BCLBE and BBLJ 2013 Symposium — The JOBS ACT: Initiatives and Challenges of the New Legislation

By Will Schildknecht, J.D. Candidate 2015 | Posted on

A new frontier in securities law, but how will people use it?

The Jumpstart Our Business Startups Act (JOBS Act) offers new avenues for investors and small companies to participate in the market.  Leaders in business and law will be gathering at the University of California, Berkeley, School of Law on March 15, 2013, to discuss the Act’s opportunities and risks.  The Berkeley Business Law Journal and Berkeley Center for Law, Business, and the Economy are proud to present their 2013 symposium—The JOBS Act: Initiatives and Challenges of the New Legislation from 8:45a – 2:00p at Boalt Hall.  Registration is required.  The symposium will bring together prominent speakers from the fields of law, securities regulation, and venture capitalism to discuss two critical areas of the Act.

The first panel session will explore “The IPO ON-Ramp.”  In response to the decrease in companies applying for initial public offerings, the JOBS Act incentivizes companies to make an offering and introduces a gradual five-year plan to scale up to full public status.  Panelists including Robert Bartlett and Reza Dibadj from UC Berkeley, School of Law, as well as Martin Zwilling from Startup Professionals, will discuss the reason for the decline in IPOs and whether the steps taken in the JOBS Act will arrest and reverse this decline.  The IPO ON-Ramp panel runs from 9:00 – 10:45a.  Further readings about the IPO panel discussion are available on the BCLBE website.

The second panel will discuss the widely-publicized “Crowdfunding” public offering exception.  The panelists will demystify the types of small money investments that are permitted under the crowdfunding exception.  Having discussed the newly permitted activities, the panel will engage in a cost-benefit discussion of the opportunity for new investment avenues weighed against the potential for fraud inherent in this up-tempo investment frontier.  Panelists from the first session will be joined by Eric Brooks from the SEC and Mary Dent from Silicon Valley Bank.  The “Crowdfunding” panel will present their thoughts from 11:00a – 12:45p.  More information on the Crowdfunding panel discussion is available on BCLBE’s website.

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AT&T Mobility LLC v. AU Optronics Corp.: Out-of-State Price Fixing Still Actionable Under California’s Cartwright Act

By Valerie Ramos, J.D. Candidate 2015 | Posted on

The Ninth Circuit recently held that the Cartwright Act, California’s antitrust law, applies not only to “the indirect purchase of price-fixed goods,” but also where “the conspiratorial conduct that led to the sale of those goods” occurs in California.  AT&T Mobility v. AU Optronics Corp.  The civil action follows on the heels of a DOJ criminal investigation that resulted in more than $890 million in fines.  In 2001, AU Optronics Corporation and other Asian manufacturers of liquid crystal display (LCD) panels had met secretly and agreed to exchange information regarding shipping, production, supply, and demand.  The complaint alleges the result was fixed prices of LCDs in the U.S. and other regions.

Unlike federal antitrust law, California’s Cartwright Act provides a private cause of action for damages caused by indirect purchasers of price-fixed goods.  The Cartwright Act thus reaches beyond the Sherman Act in the sense that its focus has always been on “the punishment of violators for the larger purpose of promoting free competition.”

The plaintiffs, all of which are companies that provide voice and data communication services and sell mobile wireless handsets, sued a collective of manufacturers and distributers of LCD panels.  Plaintiffs alleged that from 1996 to 2006, “they purchased billions of dollars worth of mobile handsets containing Defendants’ LCD panels” at artificially inflated prices due to a global conspiracy to fix the LCD panel prices.  The sale of these LCD panels did not occur in California.

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Supreme Court Holds Proof of Materiality Is Not Necessary to Win Class Certification

By Arnold & Porter LLP Partners Michael Trager, Veronica Rendon, and Scott B. Schreiber | Posted on

[Editor’s note: The following post from Arnold & Porter’s recent Client Advisory on the implications of the recent Supreme Court decision in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds.  The authors include: Michael D. Trager, Veronica E. Rendon, and Scott B. Schreiber.]

