Thursday, November 20, 2014

Senator Blumenthal Urges SEC to Require Disclosure of Fee-Shifting Provisions in Company By-laws

Senator Richard Blumenthal (D Conn) called on the SEC to protect a key check on corporate malfeasance, namely, private citizen suits. Specifically, in a letter to SEC Chair Mary Jo White, the Senator asked the SEC to investigate Alibaba Group Holding, Ltd., one of several companies that failed to disclose to investors the existence of provisions limiting private citizen suits. The letter follows a Delaware Supreme Court ruling in ATP Tour v. Deutscher Tennis Bund that allowed companies to unilaterally amend their bylaws and require an investor who files suit against a company to pay the corporation’s legal expenses unless the investor receives substantially all of the relief he or she seeks.

The Senator urged the SEC to label such fee-shifting provisions as major risk factors and require companies to disclose them before any initial public offering. More broadly, the SEC should clarify that fee-shifting provisions are inconsistent with federal securities law. At a minimum, he urged the SEC to refuse to permit registration statements to move forward for any company that includes these provisions in violation of the federal securities laws.

The potential ramifications from the Delaware decision are immense, stressed Senator Blumenthal. No rational investor, even with significant financial interests at stake and when presented with clear evidence of corporate misconduct, will brave litigation when the corporate defendant can force the investor to face financial ruin unless he or she substantially wins on every point. While ATP Tour only affects corporations headquartered in Delaware, he acknowledged, Delaware is home to many of the country’s largest public companies. Further, the Delaware Supreme Court ruling is already beginning to have a ripple effect in other jurisdictions, leading other state courts to reconsider longstanding doctrine in this area.

Responding to the Delaware decision, in recent months dozens of companies have added provisions to their bylaws or articles of incorporation designed to stop shareholders from vindicating their legal rights. This change in corporate law, he said, not only leaves shareholders unable to protect their interests, but it also undermines the integrity of the capital markets and threatens to decrease market participation.

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