overleveraged. Numerous motions to dismiss were filed, including one for failure to state a claim on the grounds that the avoidance powers of Section 548 of the Bankruptcy Code do not apply because the shareholder distribution, which was made by a foreign entity (Basell, a Luxembourg company) to a foreign entity (BI S.à.r.l., its Luxembourg parent), constitutes an extraterritorial transaction. The defendants moved to dismiss the complaint on the basis that prevailing case law in the Southern District of New York held that Section 548 did not apply outside of the United States.

Decision

The Bankruptcy Court first noted that there is a presumption that legislation of Congress is meant to apply only within the territorial jurisdiction of the United States, but that courts will perform a two-step inquiry to determine whether to apply this presumption in a specific factual setting. First, a court must determine whether the presumption applies at all by considering the conduct regulated by the legislation in question, and whether that conduct occurred outside of the United States. If the presumption is implicated, the court then must consider whether Congress intended to extend the statute's coverage to the extraterritorial conduct at issue. After analyzing the facts and law, the Bankruptcy Court concluded that the presumption against extraterritoriality was rebutted, and the motion to dismiss the complaint was denied.

In determining whether a transaction is domestic or extraterritorial, courts consider a number of factors, including whether the participants, acts, targets and effects involved in the transaction primarily are foreign or domestic. The Bankruptcy Court was unconvinced that the "minimal contacts to the United States" advanced by the Trustee1 were sufficient to overcome the substantially foreign nature of the shareholder distribution, and determined that the connection to the United States was insufficiently strong for the transfer to be considered anything but extraterritorial. Therefore, the shareholder distribution constituted an extraterritorial transfer.

The Bankruptcy Court then considered whether Congress intended that Section 548 of the Bankruptcy Code apply to extraterritorial transfers. The Court first looked to the language of the statute2 and noted that the text does not contain any express language or indication that Congress intended for it to apply extraterritorially. The Bankruptcy Court then looked to context, such as the surrounding provisions of the Bankruptcy Code, including (i) Section 541, which provides for a bankruptcy court's in rem jurisdiction over all of a debtor's property, whether foreign or domestic and that any interest in property recovered under Section 550 becomes property of the estate,3 and (ii) Section 550, which authorizes a trustee to recover transferred property to the extent that the transfer is avoided under Section 548.

The Bankruptcy Court agreed with the reasoning of the Fourth Circuit4 in In re French, stating: "It would be inconsistent (such that Congress could not have intended) that property located anywhere in the world could be property of the estate once recovered under Section 550, but that a trustee could not avoid the fraudulent transfer and recover that property if the center of gravity of the fraudulent transfer were outside of the United States." In addition, the Bankruptcy Court praised the reasoning of Professor Jay Westbrook in an article5 analyzing both the In re French decision and a decision criticizing the same.6 The counterargument to the extraterritorial reach of Section 548 is that because property held by third-party transferees becomes property of the estate only when the transfer has been avoided, Section 541 does not indicate Congress’s intent that Section 548 apply extraterritorially. Here, the Bankruptcy Court agreed with Professor Westbrook that Section 541 "strongly suggests that Congress intended the reach of [the avoiding] powers to be co‑extensive with the broad, global embrace of its definition of estate property."

Discussion

This decision appears to be somewhat at odds with the language of Section 541, which speaks of property "wherever located" as property of the estate, including property once it is recovered under Section 550 pursuant to an avoidance action, but with no explicit mention of the extraterritorial reach of avoidance actions themselves. The lack of clear Congressional intent that avoidance powers apply to foreign transactions was the basis for prior decisions in the Southern District of New York which took the opposite view and held that the avoidance powers only apply domestically.7 Those courts reasoned that if Congress intended for the avoidance powers to have extraterritorial reach, it could have so stated either the relevant statutory provisions governing avoidance actions under the Bankruptcy Code or in Section 541 itself.

Judge Gerber, in a footnote, expressed his respectful disagreement to the extent that his decision is inconsistent with prior decisions recognizing the general presumption against extraterritoriality absent explicit language to the contrary. This ruling furthers uncertainty in the Southern District of New York as to whether transfers that occur abroad may be avoided in a chapter 7 or 11 case.8

ENDNOTES

1 The Trustee's arguments were the following: at least some of the decisions to make the shareholder distribution were made in the United States; the merger had substantial connections to the United States and, as part of the merger, so did the shareholder distribution; and payment of the shareholder distribution had substantial effects in the United States by rendering Basell—and 13 days later, the resulting company—undercapitalized.
2 Section 548 of the Bankruptcy Code provides that a trustee may avoid any fraudulent transfer of an interest of the debtor in property that was made within two years of the bankruptcy filing.
3 Section 541 of the Bankruptcy Code, which defines "property of the estate" provides, among other things, that the estate includes any interest in property that the trustee recovers under Section 550 of the Bankruptcy Code, wherever located and by whomever held.
4 French v. Liebmann (In re French), 440 F.3d 145 (4th Cir. 2006), cert. denied 549 U.S. 815, 127 S. Ct. 72 (2006).
5 Jay Lawrence Westbrook, Avoidance of Pre-Bankruptcy Transactions in Multinational Bankruptcy Cases, 42 TEX. INT’L L.J. 899.
6 Barclay v. Swiss Fin. Corp. Ltd. (In re Bankr. Estate of Midland Euro Exch. Inc.), 347 B.R. 708 (Bankr. C.D. Cal. 2006) (acknowledging that Section 541 provides that property of the estate includes property "wherever located," but ultimately concluding that Section 541 did not support a reading of Section 548 to apply extraterritorially).
7 Referring to Maxwell Communication Corp. plc v. Barclays Bank (In re Maxwell Commc’n Corp. plc), 170 B.R. 800 (Bankr. S.D.N.Y. 1994); Societe General plc v. Maxwell Commc’n Corp. plc (In re Maxwell Commc’n Corp. plc), 186 B.R. 807 (S.D.N.Y. 1995); and Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 513 B.R. 222 (S.D.N.Y. July 28, 2014).
8 Chapter 15, which governs U.S, bankruptcy cases in aid of (or ancillary to) foreign bankruptcy, reorganization and insolvency proceedings, explicitly does not permit the use of avoiding powers under the Bankruptcy Code by a foreign representative in a chapter 15 case. Cases are divided as to whether a foreign representative in a chapter 15 case may bring avoidance actions under foreign law in the U.S. While chapter 15 cases present unique considerations of comity with foreign jurisdictions, the express prohibition on a foreign representative bringing avoidance actions under the Bankruptcy Code at least arguably provides some support for the notion that Congress did not intend for Bankruptcy Code avoidance actions to have extraterritorial reach, at least in some circumstances.

The full memorandum was originally published by Shearman & Sterling on February 2, 2016, and is available here.


February 10, 2016
A Conversation with SEC Chair Mary Jo White
by Mary Jo White
Editor's Note:

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s recent interview at the Keynote Session of the 43rd Annual Securities Regulation Institute, available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

SEC Chair Mary Jo White participated in a Q&A session with Steven Bochner, Chair of the Securities Regulation Institute. The Q&A was part of Northwestern University School of Law’s 43rd Annual Securities Regulation Institute. The event was held in San Diego, California. This transcript was edited for clarity.

Steven Bochner: It is my great honor to introduce the Alan Levenson keynote speaker and I’m going to read her resume, even though I know most of it by heart, because it’s a long, impressive resume and we’re honored to have you here, Chair White.

Mary Jo White was sworn in as the 31st Chair of the SEC on April 10, 2013. She arrived at the SEC with decades of experience as a federal prosecutor and securities lawyer. As the United States Attorney for the Southern District of New York, she specialized in prosecuting complex securities and financial institution fraud cases, as well as international terrorism cases. She’s the only woman to hold the top position in the 200-year plus history of that office. Prior to that, Chair White served as the United States Attorney and served as the first Assistant United States Attorney and later Acting United States Attorney for the Eastern District of New York. She previously served as Assistant United States Attorney for the Southern District of New York and became Chief Appellate Attorney at the Criminal Division.

She’s been a huge contributor to this conference for many, many years, and I think serving on the board for 10 years and chair of the Enforcement Session many times. This is her second Alan B. Levenson keynote address and she twice addressed this group as the U.S. Attorney for the Southern District of New York, once in 1998 and then again in 2001.

So we are honored to have you here and I’m always happy to see you, but especially happy this year because it was quite an ordeal to get out here.

Chair White: Little bit of a saga. Little bit of a saga.

Steven Bochner: Right.

Chair White: Honored to be here. Great to see everyone.

We were in New York for the blizzard, which most of you, thankfully, escaped. So at one point I was coming by way of Detroit and Los Angeles to get here and I said to Juliann, one of your fearless leaders, but for her and having known her for these decades, I might’ve decided not to make the trip. But, seriously, I’m very, very honored to be here.