In a February 27, 2013 ruling in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, the Supreme Court addressed the question of whether a plaintiff invoking the fraud-on-the market presumption to satisfy the reliance element of a securities fraud claim must prove, as a prerequisite to class certification, the materiality of the alleged misrepresentations.  In a six-to-three decision, the Court held that proof of materiality is not necessary at the class certification stage because the applicable provision of Federal Rule of Civil Procedure 23(b)(3) “requires a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor of the class.”  The Court explained that materiality is an objective issue, the resolution of which necessarily applies in common to all members of a class.  Because materiality is an issue for which the class “is entirely cohesive” and will “prevail or fail in unison,” the Court concluded that proof of materiality is not a prerequisite to class certification.

Fraud on the Market

In Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court first endorsed the “fraud-on-the-market” theory, which allows certain securities-fraud plaintiffs to invoke a rebuttable presumption of reliance on public, material misrepresentations.  The premise of the fraud-on-the-market theory is that, in an efficient market, the price of a security reflects all publicly available information about a company; therefore, a court may presume that a purchaser of the security has indirectly relied on that information at the class certification stage, although reliance could be challenged later in the proceedings.  The rebuttable presumption reflects the Court’s recognition of the evidentiary difficulties posed by requiring direct proof of reliance, which is an essential element of a securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder.

The fraud-on-the-market presumption is of vital importance to plaintiffs seeking to certify a class action under Rule 23(b)(3).  As the Court explained in Amgen, without the presumption, questions of individual reliance would ordinarily predominate over questions common to the class, precluding class certification. 

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New Regulations Announced: Foreign Account Tax Compliance Act

By Constance Descout, L.L.M. Candidate 2013 | Posted on

The U.S. Department of the Treasury and the Internal Revenue Service have released long-awaited final regulations implementing the Foreign Account Tax Compliance Act (“FATCA”).

Congress enacted FATCA in 2010 as part of the Hiring Incentives to Restore Employment Act (the “HIRE Act”), and it is housed in Sections 1471 through 1474 of the Code.  FATCA creates a new tax information reporting and withholding regime for payments made to certain foreign financial institutions and other foreign persons.  FATCA requires certain U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report information about those assets on a new form (Form 8938) that must be attached to the taxpayer’s annual tax return.

This Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds.  For instance, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.  The thresholds for taxpayers who reside abroad are higher.  For instance, a married couple residing abroad and filing a joint return would not file a Form 8938 unless the value of the specified foreign assets they hold exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.  Instructions for Form 8938 provide further information, including details on the thresholds for reporting, what constitutes a specified foreign financial asset and how to determine the total value of relevant assets.

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Professor Eric Talley Discusses Implications of Activist Shareholders on Corporate Governance

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

Activist shareholders have been in the spotlight lately.  Berkeley Law Professor Eric Talley recently joined a panel on KPCC Radio for a discussion on the implications of these events for corporate governance.  The Panel also featured Stanford Law Professor Robert M. Daines and Laura Berry, the Executive Director of the Interfaith Center on Corporate Responsibility.

From the panel:

  • Apple, PNC Financial Services Group, and gun manufacturers are each under pressure from activist investors.  David Einhorn wants Apple to pay out some of its $137-billion in cash to shareholders.  A segment of PNC’s investors want the bank to review how its loans contribute to global warming.  And in California, the country’s biggest public pension fund is selling its shares in firearms makers.
  • While the companies’ shareholders each want different things, the high-profile conflicts all highlight the powerful influence of shareholder rights.  AirTalk examines the strategies of all the stakeholders and the history of investor activism.
  • How do shareholder rights coexist or conflict with corporate interests?  Should corporate governance be “shareholder-centric” or “board-centric?”

Listen to the full “Activist Shareholders Try New Tactics” panel here.

From the Bench: Wells Fargo’s Contribution to Mortgage Settlement Does Not Bar Some Future Claims

By Mark Rutter, J.D. Candidate 2015 | Posted on

Wells Fargo’s bid to block the government’s most recent charges against it stemming from the mortgage crisis—primarily alleged violations of the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”)—took a blow earlier this month when a court ruled that its $5 billion contribution to the multi-bank, $25 billion settlement in April over foreclosure practices did not preclude the new charges.  Previous coverage of Wells Fargo’s attempt to preclude the litigation is here.  U.S. District Judge Rosemary Collyer ruled that the settlement did not bar all civil or administrative claims against Wells Fargo, including those under the False Claims Act, paving the way for prosecutors in the United States Attorney’s Office for the Southern District of New York to move forward with the suit.

