Institutional Shareholder Services (ISS) recently announced
that, effective in late February or early March, it is replacing
its Governance Risk Indicators (GRId) database with the new ISS
Governance QuickScore (QuickScore), which is designed to
quantitatively identify risks within a company. Although GRId and QuickScore both attempt to measure governance
risk, QuickScore is a more quantitatively driven system that
searches for relationships between governance factors and important
financial metrics, with an overlay that aligns qualitative aspects
of governance with ISS policy. The quantitative methodology is
based on ISS's best practices as to numerous governance
factors. Additionally, where GRId provided a color-coded scoring of
qualitative risk factors, QuickScore assigns a numeric score based
on four governance dimensions: board, compensation, shareholder
rights and audit. Initially, QuickScore will rate over 4,000 companies within 25
markets, including the 3,000 largest US companies by market cap,
the 250 largest Canadian companies by market cap and United
Kingdom, Europe, Japan and Asia Pacific companies in the MSCI-EAFE
index. Companies rated by QuickScore have been granted access to
ISS's free data verification site, where they can review data
ISS has collected on the QuickScore factors. Companies will have
the ability to submit requests to ISS for data changes or updates
through this site until February 15, at which time it will close
until QuickScore is launched. ISS intends to begin including a
covered company's QuickScore in its proxy research reports
beginning in late February or early March. Additional information regarding QuickScore is available here. The National Association of Manufacturers, the Chamber of
Commerce of the United States of America and Business Roundtable
recently filed their opening brief with the US Court of Appeals for
the District of Columbia Circuit in their suit against the
Securities and Exchange Commission challenging the final SEC rule
implementing Section 1502 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, commonly referred to as the "conflict
minerals rule." As reported in
Corporate and Financial Weekly Digestof August 24, 2012, the
conflict minerals rule mandates disclosure and reporting
requirements regarding the use by issuers of certain minerals
sourced from the Democratic Republic of the Congo (DRC) and
adjoining countries. In their brief, the petitioners argue that the court should
strike down the conflict minerals rule for the following reasons:
(1) the SEC failed to conduct a proper cost-benefit analysis and,
in particular, did not determine whether the rule would achieve the
intended benefit for the DRC and underestimated the rule's
costs to issuers; (2) the SEC misconstrued the statute in
concluding that it could not adopt a de minimis exception to the
rule; (3) the rule wrongly requires due diligence and a Conflict
Minerals Report from companies that merely have a "reason to
believe" their minerals "may have originated" in the
covered region (rather than limiting the rule's application to
companies whose minerals "did originate" in the region);
(4) the SEC failed to justify its decision to require companies to
trace minerals back to the smelter or refiner, even though
commenters suggested the far less burdensome approach to use
"flow-down" clauses in contracts to require suppliers not
to source conflict minerals from the covered countries; (5) the SEC
mistakenly interpreted the statute to apply to companies that do
not manufacture any products and merely contract for the
manufacture of products; (6) the rule is internally inconsistent
because it gives smaller issuers four years to create the
infrastructure necessary to trace conflict minerals in their supply
chain, while giving larger issuers only two years, despite
acknowledging that many large issuers cannot meet their obligations
under the rule without obtaining information from smaller
companies; and (7) the rule compels speech in violation of the
First Amendment by requiring companies to describe their products
as "not DRC conflict free," even in circumstances in
which a company is simply unable to trace their supply chains to
determine their minerals' origins, thereby forcing companies to
associate themselves falsely with groups engaged in human rights
violations. (Brief of Petitioners, National Association of
Manufacturers v. SEC, No. 12-1422 (D.C. Cir. filed Jan. 16,
2013), ECF No. 1415549.) The SEC's brief is due on March 1. On February 5, the Securities and Exchange Commission hosted a
roundtable discussion regarding the impact that decimal-based
pricing increments (i.e., decimalization), which replaced
fraction-based tick sizes in 2001, has had on US securities
markets, investors, issuers and market professionals. Some have
argued that decimalization is one of the principal reasons for the
dramatic decrease in smaller initial public offerings. Participants
in the roundtable included academics, representatives of securities
exchanges, institutional investors, venture capital firms, market
makers, retail brokerage firms and other market professionals. Panelists discussed whether the current decimalization regime
could be enhanced to promote capital formation and, in particular,
revitalize the market for initial public offerings in the United
States. The roundtable focused on the impact of decimalization on
small- and mid-cap companies (generally, companies with market
capitalizations below $1 billion), and the potential advantages and
disadvantages of larger tick sizes in terms of liquidity, the
availability of analyst research for small- and mid-cap companies,
price discovery and transaction costs. Panelists also discussed the
potential merits and design of a potential SEC pilot program
intended to establish an empirical basis for action, if any, that
the SEC may take with respect to tick sizes. While SEC staff
members indicated that no final decision had been made to move
forward with a pilot program, participants in the roundtable
generally favored the concept of such a program. The roundtable represents part of the SEC's response to
Section 106(b) of the Jumpstart Our Business Startups Act, which
required the SEC to study and report on the impact that
decimalization has had on the number of initial public offerings
since its implementation, as well as the impact decimalization has
had on liquidity for small- and mid-cap company securities. In the
SEC's July 2012 Report to Congress on Decimalization delivered
pursuant to the JOBS Act, the SEC staff recommended that the SEC
"solicit the views of investors, companies, market
professionals, academics and other interested parties on the broad
topic of decimalization," including how to best study its
effects. The staff also recommended that the SEC not then proceed
with any specific rulemaking to increase tick sizes. To view a webcast of the roundtable, click
here. The Securities and Exchange Commission's Division of Trading
and Markets has issued Frequently Asked Questions (FAQs) that
provide guidance on the exemption from broker-dealer registration
in Section 201(c) of the Jumpstart Our Business Startups Act.
