The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

A year ago, President Obama signed the Jumpstart Our Business Startups (JOBS) Act, a legislative product of rare bipartisan collaboration that was intended to improve employment and make it easier for smaller firms to raise private equity. (For an overview of the Act’s provisions, refer here.) Twelve months later, many of the rules needed to implement the JOBS Act remain uncompleted and the legislation’s promise remains largely unfulfilled.

As detailed in a March 29, 2013 Washington Post article entitled “JOBS Act Falls Short of Grand Promises” (here), “nearly a year after its enactment, major portions of the act are in limbo, and other parts have failed to measure up to the grandiose job-creation promises.”

The JOBS Act was specifically intended to aid “Emerging Growth Companies” (ECGs), which the Act defined as companies with annual revenues under $1 billion. Among other things, the Act was intended to make it easier for these companies to go public. It would be hard to make the case that the JOBS Act has delivered a boost to initial public offerings. As detailed in a March 27, 2013 Wall Street Journal article entitled “JOBS Act Sputters on IPOs” (here), in the twelve months since the Act’s passage IPOs of ECGs “are on track to fall 21% to 63 from 80 in the prior year.” The Journal article does note that a number of market and economic factors “helped chill the climate for IPOs over the past year” and “the IPO market is showing signs of improving health.”

Another concern about the IPOs that are taking advantage of the Act’s provisions is that some may not be exactly represent the kind of companies Congress had in mind. For example, one of the companies that completed its offering while taking advantage of the JOBS Act’s so-called “IPO on-ramp” provisions, was Manchester United, a 135 year old sports club based in Manchester, England, that, though obviously unlikely to create any U.S. jobs, nevertheless qualified as an “Emerging Growth Company.” As Jason Zweig noted in his August 3, 2012 Wall Street Journal article entitled “When Laws Twist Markets” (here), among the other companies taking advantage of the JOBS Act provisions are “blank check companies,” noting that “In an irony only Congress could foster, many of the blind pools rushing to list under the JOBS Act have no employees and say in their prospectuses that they might never hire anybody at all.”

Even for ECGs that completed IPOs after the JOBS Act was enacted, the impact of the IPO on-ramp provisions has been mixed. A January 2013 memo from the Skadden firm entitled “The JOBS Act: What We Learned in the First Nine Months” (here) analyzed the 53 ECGs that completed IPOs between April 5, 2012 ad December 15, 2012. The memo relates that certain of the Act’s provisions, such as the provision allowing draft registration statements to be submitted confidentially and the provision allowing ECGs to provide scaled-down executive compensation disclosure, have met with “strong acceptance.” Other provisions such as the option for ECGs to provide an abbreviated period of financial statement disclosure, have met with only “weak acceptance.” Yet other provisions, such as those allowing “test the waters” communications in advance of the offering, have met with “mixed acceptance.” As pointed out in the March 2013 issue of CUG.COMments (here), while “certain aspects” of the JOBS Act “have been seized upon by ECGs,” the ECGs’ “utilization of the available benefits” has been “inconsistent.”

While the IPO on-ramp provisions have had a mixed effect, the “most significant bits” of the Act, according to a March 30, 2013 Economist article entitled “America’s JOBS Act: Still Not Working” (here) are “bottled up at the SEC.” Most importantly, the SEC still has not issued rules to implement the Act’s provisions relating to Crowdfunding. The SEC also has not issued rules to allow companies to raise as much as $50 million in the public markets without undertaking reporting obligations, nor has it issued rules lifting restrictions on advertising private securities offerings.

Among the reasons for the delays on the crowdfunding rules has been an internal debate within the SEC about the best approach to take. According to the Economist, Mary Shapiro, the outgoing SEC chairman was concerned that the JOBS Act would “eliminate important protections for investors” and she was particularly critical of the crowdfunding provisions. It remains to be seen what the approach will be of the incoming chair, Mary Jo White; at a minimum, it may be many months before the final rules are put into effect.

My earlier post on concerns about problems with crowdfunding can be found here. A more basic question concerns who will actually be able to take advantage of crowdfunding, given the Act’s statutory constraints, an issue I discussed here.

According to the Post article linked above, the Act’s mixed record has occasioned some concerns and even regrets on Capitol Hill. There is now a perception in Washington that the Act, described in the article as “a grab bag of ideas cobbled together for greater impact,” was “hastily introduced” and enacted due to election year pressures with “record speed.” The result, according to unnamed critics, is “laws fraught with risks to investors.” At a minimum, the Act “underscores how difficult it can be for Washington to spur job creation even when there’s strong bipartisan consensus on a plan.”

