Securities Mosaic® Blogwatch
April 2, 2012
Insider Trading in Takeover Targets
by R. Christopher Small

Editor's Note: The following post comes to us from Anup Agrawal, Professor of Finance at the University of Alabama, and Tareque Nasser of the Department of Finance at Kansas State University.

In our paper, Insider Trading in Takeover Targets, forthcoming in the Journal of Corporate Finance, we provide systematic evidence on the level, pattern and prevalence of trading by registered insiders before announcements of takeovers during modern times. We examine insider trading in about 3,700 targets of takeovers announced during 1988-2006 and in a control sample of non-targets, both during an 'informed' and a control period. We analyze open-market stock transactions of five groups of corporate insiders: top management, top financial officers, all corporate officers, board members, and large blockholders. We separately examine their purchases, sales and net purchases in target and control firms during the one year period prior to takeover announcement (informed period) and the preceding one year (control) period, using a difference in differences (DID) approach. Using several measures of the level of insider trading, we estimate cross-sectional regressions that control for other determinants of the level of insider trading.

We find an interesting and subtle pattern in the average trading behavior of target insiders over the one year period before takeover announcement. We find no evidence that insiders increase their purchases before takeover announcements; instead, they decrease them. But while insiders reduce their purchases below normal levels, they reduce their sales even more, thus increasing their net purchases. This pattern of passive insider trading is confined to the six-month period before takeover announcement, when insiders are more likely to be informed about an upcoming takeover; it holds for each insider group, and for all three measures of net purchases that we examine. The economic magnitude of this effect is quite substantial. Over the six-month pre-announcement period, our DID estimates indicate an increase of about 50% in the dollar value of net purchases of targets' officers and directors, relative to their usual net purchase levels. These effects are even stronger in certain sub-samples with less uncertainty about takeover completion, such as friendly deals, and deals with a single bidder, domestic acquirer, or less regulated target. As with all prior studies analyzing trades of registered insiders, we assume that insiders comply with the law to report all their trades to the SEC and do not trade via third parties.

Our findings suggest that target insiders engage in profitable passive insider trading before takeover announcement. This trading pattern appears to reflect insiders' attempts at capitalizing on their information advantage during takeover negotiations, while avoiding running afoul of SEC rules on insider trading. As such, this finding suggests the limits of insider trading regulation, an issue that has been extensively debated by law and economics scholars (see, e.g., Manne (1985), Salbu (1993), and Fried (2003)).

We find that registered insiders of target firms forgo large potential gains from increasing their purchases before news of a takeover is publicly disclosed. While insiders reduce their pre-announcement purchases before all three types of takeovers that we examine (mergers, tender-offers and LBOs), the reduction is statistically significant only in mergers. These findings suggest that insider trading regulations are somewhat effective at deterring registered insiders from trading actively before takeovers, especially mergers. This finding contrasts with prior findings, discussed in the introduction, of profitable active trading by registered insiders before many other corporate events such as bankruptcies, stock repurchases, earnings announcements, and earnings restatements.

Why do registered insiders shy away from active, profitable trading before mergers, but not before other major corporate events? The answer may lie in the enforcement mechanism used for different insider trading laws. As Agrawal and Jaffe (1995) discuss, the reduction in pre-announcement purchases by target insiders in mergers appears to be an unintended consequence of the ban on short-swing trading (section 16b), which is enforced by private attorneys, rather than by the SEC. The main regulation against insider trading, rule 10b-5, which can only be enforced by the SEC, appears to be largely ineffective against the type of insider trades for which it might be the easiest to enforce, namely trades reported to the SEC by registered corporate insiders. Whether this apparent non-enforcement (or under-enforcement) of rule 10b-5 against registered corporate insiders is by choice (e.g., optimal non-enforcement, as argued by Carlton and Fischel (1983)) or due to the difficulty of proving a violation under rule 10b-5, remains an open question for future research.

More broadly, how do our findings that registered insiders engage in profitable passive, but not active, trading tie up with other indications (e.g., stock price run-ups and SEC actions) of widespread insider trading in takeover targets in general? Well, a takeover deal directly involves at least two firms, involves several intermediaries (such as investment bankers, lawyers and auditors), and affects most of the stakeholders (employees, investors, customers, suppliers, etc.) in the firms. So information can leak from a variety of sources. Our findings suggest that the overall level of insider trading in target firms might be even higher absent the deterrent effects of insider trading laws and their enforcement. The international evidence in Bhattacharya and Daouk (2002) is consistent with this conjecture.

