United States: January 2015 Corporate Alert

The Herrick Advantage

On February 11, Herrick will host a Harvard Business School Club of New York (HBSCNY) event with Nina and Tim Zagat, creators of the world-famous Zagat restaurant guides. The Zagats will join us to discuss how they built their guide from a small startup in 1979 to an eventual exit to Google.

For more information, or to register through HBSCNY, please click here.

Newly Enacted Amendments to the New York Uniform Commercial Code

Effective December 17, 2014, several important amendments to the New York Uniform Commercial Code ("NY UCC") were enacted, including amendments to Article 9 of the NY UCC which governs secured transactions.

Security interests in most types of collateral are perfected by filing UCC-1 financing statements.  Financing statements are indexed by debtor name, so using the correct debtor name is integral to perfection. The newly enacted amendments provide guidance regarding the correct way to reference the names of individuals and registered organizations. The names of individuals in particular have been a ripe source of litigation since the NY UCC provided no guidance regarding name references and there are many possible variations (for example, nicknames (e.g., Jon for Jonathan), middle names and/or initials) and sources (e.g., driver's license, passport, social security card, birth certificate). The new amendments provide that for an individual who has a current New York driver's license or non-driver photo identification, the correct name for the financing statement is the name indicated on such license or identification. If a person has no driver's license or identification card or it is expired, the financing statement must indicate (1) the debtor's "individual name" (which is not defined) or (2) the debtor's surname and first personal name.

The correct name of a registered entity for purposes of a financing statement is that indicated on "public record of the debtor's jurisdiction or organization." The new amendments clarify that the public record is "a record initially filed with or issued by a state or the United States to form or organize an organization." The amendments also state that if there is more than one such record, the most recently filed record controls.

Security interests in deposit accounts and security accounts are perfected by control. The new amendments create two new additional methods for a secured party to obtain control over a deposit account: (1) if the account is in the name of the secured party or (2) if the name of the account indicates that the secured party has a security interest therein. The new amendments also state that a secured party will have control over a deposit account if another person has control on behalf of the secured party. In addition, the amendments clarify that a secured party has control over an account even if the obligation of the securities intermediary or bank to comply with the entitlement orders or instructions of the secured party is subject to conditions (other than further consent by the debtor).

2015 Hart-Scott-Rodino Thresholds

The Hart-Scott-Rodino Antitrust Improvements Act requires companies proposing a merger or an acquisition to notify the Federal Trade Commission and the Department of Justice and to observe certain waiting periods before consummating such transaction if the size of the parties involved and the value of such transaction exceed certain thresholds.  The FTC revises the thresholds annually based on the change in gross national product.

For 2015, the size-of-transaction threshold increased from $75.9 million to $76.3 million.  As a result, transactions in which an acquiring person holds an aggregate total amount of voting securities or assets in the acquired person valued at less than $76.3 million will not be required to make a pre-closing filing or to observe the statutory waiting period.  Acquisitions valued between $76.3 million and $305.1 million are reportable based on the size-of-the person thresholds. Generally, a transaction is reportable where one party has sales or assets of at least $15.3 million (increased from $15.2 million) and the other party has sales or assets of at least $152.5 million (increased from $151.7 million).  Transactions which result in the acquiring person holding an aggregate total amount of the voting securities or assets of the acquired person valued in excess of $305.1 million (increased from $303.4 million) will be reportable, absent an applicable exemption.

The new thresholds will take effect on February 20, 2015 and will apply to transactions that close on or after such date.

Delaware Chancery Court Clarifies Duties of Stockholders Petitioning for Appraisal of Shares

In In Re Appraisal of Ancestry.com, Inc. and Merion Capital LP v. BMC Software, Inc., the Delaware Chancery Court held that the record owner of shares seeking appraisal rights under Section 262 of the Delaware General Corporation Law is not required to show that the specific shares for which it seeks appraisal were not voted by previous stockholders in favor of a cash-out merger. This pair of decisions reaffirms the Court's position, previously stated in its 2007 opinion in In Re Appraisal of Transkaryotic Therapies, Inc., that, pursuant to Section 262, the only requirements of the record owner of shares are that it (i) holds the shares on the date it makes its appraisal demand, (ii) continuously holds the shares through the effective date of the merger, (iii) delivers a written demand for appraisal to the company before the stockholder meeting to vote on the merger and (iv) has not itself voted in favor of the merger. In citing the plain language of this statute, the Court held that the record owner seeking appraisal itself must not vote in favor of the merger and refused to read in any requirement that it demonstrate that previous owners of those specific shares did the same. The Court also affirmed its previous stance that investors that acquire target company shares after the record date may assert appraisal rights only if the total number of shares for which appraisal is being sought is less than the total number of shares that either voted no or abstained from voting on the merger. These opinions affirm the viability of the increasingly popular "appraisal arbitrage" strategy whereby investors acquire target company shares after the record date and then assert appraisal rights for those shares which have typically increased in value, a practice which has contributed to the considerable growth of appraisal petitions in recent years.