The picture is not entirely negative. According to the Journal, biotechnology companies, which have been “a bright spot for IPOs during the past year,” appear to be “using the new rules more than other companies.” Many biotech firms are unprofitable when they go public and they find that “the ability to save time and money by taking advantage of the relaxed standards was beneficial.”

Among many others concerned with the Act and its possible implications, D&O insurers continue to weigh the Act’s effects. For now, most insurers continue to await developments, particularly the introduction of the crowdfunding rules. The insurers remain concerned about possible crowdfunding abuses and about the liability measures in the crowdfunding provisions. Some insurers have already started adding crowdfunding exclusions to their private company D&O insurance policies. At a minimum, the delays attending the Act’s implementation have introduced an element of uncertainty, which likely has increased the insurers’ general wariness. The general perception seems to be that the Act could still have a significant impact on the scope of policyholders’ potential liability, but exactly what that might mean remains to be seen. Even after a year, the Act’s impact remains unclear, for insurers as for other observers and commentators.

About the Ruling in the Consolidated Libor-Scandal Antitrust Litigation: Readers interested in Judge Buchwald's opinion in the consolidated Libor-scandal antitrust litigation (about which refe here), and who are wondering what remains after the recent rulings and what the implications may be for the other Libor-related lawsuits will want to review Alison Frankel's April 1, 2013 post on her On the Case bliog (here). Frankel has a detailed analysis of what portions of the consolidated cases remain after the ruling, as well as what it all might mean for the other cases before Judge Buchwald as well as the cases that have not yet been consolidated in her court.

Yet Another Modest Securities Suit Settlement Involving U.S. Listed Chinese Company: During 2010 and 2011, plaintiffs’ lawyers rushed to file lawsuits against U.S.-listed Chinese companies that caught up in various accounting scandals. However, as I have previously noted, even the cases that have survived the preliminary motions have produced only very modest settlements.

In the latest example of one of these cases settling modestly, on April 1, 2013, the plaintiffs’ lawyers in the securities suit involving Deer Consumer Products announced that the case had been settled for $2.125 million. As noted in the parties’ stipulation of settlement (here), the settling defendants include the company and two individuals, although the released defendants appear to include all of the Deer company-related defendants. The settlement does not appear to involve the payment of any insurance funds; the stipulation recites that the settlement amount “shall be paid exclusive by the Settling Defendants.”

As I recently noted (here, second item), the exceptions to this pattern of the securities suits against U.S.-listed companies settling modestly are the cases in which there are significant settlement contributions from the companies’ outside professionals. For example, as discussed in the recent post, the recent $20 million settlement in the case involving Sinotech Energy Limited included an $18 million settlement contribution from the company’s offering underwriters. And of course there is the eye-popping $117 million settlement payment by Ernst & Young in the Ontario securities class action lawsuits involving Sino Forest.

The plaintiffs’ lawyers in the Deer Consumer Products, perhaps recognizing the impact of the claims against the Chinese companies’ outside advisors, on March 9, 2013 filed a separate action in the Central District of California against the company’s outside auditors, Goldman Kurland Mohindin,  in what appears to be something of a second phase of litigation.

Rule 10b5-1 Trading Plans: “Avoiding the Heat”: The SEC promulgated Rule 10b5-1 in order to allow company insiders to safely trade in their company securities without incurring liability under the securities laws. As it has turned out, trading under Rule 10b5-1 plans has been a source of significant scrutiny, as I recently noted here. Nevertheless Rule 10b5-1 trading plans can still provide significant liability protection, if they are set up, implemented and maintained appropriately.

A March 11, 2013 memo from the Covington & Burling law firm entitled “Rule 10b5-1 Trading Plans: Avoiding the Heat” (here) lays out the practical steps that companies and their executives can take to try to take advantage of the Rule and to avoid the issues that have caused problems with trading plans in the past. The memo’s authors note that “remains a beneficial and frequently utilized provision to permit corporate insiders to sell the securities of their companies while minimizing the risk of engaging in insider trading.” However, they add that “public companies and insiders seeking to rely on Rule 10b5-1 should renew their focus on ensuring that their trading plans comply with the requirements of the rule.”