Juliann also warned me-”You know, it’s cold out here.” Compared to what, right? Compared to what? Compared to 23 degrees and 30 inches of snow, it’s great out here. So it’s terrific to be here.

Steven Bochner: And as I mentioned, you-this is your second Alan B. Levenson keynote and you’ve made some remarks—I think in the prior one that I heard, you made some remarks about the impact of Alan Levenson on the Institute and the SEC. Did you want to comment?

Chair White: Sure. First, you know, Alan Levenson has just a tremendous legacy at the SEC, not only for his accomplishments, but just as a terrific, terrific, colleague. I didn’t have the pleasure of actually knowing Alan, but one of the things I actually do when you speak whether in a Q&A or in a keynote speech in honor of someone else, a former government official, is actually take it upon yourself to learn about him or her and their era at your agency and—in learning about Alan Levenson, it’s just kind of head-jerking.

You start with his smarts, I think he was a graduate of Dartmouth, two Oxford degrees, and Yale Law School. So he obviously had all the cerebral equipment. Served as the director of Corp Fin from 1970 to ’76 and he was also kind of a co-founder, along with Stan Sporkin, of the precursor to the FCPA, the Foreign Corrupt Practices Act.

I mean, he not only co-founded this Institute, he also was the founder of SEC Speaks, which is a program in [Washington]. You know, great believer in continuing legal education. We reached out to John Huber, who actually worked for Alan and later himself became a distinguished director of the Division of Corporation Finance, said Alan was very practical, very hands-on, and the most important thing was that the division communicate clearly with the private bar about what’s required in the way of disclosure and other requirements and to be consistent about that so that you then, as the private bar, can advise your clients and that will improve disclosure.

So I guess tomorrow you will hear from Keith Higgins, the current director of Corp Fin, who I know will represent the staff and the agency extraordinarily well, tell you what we’re up to, et cetera, and in the finest tradition of this Institute will be explaining how well we’re doing in being clear and consistent with the guidance that we give to the private bar and to issuers. I think maybe shareholder proposals will be one that you’ll address as part of that, Keith. So good luck.

Steven Bochner: So it was almost three years ago and I think you were scheduled to speak at this conference. In fact, you might’ve been out here and you then had to be whisked back to D.C. because President Obama nominated you. So it’s been three years and it’s been I think-it seems to me a challenging and somewhat tumultuous period in the sense that you took over right as the recession was kind of waning. You had a set of congressionally mandated rulemaking initiatives, first Dodd-Frank, JOBS Act, a whole host of mandates.

I’d be interested to just hear your reflections, what parts of the job met your expectations, kind of what you expected when you agreed to do this, and what surprised you about the job?

Chair White: How long do you have? Well, let me start with what was as expected maybe-in terms of Dodd-Frank and the JOBS Act. Between them, the agency did get about 100 mandated rulemakings, which has obviously led to the most daunting rulemaking agenda really in the agency’s history. That really didn’t surprise me. I knew that was going to be the case coming in and thanks to our staff, I think we’ve done a tremendous job at that. So that wasn’t a surprise.

I think one thing that maybe exceeded my expectations and not just because a few of them are in the audience, is just how spectacular the SEC staff is, both in terms of its expertise and its dedication. I knew the SEC staff from my prior life as U.S. Attorney and in the private sector, firsthand, I was enormously impressed by them. But when you’re in the trenches with the staff [inside the SEC], particularly when you’re doing so many rulemakings, a number of them obviously controversial. I have even greater admiration for what they accomplish without any question.

The Dodd-Frank Act in particular was and is controversial. It obviously followed the financial crisis [, and what I didn’t fully expect] was the [continued] controversy from the statute, even though it’s obviously the law now; [the controversy] has carried over perhaps more than I expected in terms of its impact on the Commission and our rulemakings as we carry out the mandates. I think it may have at least in part played a role in some of our 3-2 votes.

In terms of the other responsibilities of the SEC, vast array of responsibilities, 25,000 registrants, we oversee FINRA, the PCAOB, and the markets. That’s pretty much as expected. It is daunting, but it is very, very exciting as well.

Washington, I won’t say what my expectations were going in. It’s met my expectations. I think I’ll leave it at that. It’s met my expectations. Who put the SEC in Washington anyway? And, by the way, the government offices, if you don’t know, are closed in Washington still.

Steven Bochner: The weather is pretty nice out here. Maybe we can move-

Chair White: It’s great out here. It’s great out here. And New York opened on Monday, but passing that—Edgar’s up and running and also our market surveillance folks are on duty and the rest of us are too, even though the offices are closed.

You know, other things I guess the Sunshine Act, which you-probably most of you know what that is. It’s a post-Watergate statute meant to bring—and it’s a good thing—greater transparency to government agencies so that you know what we’re doing and, hear about what the issues are in public. You can hear from the staff. You can hear from the Commissioners.

It’s why you see a Sunshine Act notice in advance of our rulemakings because we’re doing them as we must at an open meeting. But what that actually means in practice, and the SEC really is quite-a strict adherent to the requirements-is that neither I, nor any of my fellow Commissioners, my other four fellow Commissioners, can talk to more than one of each other at a time. So what you see with envy, frankly, at least I do as Chair, is some old photographs with the five Commissioners sitting around a table discussing issues, business, and policy. We can’t do that anymore. It’s really a lot of shuttle diplomacy, and I think the transparency piece is great and important, but I think it really does, I think-isn’t built for efficiency and clear communications as I—you’d like to see. So that’s been more of an impact than I was anticipating, even though I knew of the Act and its requirements.

What else and I’ll stop. I guess the amount of time that I devote to international issues and the time I spend with fellow financial regulators both domestic and international and most of that is very good. Our markets are obviously global, interconnected. We did have a financial crisis. So all that communication and trying to avoid regulatory arbitrage is extremely important.

I, actually, personally represent the agency on the IOSCO Board, which are other securities regulators from around the world, the Financial Stability Board Steering Committee, which is the senior group of the Financial Stability Board, and I am, as the Chair, a member of FSOC, the Financial Stability Oversight Council, and obviously lots and lots of help from the staff in the policy divisions and our economists in DERA, who are just amazing. I think all of these organizations, in addition to trying to identify risks around the corner and really addressing them, need to prioritize their agendas. I think what the SEC brings to the table, among many other things, is our expertise about the capital markets and how banks may be different than the capital markets in those arenas.

I’m sure there are others, but that’s kind of a running list.

Steven Bochner: Thank you. Thank you.

Let’s talk a little bit about 2015 and maybe how you would characterize the year and the Commission’s accomplishments, the SEC accomplishments, and then maybe move quickly to 2016. Tell us a little bit about how you set your agenda and what you think the priorities for the Commission will be this year.

Chair White: 2015 [was] a year of really tremendous accomplishments for the SEC, very proud of not only how much we accomplished, but how well I think the agency [performed]. We finished basically all of the JOBS Act mandates with Regulation A+ and crowdfunding, made great progress on finishing the rest of our Dodd-Frank mandates, and we’ve already started finishing our FAST Act mandates as well.

We were able to also, and I was very pleased about this, actually propose four major rules for enhancing oversight and the regulation of the asset management industry. We advanced some of our market structure initiatives by way of proposals, including greater transparency for ATSs, very important to do.

I’ll stop in a second, but I’m like a broken [record], wind me up and I’ll keep going.

Enforcement had a record year. You probably heard about that for two-and-a-half hours from Andrew Ceresney, but I think 807 actions and over $4 billion in orders to return money to investors and in penalties. Our examiners who examine broker-dealers and investment advisers, did almost 2,000 exams, which is a five-year high, and really high-quality, risk-focused exams, so very, very proud of that.

Other divisions and offices in the agency, also really clicking on all cylinders—some leading reports put out by our economists in DERA, terrific and very important oversight by our Office of Chief Accountant, overseeing the credit rating agencies, the municipal securities markets. So I think a really, really strong year across the boards.

Steven Bochner: Yeah.

Chair White: In terms of 2016, I mean—I’m sorry. You want—

Steven Bochner: Yeah. Well, I was going to-lead you to that as the-sort of the congressionally mandated agenda hopefully wanes, that maybe 2016 will be a year when you’ll have a little more time to think about what should we do as opposed to what-

Chair White: Look, [the mandates] have obviously been a challenge, you know, throughout my tenure. It remains a challenge to some degree to also advance the mission critical rulemakings and other initiatives of the agency. Disclosure effectiveness obviously being one where we also made progress last year and will be a priority going forward this year. I hope to carry forward those asset management rulemakings that I mentioned. We’ve got a couple more to do, market structure initiatives, and none of these that I’m mentioning, by the way, are Dodd-Frank mandates or JOBS Act mandates.