In re Appraisal of Ancestry.com, Consol. C.A. No. 8173-VCG (Jan. 5, 2015); and
Merion Capital v. BMC Software, C.A. No. 8900-VCG (Jan. 5, 2015)

SEC Proposes Changes to Exchange Act Registration to Implement JOBS Act

The Securities and Exchange Commission ("SEC") recently proposed amendments to many of the registration requirements under the Securities Exchange Act of 1934 (the "Exchange Act") to implement Titles V and VI of the Jumpstart Our Business Startups Act (the "JOBS Act"). In 2012, the JOBS Act amended and relaxed the registration, termination and suspension of reporting thresholds under the Exchange Act so that an issuer is only required to register a class of equity securities if the issuers: (a) has total assets of more than $10 million; and (b) the class of equity securities is "held of record" by either (i) 2,000 persons, or (ii) 500 persons who are not accredited investors. The SEC is proposing to clarify, among other things, how issuers determine record holders who are accredited investors so as to rely on these new, higher thresholds established by the JOBS Act.

Accredited Investors

The SEC is proposing that the definition of "accredited investor" in the Securities Act of 1933 (the "Securities Act") Rule 501(a) apply in making determinations under the Exchange Act Section 12(g)(1). As such, the determination would be made as of the last day of the fiscal year rather than at the time of the sale of the securities. The SEC acknowledged that issuers may have difficulty determining whether existing security holders are accredited investors because issuers are not required to periodically assess an investor's continued status as an accredited investor. Without new guidance, the SEC believed that issuers would likely use procedures similar to those used when relying on Rule 506, i.e. taking appropriate steps to establish a reasonable belief that a prospective investor is an accredited investor. Thus, the SEC is proposing that issuers will need to use due diligence to determine, based on facts and circumstances, whether it can rely upon prior information to form a reasonable basis for believing that the security holder continues to be an accredited investor as of the last day of the fiscal year.  However, the SEC is considering whether a different approach may be more appropriate and is soliciting comment with respect to this provision.

Held of Record

As amended by the JOBS Act, Section 12(g)(5) of the Exchange Act provides that the definition of "held of record" does not include securities held by persons who received them pursuant to an "employee compensation plan" in transactions exempt from Section 5 of the Securities Act. Congress further instructed the SEC to adopt a safe harbor upon which issuers may rely when determining whether holders of their securities received them pursuant to an "employee compensation plan" in exempt transactions. Accordingly, the SEC has proposed amending Rule 12g5-1 to include a non-exclusive safe harbor by providing that a person will be deemed to have received the securities pursuant to an employee compensation plan if such person received them pursuant to a compensatory benefit plan that met the conditions of Securities Act Rule 701(c).

Second Circuit Puts New Obstacles in Prosecutors' Way

A recent unanimous decision by the Second Circuit Court of Appeals overturning two major government convictions created new obstacles for insider trading prosecutors. The Court in United States v. Newman and Chiasson held that the government "must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit." In reaching its decision, the Court relied on 31-year-old case, Dirks v. S.E.C., 463 U.S. 646 (1983), and rejected the SEC's theory that a recipient of confidential information (the "tippee"), must refrain from trading whenever he receives inside information from an insider (the "tipper"). Instead, the Court held that the tippee's duty to disclose or abstain from trading on inside information is derived from the tipper's fiduciary duties. Since a breach of an insider's fiduciary duty requires that he will "personally benefit, directly or indirectly from his disclosure," Dirks, 463 U.S. at 662, a tippee may not be held liable in the absence of this benefit.

The Court further noted that for purposes of insider trading liability, the insider's disclosure of confidential information, standing alone, is not a breach of fiduciary duty. Thus, without establishing that the tippee knows of a personal benefit attached to the disclosure of confidential information, a prosecutor cannot meet its burden of showing that the tippee knew of a breach. In accordance with this assessment, the Court found that the defendants were not only unaware that insiders had received a benefit, but that no such benefit ever existed.

Additionally, the court refined the meaning of "personal benefit" in its decision, stating that a tip in exchange for "mere friendship" or "career advice" and such is not sufficient to qualify for "personal benefit." Instead a narrower standard was created by the Court. To meet the "personal benefit" criteria, an exchange that is "objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature" must have occurred.

United States v. Newman and Chiasson 13-1837-cr, 13-1917-cr (Dec. 10, 2014).

Omissions Regarding "Known Trends" May be Actionable Under 10b-5

In a split from the Ninth Circuit's decision a year ago in In re NVIDIA Corp. Securities Litigation, 768 F.3d 1046 (9th Cir. 2014), the Second Circuit recently held that the failure to make a required disclosure under Item 303 of Regulation S-K can serve as an actionable 10b-5 securities fraud claim if certain other requirements are met.  Item 303 imposes obligations on reporting companies to disclose, inter alia, any known trends or uncertainties that the company reasonably expects will have a material impact on revenue or income. The trend must be both "presently known to management and reasonably likely to have material effects on the [company's] financial conditions" to trigger the disclosure requirement.

