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I am a corporate and securities attorney in Seattle.  Over the years, I have represented numerous private companies, VC funds, placement agents, and others in venture transactions.  Today, much of my work involves capital markets transactions, public company SEC reporting, and related corporate and disclosure advice.  I have advised in dozens of initial public offerings, stock exchange listings, secondary offerings, public and private M&A deals, international transactions, PIPEs, spin-offs, going private transactions, and other transactions.

Exclusive Forum Provisions

We have previously blogged about Delaware corporations considering, and Delaware courts upholding, “exclusive forum” provisions in their charter documents. These provisions require stockholder derivative and other intra-corporate lawsuits to be filed in the Delaware Court of Chancery.

Last week, following overwhelming support in the Delaware Legislature, the Delaware Governor signed into law an amendment to the Delaware General Corporation Law that expressly authorizes provisions in the corporation’s certificate of incorporation or bylaws establishing Delaware as the exclusive forum for “internal corporate claims.” Internal corporate claims
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Yesterday the SEC issued its long-awaited “pay-versus-performance” rule proposal. The rules would add a new paragraph (v) to Item 402 of Regulation S-K. In short, the proposed rules would require a new table comparing “executive compensation actually paid” to the “total shareholder return” (TSR) of the company and its peers, as well as a discussion of the relationship between these amounts.

Here is a quick summary of the main requirements of the proposal:


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In light of the SEC’s first enforcement action against a company for impeding whistleblower activity in violation of Rule 21F-17, employers may wish to consider clarifying in their agreements, policies and practices that involve confidentiality obligations that employees may provide truthful information to the SEC or other governmental agencies concerning potential violations of law.

Rule 21F-17, adopted pursuant to the Dodd-Frank Act, provides in relevant part:

(a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.

KBR, a Houston-based global technology and engineering firm, had a practice of conducting internal investigations in response to complaints regarding potential illegal or unethical conduct, which included interviewing employees (including those who had lodged a complaint). KBR required witnesses in these internal investigations to sign a confidentiality statement that included the following language:

I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.

The SEC acknowledged that it was not aware of any employee in fact being prevented from communicating directly with SEC staff, or of KBR taking any action to enforce these confidentiality statements. Nevertheless, the SEC concluded that that the language in the confidentiality statement impeded communications with the SEC staff about potential securities violations by requiring permission from KBR’s legal department or face the prospect of discipline.
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We have previously blogged about the SEC’s July 2013 rule change that disqualifies certain “bad actors” from using Rule 506. Thankfully, Rule 506 permits the SEC to determine, upon a showing of good cause, that it is not necessary under the circumstances to deny availability of Rule 506. The SEC has recently issued a policy statement explaining how it will evaluate whether a party seeking a waiver has shown good cause that it is not necessary under the circumstances that the exemptions be denied.

Background

Other securities offering exemptions, including Rule 505 and Regulation A, have had bad actor disqualifications for many years, and the SEC has also had the authority to grant waivers under these exemptions using a similar “good cause” standard. In fact, based on this interesting article from Urska Velikonja, the SEC granted waivers nearly 200 times between July 2003 and December 2014. However, because Rule 506 is so much more widely used in mainstream private securities offerings, significant attention to waivers of bad actor disqualifications emerged as the first waivers were granted under Rule 506 (such as those granted to Oppenheimer and H.D. Vest). The attention to the issue culminated in several SEC commissioners publicly expressing diverging views about the proper use of waivers, including in speeches by SEC Commissioners Daniel Gallagher, Kara Stein and Michael Piwowar and SEC Chair Mary Jo White. This ultimately led to the SEC issuing its recent policy statement to bring consistency to how such waivers are granted, whether under Regulation A, Rule 505 or Rule 506.
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Today, the U.S. Supreme Court issued its anticipated Omnicare decision, which addresses the standard of liability applied to expressions of opinion in a registration statement for a public offering. While there will be clamoring about Omnicare (it is somewhat rare for the Supreme Court to issue securities law decisions), in my opinion the case does not involve a fundamental shift in how disclosure is drafted, although it does invite a few drafting and diligence strategies.