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As the various forms of social media have become increasingly pervasive, employers have struggled with appropriate responses to employees’ use of the social media sites. One question in particular that has arisen is the extent to which employers can seek to regulate and even discipline employees’ use of social media to comment on the employer or their workplace. A recent decision by a three-judge panel of the National Relations Board, addressing the social media policies of Costco Wholesale Corp. held that the company’s social media policy violated its employees’ rights under the National Labor Relations Act. A copy of the NLRB’s September 7, 2012 Decision and Order can be found here.

I should note at the outset that this NLRB ruling was discussed by a panel at the Advisen Management Liability Insights Conference in New York last Thursday. In addition, a work colleague also forwarded me a copy of the Blank Rome law firm’s September 2012 memo about the NRLB’s ruling. I acknowledge here my indebtedness to the conference panel and to my work colleague for identifying this topic and suggesting many of the comments in this post.

The NLRB’s Costco ruling arose out of efforts at the company’s Milford, Connecticut facilities to organize the facilities’ meat department employees. In connection with these activities, the concerned union filed charges with NLRB alleging that the company had violated the employees’ rights under the National Labor Relations Act. Among other things, the Union alleged that the company had certain unlawful rules in its employee handbook. Among these rules is one stating that “any communication transmitted, stored or displayed electronically must comply with the policies outlined in the Costco Employment Agreement.”

The rule goes on to state that statements “posted electronically (such as [to] online message boards or discussion groups) that damage the Company, defame any individual or damage any person’s reputation, or violate the policies outlined in the Costco Employee Agreement may be subject to discipline, up to and including termination of employment.”

The Administrative Law Judge who heard the union’s charges upheld this rule, determining that employees would reasonably conclude that the company’s purpose in devising h the rule was to ensure a “civil and decent workplace.”

The NLRB rejected the ALJ’s determination, concluding to the contrary that the rule “allows employees to reasonably assume that it pertains to – among other things—certain protected concerted activities, such as communications that are critical to the Respondent’s treatment of its employees.” The Rule, the NLRB said, “clearly encompasses concerted communications protesting [Costco’s] treatment of its employees.” Costco’s maintenance of the rule therefore “has a reasonable tendency to inhibit employees’ protected activity” and as such “violates” the National Labor Relations Act.”

The Blank Rome law firm’s memo comments that the NLRB’s ruling, (the NLRB’s first binding decision on the issue) “serves as a reminder to employers to review the scope of their social media policies and to carefully analyze how they may be construed.”

As noted in a September 21, 2012 memorandum from the Franczek Radelet law firm about the ruling (here), the need to review social media policies applies to both union and non-union employers, adding that “now more than ever, all employers should continue to review and update all of their policies to ensure that they are specific, narrowly tailored to their business needs, and do not sweep so broadly so as to interfere with employee rights under federal labor law.”

In thinking about the potential EPL insurance implications of this development, it is important to note that many EPL policies have National Labor Relations Act exclusions, precluding coverage for claims based upon alleged violations of the NLRA or similar federal, state and local statutes. However, many insurers are willing upon request to amend this exclusion to provide a carve-back specifying that the NLRA exclusion does not apply to claims for retaliation.

A retaliation carve-back to the EPL policy’s NLRA exclusion would not preserve coverage for all claims asserting that a company’s social media policy violates the NLRA. However, Costco’s social media policy not only contemplated discipline for violation of the policy, but expressly allowed for employee termination. The retaliation claim coverage carve-back to the NLRA exclusion might preserve coverage for a claim by an employee that he or she was terminated in retaliation for engaging in activity that contravened a social media policy that violated the NLRA – or to put it more simply, in retaliation for engaging in activity protected by the NLRA. However, even among carriers who are willing to extend the carve-back to the NLRA exclusion, the carriers sometimes restrict the carve-back so that it does not extend to extend coverage to class or mass action claims.

Jay Rockefeller’s Cyber Security Letter: On September 19, 2012, John D. Rockefeller, IV, the Democratic Senator from West Virginia, sent a letter to the CEOs of all of the Fortune 500 companies, asking each CEO to voluntarily respond by October 19, 2012 to several broad questions pertaining to the company's view on cybersecurity and to the federal government's efforts to promulgate national cybersecurity standards. A copy of hte letter Senator Rockefeller sent to IBM's CEO can be found here. ,  

As detailed in a September 19, 2012 memorandum from the Gibson Dunn law firm (here), Rockefeller’s letter follows his unsuccessful efforts earlier this year to pass legislation intended to impose heightened cybersecurity standards on a national level. (Indeed, a cynical reader might say that the letter is basically just one long gripe to the CEOs that the legislation failed to pass due to a filibuster and the efforts of business lobbyists.)   The law firm memo also points out that the letter follows other efforts Rockefeller has made to focus on cybersecurity outside of the legislative process, including his successful efforts last year to have the SEC provide guidance to pubic companies on what disclosures they should make concerning the companies’ cybersecurity risks and incidents.