In the instant case, Stratte-McClure v. Morgan Stanley, the Plaintiffs alleged that Morgan Stanley and six of its current and former officers made material misstatements and omissions between June and November 2007 in an effort to conceal Morgan Stanley's exposure to the subprime mortgage market. Particularly, the action arises out of what the Second Circuit describes as a "massive propriety trade" executed in December 2006: a $2 billion short position (the "Short Position"), in which Morgan Stanley purchased credit default swaps ("CDSs") on collateralized debt obligations ("CDOs") backed by mezzanine tranches of subprime residential mortgage-backed securities, and a $13.5 billion long position (the "Long Position") in which Morgan Stanley sold CDSs that referenced more senior tranches of CDOs. The Plaintiffs contended that Morgan Stanley made material omissions on their 10-Q filings by failing to disclose the existence of the Long Position, that Morgan Stanley had sustained losses on that position in 2007, and that Morgan Stanley was likely to incur additional significant losses on the Long Position in the future.

An omission under securities laws is actionable only when the "corporation is subject to a duty to disclose the omitted facts." Accordingly, the Second Circuit maintained that, due to the "obligatory nature of [Form 10-Q], a reasonable investor would interpret the absence of an Item 303 disclosure to imply the nonexistence of [material known trends or uncertainties]." The Court found that that Morgan Stanley had not satisfied their Item 303 requirements through the use of generic cautionary language "spread out over several different filings."  The Court did not go so far as to say that Morgan Stanley had a duty to disclose the particulars of its trading positions, but only that "it faced deteriorating real estate, credit and subprime mortgage markets, that it had significant exposure to those markets, and that if the trends came to fruition, the company faced trading losses that could materially affect its financial condition.

The Court, however, dismissed the suit for failure to state a claim because it found that the Plaintiffs did not adequately plead scienter - in the present case, an allegation that Morgan Stanley was at least consciously reckless - under the Private Securities Litigation Reform Act's heightened pleading standards.

Stratte-McClure v. Morgan Stanley, 2015 WL 136312 (2d Cir. 2015)

SEC's 2015 Examination Priorities

The Securities and Exchange Commission (the "SEC") recently identified its examination priorities for 2015. With a view towards protecting investors and the integrity of the capital markets, the SEC will focus on three themes during its examinations:

  • Examining matters of importance to retail investors and investors saving for   retirement;
  • Assessing issues related to market-wide risks; and
  • Using data analytics to identify and examine registrants that may be engaged in illegal activity.

Protection of Retail Investors and Investors Saving for Retirement

The SEC noted that financial professionals are increasingly choosing to operate as investment advisers.  In its attempts to protect retail investors and investors that must save for their retirement, the SEC intends to focus on:

  • examining fee arrangements offered by such investment advisers and focusing on recommendations of account types and whether they are in the best interest of clients;
  • assessing whether registered entities are using improper or misleading practices when recommending that investors move retirement assets from employer-sponsored plans into other investments and accounts;
  • evaluating registered entities' recommendations or determinations to invest retirement assets in structured products and higher yield securities, including whether due diligence was conducted, whether disclosures were made, and the suitability of the recommendations;
  • examining registered entities' supervision of branch offices to determine when branch offices are not adhering to the home office policies;
  • assessing funds offering alternative investments and using alternative investment strategies, with a particular focus on leverage, liquidity, and valuation policies and practices, internal controls and marketing; and
  • reviewing fund disclosures made by fixed income investment companies.

Assessing Market-Wide Risks

The SEC aims to monitor the financial markets for structural risks and trends that may involve multiple firms or entire industries. Specifically, the SEC will focus on (i) the largest broker-dealers and asset managers, (ii) clearing agencies, (iii) examining broker-dealers' and investment advisers' cyber-security compliance and controls and (iv) whether firms are violating their best execution duties by revising trade order flows.

Use of Data Analytics

In order to prevent and combat fraudulent and illegal activity in the marketplace, in 2015 the SEC will also increasingly use data analytics to:

  • identify persons with a track record of misconduct and examine firms that employ such individuals;
  • examine broker-dealers and transfer agents for indications that they may be engaged in, or aiding and abetting, pump-and-dump schemes or market manipulation;
  • examine clearing broker data to identify introducing brokers and registered representatives that engage in excessive trading; and
  • examine clearing and introducing broker-dealers' anti-money laundering programs, with a special focus on firms that have not filed or not timely or completely filed suspicious activity reports and on broker-dealers that allow customers to deposit and withdraw cash and/or provide customers direct access to the markets from higher-risk jurisdictions.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions