TheAdvocate - Bernstein Litowitz Berger & Grossmann LLP · a similar post-IPO plan to distribute non-voting shares and solidify founder and CEO Mark Zuckerberg’s control. Amid re-newed

TheSummer 2017Advocate

F O R I N S T I T U T I O N A L I N V E S T O R S

One Share, No Vote Multi-Class Shares Sideline Investorsas Corporate Insiders Run the Show

How Public-PrivatePartnerships Can Shore

Up the SEC

House Legislation Aims to Gut Class Action

Practice

Update on Standardsfor Prospectus

Liability in Europe

FOR INSTITUTIONAL INVESTORS

2 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com

Spring 2017

Features

3 Inside Look

12 Eye on the Issues

28 Contact Us

Departments

One Share, No Vote

A rising tide of multi-class shareserodes crucial shareholder rights

Principally authored by Brandon Marsh

4

As part of BLB&G’s firmwide Going Green Initiative, this publication has been printed on recycled

paper. If you would prefer to receive The Advocate for Institutional Investors as an electronic PDF

file instead of a printed copy, please contact us at [email protected].

ContentsH.R. 985: Raising the Baron Class ActionsHouse of Representatives moves tocurtail victims’ rights

By Jesse Jensen

18

Prospectus Liability in Europe

A survey of recent developments

By Tomas Arons

22Protecting the Shareholder Franchise

Jon Feigelson joins BLB&G as Corporate Governance Director

26GOING GREEN

Partnering for the Public Good

How public-private partnershipscan strengthen the SEC

Principally authored by David Kaplan

8

Justice Gorsuch: Friendor Foe?

How might the new Supreme CourtJustice lean on securities class actions?

By Alla Zayenchik

16

INTERNATIONAL FOCUS

Summer 2017 The Advocate for Institutional Investors 3


LookInside

I n the wake of the 2016 presidential election and the inauguration of a new regime in Washington, this

edition of The Advocate examines the power of the vote. What changes will the Trump administration bring

to the nation’s securities laws? How could changing securities standards and enforcement priorities impact

institutional investors’ ongoing work to protect their investments and advocate for honest corporate disclosures?

With these questions in mind, we survey recent developments in each branch of the federal government. We

also look at what some believe is the waning power of the vote in corporate governance, as certain companies

choose dictatorship over democracy by foreclosing investors from having any vote in corporate affairs.

Our cover story, “One Share, No Vote,” focuses on an ominous corporate governance trend: the recent increase

in companies issuing non-voting shares, particularly in the technology sector. The article surveys how such

distorted stock structures create perverse incentives and suppress healthy investor activism.

Also in this issue, BLB&G Partner David Kaplan outlines how the SEC can both improve securities enforcement

and save taxpayer money with one simple solution: enforcement partnerships with experienced private litigators.

The article, “Partnering for the Public Good,” expresses support for the same sort of public-private partnerships

that President Trump has repeatedly praised.

On the legislative front, BLB&G attorney Jesse Jensen examines one of the first acts of America’s new House

of Representatives: passing the dangerous H.R. 985 bill. The article, “Raising the Bar on Class Actions,” explains

how H.R. 985 threatens to stymie individual rights, thwart class actions, and keep institutional investors and

others out of the courtroom. Fortunately, the legislation faces long odds in the Senate.

The new White House has already made a significant impact on the judicial branch. In “Supreme Court Justice

Neil Gorsuch and Securities Litigation — Friend or Foe?,” BLB&G attorney Alla Zayenchik discusses how President

Trump’s first Supreme Court appointee may impact shareholder rights for years to come.

In our continuing coverage of international securities litigation, we are also pleased to share a valuable piece

by Professor Tomas Arons of Utrecht University in the Netherlands, in which he outlines the laws governing

prospectus liability in various European countries.

Finally, our regular “Eye on the Issues” column highlights significant recent developments in domestic and

international securities litigation and regulation affecting institutional investors.

Please note that current and past issues of The Advocate are available on our website at www.blbglaw.com.

The Editors — Brandon Marsh and Julia Tebor



Increasingly, companiesin the technology sector

and elsewhere are issuing two classes oreven three classes ofstock with disparate

voting rights in order togive certain executivesand founders outsized

voting power.

R ecent developments in the secu-

rities markets are drawing insti-

tutional investors’ attention back

to core principles of corporate governance.

As investors strive for yield in this post-

Great Recession, low interest rate envi-

ronment, large technology companies’

valuations climb amid promises of rapid

growth. At the same time, some of these

successful companies are exploiting their

market favor by asking investors to give

up what most regard as a fundamental

right of ownership: the right to vote.

Companies in the technology sector and

elsewhere are increasingly issuing two or

even three classes of stock with disparate

voting rights in order to give certain exec-

utives and founders outsized voting power.

By issuing stock with one tenth the voting

power of the executives’ or founders’ stock,

or with no voting power at all, these com-

panies create a bulwark for managerial

entrenchment. Amid ample evidence that

such skewed voting structures lead to

transfers of value and skewed managerial

incentives, many public pension funds

and other institutional investors are

standing up against this trend. But in the

current environment of permissive ex-

change rules allowing for such dual-class

or multi-class stock, there is still more that

investors can do to protect their funda-

mental voting rights.

A rising tide of multi-class sharessparks a backlash

Historically, companies with dual-class

stock structures have been a distinct minor-

ity of the market. Prominent among such

outliers are large media companies that

perpetuate the managerial oversight of a

particular family or a dynastic editorial

position, such as The New York Times,

CBS, Viacom, and News Corp. Now, corpo-

rate distributions of non-voting shares are

on the rise, particularly among emerging

technology companies. In 2012, Google

— which already protected its founders

through Class B shares that had ten times

the voting power of Class A shares —

moved to dilute further the voting rights

of Class A shareholders by issuing to

them third-tier Class C shares with no vot-

ing rights as “dividends.” Shareholders,

One Share, No Vote

Principally authored by Brandon Marsh

Dual-class capital structures are a recipe for executive entrenchment, fiduciary misconduct, and erosion ofshareholder rights

To forego the ownershipgymnastics of diluting existing shareholders’

voting rights by issuingnon-voting shares as

dividends, the more recent trend is to set up

multi-class structuresfrom the IPO stage.

led by a Massachusetts pension fund, filed

suit, alleging that executives had breached

their fiduciary duty by sticking investors

with less valuable non-voting shares. On

the eve of trial, the parties agreed to set-

tle the case by letting the market decide

the value of lost voting rights. When the

non-voting shares ended up trading at a

material discount to the original Class A

shares, Google was forced to pay over

$560 million to the plaintiff investors for

their lost voting rights.

Facebook followed suit in early 2016 with

a similar post-IPO plan to distribute non-

voting shares and solidify founder and

CEO Mark Zuckerberg’s control. Amid re-

newed investor outcry, the pension fund

Sjunde AP-Fonden and numerous index

funds filed a suit alleging breach of fidu-

ciary duty. Also in 2016, Barry Diller, the

controller of IAC/InterActiveCorp, tried an

even more egregious gambit, creating a

new, non-voting class of stock in order to

insulate his ability to pass control of the

business to his heirs without regard to

the dilution that would come from new

stock compensation and stock acquisitions,

and despite the fact that they owned less

than 8 percent of the company’s stock.