Hope to finalize our very important plan for a consolidated audit trail, which will really be a game changer in terms of regulators’ window into the equity markets and others.

I think on the Dodd-Frank front, we’ve basically finished most of our major Dodd-Frank mandates. We sort of put them in different buckets, but we’ve done credit rating agencies and we’ve done clearing agencies and we’ve done Volcker. We’ve done private fund advisers, municipal advisors. We’ve done major reforms in the securitization markets.

And so what’s really left in those major categories is to finish Title VII, the over-the-counter securities-based swap regulations. We’ve proposed all of those rules. In 2015, we adopted a number of them, but we have to finish those adoptions and then the executive comp rules, all of which we did propose or adopt in 2015. So they’re on our agenda for 2016 as well as is fiduciary duty for broker-dealers and advisers, third-party exams for investment advisers. There’s a lot more. It should be a very busy year.

Steven Bochner: Yeah. We’ll be hearing tomorrow from Division Director Higgins about disclosure effectiveness, but I wanted to see if you wanted this opportunity to talk about your perspective on that and what we’re likely to see.

Chair White: Yeah. This is one of our-it’s really my—and I’m sure Keith would share this as well-most important priorities. Obviously, this is not mandated by anyone other than one wants to have what is our probably most important set of powers be as optimal as they can be, and so I mentioned that– our first tangible product was issued [in 2015] and there are lots of work streams that are quite active and ongoing in this initiative, but we put out a request for comment on some revisions to S-X, very complicated in terms of financial statements provided on others than the issuer, remarkably clear, by the way. If you really have insomnia one night and you want to be entertained, you actually will understand it all. So really a very, very good job on that.

I think next in the flow in terms of the order of things in the short term probably a concept release on S-K, the financial and business issues raised there. We’re also doing some technical amendments of our rules primarily related to financial statements—addressing some redundancy, some overlaps, perhaps some contradictions with what’s required by U.S. GAAP. So that will be happening. We’re focusing on the industry guides, particularly Industry Guide 7, the mining and the bank holding company industry. That’s [Guide] 3, as well as 7.

Then, one of the other things, just sort of stepping back for a second on disclosure effectiveness, we’ve urged and gotten a lot of comments from all kinds of constituencies—preparers and auditors and investors and others who really have put in some very, very useful comments. We urge more and they do begin to grow, but what you basically have among the comments are also some thoughts about where there should be greater disclosure perhaps than under our current rules.

I think foreign tax disclosure is one the staff has looked at as to where [there may need to be more]—where we may need better and greater disclosure, not just eliminating redundancies and it’s really about optimal effective disclosure, not eliminating but making it better.

Other issues that have been raised, for example, are where we don’t have line item requirements, for example, in cybersecurity, for climate change, other things of that nature. What the disclosure effectiveness review gives us is the opportunity to look at the current state of disclosure really in all areas, see what it is, and see whether there is room to improve it in either direction really in terms of adding or subtracting.

Steven Bochner: So there may be some combination of, perhaps looking at line item disclosure may be more qualitative and then I know you’ve made comments in the past about encouraging disclosure that’s not even elective in connection with shareholder relations.

Do you suspect it’s going to be greater or lesser on any of those fronts or too early to—

Chair White: I think it’s too early to tell that. I think it really is a very active, deep effort to just make our disclosure system as best as it can possibly be.

Steven Bochner: Okay. There’s been a dramatic change in my practice certainly, probably the biggest change I’ve seen in my career in just the number of exemptions, ‘33 Act exemptions. We’re going to talk a—we’ve talked already about it. We’re going to talk a little bit more about it on the corporate finance panel tomorrow, but wanted to get your reflections just on the flexibility now that issuers have.

You know, Reg A+, crowdfunding. We’ve got proposed changes to 147 and 504. We have general solicitation in the context of private placements. That’s something that’s been talked about for decades and now is with us and, you know, it obviously gives issuers a menu of different choices and flexibility and I think it was last year, it was either here or New York, I can’t remember, but you mentioned that you were going to pay close attention to kind of how these rules were implemented, particularly general solicitation, how it was used, kind of keep a watchful eye, and I’d be interested in your perspective on that landscape.

Chair White: Yes. It’s a big landscape, obviously changing recently and fairly rapidly. I think it’s an exciting landscape, that does present real new opportunities for capital raising and flexibility for issuers. It also, puts in very stark relief for the SEC and others to make certain that investors are optimally protected in those markets, and I think I maybe mentioned this in New York—one of the things that I decided to do, given all these changes and how significant they are, is to form interdivisional working groups at the SEC, which is Corp Fin and Trading and Markets and Enforcement and OCIE, examiners, our economists play a big part in this, to really monitor these markets as they come out of the gates.

And so, for example, general solicitation, the ban on general solicitation for Rule 506(c) was lifted and effective September 2013. So rather than to wait two years or so and say, how has it worked and somebody just gave us a tip on this fraudulent activity. Again, as you know and may well remember from-particularly when we adopted—lifted the ban on general solicitation mandate—as mandated by the JOBS Act, there was a lot of concern about whether there would be pervasive fraud because of permitting general solicitation, even though one could sell only to accredited investors, and so part of the purpose was how’s the market working, how might we adjust it to make it work better, more efficiently, and also be right on top of any fraud that might be occurring.

What we’ve seen in that—and, again, it’s too early to make any real judgments on that, but on the fraud/misconduct front, we do have some open investigations in several categories. One is actually in the area that is regulated, which is the reasonable efforts that issuers have to make to determine that who they’re selling to are accredited investors and either just not doing it at all or doing a job that clearly doesn’t pass muster. There are certainly, as you have in any market, some instances of fraud, but what we don’t see yet and hope we don’t, is evidence of rampant fraud in that market, obviously something we have to stay very vigilant about.

In terms of use of 506(c), it’s being used, but it’s not being used perhaps as much as some would have thought it might be. 506(b) where there isn’t general solicitation is a hugely vibrant market, continues to be. I think I’m right about this. From 2013, when 506(c) became effective, through 2015, you had about $2.8 trillion sized market for 506(b) and about a $71 billion market for 506(c). So that gives you a sense of the difference in the use of those exemptions.

One thing we’ve seen this year, and again, not to over conclude from this, is that the size of the 506(c) offerings are getting bigger by size, not in numbers, but in size.

So, Steve, bottom line is that we’re always watching the offerings public and private for both, how effective they are, are all these new measures just substituting for a different method of raising capital or are we actually getting more capital raised, looking at the investor protections. Some of those lines between—which used to be a little starker, I think, between private and public offerings, are blurring a bit because you have different requirements in different ones of these exemptions. You compare Reg A+ to crowdfunding, there are lots of different kind of moving pieces. You worry about, again, as a regulator the differences in liability for issuers and that kind of thing.

So it’s something that presents excitement, I think, but also bears a lot of vigilance and a lot of study.

Steven Bochner: Thank you. A related topic would be the accredited investor definition and I think it could have a very large impact on how the exemptions are used, because to the extent you raised the threshold for the accredited investor definition and it may make exemptions like the proposed 147 or small issuer exemption more attractive because you raise the threshold and those investors are harder to reach, the thresholds are harder to comply with. And [I’d] be interested—we’ll probably talk about this tomorrow in a little more detail, but at your level, what do you think is likely? Can you give us a glimpse into your thinking and what do you suspect is likely to happen there on accredited investor?

Chair White: —You’ll know this and you’ll talk about it some more [tomorrow]. The staff actually published its review and study in December on accredited investors. Actually one of the 30 mandated studies under the Dodd-Frank Act, but it’s obviously an issue absent the mandate that the Commission and many others, our advisory committees and you have been studying for a long time because of how important it is and it’s even more important now with these other changes. And, again, what I—and we’ve gotten—it’s obviously open for comment. We urge you and your clients to comment on this. We are very interested in all the comments.

Going in, my own views on this, is I think the rule needs changing. I don’t think, at least alone, that the net worth and income criteria by themselves are a very good or at least not optimal proxy for who doesn’t need the protections [of the Securities Act], who can fend for themselves in the marketplace. There are number of alternatives that are discussed in that study that are being considered as, again, proxies for sophistication and being able to fend for yourself depending on your background, your professional qualifications, how much you have been involved in investing.

I think investment limits is a very interesting concept in this space, obviously being used in A+ and crowdfunding, but I think ultimately it will result in a rulemaking.

Steven Bochner: Yeah. And, of course, it’ll have implications not only for issuer side capital raising, but secondary transactions as well with the RAISE Act first to the accredited investor definitions.

Chair White: Absolutely.

Steven Bochner: It’ll impact both primary and secondary offerings.

