Year in Review: Top Corporate and Securities Legal Updates of 2015

Practical Law Legal Update w-001-0932 (Approx. 8 pages)

Year in Review: Top Corporate and Securities Legal Updates of 2015

by Practical Law Corporate & Securities

Top Securities Legal Updates of the Year

The past year saw a rush of SEC rulemaking governing new methods for small companies to raise capital. To that end, Practical Law's Legal Updates on the SEC's rules for "mini-public offerings" and crowdfunding were some of the most read Securities updates of the year. Legal Updates chronicling SEC rulemaking on executive compensation under the Dodd-Frank Act were also popular, as was Practical Law's coverage of FINRA's research rules for broker-dealers and NYSE and NASDAQ guidance for releasing material news.

Regulation A+

The JOBS Act was enacted in 2012 to ease access to capital markets for smaller companies. As mandated by the JOBS Act, the SEC amended Regulation A under the Securities Act. The amended Regulation A—known widely as "Regulation A+"—provides for "mini-public offerings" of up to $50 million that are exempt from SEC registration, but that share some key characteristics with SEC-registered offerings.

Practical Law described the adoption of, and additional guidance surrounding, Regulation A+ in these Legal Updates:

For more information on offerings under Regulation A+, see Practice Note, Regulation "A+" Offerings under Amended Regulation A.

Dodd-Frank Compensation Rulemaking

Several provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 relate to executive compensation practices at reporting companies. These provisions require SEC rulemaking to be implemented and some of those rules were proposed or adopted this past year. These Legal Updates described the SEC rulemaking on pay-ratio disclosure and executive compensation clawback policies:

For a status chart showing the effective dates of, and issuers affected by, key executive compensation-related provisions of the Dodd-Frank Act, see Dodd-Frank Executive Compensation Rules: Status Chart.

Material News Releases

The NYSE and NASDAQ both addressed best practices for the release of material news by listed companies, as summarized in these Legal Updates:

FINRA Research Rules

FINRA recently adopted FINRA Rule 2241, which governs conflicts of interest of broker-dealers and research analysts in the preparation and distribution of research reports on equity securities. Certain sections of Rule 2241 became effective on September 25, 2015; the remaining provisions become effective on December 24, 2015. Relatedly, FINRA adopted Rule 2242, which addresses conflicts of interest in the preparation and distribution of research on debt securities and their issuers. Rule 2242 becomes effective on February 22, 2016. These rules are discussed in detail in these Legal Updates:

Broker-dealers involved in the preparation or distribution of research reports and their counsel need to be familiar with the requirements of the new research rules. To learn about these requirements, see these two Practice Notes:

Crowdfunding

On October 30, 2015, the SEC adopted its long-awaited final rules and forms implementing Title III of the JOBS Act, the crowdfunding provision. Title III created an exemption from registration under the Securities Act for certain "crowdfunding" securities offerings conducted through "crowdfunding intermediaries" that meet specific conditions, and are offered to a large number of investors (including non-accredited investors), each of whom invests a relatively small amount. The rules are further described in Legal Update, SEC Adopts Final Crowdfunding Rules.

For a full discussion of SEC and FINRA crowdfunding and funding-portal regulations, see these two Practice Notes:

Top Corporate Legal Updates of the Year

A running theme informing much of the development of Delaware corporate law over the last two or three years has been the advent of rote litigation brought over nearly every public merger involving a Delaware target company. The reaction to this trend has taken many forms, at both the legislative and judicial level, all in an attempt to disincentivize the plaintiffs' bar from litigating every major transaction. Against this backdrop, Legal Updates on statutory changes aimed at fee-shifting and forum selection, and on court decisions that expanded the deference given to director decision-making and the freedom of contract, often proved the most popular among Practical Law's subscribers.

Delaware Statutory Amendments

Two of the most widely read Legal Updates of the year in Practical Law's Corporate service discussed the proposal and passage of amendments to the Delaware corporate statute on fee-shifting and forum selection. These updates discussed other statutory changes as well, including changes to the alternative-entity statutes and the passage of a new arbitration process for the resolution of business disputes. For full descriptions, see these Legal Updates:

For an example of a forum-selection provision for a Delaware certificate of incorporation or by-laws, see Standard Clause, By-Laws or Certificate of Incorporation: Delaware Forum Selection.

For an introduction to the Delaware Rapid Arbitration Act, see Practice Note, A Primer on the Delaware Rapid Arbitration Act.