Collyer’s decision left the bank’s lawyers, led by teams from Fried Frank and K&L Gates, vehemently protesting the court’s interpretation of contested language in the settlement.  According to Collyer, that language indicated the government retained the right to sue Wells Fargo for material violations of Housing and Urban Development/ Fair Housing Administration (“HUD-FHA”) requirements, only barring claims based on false annual certifications regarding the bank’s compliance with those requirements.  Collyer stated that the current charges do not fall under the precluded claims, finding Wells Fargo ignored the plain language of the settlement in coming to a mistaken interpretation.   As a result, the government can bring allegations under the False Claims Act in the current suit.

Collyer, however, did not address the pending case directly.  The court for the Southern District of New York will still have to make a final determination as to whether the prosecution has pled barred claims as the case moves forward.

The defense team has strongly attacked the government’s charges in its court filings, framing the current charges as part of a broader effort to avoid honoring FHA and HUD commitments to insure thousands of defaulting mortgages as it attempts to wrongly implicate the financial industry for the defaults.

The prosecution has not yet filed its response to Wells Fargo’s motion to dismiss the current suit.

Firm Advice: Your Weekly Update

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

The DOJ recently entered into its first deferred prosecution agreement with a financial institution related to the LIBOR-fixing conspiracy.  We’ve written about the LIBOR scandal here and here.  While deferred prosecution agreements are common in white collar criminal prosecutions, this was a first for the DOJ in an antitrust prosecution.  Instead, the DOJ historically has used its leniency program as its primary investigative tool.  In a recent Client Alert, Cadwalader, Wickersham & Taft explains the DOJ’s recent shift and its implications for financial antitrust enforcement.

Many large corporations are sitting on stockpiles of cash.  Options for these companies include investing the money, returning it to investors through dividends, or a stock buyback program. Holding on to the stockpile can pose serious headaches for corporations.  In a recent Corporate Finance Alert, Skadden explains the strategic considerations for different types of share-repurchasing programs, including their advantages and legal implications.  The Alert also presents an FAQ-style, how-to guide for implementing the various options.

Wilson Sonsini recently published its “Entrepreneurs Report: Private Company Financing Trends.”  From the Report:  “[T]he percentage of up rounds increased during Q4 2012 from the prior quarter.  Also, while median pre-money valuations in Q4 declined somewhat from earlier in the year, they still remained higher than those in 2011 and 2010.  Finally, preferred stock terms continued to be more company-favorable in 2012 than in prior years.  For example, the percentage of deals with senior liquidation preferences was lower in 2012 than in 2011 and 2010, and the percentage of deals with non-participating preferred stock was higher in 2012 than in the two prior years.  In sum, although total venture dollars raised in 2012 decreased from the previous year, the venture funding environment continues to be strong for entrepreneurs and early-stage companies.” 

The Week in Review: SEC Litigation, Sequester Countdown and AT&T

By Christopher Hammond, J.D. Candidate 2015 | Posted on

In a unanimous opinion yesterday, the Supreme Court limited the SEC’s ability to pursue civil penalties.  The Court held that the five-year statute of limitations begins to run at the moment a fraud is committed, not when regulators become aware if it.  In the case at issue, Gabelli v. SEC, the agency sued in 2008 for alleged violations occurring between 1999 and 2002.  Chief Justice Roberts noted practical difficulties in determining when a large governmental agency first discovers a fraud, concluding that Congress had not intended to permit the SEC to bring such actions so late.  Read the opinion here.  For more, see Reuters.

Two days until the sequester.  Congressional leaders are meeting at the White House this morning, but both sides appear to be bracing for $85 billion in across-the-board cuts on Friday, March 1.  While yet another short-term bill might resolve immediate funding concerns, the parties thus far remain gridlocked on tax reform proposals, which both recognize as an important bargaining chip.  House Speaker John Boehner has recently appeared more willing to tackle a comprehensive tax deal this Congress, but a solid democratic majority in the Senate is unlikely to concede to his current “no tax increases” position.  For more, see NYTimes, BBC and Politico.

AT&T has announced plans to expand into Europe with new lines of business, including wireless home-monitoring and automation.  The company will license its new Digital Life product to more than 30 companies worldwide, exceeding anticipated demand.  The move shows that AT&T, the U.S.’s largest phone provider, is transitioning to become a more general technology company, as consumers are increasingly seeking around-the-clock wireless connectivity and product integration.  For more, see Bloomberg.