Well, let’s talk about a related topic that you alluded to a moment ago, which is just the development of platforms, the use of technology. You know, we’ve all seen, perhaps partially as a result of Sarbanes-Oxley and Dodd-Frank and market forces, issuers that are going public are bigger for the most part and particularly in the technology sector where I spend a lot of time, and there was a comment yesterday on a panel, $100 million in revenue to—at or near it to be a public company these days, and so that’s kind of created a lot of interesting changes in the market from who’s participating in late stage capital to the need for secondary liquidity as employees need liquidity because it takes longer to get public.

I’m just curious about your perception about all of those activities and how big for the most part, how large IPO issuers are. How does the Commission kind of view all those developments?

Chair White: Yes. I mean, lots of issues in your question that are presented, which we very, very closely watch. Secondary liquidity for investors on the private side is something that our advisory committees, the Commission, lots of folks are attending to. Technology has made it possible to bring buyers and sellers together on various kinds of alternative trading platforms. We’re looking at—there have been venture exchanges before as a means of increasing secondary liquidity. They haven’t yet worked that well.

I think in general [there are] a couple things going on there. One is I think the marketplace has not yet found the solution or the optimal solutions for providing enough secondary liquidity—on the private side. I think we still need to work at it. One of the things we’re doing at the Commission is we want to modernize our rules so that we’re not presenting obstacles. If you think we are, we want to hear about that. For the most part, I think our rules have quite a bit of flexibility and certainly we are receptive and are talking all the time to market participants about new proposals and ways to increase liquidity.

In terms of the public-private [issue], there’s a lot of different kinds of debates about that. I think, as you might expect as a regulator, I’m always more comfortable when our staff has a broader window into more information and there are greater investor protections, but also, inherent in our mission, is to facilitate capital formation obviously with investor protection fully in mind, whether that be by a public offering or private offering. So we need to be focusing on those issues across the board.

I mean, the kind of the late stage private investments, pre-IPO that have gotten so much attention in the press, that’s something we look at closely there. One take away just at a high level is you’ve got pretty sophisticated institutional investors who ought to know the right questions to ask and have the leverage to be able to get the information that they need. They ought to have the resources to be able to do the due diligence they need to do, the leverage to basically negotiate favorable terms.

Now, obviously what you’ve also seen are the differences in private-public valuations, and again, what does that mean? It could mean a lot of things, but I think, one thing it may mean is no matter how good you are and how professional you are at investing, investing is hard and there’s risks inherent in every investment. I-maybe it’s even a plug for-on the public side, registration and our disclosure rules may be a better price discovery mechanism.

Concerns that come out of that clearly—there’s a lot of excitement about the unicorns and some concerns that have been raised in that space. When you come to individual investors, all the things I just said about sophisticated, large institutional investors may well not, usually don’t apply to individual investors who may get very excited from an article or a blog and invest their money, and so you worry about them not getting sufficient or accurate information. Any time you’ve got that kind of excitement in a space, it can attract and does attract fraudsters, who will basically say look, I’m investing in these-the latest hot unicorn, pre-IPO and they’re not [doing that] at all. So that’s kind of garden variety fraud that kind of comes with it.

There may be some implications for our swap rules depending on how some of these are structured. So, basically, we’re keeping a very close eye on it, but those are some of the issues.

Steven Bochner: Yeah, a lot more flexibility for issuers, though.

Chair White: Yes.

Steven Bochner: There may be some changes coming with the accredited investor definition and we’ll see technology changes these markets.

We spent a lot of time in the prior sessions talking about particularly enforcement directorates. Ceresney talked about the Newman decision, but did you want to comment at the Commission level kind of what the impact of that and how the Supreme Court has agreed to look at another insider trading case? Is that kind of changing your thinking about what cases that the SEC should bring and—

Chair White: I think the bottom line given the case that the Supreme Court has taken and what’s presented in it, which is basically the personal benefit issue is really kind of teed up pretty—pretty cleanly. There’s a little bit of stay tuned in terms of how, it might impact our insider trading program, but I think—and Andrew and I didn’t consult, so we may be giving different answers on this, but Newman has had some impact certainly on our program within [Newman’s] four corners, less impact than I think commentators have largely suggested. It’s had more of an impact on the criminal side than it does on the SEC civil side because we have different burdens of proof that make it somewhat easier for us even under Newman to go forward.

So we’ve [since Newman] brought I think over—Andrew probably gave you the stats, but I think over 30 insider trading cases and most of them involving a lot of insider trading cases, by the way, don’t involve the issues in Newman in terms of the tippees knowledge and personal benefit kinds of issues. I think over the last six years we’ve also brought—well over 600 insider trading cases. So it’s a very important area of our enforcement program.

Newman itself depending on what other courts do with it—[so far,] I think most of the decisions have been pretty favorable to narrowing [Newman] from our point of view. But we have to stay tuned on the personal benefit issue obviously.

Steven Bochner: It’ll be interesting to see what the Supreme Court says, whether it’s going to kind of go back to the SEC versus Stevens reputational benefit—

Chair White: Right.

Steven Bochner: —what actually is the benefit. I guess we’ll get more clarity—on that.

Chair White: —yes, and it’s really around the close family, close personal relationship space where I think it’ll make the most difference.

Steven Bochner: Yeah. Well, let’s switch gears here and talk a little bit about I guess one of the last remaining Dodd-Frank provisions, at least impactful in my world, is the clawback provisions and we just had the accounting panel and talked about the new revenue recognition standards which are looming and it looks like the clawback provisions in the revenue—and I think somebody commented that something like 80 percent of companies weren’t ready for that and you look at the clawback provisions, which are going to be much broader and fiercer than the Sarbanes-Oxley clawback provisions.

Can you give the audience any sense of the timing of that and actually, it seemed like the statute was quite prescriptive and you didn’t have a lot of flexibility, but curious about your reaction.

Chair White: I’m glad you said that. The statute—as in many of these Dodd-Frank rulemakings—is pretty prescriptive. I mean, one of the big challenges we had on crowdfunding was to try to make it workable, but also obviously carry out the [statutory] provisions which was a huge challenge. In terms of clawback, hedging, and pay-for-performance, they’re all 2016 priorities. You heard me talk a moment ago about how many of those [2016 priorities] we have, but we’re obviously going to move as many of them as we can.

On clawbacks specifically, yes, the statute was pretty prescriptive. Some of the most frequent criticisms that you hear—we’ve gotten a lot of comments in on this on lots of issues, frankly, really are in the statute or the legislative history and the plain meaning of the statute. No fault, is [an example]—you can just the read the statute on what that says.

In terms of who does it cover, which is another issue that a lot of folks have commented on, NEOs or broader than NEOs. Again I would refer you to the statute.

[There are other issues—] what compensation is covered? How much board discretion should there be? I mean, lots of comments on those issues. Should FPIs be included/excluded? We’re working through all of those issues, but, again, I would urge people as they’re commenting and thinking about this to understand what our statutory baseline, for want of a better way to describe it, is to begin with. There some issues we have more discretion on than others, clearly.

Steven Bochner: Yeah. And I’d like to also point out I came up with a—we collectively came up with a list of questions for Chair White and she didn’t duck any of them. I thought she was going to sort of pick and choose and say, “No, no, no,” and she agreed to talk about every one of them. So thank you so much for that.

Chair White: It’s because I’m from New York. You know, we just don’t know when to stop, right?

Steven Bochner: Yeah.

Steven Bochner: We have a few more minutes. Maybe talk a little bit about something that the next panel’s going to touch on as people get their lunch in a few minutes here, which is kind of balancing shareholder rights with the domain of the board. I mean, that seems to be one of the topics of our time here and there’s just been—since Sarbanes-Oxley dramatic change in shareholder rights, which has caused shareholder activism and a lot of is it a good thing/bad thing? The answer is probably somewhere in the middle, but proxy access, I think people know that history here.

What’s your view of how to strike that balance, the Commission’s role in it? How do you see that particular debate playing out?

Chair White: Yes. I think at its core it’s not for the Commission to take sides in the debate. I can sort of explain what I mean about that a little bit. I mean, we obviously have rules that govern various acts of activism if we want to phrase it that way. We have rules that require disclosure. We’re focused on everybody, obeying/adhering to those rules, so investors get the information, shareholders get the information that they need to have. And so, I think that’s, one kind of important bedrock principle in that to the extent that I’ve said this before, I don’t think activists are a seamless piece. I think they can fall into different categories and they can be seeking different things and they can use different methods, which presumably means issuers may want to be responding differently depending on exactly what’s in front of them.

