Stacey P. Eilbaum

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On October 20, 2015, SEC Chair Mary Jo White gave the keynote address at the “Evolving Structure of the U.S. Treasury Market” conference organized by the U.S. Department of Treasury and the Federal Reserve Bank of New York. The conference and speech follow this summer’s Joint Staff Report analyzing the significant volatility that the U.S. Treasury market experienced on October 15, 2014. The Joint Staff Report was a cooperative effort of the Department of Treasury, the Federal Reserve, the SEC and CFTC, and was the subject of a previous post on this blog (Regulators Fail To Identify Cause Of Abnormal US Treasury Trading on October 15, 2014).

Potentially abusive trading algorithms, such as algorithms that purportedly engage in “spoofing” or “layering” are the subject of considerable regulatory interest.  However, in an interesting complaint filed on October 19, 2015, the CFTC alleged that a firm manually entering futures orders engaged in illegal spoofing that appears to have lured algorithmic traders into the market. 

After prolonged criticism over its lack of prosecution of individuals responsible for corporate misconduct, the Justice Department has issued new internal guidance that makes clear that prosecuting individuals in white collar cases is a high priority and should be considered at the very early stages of a corporate misconduct investigation. 

Yesterday, the Delaware Senate passed legislation prohibiting publicly-traded corporations from adopting bylaws that force shareholders to pay legal fees if they bring internal corporate claims against the company in court and do not win. The legislation also allows Delaware corporations to designate Delaware – but not any other state – as the exclusive forum for internal corporate claims. The bill passed on a 16-5 vote and now heads to the Delaware House of Representatives.

On April 29, 2015, Senator Bryan Townsend introduced legislation that would amend the Delaware General Corporation Law (DGCL) to ban fee-shifting bylaws for Delaware stock corporations (non-stock corporations would continue to be able to adopt fee-shifting bylaws). The bill, Senate Bill No. 75, would also confirm the Court of Chancery’s decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), by amending the DGCL to permit board-adopted bylaws designating Delaware as the exclusive forum for intra-corporate litigation. However, the bill would reject the Chancery Court’s decision in City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229, 234 (Del. Ch. 2014), by prohibiting Delaware corporations from designating an exclusive forum other than Delaware for such claims.

Signaling that it is closely scrutinizing the expenses of senior executives and the internal controls of public companies, the Securities and Exchange Commission charged former Polycom CEO Andrew M. Miller this week with using approximately $190,000 in corporate funds for personal expenses and falsifying business records to hide this scheme from investors.  The SEC alleged in its civil complaint that Miller submitted, or directed his administrative assistants to submit on his behalf, requests for reimbursement for personal expenses with fabricated business descriptions to conceal the true nature of the expenses.

The alleged personal expenses were wide-ranging, including meals with friends, weekend getaways, limousine rides for his girlfriend, hotel and spa gift certificates, clothing and accessories, and baseball and theater tickets.  In addition to submitting false expense reports, the SEC alleged that Miller misused Polycom’s sales incentive program for additional personal travel and perks, including a trip to Bali.

In December, we reported on the Delaware Court of Chancery’s continued validation of board-adopted forum-selection bylaws in City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229, 234 (Del. Ch. 2014), and the proposed amendment to the Delaware General Corporation Law (DGCL) that would eliminate the ability of Delaware stock corporations to impose liability for attorneys’ fees on shareholders through bylaw and charter provisions—a response to the Delaware Supreme Court’s decision in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 555 (Del. 2014).

With a new legislative proposal from the Delaware Corporation Law Council this month, legislative action may be on the horizon.  This new proposal would not only prohibit stock corporations from imposing liability on shareholders through fee-shifting but also from designating a forum other than Delaware as the exclusive forum for resolving intracorporate disputes.

The D&O Diary featured a version of this post, entitled “New Debate in January on Delaware Bylaws re Shareholder Liability,” as a guest blog post. Many thanks to Kevin LaCroix of The D&O Diary for publishing our post.

The ability of corporations to impose liability on shareholders through bylaws and charter provisions has been the subject of much debate recently.  On May 8, 2014, the Supreme Court of Delaware held in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 555 (Del. 2014), that “a fee-shifting provision in a non-stock corporation’s bylaws can be valid and enforceable under Delaware law.” This decision (in favor of ATP, represented by Proskauer’s own Brad Ruskin) prompted a proposed amendment to the Delaware General Corporation Law (DGCL) that would eliminate the ability of Delaware stock corporations to impose liability on shareholders through bylaw and charter provisions, including fee-shifting liability, and a debate about the use of bylaws to define the bounds of shareholder litigation.  Act to Amend Title 8 of the Delaware Code Relating to the General Corporation Law, S.B. 236, 147th Gen. Assemb. (Del. 2014).  Senator Bryan Townsend, D-Newark, was able to delay the debate on the proposed legislation until the Delaware legislature reconvenes in January 2015.