Month: April 2013

After the SEC Seems to Grant Approval for the Use of Social Media to Release Material Nonpublic Information, Zynga Announces It Will Use Social Media to Release Material Nonpublic Information

Zynga tells where, but not what or when. Is this general disclosure enough?

After the SEC provided guidance on the use of social media, we may be starting to see companies embrace it.

In the Form 8-K for their latest earnings release, Zynga followed the guidance and let investors know that they would use a variety of channels to announce material information, including social media.  They also provided the URLs for their Facebook, Twitter and blog pages.

It will be interesting to see how the SEC views this strategy since their guidance was not exactly a groundbreaking open invitation to use any and all websites with an Internet connection.  The existing SEC guidance made clear that the SEC was not picky about how a company distributes information as long as the method gets the information to the general public.  Does the Facebook page, Twitter feed or blog have a following that is wide enough that a post will be considered public dissemination?  Even if you tell people that you will use those channels to make announcements?  That is the question.  As the SEC said in the latest release:

Regulation FD requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively. It is intended to ensure that all investors have the ability to gain access to material information at the same time. [emphasis added]

and

Companies should review the Commission’s existing guidance — it is flexible enough to address questions that arise for companies that choose to communicate through social media, and the guidance does so in a straightforward manner.

Here is how Zynga did it:

Our investors and others should note that we currently announce material information to our investors using SEC filings, press releases, public conference calls and webcasts. We use these channels as well as social media channels to announce information about the company, games, employees and other issues. Given the recent SEC guidance regarding the use of social media channels to announce material information to investors, we are notifying investors, the media, our players and others interested in the company that in the future, we might choose to communicate material information via social media channels and it is possible that the information we post on social media channels could be deemed to be material information. Therefore, in light of the SEC’s guidance, we encourage investors, the media, our players and others interested in our company to review the information we post on the U.S. social media channels listed below. . .

Any updates to the list of social media channels we will use to communicate material information will be posted on the Investor Relations page of the company’s website at http://investor.zynga.com.

Despite the hoopla around “SEC BLESSES SOCIAL MEDIA!!!!”, the big question is how the SEC will respond to this method when important information is released on some blog without a press release or Form 8-K announcing that the specific piece of information will be released at a particular time on that blog.  I still think it is an open question as to whether a Zynga-type notice will save the release of material nonpublic information on a lightly trafficked blog.

Links:
Zynga Form 8-K
SEC Release re: Use of Company Websites
SEC Guidance for Use of Social Media

When Introductions Go Bad. Be Wary of the Unregistered Broker-Dealer.

I frequently get questions along these lines:  “If we pay someone a commission to make introductions to investors, that’s okay, right?  I mean, people do it all the time.”

Then we get into discussions about broker-dealer vs. finder and the requirements for a finder under the Texas statutes.  However, if someone is getting paid a commission for introductions to investors, you can bet he or she is acting as broker and better have a license.

Another unregistered broker-dealer case came down from the SEC last month.  In this case, an investment fund retained Stephens as a “consultant” to find potential investors.  Stephens had not been registered with the SEC in any capacity since he was barred from association with investment advisers since 2002. However, due to connections with the fund and a long history in the industry, he still had contacts with potential investors.

Stephens’ consulting arrangement entitled him to a percentage of all capital commitments from investors he introduced, which was revised for other introductions. He earned about $3.8 million on commitments of $569 million, which is not too shabby.  He was also involved significantly in the investor solicitation process and provided services way beyond the “finder” function.

Fines, industry suspensions and cease-and-desist orders were delivered to the fund and the principals of the fund, proving that someone else’s improper conduct can hurt the issuer and the individuals involved (another thing I hear:  “If it is a problem, it isn’t my problem, right?”  Wrong.).  Although the facts of the case seem egregious, most situations seem to be closer calls.  However, the results are usually the same, and calling someone a “consultant” (a frequent suggestion) does not change the analysis.

For $3.8 million (or even a lot less), just get licensed or hire someone who is.