The California Public Employees’ Retire-

ment System (CalPERS), which manages

the largest public pension fund in the

United States, filed suit in late 2016.

(BLB&G represents CalPERS in this litiga-

tion.) Both suits are currently pending.

To forego the ownership gymnastics of

diluting existing shareholders’ voting

rights by issuing non-voting shares as

dividends, the more recent trend is to set

up multi-class structures from the IPO

stage. Tech companies Alibaba, LinkedIn,

Square, and Zynga each implemented

dual-class structures before going public.

Overall, the number of IPOs with multi-

class structures is increasing. There were

only 6 such IPOs in 2006, but that number

more than quadrupled to 27 in 2015.

Snap pioneers the “No VotingRights Whatsoever” tech IPO

Snap Inc., which earlier this year concluded

the largest tech IPO since Alibaba’s, took

the unprecedented step of offering IPO

purchasers no voting rights at all. This is

a stark break from tradition, as prior dual-

class firms had given new investors at

least some — albeit proportionally weak

— voting rights. As Anne Sheehan, Direc-

tor of Corporate Governance for the Cali-

fornia State Teachers’ Retirement System

(CalSTRS), has concluded, Snap’s recent

IPO “raise[s] the discussion to a new level.”

CalSTRS was not alone in its criticism of

Snap’s IPO. The Council of Institutional

Investors (CII) called for an end to dual-

class IPOs in 2016. After Snap announced

its intended issuance of non-voting stock

earlier this year, CII sent a letter to Snap’s

executives, co-signed by 18 institutional

investors, urging them to abandon their

plan to “deny[] outside shareholders any

voice in the company.” The letter noted

that a single-class voting structure “is

associated with stronger long-term per-

formance, and mechanisms for account-

ability to owners,” and that when CII was

formed over thirty years ago, “the very

first policy adopted was the principle of one

share, one vote.” Anne Simpson, Invest-

ment Director at CalPERS, has also strongly

criticized Snap’s non-voting share model,

stating: “Ceding power without account-

ability is very troubling. I think you have

to relabel this junk equity. Buyer beware.”





Investors have also called for stock index

providers to bar Snap’s shares from

becoming part of major indices due to its

non-voting shares. By keeping index fund

investors’ cash out of such companies’

stock, these efforts could help provide

concrete penalties for companies seeking

to go to market with non-voting shares. It

remains to be seen how index providers

will respond.

Dual-class structures hamper accountability

There are many compelling reasons why

institutional investors strongly oppose

dual-class stock structures that separate

voting rights from cash-flow rights. Such

structures reduce oversight by, and ac-

countability to, the actual majority own-

ers of the company. They hamper the

ability of boards of directors to execute

their duties to shareholders because cor-

porate managers with outsized voting

power can dictate important company

decisions. And they can incentivize man-

agers to act in their own interests, instead

of acting in the interest of the company’s

owners. Hollinger International, a large

international newspaper publisher now

known as Sun-Times Media Group, is a

striking example. Although former CEO

Conrad Black owned just 30 percent of

the firm’s equity, he controlled all of the

company’s Class B shares, giving him an

overwhelming 73 percent of the voting

power. He filled the board with friends,

then used the company for personal ends,

siphoning off company funds through a

variety of fees and dividends. Restrained

by the dual-class stock structure, Hollinger

stockholders at large were essentially

powerless to rein in such actions. Ulti-

mately, the public also paid the price for

the mismanagement, footing the bill to

incarcerate Black for over three years

after he was convicted of fraud.

Academic studies also reveal that giving

select shareholders control that is far

out of line with their ownership stakes

results in perverse incentives and weaker

corporate governance structures. A 2012

study funded by the Investor Responsi-

bility Research Center Institute (IRRC), and

conducted by Institutional Shareholder

Services Inc., found that controlled firms

with multi-class capital structures have

more material weaknesses in accounting

controls and are riskier in terms of volatility.

A follow-up 2016 study reaffirmed the

findings, noting that multi-class companies

have weaker corporate governance and

higher CEO pay. As IRRC Institute Execu-

Academic studies also reveal that giving selectshareholders control thatis far out of line with theirownership stakes resultsin perverse incentives andleads to weaker corporate governance structures.

Continued on back cover

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The SEC’s EnforcementDivision can be more

effective if we restore itsability to tap the talentsof America’s top private

sector attorneys.

P resident Donald Trump has sharply

criticized Wall Street for the

“tremendous problems” it has

caused our country and promised, “I’m

not going to let Wall Street get away with

murder.”

However, Trump’s pick to lead the US

Securities and Exchange Commission, Jay

Clayton, is a Wall Street deal lawyer with

a career spent representing big banks and

other large companies. Clayton’s nomi-

nation signals that the agency’s focus may

be on capital formation, not enforcement.

Trump can prove his commitment to

policing financial fraud by reversing

Executive Order 13433, which prevents

the SEC and other federal agencies from

partnering with private law firms on a

contingent-fee basis.

Let the free market work

Public-private partnerships are not only

an ideal solution to one of the nation’s

greatest challenges — enforcing our secu-

rities laws against powerful corporations

and executives — but a prime example of

letting the free market do what it does

best: allocate resources efficiently.

The SEC clearly has its problems. As

Columbia Law Professor John Coffee has

emphasized in several books and articles,

the SEC is “overstrained and under-

funded,” and outmatched by the experi-

ence and resources of corporate America’s

top-tier defense counsel, leaving it “par-

ticularly vulnerable” in big cases. Indeed,

the SEC missed Bernie Madoff’s decades-

long investment fraud despite repeated

warnings, and failed to prosecute a single

Principally authored by David Kaplan

Partneringfor thePublic

GoodUsing the private sector to strengthen the SEC

Restoring the SEC’s abilityto enter public-private

partnerships with top-tiersecurities firms would

give the agency a powerful enforcement tool without

requiring a dime of additional government

funding.

case against a top bank executive for

financial crisis-era misconduct.

The SEC’s problems are exacerbated by

Executive Order 13433. President George

W. Bush signed this executive order in

2007 amid complaints by corporate lobby-

ists after private contingent-fee counsel

successfully partnered with state attor-

neys general to recover over $200 billion

from the tobacco industry.

At a time when all sides acknowledge the

SEC’s need for more resources, Executive

Order 13433 represents outdated thinking

and hamstrings the agency’s enforcement

power. In the past few years, Executive

Order 13433 has limited the SEC’s ability

to pursue many challenging and mean-

ingful enforcement actions.

Notably, in circumstances where this ex-

ecutive order did not apply, other govern-

ment agencies have worked with private

counsel to secure massive recoveries in

complex litigation arising from the finan-

cial crisis, which cost the US economy

more than $22 trillion. The Federal Hous-

ing Finance Agency (FHFA) recovered

nearly $19 billion in connection with the

sale of mortgage-backed securities, and

the National Credit Union Administration

(NCUA) recovered more than $4 billion

for creditors of failed financial institu-

tions. In the NCUA chair’s own words:

“Without this fee arrangement, which

shifted most of the risk of these legal

actions to outside counsel, there would

have been no legal investigation of po-

tential claims, no litigation, and no legal

recoveries.”