One of my favorite anecdotes is, I gave a speech on a lot of this at Tulane, at their corporate governance [conference], and the two immediate press readouts from what I said, one said, “White supports activists.” The other one side, “White trashes activists.” So I think I struck the balance right that day. [Later, they wrote about differences] between me and your opening speaker yesterday. On shareholder proposals, obviously our rules, since 2011 have provided for qualifying shareholders to make proposals.

Proxy access, clearly 2015 was a pivotal year. I think there were a lot—I think ISS has said over 120 shareholder proposals. I think 90 plus of them made it to a ballot. Sixty percent of them if I’m right, I think got majority support, and then I think there were 118 companies who actually in 2015 adopted some form of proxy access, names everyone knows—GE, Microsoft, Goldman Sachs, Morgan Stanley, Bank of America, and many other companies. And I saw one figure recently where I think there are 20 percent of the S&P—I think it’s 100, not 500 now have some form of proxy access. If you look back in 2013, it was 1/2 of 1 percent.

So, obviously there’s been a lot of activity in that space. I expect, by the way, there’ll be more activity this season in that space too.

The other piece of this—free associating a little bit—is, the uptick in what I call direct shareholder engagement that boards and companies are doing and shareholder proposals aren’t in that category. I’m really thinking of the outreach that’s being done. I think that’s all to the good. I mean, that’s something I really think is quite constructive.

Steven Bochner: Yeah. Well, why don’t we end on a topic that I know is important to you, which is diversity and you’ve been a director of a public company. You’ve been a federal prosecutor, Chair of the SEC. You’ve worked in a law firm, so you’ve seen it from about every side and I know it’s something you care deeply about.

Chair White: Diversity on boards I think is enormously important—diversity everywhere I think is an enormously important topic. I think it adds value. I think you’ve seen in terms of the board context really study after study showing that greater diversity on boards adds value. I mean, it makes your board function better and adding value to your company obviously correlations—but start with that, and yet the numbers [on boards] really are not bearing that out in most companies.

I think on the gender side, it’s 16 percent women [on public boards] and I think GAO just put out a study in December saying that it’d take about four decades to get parity if you had an equal number of men and women, for example appointed to boards.

I don’t think it’s a want of supply either. I think there are plenty of highly qualified diverse candidates. There are resources to find them if your nominating committee needs resources to find them. I think I would urge boards to kind of start there. Where are you looking for your board candidates? If it’s that old traditional network where everybody’s come from for the last 50 years, you may have more trouble getting to highly qualified, diverse members of your board.

Obviously [I am] speaking [personally] from my various perspectives. When it comes to the SEC’s regulatory space, we don’t tell you who should be on your board and we don’t generally talk about even board qualifications. You know, a couple of exceptions to that, we do have disclosure rules on directors and their experiences and backgrounds and diversity. Those rules have been the subject of some conversation as to whether they are strong enough, whether they really are giving [enough useful information to] investors who are interested, and many are, in the racial, ethnic, and gender diversity of boards. They don’t require that disclosure. What they require is if a board considers diversity, say so and how, if it does. If you have a policy on a diversity as you’re locating and nominating directors how is that implemented and how do you judge its effectiveness?

In that rule we don’t have a definition of diversity because obviously diversity can mean a lot of things. In addition to gender, race, ethnicity, all kinds of qualifications, rightly so, fit into that concept.

We have a number of petitions pending that raise the issue of—wouldn’t this be more meaningful if you actually defined diversity in your rule, SEC, to at least include ethnicity, race, and gender, in addition to whatever other qualities, fall under that category and require disclosure of those facts And I think those concerns, from my point of view, are well-founded and I’ve asked the staff to study basically what the disclosures are currently under our existing rule, what they’ve been over time with an eye towards—with these concerns that I share, whether we need additional guidance or rulemaking.

Steven Bochner: Thank you. Well, with that, I think we’re out of time. Thank you for being here. Thank you for braving the snowstorm, shoveling your driveway.

Chair White: Thank you.

Steven Bochner: Please join me in thanking the Chair.

Chair White: Thank you.

February 10, 2016
Mergers and Acquisitions - 2016
by Andrew Brownstein, Wachtell Lipton
Editor's Note:

Andrew R. Brownstein is a partner in the corporate group at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum.

2015 was a record year for M&A. Global M&A volume hit an all-time high of over $5 trillion, surpassing the previous record of $4.6 trillion set in 2007. U.S. M&A made up nearly 50% of the total. The "mega-deal" made a big comeback, with a record 69 deals over $10 billion, and 10 deals over $50 billion, including two of the largest on record: Pfizer's $160 billion agreement to acquire Allergan and Anheuser-Busch InBev's $117 billion bid for SABMiller. Cross-border M&A reached $1.56 trillion in 2015, the second highest volume ever.

A number of factors provided directors and officers with confidence to pursue large, and frequently transformative, merger transactions in 2015. The economic outlook had become more stable, particularly in the United States. Many companies had trimmed costs in the years following the financial crisis, but still faced challenges generating organic revenue growth. M&A offered a powerful lever for value creation through synergies. In a number of cases, the price of a buyer’s stock rose on announcement of an acquisition, as investors rewarded transactions with strong commercial logic, bucking historical trends. Equity prices in 2015 were strong, if flat, providing companies with valuable acquisition currency. For at least the first half of the year, strong appetite from debt investors (particularly for quality credits) and low interest rates enabled acquirors to obtain financing on attractive terms.

Industry trends also played a significant role in M&A activity in 2015. There was consolidation in pharmaceuticals (including the pending Pfizer-Allergan transaction and AbbVie’s $21 billion acquisition of Pharmacyclics), technology (including Dell’s pending $67 billion acquisition of EMC and Avago’s $37 billion acquisition of Broadcom), insurance (including Anthem’s pending $54 billion acquisition of Cigna, Aetna’s pending $37 billion acquisition of Humana and ACE’s $28 billion acquisition of Chubb), and oil and gas (including Energy Transfer Equity’s pending $38 billion combination with Williams Companies and Royal Dutch Shell’s pending $70 billion acquisition of BG Group).

Looking ahead, as energy and commodity markets plumb lows, equity markets have become volatile, China and Brazil slump, Europe splinters, and debt markets look increasingly shaky, one may well wonder if M&A activity in 2016 will be less robust than in 2015. Although many of the factors that drove activity in 2015 continue to be present, volatility impairs the confidence essential to large, strategic M&A transactions, even though it may also create opportunities. It is difficult to imagine M&A activity in 2016 surpassing 2015 levels, but there are signs of continuing M&A dealmaking, even amidst the current turmoil.

Below, we review some trends that we expect to continue in 2016.

Hostile and Unsolicited M&A

Hostile and unsolicited M&A have increased dramatically in recent years, from $145 billion of bids, representing 5% of total M&A volume, in 2013 to $563 billion of bids, representing 11% of total volume, in 2015. Notable recent bids include 21st Century Fox’s $80 billion offer for Time Warner, which was ultimately withdrawn; Cigna’s bid for Anthem, resulting in an agreed $54 billion merger; Mylan’s $35 billion bid for Perrigo, which was defeated, and Teva’s $40 billion bid for Mylan, which was ultimately withdrawn; DISH Network’s $26 billion bid for Sprint Nextel, which was ultimately withdrawn; and Energy Transfer Equity’s bid for Williams Companies, resulting in an agreed $38 billion combination.

A number of recent hostile and unsolicited transactions have involved non-U.S. targets. Foreign takeover laws present a multifaceted overlay in any cross-border transaction, and the legal and tactical considerations can be particularly complex in the case of a hostile bid for a non-U.S. company. Careful planning and coordination with foreign counsel are critical in hostile and unsolicited transactions, on both the bidder and target sides.

The three-way Mylan/Perrigo/Teva battle illustrates how the takeover regimes in different jurisdictions can have a significant impact. Perrigo (which had inverted from Michigan to Ireland) was subject to the “no frustrating action” rule and other Irish Takeover Rules, which made it more difficult to defend against Mylan’s hostile bid—although Perrigo ultimately succeeded in convincing shareholders not to accept the bid. By contrast, Mylan (which had inverted from Pennsylvania to the Netherlands) used a potent combination of takeover defenses facilitated by Dutch law and its own governance documents to take a resist-at-all-costs approach to Teva’s bid.

The Perrigo situation demonstrates that it is possible for a target board to successfully resist a hostile takeover attempt, even without the ability to use a poison pill. And where a poison pill is permissible, it can be a powerful means of protecting shareholder value, as illustrated by the Airgas situation: in December 2015, in vindication of the Airgas board’s judgment and confirmation of the wisdom of the Delaware case law (particularly the Delaware Chancery Court’s 2011 Airgas opinion validating the use of the poison pill), Airgas agreed to be sold to Air Liquide at a price of $143 per share, in cash, nearly 2.4 times Air Products’ original $60 offer and more than double its final $70 offer, in each case before considering the more than $9 per share of dividends received by Airgas shareholders in the intervening years.