Statutory Backdrop

Section 11 of the Securities Act of 1933 permits purchasers of securities to sue for damages if a registration statement, at the time it became effective:

  • contained an untrue statement of a material fact; or
  • omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

In contrast with other types of securities liability, neither the untrue statements prong nor the omissions prong of Section 11 requires showing that a defendant acted with any intent to deceive or defraud.

Omnicare’s Opinions

Omnicare, the nation’s largest provider of pharmacy services for residents of nursing homes, filed a registration statement for a public offering of its common stock. In discussing the effects of various laws on its business model, including its acceptance of rebates from pharmaceutical manufacturers, the registration statement contained the following statements of opinion:

  • “We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws.”
  • “We believe that our contracts with pharmaceutical manufacturers are legally and economically valid arrangements that bring value to the healthcare system and the patients that we serve.”


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The SEC has recently issued interpretations regarding Rule 147.  This rule provides a safe harbor under Section 3(a)(11) of the Securities Act of 1933, as amended, which exempts from federal registration securities offered and sold only to persons resident within a single state or territory, in which the issuer is also resident.  While the exemption is a relatively simple idea at a high level, there can often be challenges in applying it, such as determining where a company resides or where an offer occurs.  Rule 147 provides bright line
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FINRA, the securities self-regulatory organization whose members are broker-dealers, recently simplified two rules that are critical in the public offering process.

FINRA’s Corporate Financing Rule generally regulates underwriting compensation and prohibits unfair arrangements in connection with the public offering of securities.  Among other provisions, the rule requires members to file information with FINRA about the securities offerings in which they “participate” and to disclose affiliations and other relationships that may indicate the existence of conflicts of interest.  The rule also imposes lock-up restrictions on certain securities acquired from the issuer by a member and restricts the receipt of certain items of value, such as termination or “tail” fees and rights of first refusal as to future transactions (ROFRs).  In addition, FINRA’s Conflict of Interest Rule prohibits FINRA members that have a “conflict of interest” from participating in a public offering of securities unless certain conditions are met.

These two FINRA rules have been revised to simplify member participation in offerings and associated reporting, while enabling members to negotiate more broadly for tail fees and ROFRs, as follows:
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Bill Carleton has a good post regarding the recent comments from Keith Higgins, the Director of the Division of Corporation Finance, who spoke at the 2014 Angel Capital Association Summit.  Higgins discussed the SEC’s principles-based approach with respect to meeting the requirements of new Rule 506(c). 

Since the SEC’s adoption of new Rule 506(c) in September 2013 allowing general solicitation by issuing companies in certain circumstances, angel investors have been concerned about the accredited investor verification standards set forth in those new rules.  The debate has centered around what actions
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As we’ve previously blogged, in July 2013 the SEC adopted rules that permit general solicitation and general advertising in connection with certain offerings of securities to accredited investors.  Yesterday, to help the markets understand some common interpretative questions associated with these new rules, the SEC issued several new Compliance and Disclosure Interpretations.  The new interpretations mainly address:

  • when and how companies may switch between “old” Rule 506(b) (no general solicitation) and new 506(c) (general solicitation permitted),
  • the need to amend Form D if such changes are made,
  • the


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As we mentioned in this post earlier this month, the Delaware Court of Chancery has issued its decision in the matter of In re Trados Incorporated Shareholder Litigation, C.A. No. 1512-VC (August 16, 2013), in which it addresses extensively a variety of issues that directors and investors will want to consider in similar circumstances.  In the opinion, by Vice Chancellor J. Travis Laster, the court found that although the preferred stockholders received all of the merger consideration in an end-stage transaction and the common stockholders received nothing, and although the Trados directors failed to demonstrate that they had followed a fair process, the transaction was still “entirely fair” to the common stockholders because the common stock had no monetary value before the merger.  You can read our detailed alert here by DLA Piper partners John J. Gilluly III and John Reed, which provides background for the case and includes additional detail regarding the four key takeaways from the opinion listed below.
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