The full paper is available for download here.

April 2, 2012
Upcoming ERISA Litigation and Compliance Events
by Susan Mangiero

I have the pleasure of moderating a series of in-person and telephonic conferences about ERISA litigation and compliance in the next several months. Formally entitled the "FTI Consulting ERISA Litigation and Compliance Breakfast Series 2012: The $17.5 Trillion Challenge For Corporate Executives and Asset Managers," professionals working for or with pension plans are encouraged to attend these no-charge sessions with experts in New York (April 18, 2012), Chicago (April 26, 2012), Boston (May 3, 2012), Washington, DC (May 9, 2012), Philadelphia (May 15, 2012) and San Francisco (June 5, 2012).

The corporate pension market in the United States is facing unprecedented challenges in the form of massive deficits, new disclosure rules, recapitalizations, complex financial arrangements, turbulent market conditions and a rise in fiduciary breach litigation against C-level decision makers, board members and asset managers. Plan sponsors are being asked to improve governance, better manage risks and acknowledge the enterprise impact of nearly $18 trillion invested in U.S. retirement vehicles such as defined benefit plans and 401(k) plans. The perfect storm of low interest rates, sagging equity returns, mandatory cash infusions, increased longevity, financial volatility, investment complexity and greater regulatory scrutiny is a reality that is here to stay. Being informed and action-oriented is important as never before.

Join leading industry and regulatory experts in a lively discussion about the changing legal and financial landscape for ERISA fiduciaries, counsel and asset managers. Aimed at professionals who work for or with corporate benefit plans, these complimentary breakfast meetings examine the impact of new rules and regulations, lessons learned from the courts and ways to mitigate personal and professional liability at a time when fiduciary litigation is soaring.

Join us in New York, Chicago, Boston, Washington, Philadelphia and/or San Francisco for breakfast and a chance to hear and participate in a moderated panel discussion session about important topics such as pension and 401(k) plan governance, service provider due diligence, fee economics, withdrawal liability, successor liability, bankruptcy restructuring and much more. Stay abreast of breaking news, network with colleagues and earn CLE, if applicable. Call-in arrangements will be made for those who cannot attend in person so you can participate in each and every event.

For more information, including a list of esteemed speakers, visit

April 2, 2012
ERISA Pension Plans: Due Diligence for Hedge Funds and Private Equity Funds
by Susan Mangiero

Join me on May 1, 2012 for a timely and interesting program about alternative investment fund due diligence and other considerations for ERISA plan sponsors, their counsel and consultants. Click here for more information.

This CLE webinar will provide ERISA and asset management counsel with a review of effective due diligence practices by institutional investors. Best practices will be offered to mitigate government scrutiny and suits by plan participants.


With the DOL's and SEC's new disclosure rules and heightened concerns about compliance and valuation, corporate pension plans that invest in alternatives must focus on properly vetting asset managers more than ever before or risk being sued for poor governance and excessive risk-taking.

The urgencies are real. The use of private funds by asset managers is crucial for 401(k) and defined benefit plan decision makers. Understanding the obligations of private funds is essential to any retirement funds with limited partnership interests.

In addition, suits and enforcement actions against asset managers make it incumbent on counsel to hedge fund and private equity fund managers to fully grasp and advise on full compliance with the duties of ERISA fiduciaries to plan participants.

Listen as our ERISA-experienced panel provides a guide to the legal and investment landmines that can destroy portfolio values and expose institutional investors and fund managers to liability risks. The panel will outline best practices for implementing effective due diligence procedures.


  • ERISA fiduciary duties for institutional investors
    1. Hedge funds and private equity funds compared to traditional investments
  • Regulatory developments
    1. Disclosure
    2. Compliance
    3. Valuation
  • Developments in private litigation involving pension plan fiduciaries and alternative fund managers
  • Best practices for developing due diligence plans


The panel will review these and other key questions:

Following the speaker presentations, you'll have an opportunity to get answers to your specific questions during the interactive Q&A.