Inversions

Over the last several years, a number of U.S. companies have “inverted” through mergers with foreign companies, affording the combined company greater flexibility in future tax planning. Many predicted that the Treasury/IRS notices issued in September 2014 and November 2015 might impede inversion transactions by making it more difficult to invert and by reducing the advantages of becoming an inverted company. Some deals fell apart after the September 2014 notice, and each of the notices led to the restructuring of some deals. However, companies have continued to pursue inversion transactions.

Activism and M&A

Shareholder activism has reached unprecedented levels, and we expect that trend to continue. Despite recent poor performance by big-name activists such as Carl Icahn and Pershing Square and by activist-targeted companies, we expect shareholder activism to continue, including at the largest companies. In the M&A realm, Pershing Square currently is working with Canadian Pacific Railway in its bid for Norfolk Southern. ValueAct publicly advocated for Willis Group’s merger with Towers Watson after the deal faced criticism for offering too low a price for Towers Watson shareholders (the deal was approved after it was amended to increase the consideration to the Towers Watson shareholders). Following earlier pressure from Trian on DuPont and Third Point on Dow Chemical to break up, DuPont and Dow agreed to a $69 billion merger, with an anticipated three-way separation in the future. Icahn is continuing to agitate for a break-up of insurance giant AIG, even after the company recently presented its own alternative plan. Icahn also made a successful overbid for Pep Boys after it had agreed to sell itself to Bridgestone. Other activist tactics included encouraging or pressuring two companies to merge (and building stakes in both companies as part of the campaign, as Elliott did in the Polycom/Mitel Networks situation and Starboard Value did at Staples/Office Depot and at Yahoo! / AOL), or seeking to interfere with pending transactions (as in the Media General/Meredith Corp/Starboard Value/Nexstar Broadcasting situation).

Activists often urge or are attracted to M&A situations because they create opportunities for short-term profits and can be exploited by savvy investors who understand the workings of transactions and public markets. As with all activism, it is critical to be well-prepared; to honestly evaluate both strengths and weaknesses of the situation; to carefully consider how, when and whether to respond to the activist; and to engage with shareholders, analysts and other relevant market participants.

Spin-offs

Many companies do spin-offs to create value by, among other things, allowing for enhanced business focus, business-appropriate capital structure and distinct investment identity for both the spun-off business and the remaining business. Significant recent spin-offs include Energizer Holdings’ spin-off of its household products business, Gannett’s spin-off of its publishing business, DuPont’s spin-off of its performance chemicals business, eBay’s spin-off of PayPal, Baxter’s spin-off of its biopharmaceuticals business, HP’s separation of its PC and printer business and its enterprise business, and W.R. Grace’s separation of its construction products and packaging technologies businesses and its catalyst technologies and engineered materials businesses. Pressure from activists in recent years has led to greatly increased spin-off volumes, as companies respond to direct pressure and in other cases act preemptively to avoid activism where a “conglomerate discount” can be a source for agitation.

2015 brought important changes to the tax landscape for spin-offs. The IRS will no longer issue rulings as to the tax-free treatment of certain “cash-rich” spin-offs, where a very large percentage of the asset value of the parent or the spun-off corporation consists of cash or a noncontrolling stake in another publicly traded entity. The IRS also will no longer rule on whether the “active trade or business” requirement for a tax-free spin-off is satisfied if the fair market value of the gross assets of the active trade or business on which either company is relying is less than 5% of the total fair market value of the gross assets of the company. This appeared to lead Yahoo! to abandon its planned tax-free spin-off of a company that would hold its stake in Alibaba. In addition, Congress amended Section 355 of the Internal Revenue Code to provide that a spin-off in which only the spun-off company (or the remaining company) is a REIT cannot qualify for tax-free treatment. (REIT to REIT and REIT/Taxable REIT Subsidiary spin-offs can still qualify as tax-free, however.) As a result, the popular activist tactic of pushing for “OpCo / PropCo” separations—in which an operating company with significant real estate holdings spins its properties off into a separate publicly traded REIT and leases them back—has become less attractive.

Governance advisors and activists have increased their focus on newly public companies. ISS issued voting guidelines under which it generally will make adverse recommendations for directors at the first shareholder meeting of a newly public company if that company has bylaw or charter provisions that are “adverse to shareholder rights.” The Council of Institutional Investors issued a draft statement laying out investor expectations as to various governance features of newly public companies. And Carl Icahn threatened campaigns at eBay, Manitowoc and Gannett, resulting in settlements in which the companies undertook various commitments relating to the governance structure of the businesses they were spinning off.

Newly public companies often are at their most vulnerable to takeover approaches, as they seek to establish themselves and build a knowledgeable investor base. Companies considering a spin-off or IPO should, as always, focus on how to structure the governance of the new company in a manner that maximizes long-term value creation. But they also should understand the governance landscape and the implications of their choices as they chart a course for the enterprises they are creating.

Strategic Deals and Regulatory Scrutiny

Bigger is not always better in the eyes of regulators, and muscular enforcement of antitrust and other regulatory regimes, both domestic and foreign, repeatedly manifested itself in 2015. We expect this trend to continue at least through the upcoming presidential election. Comcast’s $45 billion acquisition of Time Warner Cable, Sysco’s $3.5 billion acquisition of U.S. Foods, Tokyo Electron’s $9.3 billion acquisition of Applied Materials, and Electrolux’s $3.3 billion acquisition of General Electric’s appliances business were all blocked or scuttled after facing stiff resistance from regulators. A number of significant deals also remain in the regulatory pipeline, including Halliburton’s $35 billion acquisition of Baker Hughes, FedEx’s $5 billion acquisition of TNT Express, and Staples’ $6 billion acquisition of Office Depot.

Even difficult deals, however, can get done. General Electric’s $14 billion acquisition of Alstom’s energy business, Holcim’s $47 billion merger with Lafarge, Expedia’s $1.6 billion acquisition of Orbitz, and Dollar Tree’s $9 billion acquisition of Family Dollar Stores all withstood significant regulatory scrutiny. The key to getting a tough deal through is a thorough analysis of the substantive issues, and the potential objections and theories that may be advanced by regulators; development of a comprehensive and well-thought out approach for proceeding through global regulatory processes, including consideration of possible remedy packages; and, if necessary, preparing a litigation strategy.

Parties also need to carefully consider the appropriate contractual allocation of risk in light of the competition and other regulatory issues presented. The “outside date” of the agreement (including extension provisions), extent of “efforts” obligations, cooperation and control provisions and closing conditions all merit detailed attention. Reverse termination fees tied to failure to obtain regulatory approval, while not necessarily appropriate in all cases, can also be an effective mechanism for aligning incentives.

Continued Creativity by Private Equity

Private equity firms have played a less visible role in the current M&A boom than they did 10 years ago, when PE firms would routinely agree to $10 billion+ leveraged buyouts, sometimes in “club deals” along with other firms. This has been driven by a variety of factors, including relatively high public market valuations, which provided strategic bidders competing with PE buyers with a valuable acquisition currency and led sponsors to conclude that targets were overvalued in many cases; strategic bidders’ ability to extract synergies, which allowed them to dig deeper when bidding against PE firms; and the leveraged lending guidelines issued by the FDIC, the Federal Reserve and the OCC, which constrained banks’ ability to lend into more heavily leveraged transactions.

Despite these factors, PE firms hardly stayed on the sidelines. In some cases, sponsors teamed with strategics to bid on an asset, bringing together expertise in financial structuring and operational management, as well as the ability to create synergies. Notable examples of such transactions include the acquisition of Kraft Foods by H.J. Heinz, 3G Capital and Berkshire Hathaway, and the $9 billion acquisition of Suddenlink by Altice, BC Partners and CPP Investment Board. In other cases, PE firms used portfolio companies as a platform for M&A, again combining the strengths of private equity and strategic firms. PE firms also used creative deal structures, such as a rollover by a PE seller of part of its stake in a portfolio company for the stock of the acquiror, which can help bridge a valuation gap and preserve a portion of the upside for the PE seller. Similarly, a company may sell a business to a PE firm and retain a stake in the divested business, which could ease the sales process, facilitate ongoing relationships and reduce the need for debt financing.

With substantial capital at their disposal, and the continued availability of financing on relatively attractive terms—as well as sponsors’ desire for exits—private equity firms can be expected to continue to seek opportunities, both traditional and non-traditional. Flexibility and creativity will continue to be key in getting transactions done.

* * *

With a record year behind us, and market conditions that have become decidedly turbulent, dealmaking volume in 2016 remains an open question. Regardless of how robust it continues to be compared to 2015’s record volume, it is important for any company undertaking M&A to understand the context of the particular situation, including the risks and benefits of a particular transaction, and the forces that may encourage or derail an agreement and its consummation.