In contrast to the $23 billion recovered

by these agencies through public-private

partnerships, the SEC — laboring without

a deep and talented pool of private litiga-

tors — has levied less than $4 billion in

penalties, disgorgement, and monetary

relief in all of its financial crisis-era cases.

A powerful tool

Restoring the SEC’s ability to enter public-

private partnerships with top-tier securi-

ties firms would give the SEC a powerful

enforcement tool without requiring a

dime of additional government funding.

It would also allow the SEC to focus its

scarce resources on other objectives,

such as capital formation, reducing un-

necessary regulations, and improving

corporate transparency.

As for enforcement, to quote Coffee, the

SEC would be able to “focus on what

they are best at: insider trading, Ponzi

schemes, and smaller frauds not involv-

ing a complex institutional structure and

multiple actors.” Sophisticated private-

sector counsel would be available to

assist the SEC in the largest and most

complex cases, where it most needs help.

Both Trump and the Republican Party

strongly support the efficiencies and

advantages offered by public-private

partnerships. Trump “the Developer” has

partnered with government entities to

build hotels, convention centers and ice

rinks. Trump “the Candidate” and the

2016 Republican Party platform both

emphasized public-private partnership as

essential to “save the taxpayers’ money”

by controlling the costs of infrastructure

and government spending.

The same policy thinking supports allow-

ing the SEC to utilize private-sector law

firms to aid the agency in effectively en-

forcing securities laws.





Trump promised to “police markets for

force and fraud” and hold “both Wall

Street and Washington accountable.”

Trump can take a significant step toward

fulfilling these promises by rescinding

Executive Order 13433 and restoring the

SEC’s ability to obtain private-sector legal

services at no cost or risk to the American

taxpayer. With a pen stroke, he can make

the SEC a better financial cop and trans-

fer risk to the private sector, while silenc-

ing those who would criticize the Clayton

nomination as signaling a laissez-faire

attitude toward enforcement.

David Kaplan is a Partner in BLB&G’s

California office. He can be reached at

[email protected].

BLB&G is proud to host the Real-Time Speaker Series, featuring candid

conversations with academics, policy makers, commentators and other experts

about the financial markets and issues of importance to the institutional

investor community. Past installments include:

Control Fraud and The Imperial CEO

A conversation with Professor Bill

Black, an expert on white-collar crime,

former federal bank regulator, and

advisor to governments worldwide

Supreme Court Vacancy, Its ImpactNow and in the Future

A conversation with the nation’s

leading Supreme Court expert, Erwin

Chemerinsky

Institutional Investor Focus on Corporate Disclosure of Climate Changeand Sustainability Risks and Practices

A conversation with Jim Coburn,

Senior Manager of Ceres, and Andrew

Collins, Director of the Sustainability

Accounting Standards Board

Corporate Heroism: The Whistleblower

A c onversation with Dr. Eric Ben-Artzi

and Dana Gold of The Government

Accountability Project

Trump “the Candidate”and the 2016 RepublicanParty platform both emphasized public-privatepartnership as essentialto “save the taxpayers’money” by controlling thecosts of infrastructure andgovernment spending.

An earlier version of this article appeared in the March 6, 2017 edition of The National Law Journal © 2017ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. ALM-Reprints.com, 877-257-3382, [email protected]

Subscribe to BLB&G’s ongoing Real-Time Speaker Series:

www.blbglaw.com/realtime


EyeBy Alla Zayenchik

on the Issues

SEC reconsiders CEO-to-Worker PayRatio Rule

On February 6, 2017, Acting SEC Chairman

Michael S. Piwowar announced that the

Commission is reconsidering the imple-

mentation of the CEO-to-Worker Pay Ratio

Rule. The rule requires a public company

to disclose the ratio of its median total an-

nual compensation across all employees

to the total annual compensation of its

chief executive officer. Although the Dodd-

Frank Wall Street Reform and Consumer

Protection Act required the rule, the SEC

adopted the rule in August 2015, and com-

panies were told to provide the disclosure

for their first fiscal year beginning on or

after January 1, 2017, Piwowar unexpect-

edly announced that the SEC was seeking

further public input on the merits of the

rule before any potential implementation.

Investors and legislators have strongly

denounced the delay. On March 22,

2017, a group of 100-plus institutional in-

vestors holding a combined $3 trillion in

assets under management sent a letter to

Piwowar, urging the SEC not to delay

implementation of the rule. The letter,

signed by representatives of unions, pen-

sion plans, asset managers, faith-based

funds, advocacy investment organiza-

tions, and state treasurers, stated that

any delay imposes “significant costs” on

investors and noted that “pay ratio dis-

closure will provide material information

to investors who are concerned about

CEO and employee compensation and

its impact on shareholder value.” The

investors noted that pay ratio information

is material because, among other things,

it “enables investors to make more in-

formed decisions on executive compensa-

tion, sheds light on the impact of high

Citigroup, Barclays, JP Morgan, and RBS have been sentenced in connection with

the massive rigging of currency exchange rates that rocked the markets in 2015.

Earlier this year, Judge Stefan R. Underhill of the United States District Court for

the District of Connecticut approved over $2.5 billion in criminal fines imposed

by the Department of Justice, which were part of an overall $5.8 billion settlement

between the companies and the regulators. Citigroup led the pack with a $925

million criminal fine, followed by a $650 million fine against Barclays, a $550 million

fine against JP Morgan and a $395 million fine against RBS. Judge Underhill

noted that he would “encourage the US government to consider prosecution of

individuals” in connection with the FX rate rigging, noting that the most effective

way to deter illegal anticompetitive behavior is to take action against the people

responsible, including by clawing back or requiring disgorgement of incentive

compensation that was triggered by the wrongful conduct. Judge Underhill noted

that “when the market is rigged, folks who play by the rules are suckers.”

CEO-to-employee pay ratios on employee

morale,” and indicates a company’s ap-

proach to balancing internal equity and

external competitiveness when setting

CEO pay targets.

A group of US Senators also sent a letter

to Piwowar opposing any delay in the

rule’s implementation and highlighting the

rule’s history: “For nearly seven years,

investors have been waiting for this dis-

closure, and now as the first reporting pe-

riod has just begun, you have inexplicably

halted this important investor tool.”

Rigged markets: Big banks sentenced after pleading guilty to FX rate fixing

13


DFC Global has appealed a ruling by the Delaware Chancery

Court that Lone Star Fund VIII underpaid for DFC Global by

more than $100 million in a $1.3 billion transaction whereby

Lone Star Fund VIII acquired the payday lender. In 2016, Chan-

cellor Bouchard ruled in an appraisal proceeding (an action

brought by an investor who believes that she was not adequately

compensated in a corporate buyout) that shareholders in DFC

Global had been significantly underpaid when selling their

shares in the buyout. The Court found that the fair market

value of DFC Global shares was materially higher than the

buyout price. In its appellate brief, DFC Global argues that the

deal price should be deemed the best indicator of fair value

because there was a sales process that resulted in an arm’s-

length transaction. As a result, DFC Global argues that the

Chancery Court should not have the ability to independently

evaluate the transaction price. The trial court disagreed, re-

fusing to defer to the deal price in light of the “uncertain reg-

ulatory environment” that served as the backdrop for this

transaction. As the Court explained, the transaction was ne-

gotiated and consummated during a period of significant

company turmoil and regulatory uncertainty, calling into

question the reliability of the transaction price as well as man-

agement’s financial projections.