From the Bench: Dichter-Mad Family Partners v. United States

By Will Schildknecht, J.D. Candidate 2015 | Posted on

The Ninth Circuit recently affirmed a judgment – from the Central District of California – that the victims of Bernard Madoff’s Ponzi scheme lack subject matter jurisdiction to sue the Securities and Exchange Commission as an agency of the United States under the Federal Tort Claims Act.

The SEC compiled a 450-page public report highlighting its failure to uncover Madoff’s problematic investment activities.  The allegations posed by the victim plaintiffs centered on decisions made by the SEC which the district court acknowledged “should have and could have been made differently” and “reveal[ed] the SEC’s sheer incompetence.”  Nevertheless, the court held that the United States was protected from suit because the Securities and Exchange Commission was engaged in a discretionary function.  An exception is set aside in the Federal Tort Claims Act (“FTCA”) whereby employees of the Government cannot be held liable for failures relating to purely “discretionary” functions of that employee.

The district court, considering the legislative history of the FTCA, noted that Congress “repeatedly and explicitly suggested” that the SEC should be shielded by the discretionary function exception.  The FTCA only allows a claim where statutory language mandates a particular course of action.  By contrast, the duties and functions of the SEC allow it discretion in choosing who to investigate and when to bring enforcement proceedings.  Because the plaintiffs could not demonstrate that the SEC violated a specific and mandatory policy directive that related to the investigation, the court held they failed to overcome an FTCA claim’s threshold requirement.

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Crown Jewels — Restoring the Luster to Creative Deal Lock-ups?

By Daniel E. Wolf, David B. Feirstein, and Joshua M. Zachariah, Partners, Kirkland & Ellis, LLP | Posted on

[Editor’s note: The following post comes from Kirkland & Ellis’s recent M&A Alert by Daniel E. Wolf, David B. Feirstein, and Joshua M. Zachariah.]

The “crown jewel” lock-up, a staple of high-stakes dealmaking technology in the 1980s M&A boom, has been showing some signs of life in the contemporary deal landscape, albeit often in creative new forms. As traditionally conceived, a crown jewel lock-up is an agreement entered into between the target and buyer that gives the buyer an option to acquire key assets of the target (its “crown jewels”) separate and apart from the merger itself. In the event that the merger fails to close, including as a result of a topping bid, the original buyer retains the option to acquire those assets. By agreeing to sell some of the most valuable pieces of the target business to the initial buyer, the traditional crown jewel lock-up can serve as a significant deterrent to competing bidders and, in some circumstances, a poison pill of sorts.

Given the potentially preclusive nature of traditional crown jewel lock-ups, it is not surprising that they did not fare well when challenged in the Delaware courts in the late 1980s. As the Supreme Court opined in the seminal Revlon case, “[W]hile those lock-ups which draw bidders into a battle benefit shareholders, similar measures which end an active auction and foreclose further bidding operate to the shareholders detriment.” Building on the holding in Revlon, the court in Macmillan said that “Even if the lockup is permissible, when it involves ‘crown jewel’ assets careful board scrutiny attends the decision. When the intended effect is to end an active auction, at the very least the independent members of the board must attempt to negotiate alternative bids before granting such a significant concession.” Although crown jewel lock-ups fell out of favor following these rulings, modern and modified versions of the traditional crown jewel lock-up have been finding their way back into the dealmakers’ toolkit.

During the height of the 2008 financial crisis, we saw a crown jewel lock-up in its most traditional form in the JPMorgan rescue acquisition of Bear Stearns. Driven by “life-or-death” urgency, Bear Stearns agreed to an option for JPMorgan to buy its Manhattan headquarters for approximately $1.1 billion, including in circumstances where a topping bid emerged. In the ensuing litigation, the plaintiffs argued that the option to purchase the building constituted an “effective” termination fee because the purchase price under the option was allegedly below fair value. A New York court, applying Delaware law, rejected this argument stating that the record did not substantiate the claim that the price was below fair value. The court, mindful of the extreme circumstances, also noted that the plaintiffs’ criticism of the “effective” termination fee and lock-ups as being excessive or unprecedented was also misplaced because Delaware law does not “presume that all business circumstances are identical or that there is any naturally occurring rate of deal protection, the deficit or excess of which will be less than economically optimal.”

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