The SEC is taking renewed aim at earnings management, and this time it’s not just improper revenue recognition.

Both in its recent enforcement order against Marvell Technology Group – imposing s $5.5 million fine and a cease-and-desist order – and in its on-going action against Under Armour,[1] the SEC has focused on what, anecdotally, is not a terribly uncommon practice – accelerating (or “pulling in”) sales from a future quarter to the present in order to “close the gap between actual and forecasted revenue.”[2]  In both cases, the schemes consisted of offering various incentives, such as “price rebates, discounted prices, free products, and extended payment terms”[3] to entice customers to accept products in the current quarter that they would not need until the next.  In an environment of declining sales, these inorganic efforts to meet earnings numbers allegedly misled the market about the direction of the business. Continue Reading SEC Cracks Down on Earnings Management

On November 22, 2019, the First Circuit Court of Appeals held in Sun Capital Partners III, LP, et al. v. New England Teamsters & Trucking Industry Pension Fund, that two private equity funds, Sun Capital Partners III, LP and Sun Capital Partners IV, LP were not liable for approximately $4.5 million in multiemployer pension plan withdrawal liability of their bankrupt portfolio company.  The First Circuit reversed a 2016 District Court decision finding that the funds had created an implied partnership-in-fact.

Although the First Circuit found in favor of the funds, its opinion suggests that courts might imply a partnership-in-fact, and private equity funds could be found liable for the pension obligations of their portfolio companies, depending on the relevant facts and circumstances.  While the decision relates to a private equity fund, and thus has several important implications for private equity firms, the issues at play could also have implications for other alternative investment managers, including venture capital funds, family offices and sovereign wealth funds.

Please click here for our full analysis.

A week after Glass Lewis issued its 2020 proxy voting guidelines,[1] Institutional Shareholder Services (ISS) released its final updates to its 2020 proxy voting policies.  The updated policies will be applied to shareholder meetings beginning on February 1, 2020, and the changes to U.S. polices are summarized below. Continue Reading ISS Updates its 2020 Proxy Voting Policies

Glass Lewis recently released its 2020 proxy voting guidelines and shareholder initiatives.[1]  The following is a summary of Glass Lewis’ proposed changes and updates for 2020.  Most significantly, the updated guidelines reflect a response to the Securities and Exchange Commission’s recent announcement that it may decline to take a view or may respond orally to no-action requests for shareholder proposals under Rule 14a-8 of the Exchange Act.[2]  Starting in 2020, Glass Lewis generally will recommend a vote against members of a company’s governance committee if a company omits a shareholder proposal from its proxy statement without evidence of receiving no-action relief from the SEC, as described in more detail below. Continue Reading Glass Lewis Updates Its 2020 Proxy Voting Guidelines

On November 5, the SEC released its widely anticipated proposed changes to some of the procedural requirements for shareholder proposals to be included in management’s proxy statement under Exchange Act Rule 14a-8. In this latest release, the SEC addresses procedural requirements that it has not revised in more than 20 years. The release proposes five changes to Rule 14a-8 that we discuss in further detail in the attached memo.

Please click here to read the full alert memorandum.

On November 5, a divided Securities and Exchange Commission (“SEC”) proposed new rules about proxy advisory firms. The proposed rules would, if adopted, have three principal effects:

  • Before a proxy advisory firm distributes its recommendations for a particular shareholder vote to its clients, it would be required to give a company an opportunity to comment on the recommendations. The proposed rules provide specific choreography for this interaction between the firm and the company.
  • In the proxy voting advice that a proxy advisory firm distributes to its clients, the firm would be required, if the company so requests, to include a hyperlink to a company statement responding to the firm’s recommendations.
  • The proxy voting advice would also be required to include disclosures on conflicts of interest, including between the proxy advisory firm and the company. The firm would also have a strong incentive, under revised antifraud provisions, to include disclosure on its methodology and sources.

The proposed rules would also codify the view that proxy voting advice, as it is currently provided by ISS and Glass Lewis, constitutes a proxy solicitation. This view underpins the SEC’s attempt to regulate the proxy advisory firms, and it is hotly contested, including in a lawsuit filed by ISS in late October.

Please click here to read the full alert memorandum.

Vice Chancellor Slights, of the Delaware Court of Chancery, included a slightly self-effacing, and only slightly humorous, note in his recent opinion in a fiduciary claim against the directors of Tesla, Inc., to the effect that the defendants have reason to believe that they drew the wrong judge in the case.  The case relates to the 2018 incentive compensation award to Tesla’s CEO, Elon Musk, that caps out at about $55 billion (that “b” is not a typo).  The footnote concerns, in part, Vice Chancellor Slights’ determination, in a separate recent claim alleging fiduciary breaches by the Tesla board, that members of Tesla’s board were not independent.[1] Continue Reading Update on Director Independence

The CEOs of 150 major US public companies recently pledged to act for all of their “stakeholders” – customers, employees, suppliers, communities and yes, even stockholders.[1] Much commentary ensued. But before we get too excited about whether these CEOs are grasping the mantle of government to act on behalf of the citizenry and other people who aren’t paying them, there is the prior question of whether, as a matter of Delaware law, they can. Continue Reading Outlaws of the Roundtable? Adopting a Long-term Value Bylaw

On September 21, 2019, Cleary Gottlieb partners Ethan Klingsberg and Jim Langston, along with moderator Paul Washington, executive director of The Conference Board, Anu Aiyengar, Head of North American M&A at J.P. Morgan and Anthony Kim, Partner at Centerview Partners, discussed M&A risks for boards and management teams arising in connection with:

  • internal forecasts
  • the roles of insiders
  • fundless, LP and lesser-known sponsors

Continue Reading M&A Risks for Boards and Management Teams in 2019-20 – Takeaways from Conference Board Panel Discussion among Cleary Gottlieb, J.P. Morgan and Centerview M&A Advisors

Last week, the Securities and Exchange Commission adopted a rule under which any issuer can “test the waters” for a securities offering before or after filing a registration statement. This new rule extends an accommodation previously available only to emerging growth companies.

Please click here to read the full alert memorandum.