The case has garnered significant interest in the business and

legal communities. Nine law and corporate finance professors

filed an amicus brief in support of DFC Global, urging the

Delaware Supreme Court to rule that the Chancery Court must

defer to the transaction price when a deal results from arm’s-

length negotiations. On the other hand, BLB&G represented

twenty-one leading law, economics, and corporate finance

professors, including a Nobel prize winner, who filed an amicus

brief supporting the Chancery Court’s ability to independently

determine the value of a company. This amicus brief points

out that a hard-line rule is unnecessary because, among other

things, the Chancery Court’s opinion can be appealed. The ac-

ademics who favor affirming the Chancery Court’s opinion

argue that adopting a rule that presumptively requires the

Court of Chancery to defer exclusively to the transaction price

unless that process does not result from an arm’s-length

process would be “a trifecta of bad law, bad economics, and

bad policy.” These professors point out that deference to the

deal price in appraisal actions is the functional equivalent of

eliminating the appraisal remedy altogether.

The Supreme Court has agreed to decide

a common issue in securities litigation

that has split courts nationwide: whether

shareholders can sue a public company

that fails to “[d]escribe any known trends

or uncertainties that have had or that the

[company] reasonably expects will have

a materially favorable or unfavorable im-

pact” on the company. The quoted lan-

guage is from Item 303 of SEC Regulation

S-K, which requires the disclosure of

such information in public companies’

periodic reports. The issue is whether a

company’s failure to abide by Item 303

can qualify as an “actionable omission”

and thus be sufficient grounds for a

shareholder lawsuit under potent provi-

sions supporting shareholder lawsuits:

Section 10(b) of the Securities Exchange

Act and SEC Rule 10b-5 promulgated

thereunder. While proponents of trans-

parency support shareholders’ rights to

enforce such disclosure provisions, op-

ponents argue that Item 303’s language

is too broad and would make it difficult

to determine when management is obli-

gated to make a disclosure. The Supreme

Court is expected to issue an opinion by

June 2018.

Summer 2017 The Advocate for Institutional Investors

What’s deal price got to do with it?

High Court to rule on liability for failing to disclose known trends

Corzine sidelined

The US Commodity Futures Trading Com-

mission’s years-long litigation against the

former CEO of MF Global Holdings Ltd.

has concluded with a settlement. After the

brokerage firm MF Global went bankrupt

in a 2011 liquidity crisis, the CFTC sued

CEO Jon Corzine for dipping into nearly $1

billion of segregated client funds in an ef-

fort to obtain badly needed liquidity. The

settlement requires Corzine to pay a $5

million fine out of his own pocket, rather

than from insurance. The CFTC had pre-

viously forced MF Global to pay over $1.2

billion in restitution to its customers,

along with a penalty of $100 million, due

to actions the company took under

Corzine’s leadership. The Corzine settle-

ment also imposes a lifetime ban on

Corzine from CFTC markets, preventing

him from personally trading clients’

money in the commodity futures industry.

The ban on Corzine, also a former CEO of

Goldman Sachs, is a significant measure

against one of Wall Street’s top traders

and leaders.


In the Summer 2016 edition of The Advocate, we discussed the Supreme Court’s

agreement to hear the Salman v. United States case and to clarify standards for

insider trading liability. Late last year, the Court’s unanimous decision in the case

was welcome news to those opposed to insider trading. The decision confirms that

a tipper — i.e., someone who divulges non-public company information —

breaches a fiduciary duty by giving a tip to a trading relative or friend. This clarifies

that in order for the tipper to be liable for insider trading, a tipper need not receive

something of “a pecuniary or similarly valuable nature” in exchange for the tip.

This less restrictive view of insider trading liability affirmed the Ninth Circuit’s hold-

ing and rejected a prior, contrary ruling by the Second Circuit in US v. Newman.

Judge Jed S. Rakoff of the United States District Court for the Southern District of

New York played an active role in both the Salman and Newman cases. He was the

author of the 2013 Newman district court decision that the Second Circuit reversed.

He was also the author of the Ninth Circuit’s now-affirmed Salman opinion while

sitting by designation on the Ninth Circuit.

Following the Supreme Court’s anti-insider-trading Salman ruling, Judge Rakoff is

now calling for a more straightforward insider trading statute to replace the existing

framework, which consists largely of judge-made rules. Speaking at the Securities

Litigation & Enforcement Institute at the New York City Bar on March 1, 2017, Judge

Rakoff called for Congressional action to simplify and expand the definition of

insider trading by adopting an approach similar to that taken by the European

Union. Judge Rakoff noted that the EU’s Market Abuse Regulation (MAR) bars in-

sider dealing through a prohibition on the unlawful disclosure of inside

information. The MAR’s basic goal is to promote and maintain fair markets by making

it unlawful to disclose inside information that may have a significant effect on the

price of a financial instrument. Judge Rakoff praised the MAR for its flexibility, not-

ing that “[b]ecause the EU approach focuses not on fraud but on equality of access,

it has virtually none of the difficulties that plague US law.” Specifically, Judge

Rakoff noted that the MAR allows for punishment of individuals who “ought” to

know that their trading is wrongful. Time will tell whether Judge Rakoff’s call for a

statutory solution to the shifting landscape of insider trading liability will resonate

with Congress.

EyeBy Alla Zayenchik

on the Issues

Judge Rakoff calls for insider trading overhaul

Former MF Global CEO Jon Corzine



Supreme Court to rule on statutes ofrepose in securities action

How quickly must class action

plaintiffs act in order to preserve

individual claims?

The Supreme Court is set to rule on a

case that has significant implications for

investors considering pursuing individual

actions under the securities laws.

On April 17, 2017, the Supreme Court

heard oral argument in the case of

California Public Employees’ Retirement

System v. ANZ Securities Inc. The case

relates to whether and how quickly individ-

ual investors must act to preserve individ-

ual claims when their claims are already

asserted as part of a pending securities

class action.

In ANZ Securities, the Second Circuit

ruled that the filing of a securities class

action lawsuit under the Securities Act of

1933 does not toll or otherwise satisfy the

“statute of repose” (a time limitation) for

individual claims asserted separately, after

the filing of the class action. This means

that if an investor who is an unnamed

plaintiff in a Securities Act class action is

considering pursuing its claims separately,

the investor must act to preserve those

claims (for instance, by filing a separate

individual suit) even while the class action

asserting its claims in the aggregate is

pending. This holding is notable because,

depending on the particular case, investors

may be forced to file such additional pro-

tective lawsuits even before the class action

case reaches any significant milestones.