Ratification of Defective Corporate Acts under DGCL Section 205

With statutory amendments comes the need for judicial interpretation. In an issue of first impression, the Delaware Court of Chancery addressed for the first time the scope of its power to ratify defective corporate acts under the new Section 205 of the DGCL. The statute, which went into effect on April 1, 2014, was adopted together with a new Section 204 that provides a safe harbor procedure for boards to ratify corporate acts or transactions and stock that would otherwise be void or voidable due to a "failure of authorization." Section 205 confers jurisdiction on the Chancery Court to hear actions on ratification when the sitting board has questionable status.

In its decision, the Chancery Court determined that it has broad authority to ratify defective corporate acts, even in situations where the board has gone through few corporate formalities. The only statutory limit the court found was that an actual act must have been taken, even if defectively, as opposed to informal discussions of taking action. For a description of the court's reasoning, see Legal Update, In re Numoda: Delaware Court of Chancery Describes Ratification of Defective Corporate Acts under New DGCL Section 205.

Delaware Supreme Court Reversals of the Court of Chancery

The rarity of reversals of decisions of the Delaware Court of Chancery by the Delaware Supreme Court makes for attention-grabbing opinions when the Chancery Court is overturned. The past year saw more reversals than usual:

In C&J Energy Services, the Supreme Court's reversal of the Chancery Court's bench ruling reset the common understanding of what boards of directors must do to satisfy their Revlon duties. Far from conducting a pre-signing or even post-signing auction, a passive market check through window-shop and fiduciary-out provisions suffices, as long as the board and its financial advisor are not conflicted and the board stays informed of the major details of the negotiations and final terms. For a description and critique of the decision, see Legal Update, C&J Energy Services v. City of Miami GESERT: Delaware Supreme Court Reverses Chancery Court, Rules that Passive Market Check Satisfied Revlon.
In a decision on the consolidated appeal of the Chancery Court's decisions in Cornerstone Therapeutics and Zhongpin, the Delaware Supreme Court held that there is no automatic inference of disloyalty on the part of disinterested and independent directors just because they facilitate a transaction with a controlling stockholder. The Supreme Court's decision established that even when a transaction is subject to entire fairness review, the disinterested and independent directors who negotiated the transaction can win pre-trial dismissal of any claims brought against them if they are exculpated by a 102(b)(7) charter provision and the plaintiff has failed to plead facts that support a non-exculpated claim against them. For more, see Legal Update, Delaware Supreme Court Reverses Chancery Court in "Cornerstone" and "Zhongpin" on Entire Fairness and 102(b)(7).
In a decision reversing the Chancery Court's decision in Sanchez Energy, the Supreme Court held that a director's personal and business relationships with an interested party must be reviewed in their totality when considering a director's independence, and that a long-term friendship carries a greater inference of compromise of independence than do more superficial relationships. For more on the decision, see Legal Update, Delaware Supreme Court Reverses Chancery Court in "Sanchez Energy," Finds Reasonable Doubt of Director Independence.

Business Judgment Rule after Stockholder Approval

The Delaware Supreme Court settled an open question of Delaware law this past year, confirming that a fully informed vote by a disinterested majority of the stockholders can restore the presumptions of the business judgment rule to a board's decision-making even though enhanced scrutiny applies to the pre-vote stage under Revlon. Shortly after the Supreme Court's decision, the Chancery Court reversed its own ruling that had been issued days before. For more on this series of decisions, see these Legal Updates:

Expansion of Effect of Fraud Disclaimers

In a recent decision bearing on the language and effect of disclaimers of reliance in private M&A acquisition agreements, the Chancery Court held that the provision does not have to be framed negatively, as a statement of non-reliance, to manifest the buyer's intent to disclaim reliance on extra-contractual statements. Rather, a provision framed positively as a statement affirming what the buyer did rely on can be read to imply that the buyer did not rely on anything else.

The Chancery Court also held that a provision that is drafted adequately for purposes of disclaiming a right to bring a fraud claim based on extra-contractual statements is also effective as a bar against claims of fraudulent concealment of material information. In this regard, the court split with its own previous decision from 2013. For more on the court's recent decision, see Delaware Court of Chancery Broadens Scope of Language and Effect of Disclaimers of Reliance.

Year in Review: Top Corporate and Securities Legal Updates of 2015 | Practical Law