Link:
In re: Ranierei Partners LLC and Donald W. Phillips

 

Recent Case Shows How Little The SEC Appreciates The Beauty* Of A Reverse Merger

*Beauty Is in the eye of the stock promoter.
SEC v. Sierra Brokerage, et al.

Many of the arguments in the case are procedural, but the basis of the case involves Tsai, who created shell companies for reverse mergers.  As part of the process, Tsai would distribute the shares to his buddies to spread out the holdings in order to qualify for OTC trading.  Tsai also had stock powers from these people that allowed him to redistribute the shares in the reverse merger.

Tsai’s ability to reclaim the shares at a reduced price constituted “control” over the shareholders in addition to his control over the company and made them all “affiliates.”  According to the SEC and the court, this made him an underwriter and Rule 144 unavailable.  Thus, the distribution was a violation of the registration requirements of the 33 Act.

But wait, there’s more.  His failure to report the shares he controlled via the stock powers was a violation of Section 13(d) and Section 16(a) of the 34 Act (requirements to file Schedule 13Ds and Forms 3, 4 and 5).

If you want to draw broader lessons:

  • Spreading out securities holdings without an effective registration violates the 33 Act
  • The ability to repurchase shares demonstrates control
  • The ability to repurchase shares constitutes beneficial ownership and pecuniary interest for purposes of the Williams Act and Section 16 disclosure and short swing profit rules
  • The SEC still does not like reverse mergers

Whirlpool’s Unforced Negotiating Errors Does Not Make Its Contracts Unenforceable

Whirlpool Corporation v. The Grigoleit Company

The delightfully named Grigoleit supplied knobs to Whirlpool for many years, and was the sole supplier for a particular line of washing machines and dryers.  Whirlpool began to phase out these appliances.

As their arrangement became smaller, Grigoleit requested price increases.  They later entered into an agreement for a smaller supply of knobs at a higher price, subject to volume and inventory issues, for which Whirlpool was financially on the hook.

Whirlpool then kicked Grigoleit to the curb, and Grigoleit issued a final invoice.  Whirlpool refused to pay it and declared the agreement unconscionable.

In Michigan, a claim of unconscionability is subject to a procedural (What is the bargaining power of the parties?) and substantive (Is the challenged term reasonable?) analysis.

The court did not look at the substantive issue because it found no procedural issue.

“Although courts should not substitute their judgment for that of freely contracting parties, “[i]mplicit in the principle of freedom of contract is the concept that at the time of contracting each party has a realistic alternative to acceptance of the terms offered.””

The court noticed that Whirlpool was a large, sophisticated company and presumed it was capable of competent negotiation.  The court also noted that unconscionability is rarely found in the commercial context.

And the kicker:  the term that Whirlpool considered unconscionable was a term that was proposed by Whirlpool.

The court noted a few key points:

  • Grigoleit was the sole supplier in this case by Whirlpool’s own design.  It was a cost-saving measure on their own part.  It created the risk that a disagreement with its supplier would cause manufacturing disruptions.
  • An unfavorable contract term is not the same as an unconscionable contract term.
  • Whirlpool had the resources, experience and ability to look elsewhere for its parts.
Whirlpool’s future-looking gizmos from the 80’s to make your world a little easier.

Can you “profit” from sale of securities you don’t own, can’t vote or can’t sell?

You would think that the answer would be, “No, of course not. What kind of idiot would believe such a thing?”

And the U.S. Court of Appeals for the 2nd Circuit would agree with you.

This case deals with additional fallout from the recent Goldman Sachs insider trading scandal, in this case involving short swing trading under Section 16 of the 34 Act.  Interesting already, right?

The plaintiffs in the case argued that because the defendant, an insider of Goldman Sachs, provided insider trading tips for money to a fund manager about Goldman Sachs while owning a stake in the fund that was trading in Goldman Sachs.  Get it?

The court did, and said:

  1. Getting paid for insider tips is not the same as realizing profits for purpose of Section 16.
  2. Knowing and intending for the tips to be used for insider trading is not the same as controlling the investment decisions over the shares of the fund.
  3. A pecuniary benefit from another person’s trading is not the same as a pecuniary interest for Section 16 purposes as business dealings do not establish beneficial ownership.