  • Regulatory developments
    1. Disclosure
    2. Compliance
    3. Valuation
  • Developments in private litigation involving pension plan fiduciaries and alternative fund managers
  • Best practices for developing due diligence plans
  • What are the regulatory concerns for ERISA pension plans that allocate assets to hedge funds and private equity funds?
  • What are the potential consequences for service providers that fail to comply with new fee, valuation and service provider due diligence regulations?
  • What can counsel to pension plans and asset managers learn from recent private fund suits relating to collateral, risk-taking, pricing, insider trading and much more?
  • How should ERISA plans and asset managers prepare to comply with expanded fiduciary standards?

Following the speaker presentations, you'll have an opportunity to get answers to your specific questions during the interactive Q&A.


Susan Mangiero, Managing Director
FTI Consulting, New York

She has provided testimony before the ERISA Advisory Council, the OECD and the International Organization of Pension Supervisors as well as offered expert testimony and behind-the-scenes forensic analysis, calculation of damages and rebuttal report commentary for various investment governance, investment performance, fiduciary breach, prudence, risk and valuation matters.

Alexandra Poe, Partner
Reed Smith, New York

She has over 25 years of experience in investment management practice counseling managers of hedge funds, private equity funds, institutional accounts, mutual funds and broker-dealer advised programs. She counsels hedge and private equity fund advisers in all stages of their business and due diligence matters.

April 3, 2012
The Impact of the JOBS Act on D&O Liability
by Kevin LaCroix

On March 27, 2012, the U.S. House of Representatives passed the Jumpstart Our Business Startups Act (of the JOBS Act as it is more popularly known). President Obama is expected to sign the Act shortly. The Act is intended to facilitate capital-raising by reducing regulatory burdens. The Act also introduces changes designed to ease the IPO process for certain smaller companies. Among many other things, the Act introduces changes that could impact the potential liability exposures of directors and officers of both public and private companies. A copy of the Act can be found here.

The Act's Provisions

Emerging Growth Companies and the IPO Process: Many of the changes in the JOBS Act are geared toward "emerging growth companies" (EGCs), which are defined broadly in the Act as companies with annual gross revenues under $1 billion in the most recent fiscal year. EGCs are relieved of certain disclosure requirements in their IPO filings. EGCs are also allowed to file their IPO registration statement for SEC review on a confidential basis. The Act allows EGCs to "test the waters" for a prospective IPO by allowing the companies to meet with qualified institutional investors or institutional accredited investors notwithstanding the pending offering. In addition, the Act allows EGCs to discern the level of prospective investor interest in the offering by allowing analysts to publish research relating to an EGC notwithstanding the pending IPO.

Reduced Disclosure Requirements for Emerging Growth Companies: The Act also provides for reduced disclosure and reporting burdens for EGCs for a period of as long as five years after an IPO, as long as the company continues to meet the definitional requirements. In these provisions, the Act unwinds many of the requirements Congress only recently added through the Sarbanes-Oxley Act and in the Dodd-Frank Act.

For example, an EGC will not be subject to the requirements of an auditor attestation report on internal controls as otherwise required under Section 404(b) of the Sarbanes Oxley Act. Similarly, an EGC would be exempt from the requirements under the Dodd-Frank Act to hold shareholder advisory votes on executive compensation and on golden parachutes. EGCs also are exempt from recently enacted requirements regarding executive compensation disclosures. For example, they exempt from the requirement to calculate pay versus performance ratios and the ratio of compensation of the CEO to the median compensation of all employees. The EGCs also are not required to comply with new or revised financial accounting standards until private companies are also required to comply with the revised standard.

Private Capital Fundraising, Revised Registration Thresholds: The Act also introduces a number of reforms relating to private capital-raising. For example, the JOBS Act also eliminates the prohibition on "general solicitation and general advertising" applicable to Rule 144A offerings, provided the securities are sold only to persons reasonably believed to be qualified institutional investors. The JOBS Act also raises the threshold number of investors that would trigger the Exchange Act registration requirements. Instead of the current threshold of 500 investors, the AC specifies that companies will only be required to register their securities only after they have over $10 million in assets and equity securities held either by 2,000 persons or by 500 persons who are not accredited investors.

Crowdfunding: The Act also introduces measure designed to allow companies to use "crowdfunding" to raise small amounts of capital through online platforms. The provisions create a new exemption from registration for private companies selling no more than $1 million of securities within any 12-month period and so long as the amount sold to any one investor does not exceed specified per investor annual income and net worth limitations. The crowdfunding provisions specify that the online portals participating in these types of offerings to register with the SEC. The Act also requires the issuing companies to provide certain specified information to the SEC, investors and to the portal. The Act expressly incorporates provisions imposing liability on crowdsourcing issuers for misrepresentations and omissions in the offerings, on terms similar to the existing provisions of Section 12 of the '33 Act.