Other courts disagree with this reading of

the Securities Act and the relevant proce-

dural rules. The Tenth Circuit, for instance,

holds that the filing of the class action

effectively preserves the individual suits

while the class action is pending, so there

is no need for investors to file individual

suits so early. The Tenth Circuit and other

courts take this view based in large part

on the Supreme Court’s 1974 American

Pipe ruling, which held that the statute of

limitations is tolled for individual plain-

tiffs during the pendency of such a class

action. In late May 2017, the Ninth Circuit

also reaffirmed American Pipe tolling,

holding that it tolls the Securities Exchange

Act statute of limitations to permit suc-

cessive class action filings.

The ANZ Securities case has garnered

significant interest in the legal commu-

nity. Assisted by BLB&G, seventy-five

prominent institutional investors with

over $4 trillion under management filed

an amicus brief in the matter. The amicus

brief highlights not only the harmful bur-

dens that the Second Circuit’s holding

imposes on investors, but also how it im-

poses unnecessary litigation costs on

both plaintiffs and defendants.

A separate amicus brief filed by retired

federal judges similarly notes how the

Second Circuit’s holding results in the

filing of protective lawsuits to preserve

investors’ rights and fails to guard

against the possibility that class certifica-

tion will be unreasonably denied under

the Second Circuit’s ruling due to expira-

tion of the statute of repose. Indeed, pro-

tective suits are on the rise. In the

Petrobras securities litigation, for in-

stance, nearly 500 individual plaintiffs

opted out of the class case and are sched-

uled to have their damages claims heard

individually. Yet another amicus brief in

the ANZ Securities case — by ten securi-

ties law professors at schools including

Stanford, Cornell, Duke, and the Univer-

sity of Virginia — concludes that against

such costly protective suits, the Second

Circuit’s ruling does “not yield any coun-

tervailing benefit.”

The Supreme Court heard argument on

April 17 and a decision is expected by the

end of the term.

Alla Zayenchik is an Associate in BLB&G’s New York office. She can be reached at [email protected].

While the dispute concerning who wouldoccupy the vacant seat

has come to a close,many questions remainconcerning the impact

of Justice Gorsuch’sconfirmation on the

nation’s securities laws.

A fter a hotly contested, year-long

battle for Justice Scalia’s seat,

Neil Gorsuch has been sworn in

as the 113th Supreme Court Justice over

Democrats’ filibuster. While the dispute

concerning who would occupy the vacant

seat has come to a close, many questions

remain concerning the impact of Justice

Gorsuch’s confirmation on the nation’s

securities laws.

Early in his career, Gorsuch was critical of

securities enforcement actions. Advocat-

ing for more limited damages in securities

fraud class actions, Gorsuch authored an

amicus brief on behalf of the United

States Chamber of Commerce in the 2005

Dura Pharmaceuticals v. Broudo case.

Also in 2005, he co-wrote a decidedly

anti-enforcement article in his personal

capacity for The Legal Times, stating:

“The problem is that securities fraud liti-

gation imposes an enormous toll on the

economy, affecting virtually every public

corporation in America at one time or an-

other and costing businesses billions of

dollars in settlements every year.”

As a judge on the Tenth Circuit Court of

Appeals starting in 2006, Gorsuch rarely

had the opportunity to rule on class ac-

tion securities cases. One of his notable

securities laws decisions was MHC Mutual

Conversion v. Sandler O’Neill & Partners,

in which Gorsuch, writing for the court,

addressed Section 11 liability for issuers

making false or misleading statements.

In that case, the court declined to impose

Section 11 liability against officers of Ban-

corp predicated on their 2009 statements

concerning mortgage-backed securities

in the bank’s portfolio in connection with

a secondary stock offering to raise $90 mil-

lion. Bancorp announced that it expected

the market for its securities to rebound

soon. However, fifteen months after the

offering, the company had to recognize

$69 million in losses. In rejecting plaintiffs’

claims, Judge Gorsuch largely focused

on a limited view of liability that would

make damages available only “when the

speaker doesn’t sincerely hold the opin-

ion he expresses at the time he expresses

it.” He explained that “[i]n 2008, no doubt



orFriendFoe?

Supreme Court Justice Neil Gorsuch and securities litigation

By Alla Zayenchik

An early test for Justice Gorsuch will be

the ANZ Securities case discussed in this

issue of The Advocate (see page 15), which

involves the textual interpretation of the

Securities Act’s statute of repose. The

Supreme Court heard argument in ANZ

Securities on April 17, Justice Gorsuch’s

first day on the Court’s bench. Justice

Gorsuch appeared inclined to side with

the defendants’ position in the case and

to hold that even when the claims of an

aggrieved investor are already being

prosecuted by a class representative in a

pending class action, investors must take

action to preserve their individual claims

if they might want to pursue them out-

side of the class action context. Echoing

the judicial reasoning of the late Justice

Scalia, Justice Gorsuch noted that he

does not “like the policy consequences”

of such a holding, but that it might be re-

quired under the relevant statute’s “plain

language.”

Alla Zayenchik is an Associate in BLB&G’s

New York office. She can be reached at

[email protected].

An early test for JusticeGorsuch will be the ANZ Securities case discussed in this issue of The Advocate.



there were those who genuinely thought

the market for mortgage-backed securi-

ties would soon rebound. Events have

disproved…these opinions, but that hardly

means the opinions were anything other

than honestly offered—true opinions at

the time made.”

However, Judge Gorsuch’s ruling was

not so constrained as to limit liability to

opinions that are not sincerely held.

Judge Gorsuch wrote that liability may lie

for opinions that are given without a rea-

sonable basis — i.e., not just opinions

that the speaker does not believe — but

that the plaintiffs in the MHC Mutual

Conversion case had not alleged enough

to win under that theory either. Judge

Gorsuch also supported investors’ rights

by adding that securities issuers cannot

insulate themselves from liability by

adding “we believe” or “it is our opinion”

before statements of fact, as “issuers can-

not avoid liability by liberally sprinkling

prefatory labels throughout a prospectus

or simply tacking them onto everything

they say.” One year later, in the 2015

Omnicare decision, the Supreme Court

endorsed the broader scope of liability

and agreed that not all statements pre-

ceded by prefatory labels like “we believe”

are “opinions.”

While Justice Gorsuch has expressed

skepticism about private enforcement of

the securities laws in the past, it is not

entirely clear how he will approach secu-

rities matters on the high court. During

his Senate confirmation hearings, he

vowed that personal views and policy

preferences would not impact his deci-

sions, as his primary goal would be to re-

main faithful to the text of the law. As he

told Congress, a judge “who likes every

outcome he reaches is very likely a bad

judge.”

Justice Neil Gorsuch



As one of its first actsthis year, the House

passed a bill that deliberately attempts to

curtail class action litigation through the

imposition of significantnew restrictions.

A s recognized by the Supreme

Court, class action lawsuits play

an invaluable role in protecting

investors, consumers, and employees by

“overcom[ing] the problem that small re-

coveries do not provide the incentive for

any individual to bring a solo action pros-

ecuting his or her rights.” Amgen Inc. v.

Conn. Ret. Plans & Tr. Funds, 133 S. Ct.

1184, 1202 (2013). Yet even after the waves

of populist outcry that dominated the

2016 election, the newly-elected majority

in the US House of Representatives passed

as one of its first acts this year a bill strik-

ing at the heart of people’s rights to class

action litigation. The bill — the so-called

“Fairness in Class Action Litigation Act of

2017” (H.R. 985) — seeks to frustrate

class actions brought by consumers, em-

ployees, and investors while tipping the

scales in favor of corporate defendants.

A remarkable coalition of consumer

rights groups, civil rights advocates, and

members of the legal community have

united in opposition to H.R. 985. Nonethe-

less, the House majority passed H.R. 985

without permitting even a single hearing

on its merits, and this dangerous and

much-criticized legislation now resides

with the Senate.

H.R. 985’s radical effects on investor rights

Close examination of H.R. 985 reveals

that, far from promoting “fairness,” the

bill relies on creative methods to delay,

and ultimately dismantle, class action

lawsuits.

For example, courts currently permit law-

suits to proceed as class actions only

if (among other requirements) the pro-

Raise the BarClass on

ActionsBy Jesse Jensen

House of Representatives movesquickly to curtail victims’ rights

First on the House agenda:

H.R. 985, the so-called“Fairness in Class Action

Litigation Act of 2017,”seeks to frustrate class

actions brought by consumers, employees,

and investors while tippingthe scales in favor of well-heeled defendants. Close

examination of the bill reveals that, far from

promoting “fairness,” thebill relies on creative

methods to delay, and ultimately dismantle,class action lawsuits.

posed class representative shows that its

claims, including its injury, are “typical”

of the class’s claims. H.R. 985, however,

would prohibit class actions unless the

plaintiff demonstrates that each pro-

posed class member suffered “the same

type and scope of injury.” In many types

of class actions, this provision could rad-

ically pare down what a “class” could be,

because the same wrongdoing may injure

large groups of consumers or workers to

different degrees. For instance, the same

dangerous prescription medication may

manifest side effects that differ in scope.

While one patient may suffer a lethal heart

attack, another may suffer a debilitating

stroke. This provision of H.R. 985, how-

ever, could be interpreted to rob from the

victims of that defect their ability to band

together against the pharmaceutical com-

pany, even though all suffered from the

same faulty medication.

Moreover, H.R. 985 does not explain how

precisely a class representative could

demonstrate that all of the class mem-

bers suffered “the same type and scope

of injury.” Ultimately, courts could spend

years of litigation attempting to settle on

an accepted meaning of this restrictive re-

quirement — preventing adjudication of

the merits, and any relief to pending

classes, in the meantime.

Other provisions of the bill also transpar-

ently seek to manufacture delay. For in-

stance, while appellate courts currently

have discretion as to when they will hear

appeals of class certification decisions,

H.R. 985 would require appellate courts

to hear all appeals of class certification

decisions, no matter how frivolous. This

element of H.R. 985 caught experienced

legal scholars and practitioners by surprise,

as little-to-no commentary had suggested

that appellate courts have failed to over-

see appropriately district court rulings on

class certification. By unnecessarily bur-

dening appellate courts, this provision

of H.R. 985 would add further time and

expense to the class certification process.

Despite near-universal criticism, the bill advances to the Senate

Other than the US Chamber of Commerce

— the highest-spending lobbying group

in the United States — H.R. 985 has re-

ceived no notable endorsement. Instead,

the bill has faced widespread denuncia-

tion, including by dozens of consumer,

labor, environmental, disability, investor

and civil rights advocacy groups, all of

whom expressed concern with how the

bill would stymie the enforcement of indi-

vidual legal rights. This disparate alliance

includes such prominent organizations as

the AFL-CIO, National Disability Rights Net-

work, and Southern Poverty Law Center.

Even beyond this pervasive concern over

the bill’s impact, several legal commen-

tators have criticized the bill for funda-

mentally disregarding Congress’s own

acknowledgment that federal courts them-

selves are best positioned to make rules

governing their procedures. For example,

on March 8, 2017, the American Bar

Association — a prominent nonpartisan

professional association of legal profes-

sionals — noted in a public letter to mem-

bers of the House that H.R. 985 would

interfere with the efforts to improve class

action procedures already in progress by

the policy-making body for the federal

courts, the Judicial Conference of the





United States, all while wasting judicial

resources and unnecessarily delaying

and denying claims.

Fortunately for institutional investors, public

outcry forced the elimination of one of the

bill’s most onerous (and arguably uncon-

stitutional) provisions. The bill’s sponsor,

House Judiciary Committee Chairman Bob

Goodlatte (R-VA), voluntarily removed

from the legislation a provision that

would have forbidden any class repre-

sentative from being represented by any

counsel who had previously served as

counsel for the class representative in a

different class action.

Nonetheless, even this pared-back ver-

sion of the bill could not garner a single

Democratic vote in the House, and even

failed to capture over a dozen Republican

votes. Ultimately, however, the substan-

tial GOP House majority advanced the bill

to the Senate in March 2017, where it has

since been referred to the Senate Com-

mittee on the Judiciary.

Since that time, the Senate has appar-

ently shown no urgency with respect to

the legislation, leaving unclear H.R. 985’s

fate. Last year, the Senate Judiciary Com-

mittee refrained from acting on similar

anti-class action legislation, also intro-

duced by Rep. Goodlatte. Many commen-

tators believe that, even if H.R. 985 moves

forward to the Senate floor, it will face

greater scrutiny — and likely revision —

than it did in the House. Ultimately, per-

haps the biggest wildcard facing H.R. 985

is whether the new President will attempt

to play any role in its future, and what

that role would be.

Conclusion

H.R. 985 threatens to erect unnecessary,

costly, and time-consuming barriers to

class actions nationwide, and the House of

Representatives disappointed the country

in making its passage one of its first

priorities this year. With the bill now in the

Senate’s control, legal experts, advocacy

groups, institutional investors, and others

should remain vigilant regarding this anti-

investor and anti-consumer legislation.

Jesse Jensen is an Associate in BLB&G’s

New York office. He can be reached at

[email protected].

Other than the US Chamberof Commerce—the high-est-spending lobbyinggroup in the UnitedStates—H.R. 985 has received no notable endorsement. Instead, thebill has faced widespreaddenunciation, including by dozens of consumer,labor, environmental, disability, investor andcivil rights advocacygroups.

QuotableH.R. 985 is a “thinly veiled attempt to skew the

current standards decisively in favor of corporate

defendants.”

Rep. John Conyers (D-MI) asserting that the Fairness in Class Action

Litigation Act of 2017 is the wrong way to improve the justice process.

22

23

R ecent developments in the international enforcement of investors’ rights

are drawing attention back to the burgeoning field of securities litigation

outside the United States, particularly in Europe.

By way of background, securities litigation in Europe is largely adjudicated on a

national basis, grounded in part in the substantive law of the European Union.

Under European Union law, an issuer must publish and distribute a prospectus

before the issuer lists or makes an offer of securities. Under Article 6(1) of the

Prospectus Directive 2003/71 of the European Parliament and of the European

Council, liability for misstatements in a prospectus will attach at a minimum to

the “issuer or its administrative, management or supervisory bodies, the offeror,

the person asking for the admission to trading on a regulated market or the guarantor,

as the case may be.” Those responsible for the content of a prospectus must include

in the prospectus “declarations by them that, to the best of their knowledge, the

information contained in the prospectus is in accordance with the facts and that

the prospectus makes no omission likely to affect its import.” Article 6(2) of the

same directive imposes an obligation on the member states of the European

Union to ensure that their laws, regulations and administrative provisions on

prospectus liability apply to those persons responsible for the information provided

in a prospectus.

ProspectusLiability in

EuropeWithin the EU, the burden of

proof for misleading statementsvaries significantly

INTERNATIONAL FOCUS

By Tomas Arons

Each EU member statehas the ability to enactlaws imposing liability

in the way it sees fit, provided that such laws

maintain the effectivenessof European Union law.

This has led to the creationof various national laws

regarding prospectus liability throughout theEuropean Union. While

the laws are largely similar, they also vary in

significant ways.

Each EU member state, however, has the

ability to enact laws imposing liability in

the way it sees fit, provided that such

laws maintain the effectiveness of the

aforementioned provisions of European

Union law. This has led to the creation of

various national laws regarding prospec-

tus liability throughout the European

Union. While the laws are largely similar,

they also vary in significant ways. For ex-

ample, the United Kingdom’s Financial

Services and Markets Act of 2000 estab-

lishes liability for misrepresentations

made by securities issuers. In order to re-

cover under the statute, investors must

prove that they relied on the alleged mis-

representations in purchasing their shares.

By contrast, under Dutch law the situa-

tion is just the opposite, with a far more

permissive standard for showing an in-

vestor’s reliance. Under Dutch law, in-

vestors can bring claims alleging

misleading statements in a prospectus

under the Unfair Commercial Practices

Act of 2008. Applying a doctrine reminis-

cent of the US-style “fraud-on-the-

market” presumption of reliance, the

Dutch Supreme Court has held that in

many cases the burden of proof is on the

securities issuer and the lead managers

(i.e., the defendants) to prove that the

misleading statements were not in any

way connected to the investors’ decision

to purchase the shares. The Dutch Supreme

Court noted that defendants may be able

to make this showing where, for instance,

the shares were purchased prior to dis-

semination of the prospectus. Moreover,

the burden of proof is also on the issuers

to prove the completeness and correct-

ness of the prospectus. The burdens were

shifted to issuers and managers with

respect to non-institutional investors

because, as noted by the Dutch Supreme

Court, a misleading prospectus can reason-

ably affect the economic behavior of an

average investor who lacks knowledge and

experience. Because of their knowledge

and experience, however, institutional or

professional investor plaintiffs still bear

the burden of proving reliance and the

fact that the alleged statements were mis-

representations.

While UK law may be stricter than in some

neighboring countries in this respect, in-

vestors have still been able to recover

some significant losses in UK courts. As

noted in prior editions of The Advocate,

a large securities class action against the

Royal Bank of Scotland (“RBS”) has been

pending in UK courts since 2009. Investors

seeking over $5 billion in damages related

to misstatements that RBS made in a

stock offering at the height of the 2008

financial crisis recently settled the action

for approximately £800 million (approxi-

mately $1 billion). This significant settle-

ment in the relatively nascent field of UK

securities litigation is a welcome sign that

while foreign securities litigation often

comes with numerous inherent risks, av-

enues for meaningful vindication of in-

vestors’ rights are taking shape.

Nearby Denmark is also home to an in-

creasing number of shareholder suits. In

the spring of 2016, twenty-five institutional

investors, including Denmark’s largest

pension fund, filed a legal action against

OW Bunker, a now-defunct marine fuel

trader, in the City Court of Copenhagen.

The suit claims that misstatements in OW

Bunker’s prospectus in connection with

its 2014 IPO led to investor losses of





approximately $103 million (800 million

Danish crowns). The institutional investor

plaintiffs claim that the OW Bunker IPO

prospectus omitted material information

concerning oil-price speculation and trad-

ing with one very large customer — the

Singapore company Dynamic Oil Trading.

Indeed, a report drafted by administrators

of OW Bunker’s bankruptcy estate alleged

that a draft OW Bunker prospectus con-

tained detailed information on both the

oil-price speculation and the relationship

with Dynamic Oil Trading, but that this in-

formation was subsequently removed

from the final prospectus.

OW Bunker, like other securities cases,

was brought under the Danish Class

Action Act, which became effective in

January 2008 and provides for both opt-

in and opt-out transactions. Danish laws

pertaining to prospectus liability include

but are not limited to: 1) the Danish Secu-

rities Trading Act; 2) the Danish Financial

Businesses Act; 3) the Rules Governing

Securities Listing on the Nasdaq OMX

Copenhagen; 4) and other various deriv-

ative regulations and executive orders.

The Danish Supreme Court ruled in 2002

in the important Hafnia case that liability

for misleading prospectuses follows the

general principles of Danish tort law. As

a consequence, investors in such cases

do not enjoy the Dutch-style burden shift-

ing discussed above.

The recent RBS settlement and the filing

of the OW Bunker case illustrate the de-

velopment of viable avenues for recovery

in securities litigation venues outside the

US. As investors work to evaluate the

costs and benefits to participating in such

actions, it is important that they consider

the similarities and differences in

prospectus liability laws of the European

Union member states, including signifi-

cant differences regarding the applicable

burdens of proof. These shifting burdens

are sure to continue to have a significant

effect on the outcome of foreign securi-

ties litigation.

Tomas Arons is an expert in European

securities law, a senior legal advisor at

Dutch shareholder association VEB, and a

Professor of Law at Utrecht University in

the Netherlands. His fields of expertise

include securities liability law and class

actions. Professor Arons obtained bachelor’s

degrees in Economics and Law at Maastricht

University, two master’s degrees in Com-

pany Law and in Financial Law at Erasmus

University Rotterdam, and a master’s degree

in Economics at the University of Amsterdam.

He can be reached at [email protected] or

[email protected].

In the UK, securities issuers can be liable formisrepresentations, butinvestors must prove thatthey relied on the allegedmisrepresentations inpurchasing their shares.By contrast, Dutch law isjust the opposite. There,the burden of proof is on the issuers to provethe completeness andcorrectness of theprospectus.

Jonathan Feigelsonjoins BLB&G as

Director of CorporateGovernance.



F ormer TIAA General Counsel

Jonathan Feigelson has joined

the firm as Director of Corporate

Governance.

Bringing nearly a quarter century of legal,

financial, and corporate leadership expe-

rience to BLB&G, Jon works with and

guides the firm's institutional investor

clients in significant efforts to address is-

sues of governance and management

practices, board independence, manage-

ment accountability, executive compen-

sation, and the protection of the US

shareholder franchise.

Prior to serving as TIAA’s General Coun-

sel, Director of Corporate Governance,

head of Regulatory Affairs and Senior

Managing Director, he was the Managing

Director and General Counsel for ABN

AMRO's North American Investment Bank,

and a Vice President and Global Director

of Equity Derivatives Compliance for

Goldman Sachs. Jon began his career as

an Assistant District Attorney in the Man-

hattan District Attorney's office in the

Financial Frauds Bureau specializing in

securities and bank fraud cases.

