This week's corporate law news roundup includes discussions of the Delaware Supreme Court's finding in Sandys v. Pincus that co-ownership of an airplane could be a factor in determining a director's independence; President Trump's Core Principles for Regulating the United States Financial System executive order and its potential to overhaul Dodd-Frank; and the Chair of the House Financial Services Committee's proposed changes to the Financial CHOICE Act.
DELAWARE FINDS THAT CO-OWNERSHIP OF AN AIRPLANE COULD BE A FACTOR IN DETERMINING DIRECTOR'S INDEPENDENCE
The Delaware Supreme Court recently provided guidance on when a personal relationship would be significant enough to find that a director lacked independence in the context of demand futility. In Sandys v. Pincus, a stockholder brought a derivative action for breach of fiduciary duties in connection with the board's approval of exceptions to trading restrictions which allowed certain officers and directors of Zynga Inc., including Mark Pincus, the company's founder and controlling stockholder, to sell their Zynga shares in a secondary offering before Zynga's negative earnings announcement for Q1 of 2012. Although the Delaware courts have historically found that allegations of friendships with interested directors are insufficient to find that an independent director is interested, in Sandys v. Pincus, the court found that the co-ownership of an airplane could be a rare exception. The court reasoned that the co-ownership of an airplane between families suggests a close personal friendship; among other things, the families had a partnership for the ownership of an expensive asset and the relationship required cooperation in use. Therefore, the court held that there was reasonable doubt as of whether the otherwise independent director could be impartial. The court also found that there was reasonable doubt regarding two other directors' independence, because such directors did not qualify as independent directors under NASDAQ listing rules and were partners of a VC firm that owned approximately 9% of Zynga's stock, invested in a different company co-founded by Pincus' wife and invested in another company where one of the conflicted directors was a director. For more information, see http://courts.delaware.gov/Opinions/Download.aspx?id=249760.
TRUMP ISSUES AN EXECUTIVE ORDER THAT COULD OVERHAUL DODD-FRANK
On February 3, 2017, President Trump signed the Core Principles for Regulating the United States Financial System executive order, taking an initial step in reconsidering major financial reform measures passed and implemented in response to the 2008 financial crisis. Although the executive order is written as a general directive regarding the U.S.'s financial system and does not specifically mention the Dodd-Frank Act, President Trump has publically expressed his intent to roll back the provisions of the Act. The executive order sets forth the following core principles: (a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth; (b) prevent taxpayer-funded bailouts; (c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry; (d) enable American companies to be competitive with foreign firms in domestic and foreign markets; (e) advance American interests in international financial regulatory negotiations and meetings; (f) make regulation efficient, effective, and appropriately tailored; and (g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework. The Treasury Department has been ordered to consult with the heads of member agencies of the Financial Stability Oversight Council and report to the President on or before June 3, 2017, and periodically thereafter, on, among other things, which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies promote the core principles. For more information, see https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-executive-order-core-principles-regulating-united-states.
Chair of the House Financial Services Committee PROPOSES CHANGES TO THE FINANCIAL CHOICE ACT
In a February 6, 2017 memorandum to the Financial Services Committee Leadership Team, Chairman Hensarling proposed changes to be made to the original Financial CHOICE Act. Most of the proposed changes are related to the banking provisions and the Consumer Financial Protection Bureau, but the proposed changes also include changes related to compensation and corporate governance matters. Such changes would (i) modernize the shareholder proposal and resubmission thresholds for inflation, (ii) raise the SOX 404(b) internal control audit threshold from $250 million to $500 million, (iii) prohibit the SEC from promulgating a rule to require the use of "universal proxies," (iv) modernize the Section 12(g) registration requirements for smaller companies, (v) increase the Rule 701 cap from $10 million to $20 million with an inflation adjustment trigger, (vi) expand provisions of Title I of the JOBS Act to apply more broadly by allowing all companies (not just emerging growth companies) to "test the waters" and file IPO registration statements with the SEC on a confidential basis, (vii) increase the Reg A+ ceiling from $50 million to $75 million annually with an inflation adjustment trigger. For more information, see https://www.cfpbmonitor.com/wp-content/uploads/sites/5/2017/02/CHOICE.pdf.
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