As if often the case when legislation introduces significant innovations, it will remain to be seen how all of these changes will ultimately play out. (I am assuming here that President Obama will sign the bill in due course.) This uncertainty is increased where, as here, many of the Act's provisions (such as, for example, the crowdfunding provisions) are subject to significant additional rulemaking.

The provisions modifying the IPO process for EGSs unquestionably could encourage some smaller companies to "test the waters" and perhaps even to go public sooner. The reduced compliance and disclosure requirements for EGCs unquestionably could reduce the post-IPO costs for the qualifying companies.

The Act's exemptions for the EGCs from many of the compliance and disclosure requirements that Congress only recently imposed on all public companies at least potentially could reduce the liability exposures for Emerging Growth Companies and for their directors and officers. For example, a company that does not have to conduct a say-on-pay vote is not going to get hit with a say on pay lawsuit. Similarly, the elimination of requirements for executive compensation disclosures eliminates the possibility that those companies could be subject to allegations that the compensation disclosures were misleading.

By the same token, the Act arguable introduces provisions that could increase the potential liabilities of some companies. For example, Section 302(c) of the Act expressly imposes liability on issuers and their directors and officers for material misrepresentations and omissions made to investors in connection with a crowdfunding offering. The crowdsourcing provisions are subject to rulemaking, but the rules must be provided within 270-days of the Act's enactment. Among other things, the rulemaking will clarify the crowdsfunding issuer's disclosure requirements.

It is worth noting that these crowdfunding provisions may blur the clarity of the division between private and public companies. The crowdfunding provisions seem to expressly contemplate that a private company would be able to engage in crowdfunding financing activities without assuming public company reporting obligations. Yet at the same time, that same private company will be required to make certain disclosure filings with the SEC in connection with the offering and could potentially incur liability under Section 302(c) of the JOBS Act.

These and many other changes introduced in the Act could require the D&O insurance industry to make changes in its underwriting and perhaps in policy forms to accommodate these changes. As was the case with the Sarbanes-Oxley Act and the Dodd-Frank Act, the D&O insurance industry may face a long period where it must try to assess the impact of changes introduced by this broad, new legislation. Though many of the Act's provisions seem likely to reduce the potential scope of liability for many companies (particularly the EGCs), the Act could also introduce other changes that might result in increased potential liability for other companies (particularly those resorting to crowdfunding financing).

As a final point, it is worth noting that President Obama has still not even signed the Act but questions about the Act are already being raised. For example, an April 2, 2012 Wall Street Journal article, noting the post-IPO accounting disclosures of discount coupon company Groupon, raised the concern that if the JOBS Act had been in place, Groupon would have been able to confidentially submit its IPO documents to the SEC, allowing its pre-IPO accounting concerns to remain below the radar. Undoubtedly, further questions will be asked as the JOBS Act goes into force and its provisions are implemented.

Several law firms have issued helpful memos on the Jobs Act. A March 29, 2012 memo from the Paul Weiss law firm can be found here. A March 2012 memo from the Jones Day law firm can be found here. Very special thanks to the several readers who sent me links or asked questions about the JOBS Act.

Supreme Court Issues Unanimous Opinion in Section 19(B) Statute of Limitations: Perhaps because the issues involved are technical, there was little notice paid to to the U.S. Supreme Court's March 26, 2012 issuance of its unanimous opinion in the Credit Suisse Securities (USA) LLC v. Simmonds case. The Court's opinion, which was written by Justice Antonin Scalia, can be found here.

As discussed here, the Supreme Court had taken up the case to address the question whether the two-year statute of limitation period applicable to claims for short-swing profits under Section 16(b) of the Securities Exchange Act are subject to tolling, and if so, what is required to resume the running of the statute.

The Court held that the failure of a person subject to Section 16 to file the specified disclosure statement does not indefinitely toll the two-year statute of limitations. The Court said that even if the statute were subject to equitable tolling for fraudulent concealment, the tolling ceases when the facts are or should have been discovered by the plaintiff, regardless of when the disclosure statement was filed. The Court said that the traditional principles of equitable tolling should apply and remanded the case to the district court to determine how those principles should be applied in this case. The Court split 4-4 on the question of whether the two-year statute functions as a statute of repose that is not subject to tolling.

The Supreme Court's ruling on this technical issue regarding the application of the statute of limitations for short-swing profit claims does not have a widespread impact. However, the Court's decision eliminates the possibility that the statute could be tolled indefinitely, as arguably might have been the impact of the Ninth Circuit's opinion in the case.

A March 30, 2012 memo from the Bingham McCutchen firm about the decision can be found here. A March 30, 2012 memo from the Davis Polk law firm about the decision can be found here.

Point/Counterpoint on the "Dip" in Securities Class Action Settlements: In a prior post (here), I discussed the recent Cornerstone Research report detailing the "dip" in securities class action settlements in 2011. In an April 2, 2012 post on the New York Times Dealbook blog (here), two attorneys, Daniel Tyiukody of the Goodwin Proctor firm and Gerald Silk of the Bernstein Litowitz firm, provide their contrasting points of view on the reported "dip." The bottom line is that the kinds of cases that have been filed in recent years have been taking longer to settle - and there are a lot of cases, particularly related to the credit crisis, in the pipeline. Silk also notes that there have been fewer restatements in recent years, and also that there have been more individual (non-class) securities that have been filed.

April 3, 2012
Another SOX 304 Strict Liability Action
by Tom Gorman

The Commission filed another strict liability, SOX 304 action, seeking to clawback certain CEO and CFO compensation. This time the defendants are Michael Baker and Michael Gluck, respectively, the CEO from 1997 through February 2009, and CFO from May 2006 through December 2008, of ArthroCare Corporation. SEC v. Baker, Case No. 1:12-cv-00285 (W.D. Tx. Filed April 2, 2012).

ArtroCare is an Austin, Texas based manufacturer of medical devices whose shares are traded on NASDAQ. From 2006 through the first quarter of 2008 two company sales executives, John Raffle and David Applegate, engaged in a channel stuffing scheme which resulted in the improper inflation of company revenue and earnings. Specifically, during that time period the two salesmen shipped certain products to distributors even though they often did not need, or have the ability to pay for, them. As a result for 2006, 2007 and the first quarter of 2008 revenues were overstated by, respectively 7.9%, 14.1% and 17.4% totaling almost $72.3 million. For the same period net income was overstated by 14.5% in 2006, 8,694.3% for 2007 and 315.2% for the first quarter of 2008, totaling about $53.7 million. As a result the company was required to restate its financial statements.

The Commission previously brought an enforcement action against the two salesmen. SEC v. Raffle, Civil Action No. 1:11-cv-540 (W.D. Tx. Filed June 27, 2011). Mr. Applegate settled that action. Lit. Rel. No. 22027 (July 5, 2011).

Most of the Commission's complaint details the fraudulent conduct of the two salesmen. It notes at the outset, however, that "The Commission does not allege that Banker and Gluk participated in the wrongful conduct." Rather, the complaint seeks the repayment of cash bonuses, incentive and equity-based compensation and profits from the sale of company stock under SOX 304 during the 12 month periods following the issuance of the quarterly and annual financial statements later restated. The amount of the compensation and stock sale revenue to be clawed back is not specified.

This is not the first strict liability clawback action brought by the SEC. That case is SEC v. Jenkins, CV 09-01510 (D.Arix. Filed July 22, 2009) brought against the former CEO of CSK Auto. That case ultimately settled following the rejection by the Commission of a settlement offer of partial repayment. See also SEC v. O'Dell, Civil Action No. 1:10-CV-00909 (D.D.C. Filed June 2, 2010). While it is clearly debatable as to whether a strict liability interpretation constitutes good enforcement policy, the Commission's position has been sustained by the Second Circuit. Cohen v. Viray, Case No. 3860-cv (2nd Cir. Sept. 30, 2010).

April 3, 2012
Simpson Thacher: March Securities Alert
by Stephanie Figueroa

We are pleased to share the most recent edition of the Securities Law Alert from the partners at Simpson Thacher's Litigation Department, and SLPC Contributors, Jonathan Youngwood, Peter Kazanoff, and Paul Gluckow. The following is an excerpt from the March 2012 edition of the Alert:

This month's Alert addresses three decisions from the Second Circuit: one setting forth the requirements for pleading a "domestic transaction" within the meaning of the Supreme Court's opinion in Morrison v. Nat'l Austl. Bank Ltd.; another staying the Southern District of New York's order rejecting the SEC's proposed consent judgment with Citigroup pending appeal; and a third holding that an Article 77 proceeding falls within the securities exception to the Class Action Fairness Act.

We also discuss rulings from the Delaware Chancery Court denying motions to preliminarily enjoin the Delphi/Tokio Marine and Micromet/Amgen transactions. In addition, we address a Southern District of New York order requiring the plaintiffs in the AIG securities fraud suit to reveal the identities of confidential witnesses cited in the complaint. Finally, we discuss decisions granting motions to dismiss "Say on Pay" shareholder suits brought derivatively on behalf of Intersil Corporation, BioMed Realty Trust, Jacobs Engineering Group and Umpqua Holdings Corporation.

To view and print the full Securities Law Alert, please click here.

April 3, 2012
Cooling Coal's Jets
by Hester Serebrin

Check out the great map published yesterday by Mother Jones, which uses data from the Sierra Club's Beyond Coal project to map the status of various coal plants across the states (existing, progressing, or blocked). The accompanying article lauds the work that Sierra Club has done to toss out "two-thirds of 249 new coal plant proposals, avoiding more than 654 million metric tons of carbon that would have seeped into the atmosphere each year."

According to the Sierra Club, retiring one "dirty coal-burning plant" will prevent:

  • more than 29 premature deaths
  • 47 heart attacks
  • 146 asthma attacks
  • 22 asthma emergency room visits
April 3, 2012
The New ISS Feedback Review Board
by David Lynn

The New ISS Feedback Review Board

ISS recently announced a new "feedback review board," which is designed to be used by investors, issuers, and other interested parties who wish to communicate with ISS about its research, policies and recommendations. The feedback review board is a web-based form where "market constituents" can submit comments "regarding accuracy of research, accuracy of data, policy application and general fairness of ISS policies, research and recommendations." This can also be a place to notify ISS about factual inaccuracies in its data or research. ISS says that it may not respond to every submission through this review board. The review board is not supposed to supplant regular channels for communicating with ISS, and it isn't a forum for seeking answers to policy questions or interpretations or lobbying for favorable vote recommendations. It is unclear whether this will be something that issuers would really be inclined to utilize, particularly given that larger issuers usually get a chance to correct factual inaccuracies in ISS reports prior to issuance. In any event, it certainly seems like it may at least open up another avenue to vent.

More JOBS Act Fun Facts

With the signing of the JOBS Act scheduled for this Thursday, it seems like a good time to highlight some of the more promising aspects of the Act. Title IV of the Act could ultimately turn out to be one of the unsung heroes of the legislation in terms of the impact on capital formation, depending on how it gets implemented by the SEC. This portion of the JOBS Act creates a whole new exemption under Section 3(b) of the Securities Act, under which an issuer will be able to offer and sell up to $50 million in securities within a 12-month period in reliance on the exemption. The issuer can offer equity securities, debt securities, and debt securities convertible or exchangeable for equity interests (including any guarantees of such securities), and the securities sold under this exemption will be offered and sold publicly (without restrictions on the use of general solicitation or general advertising) and will not be deemed "restricted securities." The issuer may also "test the waters" with respect to the offering prior to filing any offering statement with the SEC, subject to any additional conditions or requirements that may be imposed by the SEC. The securities will be considered "covered securities" for NSMIA purposes and not subject to state securities review if offered and sold on a national securities exchange, or the securities are offered or sold to a "qualified purchaser."

We affectionately dubbed the legislative initiatives which served as precursors to Title IV "Regulation A+" in the May-June 2011 issue of The Corporate Counsel, noting how the new Section 3(b) exemption being contemplated was an improved version of the much-maligned and rarely used Regulation A. The reason that this new provision is relatively exciting is that it could potentially open the door again to what are effectively smaller initial public offerings up to $50 million, which we rarely see today (rather, IPOs are more often in the $100 million to $200 million range in terms of amounts raised). Much will depend on how the SEC decides to implement the exemption, as it does have strings attached like submitting an offering statement to the SEC and distributing the offering statement to investors, as well as providing periodic disclosures after the offering is completed. This provision, unlike many of the other parts of the JOBS Act, doesn't specify any deadline for rulemaking, which unfortunately may mean that it gets back-burnered while the SEC attends to more pressing rulemakings with short deadlines.

Board Portal Developments

In this podcast, Andrew Moore of Computershare Governance Services discusses the latest developments in board portals, including:

- What are you seeing companies doing in the area of board communications? What are the major trends?
- How is Computershare's BoardWorks different than other board portals?
- What is driving directors and companies to look to this type of solution? Are there legal and compliance issues that online services like this can address?

-Dave Lynn

April 3, 2012
The JOBS Act and the Capital Raising Process (The On Ramp and the Secret Review Process)
by J Robert Brown Jr.

The On Ramp provisions exempt "emerging growth companies" from certain requirements of the securities law. In addition, these companies are entitled to special access to the staff of the Commission. Specifically, Section 106 of the JOBS Act added a provision that provides:

  • (e) EMERGING GROWTH COMPANIES.- (1) IN GENERAL.-Any emerging growth company, prior to its initial public offering date, may confidentially submit to the Commission a draft registration statement, for confidential nonpublic review by the staff of the Commission prior to public filing, provided that the initial confidential submission and all amendments thereto shall be publicly filed with the Commission not later than 21 days before the date on which the issuer conducts a road show, as such term is defined in section 230.433(h)(4) of title 17, Code of Federal Regulations, or any successor thereto.

Section 6(e) of the Securities Act of 1933, 15 USC 77f(e). In other words, companies considering an IPO can have a "secret" review of the registration statement by the staff of the Commission. The information will also be exempt from disclosure under the FOIA.

Companies that "secretly" file draft registration statements will not generally be able to keep the fact secret. They may announce the filing or it may leak to the public. Secret or not, the company will presumably have to go into the quiet period. As a result, anyone watching the company will likely know that a registration statement has been filed since the company's approach to public communications will change.

Concern has also arisen that the "secret" review process will delay the market's awareness of problems raised with a registration statement. During the registration process, Groupon had a number of "well-publicized disagreements with the SEC over its accounting". Critics, according to the WSJ, have asserted that the JOBS Act, had it been in place, would have allowed the disagreements to be resolved "under the radar, without investors learning of them until later although still before any IPO.

The benefits of this system of "secret" review may ultimately prove illusory. First, without the pressure of a public filing, the staff of the Commission may take its time in commenting on draft registration statements, adding delay to the process. Moreover, without the pressure from the public to have the IPO go forward, the staff may prove more intransient with respect to issues raised in the comment process.

With the benefits questionable, the harm is not. The provision will ultimately reduce the time that the market has to assess an IPO. To the extent that all issues have been resolved with the staff during this "secret" process, the company may be able to go effective very quickly after the public filing of a registration statement. There will be less time for the public to identify issues that might become part of the SEC review process or to publicize concerns that help ensure informed decision making.

April 3, 2012
Wachtell Lipton's Critique of Harvard Law School
by Jeffrey N. Gordon

Editor's Note: Jeffrey Gordon is the Richard Paul Richman Professor of Law at Columbia Law School. This post relates to an earlier post by Martin Lipton and Theodore Mirvis, which is available here. Both this post and the Lipton-Mirvis post relate to the 2011-2012 work of the Harvard Law School Shareholder Rights Project, which is described in a post here.

The HLS Forum recently published a post by Martin Lipton and Theodore Mirvis titled "Harvard Shareholder Rights Project is Wrong." The post was based on a memorandum issued by their law firm, Wachtell, Lipton, Rozen & Katz ("Wachtell"), and signed by the authors of the post and two other top partners at the firm. The memo and post offer a strongly worded critique of Harvard Law School for permitting the operation of the Shareholder Rights Project (SRP) clinical program. The objections were twofold: First, the results achieved by the clinic - agreements by 42 large public companies to propose charter amendments declassifying their boards - are undesirable as a public policy matter. Second, the clinic was wrong to represent public pension funds and charitable endowments because this representation went beyond "provid[ing] educational opportunities while benefiting impoverished or underprivileged segments of society for which legal services are not readily available."

I think the Wachtell memo-writers' strongly held belief about the virtue of classified boards as a governance feature of large public firms has spilled over into an unfair attack on the Harvard SRP clinic based on a straitjacketed conception of clinical legal education not followed by leading American law schools. Wachtell has, of course, long been known for its invention of the poison pill and its expertise in takeover defenses. Because staggered boards make poison pills more powerful and fortify takeover defenses, it is understandable that Wachtell, and some of the clients it serves, do not welcome large-scale declassification of boards. Whether such declassification would benefit shareholders and the American economy is a legitimate question for debate. However, criticizing Harvard Law School for permitting the SRP to operate should not be part of this debate.