Section 201(c) of the JOBS Act adds Section 4(b) to the Securities
Act of 1933 (Securities Act) to provide that persons participating
in an offering under Rule 506 of the Securities Act are not subject
to broker-dealer registration solely because (i) that person
maintains a platform or mechanism that permits the offer, sale,
purchase, negotiation, general solicitation or advertisements or
similar or related activities by issuers of such securities; (ii)
that person or any person associated with that person co-invests in
such securities; or (iii) that person or any person associated with
that person provides ancillary services with respect to such
securities. In addition, that person and each person associated
with that person may not (i) receive compensation in connection
with the purchase or sale of such security, (ii) have possession of
customer funds or securities in connection with the purchase or
sale of such security, and (iii) be subject to a statutory
disqualification as defined under Section 3(a)(39) of the
Securities Act. In the FAQs, the SEC clarified that the exemption from
broker-dealer registration in Section 4(b) of the Securities Act
(Section 4(b) Exemption) is fully operational and does not require
the SEC to issue or adopt any rules. The Section 4(b) Exemption is
only available to those persons who do not receive any compensation
in connection with the purchase or sale of securities. This
restriction is not limited to transaction-based compensation. The
SEC advised that it interprets the term "compensation"
broadly to include any direct or indirect economic benefit to such
persons. However, the SEC provided that profits with respect to
co-investment in the securities offered on the platform or
mechanism would not be considered impermissible compensation for
purposes of the Section 4(b) Exemption. The SEC also advised that,
assuming all conditions are met, the Section 4(b) Exemption does
not limit the types of persons who are permitted to maintain a
platform or mechanism for an issuer's securities. Accordingly,
associated persons of issuers that otherwise qualify for the
Section 4(b) Exemption may rely on it to be exempt from
broker-dealer registration; however, the employees of an internal
marketing department or the investor relations department of an
affiliated adviser of a complex of privately offered funds may not
rely on the Section 4(b) Exemption if such employees are paid
salaries to promote, offer and sell shares of the privately offered
funds. Click
here to read the SEC's Division of Trading and Markets
Frequently Asked Questions. The Commodity Futures Trading Commission is seeking public
comment regarding a request by trueEX LLC (trueEX) to amend its
order of designation as a contract market. Pursuant to the request,
trueEX intends to allow for intermediation in connection with
trading activities on the trueEX platform. trueEX currently only
allows principal-to-principal trading on its platform. Comments must be submitted to the CFTC by March 1, 2013. The
CFTC notice requesting comment is available here.
The request submitted to the CFTC is available
here. The US Court of Appeals for the Seventh Circuit recently
affirmed an Illinois district court's dismissal of claims
brought by the former chairman and controlling stockholder of an
Illinois-state chartered bank against the Federal Deposit Insurance
Corporation (FDIC), both in its regulatory capacity
(FDIC-Corporate) and its receiver capacity (FDIC-Receiver). Plaintiff Pethinaidu Veluchamy, together with other members of
his family and the Veluchamy Family Foundation, owned 93.2% of
First Mutual Bancorp of Illinois, Inc., a holding company that was
the sole owner of Mutual Bank at Harvey, Illinois (Mutual
Bank). In June 2008, the Veluchamy family invested approximately $30
million in Mutual Bank, primarily through note purchases, in order
to maintain Mutual Bank's "well-capitalized" rating.