Priceline Does Not Owe You Anything, Including Protecting You From Your Willingness To Spend More Than A Seller Will Accept.

Plaintiffs sue Priceline over “Name Your Own Price” and because Priceline didn’t protect them from poor bidding practices and the knowledge that Priceline needs to make a profit to stay in business.

Johnson v. Priceline.com, Inc. – US Court of Appeals, 2nd Circuit

Lo and behold, advertising where the former Star Trek star pretends to negotiate discounted hotel rates for Priceline customers does not create a fiduciary duty and corresponding duty to disclose a profit motive for a business.

Priceline’s Name Your Own Price (“NYOP”) is designed to not accept a bid unless it can get a hotel room meeting a customer’s specifications at a rate lower than the bid amount, with Priceline keeping the spread.  In other words, it is not a nonprofit, either by design or circumstance.

Priceline did not explicitly say it was making money from customers using NYOP, but it didn’t hide it either.

Two plaintiffs got the hotels they were looking for at prices they were willing to pay, but they claimed they were harmed because Priceline didn’t tell them it was paying the hotels less than the NYOP bid amount.  The plaintiffs looked to the William Shatner commercials to contend that Priceline owed a fiduciary duty to the plaintiffs to tell them that the cost of providing the service was less than the price the customers paid.

The court looked for a fiduciary duty.  The plaintiffs said that because an agency relationship exists between Priceline and its customers with respect to NYOP, “fiduciary duties automatically apply by operation of law.”  The court said that the plaintiffs failed to demonstrate that Priceline was a travel agent, with the corresponding duties.

Looking to agency principles, the court stated that once Priceline accepts a customer’s bid, it is contractually obligated to provide the desired accommodations at the stated sum. After submitting the bid, however, the customer retains no authority over the manner in—or price for—which the reservation will be procured.

The court continued by stating that Priceline’s actions are akin to those of an intermediary or middleman rifling through its inventory of discounted hotel rooms until it locates an item for which the customer has stated a willingness to pay a specified price. The fact that only Priceline has access to both its algorithm and its particular inventory of discounted hotel rooms does not create a fiduciary relationship with a customer where none otherwise exists.

Since there was no agency relationship, there was no fiduciary duty to breach.

William Shatner looking out for your best interests.


__________

Technical stuff.  Points for staying awake.
The three elements necessary to an agency relationship are:

 

  • a manifestation by the principal that the agent will act for him;
  • acceptance by the agent of the undertaking; and
  • an understanding between the parties that the principal will be in control of the undertaking.
An agent owes a duty of disclosure, specifically, a “duty to use reasonable efforts to give his principal information which is relevant to affairs entrusted to him and [that] the principal would desire to have.” Second, an agent owes a duty to account for all profits arising out of the agent’s employment that do not form part of his agreed-upon compensation.

Thinking You’ll Do A Better Job Than The Other Guy Is Not Reason Enough For A Board Of Directors To Avoid “Approval” Of Dissident Board Nominees That Will Harm The Corporation

Withholding approval is a threat to the shareholder franchise when the incumbent board retains power to approve a dissident slate but refuses to entrench itself.

SandRidge Energy found itself in a proxy fight launched by hedge fund instigator, TPG-Axon. TPG launched a consent solicitation to de-stagger SandRidge’s board, amend the bylaws, remove all of the current directors and install its own slate. Let’s just say that SandRidge’s performance had been lacking at the time.

The SandRidge board resisted and warned stockholders that the election of TPG’s slate would be a change of control that would trigger a requirement for SandRidge to repurchase its outstanding notes, referred to colorfully as the “Proxy Put.” If a new board majority is not approved by an incumbent board, the Proxy Put was triggered for purposes of the notes.

A stockholder claimed breach of fiduciary duty because the sitting SandRidge board did not have a proper basis for failing to approve the TPG slate for the purposes of the Proxy Put.

The court said that a board deciding whether to approve directors for the purposes of the Proxy Put could not act consistently with its fiduciary duties by simply failing to approve any director candidates opposing the incumbents.