As Jon has explained, his significant

experience has impressed upon him the

importance of protecting shareholder

rights through corporate governance

reform: "Good corporate governance is

critical to minimizing misconduct and in-

creasing transparency. I am gratified to

continue to be able to help the institu-

tional investor community use its voice

to encourage strong governance prac-

tices and deter destructive behavior in

our capital markets."

BLB&G is excited to have Jon on board.

His wealth of knowledge and experience

will be a great advantage to all of our

clients.

Jon can be reached at

[email protected].

ShareholdertheProtecting

Franchise

Committed to



On the new administration Jon shared his thoughts that we should “expect a more busi-

ness-friendly Administration on jobs and deregulation, with

less focus on protection of investor rights and more protection

of the prerogatives of boards and management.” Jon also ex-

plained that we are likely to see “slower implementation and

perhaps reversal of the remaining Dodd-Frank rules on envi-

ronmental, social and governance matters.”

On dual-class stock structuresJon also discussed the hot topic of dual-class stock structures,

which is the subject of an article in this issue of The Advocate.

Jon called such inferior share issuances “blatantly manage-

ment-protective,” noting that “they discourage good corporate

governance while undermining voting and other key owner-

ship rights. Unfortunately as long as companies like Snap are

going to make money in their IPOs, people are going to buy

them. But some day, we are going to see another WorldCom-

type situation with the dual-class share-owned company. When

that happens, the investor community will hopefully prevail in

their efforts to prevent this from continuing to occur. I think

there is likely nothing more anti-ownership.”

BLB&G hosts the Real-Time Speaker Series — webcasts featuring candid conversations with academics, policy makers, commentators

and other experts about the financial markets and topics of importance to the institutional investor community. At the forefront

of the corporate governance issues most critical to preserving investor rights, Jon shared his views on emerging trends and the

current corporate governance landscape in a recent installment of the Speaker Series.

Jonathan Feigelson explores issues facing shareholders atBLB&G’s Real-Time Speaker Series

Subscribe to BLB&G’s ongoing Real-Time Speaker Series: www.blbglaw.com/realtime

On diversity in the boardroomTouching on diversity in the boardroom, Jon shared his opinion

that while there has been some progress, companies should

strive to do more. “In terms of what boards should and could

be doing…there needs to be a continued focus and effort to put

qualified women and not just women but minorities of all kinds

also on boards, not solely for the purpose of, but partly for the

purpose of, promoting social justice. Further, assuming candi-

dates have the right skill set for a given board position, the

more diversity of professional and personal experience a board

possesses, the more successful and effective the board is going

to be. It’s no different than the team of rivals that Lincoln had

established for his cabinet when he assumed the presidency

way back when. Different points of view and debates produce

better outcomes.”

On proxy access adoptionJon stated that “large companies will continue to make conces-

sions and allow for increased proxy access.” This is because

“throughout 2015-2016, so many major corporations in the S&P

500 have increased the number of proxy proposals allowed that

I think it makes it harder and harder for any large corporation

to hold out.…this trend is directly related to the coordinated ef-

forts of the institutional investor community.”

www.blbglaw.com/realtime



800-380-8496

E-mail: [email protected]

Editors: Brandon Marsh and Julia TeborEditorial Director: Alexander Coxe“Eye” Editor: Alla ZayenchikContributors: Tomas Arons, Jesse Jensen,David Kaplan, Brandon Marsh, David Wales,and Alla Zayenchik

The Advocate for Institutional Investors ispublished by Bernstein Litowitz Berger &Grossmann LLP (“BLB&G”), 1251 Avenueof the Americas, New York, NY 10020, 212-554-1400 or 800-380-8496. BLB&Gprosecutes class and private securities andcorporate governance actions nationwideon behalf of institutions and individuals.Founded in 1983, the firm’s practice alsoconcentrates in general commercial litigation, alternative dispute resolution,distressed debt and bankruptcy creditorrepresentation, civil rights and employ-ment discrimination, consumer protection,and antitrust actions.

The materials in The Advocate have been preparedfor informational purposes only and are not intendedto be, and should not be taken as, legal advice.The thoughts expressed are those of the authors.

© 2017. ALL RIGHTS RESERVED. Quotation with

attribution permitted.

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Julia Tebor

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tive Director Jon Lukomnik summarized,

multi-class companies are “built for com-

fort, not performance.” Earlier this year,

Harvard Law School Professor Lucian

Bebchuk also published an analysis of

dual-class structures, finding that they

result in “perverse incentives” and that

“the potential advantages of dual-class

structures (such as those resulting from

founders’ superior leadership skills) tend

to recede, and the potential costs tend to

rise, as time passes from the IPO.” Based

on his findings, Professor Bebchuk con-

cludes that “the debate should focus on

the permissibility of finite-term dual-class

structures — that is, structures that sunset

after a fixed period of time (such as ten

or fifteen years).”

The typical retort from proponents of

dual-class structures is that depriving most

investors of equal voting rights allows

managers the leeway to make forward-

thinking decisions that cause short-term

pain for overall long-term gain. This

assertion, however, ignores that many

investors — and in particular public pen-

sion funds and other long-term institu-

tional investors — are themselves focused

on long-term gains. If managers have

good ideas for long-term investments,

such prominent investors will likely sup-

port them. Moreover, any argument that

managers should be blindly trusted to

make decisions for long-term gain must

take into account the significant waves of

managerial scandals and securities fraud

in recent decades. Such conduct has re-

sulted in record fines, countless viola-

tions of the securities laws, reduced

shareholder returns, and the imposition

of significant externalities on the court

system and regulators.

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Institutional investors can help curbdual-class shares

As the trend of issuing dual-class or

multi-class stock continues, institutional

investors should remain vigilant to pro-

tect shareholders’ voting rights. Pre-IPO

investors can oppose the issuance of

non-voting shares during IPOs. Investors

in publicly traded companies can speak

out against proposed changes to share

structures or resort to litigation when

necessary, such as in the Google, Face-

book, and IAC cases.

Institutional investors may also lobby

Congress, regulators, and the national

exchanges to ban non-voting shares or

make it harder to issue no-vote shares.

For instance, in the wake of the Snap IPO,

CII Executive Director Ken Bertsch and

other investors met with the SEC Investor

Advisory Committee. They encouraged

the SEC to work with US-based exchanges

to (1) bar future no-vote share classes; (2)

require sunset provisions for differential

common stock voting rights; and (3) con-

sider enhanced board requirements for

dual-class companies in order to discour-

age rubber-stamp boards. Whether by

working with regulators, securities ex-

changes, index providers, or corporate

boards, institutional investors that con-

tinue to fight for shareholder voting rights

will be working to promote open and re-

sponsive capital markets, and the long-

term value creation that comes with them.

Brandon Marsh is Senior Counsel in the

firm’s California office. He can be reached

at [email protected].

One Share, No VoteContinued from page 7

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TheAdvocate - Bernstein Litowitz Berger & Grossmann LLP · a similar post-IPO plan to distribute non-voting shares and solidify founder and CEO Mark Zuckerberg’s control. Amid re-newed