In early 2009, the Veluchamy family arranged for an additional
capital infusion of $6 million in response to an order from the
Illinois Department of Financial and Professional Regulation
(IDFPR). On May 12, 2009, the IDFPR notified Mutual Bank that the
bank needed another $70 million in capital to remain solvent, and
that IDFPR would seize control of the bank if certain capital ratio
benchmarks were not achieved within 60 days. On July 31, 2009, the
IDFPR declared Mutual Bank insolvent and appointed the FDIC as
receiver. Shortly before the insolvency order, Mutual Bank's board
voted to seek approval from the FDIC to redeem the $30 million note
investment made by the Veluchamy family in June 2008, noting that
the Veluchamy family had agreed to keep the returned capital in a
deposit account at Mutual Bank (depositors have higher priority in
a post-insolvency distribution than capital investors).
FDIC-Corporate did not respond to the board's request, and
FDIC-Receiver rejected proofs of claims submitted by the Veluchamy
family that apparently sought to treat their $30 investment as a
deposit account. Plaintiffs brought an action under the Administrative Procedure
Act (APA) and the Financial Institutions Reform, Recovery and
Enforcement Act (FIRREA). The Seventh Circuit found that the appellants' APA claim
against FDIC-Corporate was barred because the United States has not
waived sovereign immunity for APA claims seeking money damages. The
court affirmed dismissal of plaintiffs' FIRREA claims against
FDIC-Receiver because plaintiffs' FIRREA claims were based on
the FDIC's regulatory decision not to act on the bank's
request for the redemption of the notes, as opposed to any actions
taken by the bank itself. Veluchamy v. FDIC, No. 10-3879 (7th Cir. Feb. 4,
2013). The Delaware Court of Chancery recently denied, with one
exception, cross-motions for summary judgment in an action to
determine damages arising from a failed asset purchase
agreement. Plaintiff Henkel Corporation (Henkel) entered into a December
2007 Asset Sale and Purchase Agreement (Agreement) to sell its
consumer adhesive business (Business) to defendant Innovative
Brands Holdings, LLC (IBH) for $127.5 million. After signing, IBH
subsequently refused to complete the purchase. Henkel commenced an action for specific performance. IBH filed
counterclaims seeking a declaration that a material adverse event
(MAE) had occurred and that it was not obligated to close, but that
Henkel nonetheless remained bound by the no-shop clause. Later,
during the litigation, IBH changed its position and waived all
rights to purchase the Business or to enforce the no-shop. Henkel
then sold the Business to Shurtape for $112 million, or $15.5
million less than the price agreed to by IBH. The parties then proceeded to litigation regarding the amount of
damages owed to Henkel by IBH for breach of the Agreement. Henkel
sought three types of damages: (1) the $15.5 million difference
between the purchase price in the Agreement and the amount it later
agreed to with Shurtape (Sales Price Damages); (2) the costs Henkel
incurred in conducting a second sale process (Transaction Damages);
and (3) the attorneys' fees and expenses Henkel incurred due to
IBH's breach (Legal Enforcement Damages). IBH argued that the income generated by the Business during the
period between the date IBH breached the Agreement and the eventual
sale to the alternative buyer (Interim Period) should be offset
against Henkel's damages. The court determined that
Henkel's reasonable expectations were limited to revenues
generated by the Business until the date it would have sold the
Business to IBH under the Agreement. Allowing Henkel to receive
both damages and the Interim Period income would result in a
"windfall" to Henkel. The court denied summary judgment, however, in large part
because there were disputed issues of fact as to the date of
IBH's breach, which the court needed to determine in order to
calculate the Interim Period income to be offset against
Henkel's damages. Separately, the Agreement authorized Henkel to recover legal
expenses and did not subject them to any offset by the
Business' profits, as it did with regard to actual damages.
Henkel was therefore entitled to partial summary judgment awarding
its reasonable attorneys' fees and costs. Henkel Corp. v. Innovative Brands Holdings LLC, No.
3663-VCN (Del. Ch. Jan. 31, 2013). The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
SEC/CORPORATE
ISS Announces ISS Governance QuickScore to Replace GRId
Petitioners File Opening Brief Challenging SEC's Conflict
Minerals Rule
SEC Roundtable Discusses Decimalization and Tick Sizes
BROKER DEALER
SEC Issues Frequently Asked Questions on Exemption from
Broker-Dealer Registration Under the JOBS Act
CFTC
trueEX Requests that CFTC Amend Order of Designation as a
Contract Market
LITIGATION
Seventh Circuit Affirms Dismissal of Former Bank
Executive's APA and FIRREA Claims
Delaware Court of Chancery Analyzes Damages Claims in Failed
Asset Sale
ARTICLE
12 February 2013
Corporate And Finance Weekly Digest - February 8, 2013
Summaries of the most recent corporate and financial updates.