UK: September 19, 2016 Corporate News Update

Last Updated: 20 September 2016
Article by Joseph W. Morales

SEC Penalizes Advisory Firms; NYSE Revises Equity Compensation Plan FAQs; Delaware Courts Dismiss Fiduciary Duty Claims; and Federal Court Allows Third Parties To Raise "Work for Hire" Defense

This edition of the Corporate news roundup features penalties imposed by the SEC against multiple investment advisory firms, the NYSE revising its Equity Compensation Plan FAQs for the first time in nearly a decade, Delaware courts dismissing stockholders' claims for post-closing damages, and a federal court's decision that a third party has standing to raise a "work for hire" defense in connection with a copyright infringement claim:

The SEC recently announced that two investment advisory firms are settling charges totaling about $850,000 related to compliance failures within their respective wrap fee programs. A wrap fee program typically involves a client paying a single comprehensive fee in exchange for management, brokerage, custody and other investment services. The SEC's National Exam Program includes wrap fee programs among its annual examination priorities, focusing on whether advisers are fulfilling fiduciary and contractual obligations to their client. Investigations of the settling firms found that the firms failed to establish necessary policies and procedures for determining commissions charged to their clients when sub-advisers "traded away" with broker-dealers outside of the firms' wrap fee programs. According to the SEC, the firms could not provide the magnitude of such costs to their clients and did not consider the commissions when determining whether or not the sub-advisers or wrap fee programs were suitable for their clients. Therefore, the clients were unaware that they were paying additional costs in excess of the single wrap fee they paid for the bundled investment services. For more information, click here.


The New York Stock Exchange (NYSE) recently revised its frequently asked questions (FAQs) relating to equity compensation plans for the first time in almost a decade. The revised FAQs clarify issues under NYSE Listed Company Manual Rule 303A.08, which generally requires that shareholders vote on all equity compensation plans and material revisions thereto. The latest revisions state that the rule does not provide de minimis exceptions and that issuances of shares to non-officer employees are subject to the rule. Additionally, if shareholder approval of a new equity compensation plan is required, shares may not be issued before such approval is obtained. The FAQs provide that option grants may be made before shareholder approval, as long as the options could not be exercised until shareholder approval is obtained. A listed company may not issue restricted stock before shareholder approval because restricted stock is actually issued at the time of the grant. For more information, click here.


In August 2016, the Delaware Court of Chancery dismissed stockholder claims for post-closing damages in two separate cases that highlight the trend of Delaware courts continuing to defer to director and stockholder decision-making processes. After the Corwin v. KKR Financial Holdings LLC ruling, stockholders alleging post-closing damages claims must demonstrate that (a) the stockholder vote on the transaction either was coerced or was not fully informed because of materially misleading target company disclosures or (b) the transaction is subject to an entire fairness review, because either a controlling stockholder stood on both sides of the transaction or at least half of the approving directors were not disinterested or independent. In cases where a fully informed, uncoerced stockholder vote has occurred, the "Corwin principle" restores the business judgment rule presumption to a transaction otherwise subject to enhanced scrutiny and not otherwise subject to entire fairness review. In one of the 2016 cases, the plaintiff focused its claims on alleged disclosure deficiencies in the merger context, claiming that the deficiencies rendered the stockholders' approval less than fully informed. The court disagreed, holding that the vote had been fully informed. In the other case, the plaintiffs primarily argued that a tender offer transaction was subject to an entire fairness review because, among other things, certain stockholders constituted a controlling group with influence over the directors, but also alleged that Corwin should not apply to a tender offer because it technically did not require a stockholder vote. The court concluded that a controlling group did not exist and that Corwin applies to tender offers as well as to cases in which a majority of the directors was not disinterested in the transaction. For more information, click here (City of Miami General Employees v. Comstock),  here (Larkin v. Shah) and here (Corwin discussed at "Delaware Supreme Court Reinforces Business Judgment Rule").


In August 2016, the SEC announced penalties against 13 investment advisory firms who were found to have violated securities laws by spreading false claims made by F-Squared Investments, an investment management firm, about its AlphaSector investment strategy. The SEC found that the advisory firms accepted and negligently relied upon F-Squared's claims that the AlphaSector investment strategy for investing in exchange-traded funds had outperformed the S&P Index for several years. The SEC also concluded that the advisory firms repeated many of such claims without obtaining sufficient documentation to substantiate the advertised information while recommending the investment to their own clients. F-Squared subsequently admitted that the purported track record for its strategy was substantially inflated. The penalties, which ranged from $100,000 to $500,000, were determined based on the fees that each advisory firm earned from AlphaSector-related strategies. For more information, click here.


A U.S. Court of Appeals recently ruled that a third party to an alleged employer-employee relationship could raise a "work for hire" defense to a plaintiff's copyright claims. In Urbont v. Sony Music Entertainment, the plaintiff sued Sony Music Entertainment and others, alleging infringement of the plaintiff's copyright in a theme song that had been featured in a 1960s Marvel Comics television show. The defendants claimed that the plaintiff did not own the copyright on the grounds that the plaintiff wrote the song for Marvel in 1966 and therefore the song constituted a "work for hire." In response, the plaintiff asserted that Sony and the other defendants lacked standing to raise a "work for hire" defense because (i) Marvel acquiesced to the plaintiff's copyright ownership by not challenging the plaintiff's commercial use of the song and (ii) a third party could not challenge the validity of an undisputed copyright transfer under Section 204(a) of the Copyright Act. The U.S. Court of Appeals agreed with the lower court's conclusion that Sony and the other defendants had standing to challenge the copyright ownership under the "work for hire" doctrine, noting that Marvel was not a party to the current lawsuit and therefore could not clarify its position regarding ownership of the copyright and the "work for hire" doctrine addresses ownership rights between employer and employees (or independent contractors), not copyright transfers like those covered by Section 204(a) of the Copyright Act. For more information on the case, click here.


The SEC recently proposed rule and form amendments that would require registrants to include a hyperlink to exhibits in their filings. The proposed amendments build upon a previously-issued concept release in which the SEC examined the business and financial information that Regulation S-K requires registrants to disclose and how technology can be used with respect to the disclosure and presentation of such information. The proposed amendments would require (i) registrants who file registration statements and reports that are subject to exhibit requirements under Regulation S-K (or who file Forms F-10 or 20-F) to include a hyperlink to each exhibit listed in the exhibit index of the filings, and (ii) that all such filings be submitted in HTML format. For more information regarding the proposed rule, click here, and for more information regarding the previously-issued concept release, click here.

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.

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