Clinics at major American law schools commonly engage in cause-based representation of governmental and non-profit organizations. Take, for example, New York University School of Law, where Mr. Lipton serves on the Board of Trustees (he also chaired the Board of Trustees until he moved to his current position as the chairman of the Board of Trustees of New York University), and where another top Wachtell partner signing the memorandum, David Katz, has long served as an adjunct professor. According to the NYU Law School website, the school's clinics include the Administrative and Regulatory State Clinic, which works with "non-governmental organizations that focus on improving environmental, public health, and consumer protection" (taught by Dean Revesz, a distinguished scholar with well-known policy views); the Brennan Center Public Policy Advocacy Clinic, where students have "helped promote campaign finance reform" and worked to "restore the vote to persons with felony convictions;" the Environmental Law Clinic, where students have recently worked on "environmental justice litigation;" and the Technology Law and Policy Clinic, where students work with the American Civil Liberties Union's Speech, Privacy & Technology Project on issues including "[c]hallenging unconstitutional Internet filtering," "[f]iling public records lawsuits to inform the public about government surveillance programs," and "filing briefs…arguing that overzealous enforcement of copyright will censor independent and experimental video artists..." As worthwhile as these causes may be, they are all neither universally supported nor focused on the protection of the underprivileged or impoverished.

NYU School of Law is hardly unique in this respect. My own Columbia Law School has an Environmental Law Clinic that has represented community groups and national organizations on a host of environmental matters in court as well as before regulatory agencies, taking what I am sure many affected industry participants would regard as undesirable positions. Yale Law School has an environmental law clinic that engages in similar representations; a Capital Markets and Financial Instruments Regulation Clinic; a Media Freedom and Information Access Practicum, in which students are "picking up the fight against government secrecy" by "taking on a pro se journalist's appeal from a court order denying access to court records in a corporate whistleblower case;" and a Supreme Court Clinic, which recently "filed an amicus brief on behalf of electronic privacy advocates... on the issue of the government's warrantless use of GPS tracking devices." Consistent with the practice in other schools, Harvard Law School has long operated clinics other than the SRP that advance the agendas of clients who are not impoverished or underprivileged.

Why do law schools operate such clinics? The clinics teach lawyering skills, expose students to areas of legal practice, and provide hands-on, practical experience, which could be useful to them in their future careers. Many of these careers will not involve impoverished or underprivileged segments of society. And interesting work in most areas of legal practice often involves working for clients whose agenda is contested by others in society.

By contrast to what the Wachtell memorandum seems to assume, the operation of such clinics within a law school in no way aligns the school with the agenda of the clinic's clients. The views advanced by the clinics represent those of the clients. Faculty and students choosing to work in a particular clinic are also often sympathetic to the agenda of the clients the clinic serves. In all cases, however, it is generally understood that clinics do not speak for the law school and that any views expressed by a clinic should not be attributed to the law school where it operates.

In the interest of full disclosure, I am a graduate of Harvard Law School (Class of '75). I am also a member of the advisory board of the SRP. I am not paid for my service on this advisory board; my willingness to serve on this board pro bono reflects my view that it is a worthy project, even though my personal views about various corporate governance questions - the importance of board declassification, for example - differ from those of SRP director Lucian Bebchuk. In my opinion having such a clinic would be a credit and a benefit to any law school.

View today's posts

4/3/2012 posts

The Harvard Law School Forum on Corporate Governance and Financial Regulation: Insider Trading in Takeover Targets
Pension Risk Matters: Upcoming ERISA Litigation and Compliance Events
Pension Risk Matters: ERISA Pension Plans: Due Diligence for Hedge Funds and Private Equity Funds
D & O Diary: The Impact of the JOBS Act on D&O Liability
SEC Actions Blog: Another SOX 304 Strict Liability Action
Securities Law Practice Center: Simpson Thacher: March Securities Alert
The Green Mien: Cooling Coal's Jets Blog: The New ISS Feedback Review Board
Race to the Bottom: The JOBS Act and the Capital Raising Process (The On Ramp and the Secret Review Process)
The Harvard Law School Forum on Corporate Governance and Financial Regulation: Wachtell Lipton's Critique of Harvard Law School

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