The duty of loyalty demanded that the incumbents may only refuse to grant approve if the dissidents posed such a material threat of harm to the corporation that it would constitute a breach of the duty of loyalty to pass control to them. For example, unless the dissidents lacked ethical integrity, were looters or proposed a program that would demonstrably be materially adverse to the company’s ability to meet its obligations to the creditors, then the incumbents should approve the dissidents and allow the stockholders to vote.

The incumbents noted that the dissidents did not have sufficient energy experience, although several members of their slate had substantial experience, even if not in the upstream oil and gas industry. However, that the incumbents believed that they were better suited to run the company is not a sufficient fiduciary basis to deny approval of the dissidents. The incumbents did not have reason to doubt the integrity of the dissident slate. As the court said:

“In other words, the incumbent board has simply made the same determination that all incumbents who seek to continue in office make: we are better than the new guys and gals, so keep us in office.”

The court went on to disparage a company that would enter into an agreement with a Proxy Put without hard negotiation and clear economic advantage given the obvious entrenching purposes of a Proxy Put as the court believes that the costs of resisting such a term would be insubstantial to non-existent.*

Update:
SandRidge and TPG settled, and SandRidge added four TPG nominees to the board.

Links:
Kallick v. SandRidge Energy
___________________________

*Ed. Note: Not really. Many lenders/noteholders/counterparties want to know exactly who they will be dealing with during the term of their agreement. The Proxy Put is probably more widely used and integral to many transactions than the court realizes.

SEC OK’s Social Media, Or Does It?

Cue dramatic music . . .

Last week, the SEC announced that companies can use social media to release key information. This had been described to me as a groundbreaking move for company disclosure. Then I read the release.

Background
Last year, the SEC sent a Wells Notice to Reed Hastings, CEO of Netflix, stating that he violated a bunch of 34 Act statutes and regulations, including Regulation FD, for making some statements on his Facebook page about Netflix’ user metrics.

New Stuff?
The SEC accepted the fact that it is a grey area about whether or how to use social media to release material nonpublic information. The SEC continued to say that you could do it without violating a bunch of laws and regs if you don’t restrict access and if you tell people where to look for it.

So, has the SEC finally discovered the Inter-tubes and embraced the future?

No. This is the same analysis they have been providing for years. As they said in their release about the use of company websites in 2008 [Ed.: I can’t believe it has been that long.]:

“Through the years, we have taken a number of steps to encourage the dissemination of information electronically via the Internet, as we believe that widespread access to company information is a key component of our integrated disclosure scheme, the efficient functioning of the markets, and investor protection.”

When doing the analysis of website posting for Reg FD purposes, the SEC has said that:

“Thus, in evaluating whether information is public for purposes of our guidance, companies must consider whether and when: (1) a company web site is a recognized channel of distribution, (2) posting of information on a company web site disseminates the information in a manner making it available to the securities marketplace in general, and (3) there has been a reasonable waiting period for investors and the market to react to the posted information.” [Ed.: Emphasis added.]

In other words, there is nothing new here. Would the market expect to see financial or performance metrics on a Facebook page? Is registration or subscription required? Are you effectively making a public or limited release of the information?

I interpret the new SEC release to be as much of a warning as it was “permission.”  Money quote:

“Personal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which the company would disclose material corporate information.”

From one of the greatest movies of all time:

Fletch: Can’t do that, Frank. Fat Sam isn’t the story, there’s a source behind him.
Frank Walker: Who?
Fletch: Well, there we’re in kind of a grey area.
Frank Walker: How grey?
Fletch: Charcoal?

Cross-post: How to Get $1.2 Billion of Goldman Sachs Shares Without Really Trying (err, Paying). Goldman Sachs, Warren Buffett and Berkshire Hathaway Amend 2008 Financial Disaster Warrants.

Over at Underdisclosed.com is an analysis of how Goldman Sachs and Berkshire Hathaway reworked the warrants Goldman issued in the wake of the 2008 financial calamity.  Enjoy.