February 10, 2016
SEC Files Settled Financial Fraud Action
by Tom Gorman

One of the key products of Monsanto Company is weed killer Roundup, sold to retailers and distributors but not directly to growers. After the product came off patent generics began to erode its profits. To address the issue the company created a series of programs rolled out initially in the U.S. and later in Canada and France and Germany. Ultimately improper accounting tied to those programs resulted in a restatement of Monsanto’s financial statements for its annual reports for 2009 and 2010 and the quarterly reports for 2011. That in turn spawned a financial fraud action against the company and those who participated in the conduct — Sara Burnquell, the External Reporting Lead at the firm during the period; Jonathan Nienas, the U.S. Strategic Account Lead for the Roundup Division; and Anthony Hartke, U.S. Business Analyst in the Roundup Division. In the Matter of Monsanto Company, Adm. Proc. File No. 3-17107 (February 9, 2016).

The programs designed to boost Roundup sales were similar. The initial program focused on retailers. It was designed to address their issues while permitting the company to meet its fiscal 2009 earnings goals. Monsanto’ sales force told U.S. retailers that if they maximized their Roundup purchases in the fourth quarters of fiscal 2009, Monsanto would allow them to participate in a loyalty program that would be rolled out in the first quarter of fiscal 2010. The program would make the inventories of the retailers profitable despite anticipated price cuts for the product. Customers purchased large amounts of Roundup in the fourth quarter.

When the program was rolled out in the first quarter of the next year it centered on rebates. Monsanto prepaid the rebates in the second quarter of fiscal 2010. The accounting for the rebates was improper. Under the applicable standards Monsanto was required to recognize the rebate obligation as a reduction of revenue based on a rational allocation of the rebate offer to each underlying transaction that results in progress by the customer towards earning the rebate. Nevertheless, Monsanto recognized the related revenue reductions in fiscal year 2010 despite the fact that it used the program to incentivize sales in the last quarter of fiscal 2009. Messrs. Hartke and Brunnquell were involved in this program.

In fiscal 2009 Monsanto also offered distributors a rebate on their total purchase of Roundup if they met specific volume targets. Each distributor had a separate agreement. Throughout 2009 the firm accrued substantial amounts for the rebates in accord with the applicable accounting standards. The rebates were to be recognized as a reduction of Roundup revenue for the year. In the last few months of the year, however, the company reversed a large portion of the accruals because seven customers failed to meet their goals. The accrual reversal boosted Monsanto’s reported revenues and gross profit for the fiscal year.

The next year Monsanto created a program for the seven customers to earn back the rebates. The rebates were prepaid. With three customers the firm entered into side agreements under which they failed to meet the minimum targets for the program but were promised the rebates. This meant that in 2009 Monsanto reversed the accruals, boosting earnings. At the same time the company deferred recording the rebate liabilities. Messrs. Hartke and Nienas participated in these transactions. Monsanto also had a similar program for the next year.

In Canada, France and Germany Monsanto utilized similar programs to boost sales but then improperly accounted for the rebates as selling, general and administrative expenses. Under the applicable standards payments to customers to perform services on its behalf are recognized as a reduction of revenue for the amount of the payments that exceed the estimated fair value of the services rendered. If there is no service provided by the customer the total amount should be recognized as a reduction of revenue which should have been the case with the rebates here.

The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) as well as the related rules.

Monsanto undertook a series of remedial efforts, including the retention of an independent ethics and compliance consultant. To resolve the proceeding the company consented to the entry of a cease and desist order based on the Sections cited in the Order, except Section 13(b)(5). The firm will also pay a penalty of $80 million.

Respondent Brunnquell consented to the entry of a cease and desist order based on each of the Sections cited in the Order, except Section 13(b)(5). In addition, she is denied the privilege of appearing and practicing before the Commission as an accountant with the right to reapply after two years. She will also pay a penalty of $55,000.

Respondent Hartke consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a) and 13(b)(2)(A). In addition, he is denied the privilege of appearing and practicing before the Commission as an accountant with the right to reapply after one years. He will also pay a penalty of $30,000.

Finally, Respondent Nienas consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(5). He will also pay a penalty of $50,000.

February 10, 2016
SEC Chair White on Activism & Board Diversity
by Broc Romanek

This Q&A interview with SEC Chair White conducted by Wilson Sonsini's Steve Bochner which is more useful than the typical speech (here's a summary from Ning Chiu). Here's an excerpt from near the end:

STEVEN BOCHNER: We have a few more minutes. Maybe talk a little bit about something that the next panel’s going to touch on as people get their lunch in a few minutes here, which is kind of balancing shareholder rights with the domain of the board. I mean, that seems to be one of the topics of our time here and there’s just been — since Sarbanes-Oxley dramatic change in shareholder rights, which has caused shareholder activism and a lot of is it a good thing/bad thing? The answer is probably somewhere in the middle, but proxy access, I think people know that history here.

What’s your view of how to strike that balance, the Commission’s role in it? How do you see that particular debate playing out?

CHAIR WHITE: Yes. I think at its core it’s not for the Commission to take sides in the debate. I can sort of explain what I mean about that a little bit. I mean, we obviously have rules that govern various acts of activism if we want to phrase it that way. We have rules that require disclosure. We’re focused on everybody, obeying/adhering to those rules, so investors get the information, shareholders get the information that they need to have. And so, I think that’s, one kind of important bedrock principle in that to the extent that I’ve said this before, I don’t think activists are a seamless piece. I think they can fall into different categories and they can be seeking different things and they can use different methods, which presumably means issuers may want to be responding differently depending on exactly what’s in front of them.

One of my favorite anecdotes is, I gave a speech on a lot of this at Tulane, at their corporate governance [conference], and the two immediate press readouts from what I said, one said, "White supports activists." The other one side, "White trashes activists." So I think I struck the balance right that day. [Later, they wrote about differences] between me and your opening speaker yesterday. On shareholder proposals, obviously our rules, since 2011 have provided for qualifying shareholders to make proposals.

Proxy access, clearly 2015 was a pivotal year. I think there were a lot - I think ISS has said over 120 shareholder proposals. I think 90 plus of them made it to a ballot. Sixty percent of them if I’m right, I think got majority support, and then I think there were 118 companies who actually in 2015 adopted some form of proxy access, names everyone knows –GE, Microsoft, Goldman Sachs, Morgan Stanley, Bank of America, and many other companies. And I saw one figure recently where I think there are 20 percent of the S&P - I think it’s 100, not 500 now have some form of proxy access. If you look back in 2013, it was 1/2 of 1 percent.

So, obviously there’s been a lot of activity in that space. I expect, by the way, there’ll be more activity this season in that space too.

The other piece of this — free associating a little bit - is, the uptick in what I call direct shareholder engagement that boards and companies are doing and shareholder proposals aren’t in that category. I’m really thinking of the outreach that’s being done. I think that’s all to the good. I mean, that’s something I really think is quite constructive.

STEVEN BOCHNER: Yeah. Well, why don’t we end on a topic that I know is important to you, which is diversity and you’ve been a director of a public company. You’ve been a federal prosecutor, Chair of the SEC. You’ve worked in a law firm, so you’ve seen it from about every side and I know it’s something you care deeply about.

CHAIR WHITE: Diversity on boards I think is enormously important — diversity everywhere I think is an enormously important topic. I think it adds value. I think you’ve seen in terms of the board context really study after study showing that greater diversity on boards adds value. I mean, it makes your board function better and adding value to your company obviously correlations — but start with that, and yet the numbers [on boards] really are not bearing that out in most companies.

I think on the gender side, it’s 16 percent women [on public boards] and I think GAO just put out a study in December saying that it’d take about four decades to get parity if you had an equal number of men and women, for example appointed to boards.

I don’t think it’s a want of supply either. I think there are plenty of highly qualified diverse candidates. There are resources to find them if your nominating committee needs resources to find them. I think I would urge boards to kind of start there. Where are you looking for your board candidates? If it’s that old traditional network where everybody’s come from for the last 50 years, you may have more trouble getting to highly qualified, diverse members of your board.

Obviously [I am] speaking [personally] from my various perspectives. When it comes to the SEC’s regulatory space, we don’t tell you who should be on your board and we don’t generally talk about even board qualifications. You know, a couple of exceptions to that, we do have disclosure rules on directors and their experiences and backgrounds and diversity. Those rules have been the subject of some conversation as to whether they are strong enough, whether they really are giving [enough useful information to] investors who are interested, and many are, in the racial, ethnic, and gender diversity of boards. They don’t require that disclosure. What they require is if a board considers diversity, say so and how, if it does. If you have a policy on a diversity as you’re locating and nominating directors how is that implemented and how do you judge its effectiveness?

In that rule we don’t have a definition of diversity because obviously diversity can mean a lot of things. In addition to gender, race, ethnicity, all kinds of qualifications, rightly so, fit into that concept.

We have a number of petitions pending that raise the issue of — wouldn’t this be more meaningful if you actually defined diversity in your rule, SEC, to at least include ethnicity, race, and gender, in addition to whatever other qualities, fall under that category and require disclosure of those facts And I think those concerns, from my point of view, are well-founded and I’ve asked the staff to study basically what the disclosures are currently under our existing rule, what they’ve been over time with an eye towards — with these concerns that I share, whether we need additional guidance or rulemaking.

Going Concerns: Slightly Down

Here’s the highlights of this Audit Analytics study on going concerns, for which an initial review seems to provide positive news, but a deeper analysis reveals a mixed bag of indicators:

– Fiscal year end 2014 is estimated to receive 2,233 going concerns, a decrease of 170 from the year prior, but this decrease is only 10 companies more than the 160 companies that ended up filing terminations with the SEC after disclosing a going concern in 2013. Therefore, almost all the drop was due to company attrition from the prior year’s going concern population.

– It is estimated that 15.8% of auditor opinions filed for fiscal year end 2014 will contain a qualification regarding the company’s ability to continue as a going concern. In 2008, the figure was 21.1% and the percentage decreased for 6 consecutive years thereafter to drop to the value of 15.8%.

– For fiscal year 2014, the number of new going concerns (going concerns filed for a particular fiscal year, but not the year prior) is estimated to be 530, which is the 4th year in a row with an amount under 600. This streak is notable because the 10 years prior to 2011 all had numbers above 600. Moreover, it should be noted that 48% of the new going concerns as of July 14th were disclosed in S-1s or F-1s and thus linked to recent IPOs, not established companies. A new going concern linked to a recent IPO should not necessarily be viewed as a negative economic event.

– Fiscal year 2014 saw the third (tied) lowest number of companies that improved well enough to shed its going concern status. A multi-year analysis of the going concerns allows for an identification of companies that filed a going concern one year but not the following year. This cessation can occur for one of two reasons: (1) the company files a subsequent clean audit opinion (subsequent improvement) or (2) the companies stopped filing audit opinions altogether (subsequent disappearance). A review of companies that experienced a subsequent improvement reveals that only 200 companies that filed a going concern in 2013 were able to file a clean audit opinion in 2014. This figure represents the third lowest (tied) for any year analyzed, since 2000.

Corp Fin Issues EDGAR Guidance for Asset-Backed Issuers

Yesterday, Corp Fin issued 21-pages of EDGAR guidance – in the form of 12 Q&As – for ABS issuers...

Broc Romanek

February 10, 2016
The Director Compensation Project: Wells Fargo & Company (WFC)
by Austin Chambers

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation. We are for the most part including companies from 2015's Fortune 500 and using information found in their 2015 proxy statements.

NASDAQ and the NYSE have similar rules with respect to director independence. NYSE Rule 303A.01 requires that each listed company's board of directors be comprised of a majority of independent directors. A director does not qualify as "independent" if he or she has a "material relationship with the company." NYSE Rule 303A.02(a). In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years. The NYSE imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 (C.F.R. §240.10A-3) (see Rule 303A.06) and requires consideration by the board of directors of certain specified factors in designating directors for the Compensation Committee.  See NYSE Rule 303A.02(a)(ii).

Finally, as the Commission has noted with respect to director independence: 

  • All compensation committee members must meet the general independence standards under NYSE’s rules in addition to the two new criteria being adopted herein. The Commission therefore expects that boards, in fulfilling their obligations, will apply this standard to each such director’s individual responsibilities as a board member, including specific committee memberships such as the compensation committee. Although personal and business relationships, related party transactions, and other matters suggested by commenters are not specified either as bright-line disqualifications or explicit factors that must be considered in evaluating a director’s independence, the Commission believes that compliance with NYSE’s rules and the provision noted above would demand consideration of such factors with respect to compensation committee members, as well as to all Independent Directors on the board. 

Exchange Act Release No. 68639 (Jan. 11, 2013); see also Exchange Act Release No. 68641 (Jan. 11, 2013).

Independent directors are compensated for their service on the board. The amount of “total compensation” can be seen from examining the director compensation table from the Wells Fargo & Company's (NYSE: WFC) 2015 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

Name

Fees Earned or Paid in Cash
($)

Stock Awards
($)

Option Awards
($)

All Other Compensation
($)

Total
($)

John D. Baker II

165,000

160,035

0

0

325,035

Elaine L. Chao

107,000

160,035

0

0

267,035

John S. Chen

103,000

160,035

0

0

263,035

Llyod H. Dean***

152,000

160,035

0

0

312,035

Elizabeth A. Duke**

 

 

 

 

 

Susan E. Engel

143,000

160,035

0

0

303,035

Enrique Hernandez, Jr.***

194,000

160,035

0

5,000

359,035

Donald M. James

109,000

160,035

0

0

269,035

Cynthia H. Milligan***

150,000

160,035

0

0

310,035

Frederico F. Pena

138,000

160,035

0

0

298,035

James H. Quigley***

150,500

160,035

0

0

310,535

Howard V. Richardson****

8,750

0

0

0

8,750

Judith M. Runstad***

172,000

160,035

0

0

332,035

Stephen W. Sanger***

183,000

160,035

0

0

343,035

Susan G. Swenson

119,000

160,035

0

0

279,035

John G. Stumpf*

0

0

0

0

0

Suzanne M. Vautrinot**

 

 

 

 

 

*Employee director

**Joined the Board in 2015.

*** Received an annual cash retainer of $10,000, payable quarterly in arrears, and a fee of $2,000 per separate meeting not held concurrently with or immediately prior to or following a Company Board or committee meeting.

****Resigned effective January 31, 2014.

Director CompensationDuring fiscal year 2014, Wells Fargo held nine board of directors meetings and thirty-four committee meetings. Each current director attended at least 75% of the total number of board and committee meetings on which he or she served. Overall attendance of current directors at meetings of the board and its committees averaged 98.95%. Directors are reimbursed for expenses incurred from board service, including cost of attending board and committee meetings.      

Director TenureIn 2014, Ms. Milligan, who has held her position as a member of the Board of Directors since 1992, held the longest tenure. Mr. Hutchins and Mr. Kennard hold the shortest tenure as they joined in 2014. All but three of the directors sit on other boards: Ms. Chao serves as a director for News Corp. and Vulcan Materials Company, Mr. Chen serves as a director for BlackBerry Limited and The Walt Disney Company, Mr. Hernandez serves as a director for Chevron Corp., McDonald’s Corp., and as chairman for Nordstrom, Inc., Ms. Milligan serves as a director for Calvert Funds, Kellogg Company, and Raven Industries, Inc., and Mr. Quigley serves as a director for Hess Corp. and Merrimack Pharmaceuticals, Inc.

CEO CompensationJohn Stumpf, Wells Fargo’s President and Chief Executive Officer since 2007 and Chairman of the Board since 2010, earned total compensation of $21,426,391 in 2014. He earned a base salary of $2,800,000, stock awards of $12,500,029, incentive compensation of $4,000,000, deferred earnings of $2,108,162, and other compensation totaling $18,200. Timothy J. Sloan, Senior Executive Vice President of Wholesale Banking, earned total compensation of $10,448,138 in 2014. He earned a base salary of $1,829,885, stock awards of $7,000,053, incentive compensation of $1,600,000, and other compensation totaling $18,200.

View today's posts

2/10/2016 posts

CLS Blue Sky Blog: Rethinking Limited Liability of Parent Corporations for their Subsidiaries' Extraterritorial Violations of Human Rights Law
Securities Litigation, Investigations and Enforcement: Chancery Court Continues to Close the Door on Disclosure-Only Settlements and Fees (But Opens a Window for “Mootness Dismissals”)
AG Deal Diary: The President's FY 2017 Budget Contains Substantial Funding for Cybersecurity
CLS Blue Sky Blog: Shearman & Sterling explains SDNY Bankruptcy Court Holding That Avoidance Powers Can Be Applied Extraterritorially, and Resulting Split Within the SDNY
HLS Forum on Corporate Governance and Financial Regulation: A Conversation with SEC Chair Mary Jo White
HLS Forum on Corporate Governance and Financial Regulation: Mergers and Acquisitions - 2016
SEC Actions Blog: SEC Files Settled Financial Fraud Action
CorporateCounsel.net Blog: SEC Chair White on Activism & Board Diversity
Race to the Bottom: The Director Compensation Project: Wells Fargo & Company (WFC)

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