The letters in and of themselves are unlikely to change anything. However, Rockefeller’s continuing efforts underscore the fact that cybersecuity is likely to remain both a high profile issue and a highly politicized issue. At the same time, other companies will find themselves, as Google recently did, under increased pressure to make disclosures regarding cybersecurity risks and incidents.

With increasing public scrutiny on companies’ cybersecurity preparedness and disclosure comes the increasing likelihood comes the increasing possibility that companies experiencing cybersecurity incidents —and their directors and officers -- may face claims from shareholders and other constituencies that they failed to implement appropriate cybersecurity measures or made misrepresentations about their cybersecurity preparedness. As recently noted in Rick Bortnick’s Guest Post on this blog, potential D&O liability is one of the significant components of cyber risk. The high-profile nature of these issues and the level of scrutiny increase the likelihood that we will see claims against companies’ directors and officers based on cybersecurity preparedness and cyber disclosure.

Concerns About JOBS Act Fundraising:  Another topic that the Advisen conference in New York addressed last week was whole topic of concerns with fundraising activities enabled by the recently enacted JOBS Act. The Act’s provisions permitting crowdfunding and loosening restrictions on solicitation and advertising for exempted offerings at a minimum create a context within which liability claims could arise and also increase the possibility for fraud. The Act’s provision raising from 500 to 2,000 the number of shareholders a company may have before it takes on SEC reporting obligations not only increases the potential scale of these problems but also ramps up the number of prospective claimants that might object.

As the panel at the Advisen conference discussed, these concerns will pose a host of challenges not only for prospective investors but for private company D&O underwriters, as well. A September 22, 2012 Wall Street Journal article entitled “On Crowdfunding and Other Threats” (here) reviews the steps that prospective investors can take to try to avoid getting scammed in a JOBS Act offering. Though the list of steps in the article are addressed to the investors hoping to avoid getting defrauded, the list also provides a useful starting point for D&O underwriters trying to think about and to  underwrite these risks. At a minimum, it seems clear that caution is indicated here, both for investors and for insurance underwriters

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Readers interested in a more positive perspective on the possibilities of new forms of funding such as “crowdfunding” may want to take a look at the article in this week’s issue of Time Magazine entitled “The Kickstarter Economy” (here, subscription required). The article chronicles the successes of (and challenges for) the Kickstarter, the online fundraising portal. The article optimistically suggests that the online fundraising will support nascent enterprises that are well-intentioned and worthy. At the same time, the article also documents many initiatives that failed to live up to their own aspirations.

One of the panelists at the JOBS Act session at last week’s Advisen conference was Carl Metzger of the Goodwin Proctor firm, who pointed out that his firm has a page on its website devoted to JOBS Act- related concerns. The firm’s webpage, which can be found here, is a good one-stop resource on JOBS Act issues and developments.

German Court Dismisses Investors’ Porsche Suit: As I have discussed in numerous posts on this blog (most recently here),  aggrieved investors who lost money short-selling VW shares and who claim they were misled by Porsche’s management have been trying to pursue claims against Porsche and its senior officials in U.S. courts. (Background regarding the dispute can be found here.) After their initial U.S. federal court action was dismissed (about which refer here), some investors tried to pursue claims against Porches in Germany’s courts. Now, according to press reports (refer here), the first two of these German lawsuits to be considered have been dismissed.

According to the news reports, the Braunschweig regional court determined that the allegedly misleading statements on which the investor claimants sought to rely in support of their claims against Porsche did not amount to “vicious behavior” that would have misled investors A statement on the court’s website about the September 19, 2012 court determination (in German) can be found here. According to the news reports, three additional cases remain pending before the same German court.

The outcome of the two German cases highlights why the aggrieved investors tried first to assert their claims in the U.S., and why some investors are continuing to press the U.S. claims. The appeal of the dismissal of the original U.S. federal court lawsuit remains pending in the Second Circuit. In addition, other investors’ New York state court common law claims have survived an initial motion to dismiss (about which refer here). This long-running litigation saga continues to grind on, but the outcome of the two recent German court decisions seems to suggest that whether investors are to have any hope of relief will depend on further developments in the U.S. proceedings, particularly the pending appeal in the Second Circuit.

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Among the more noteworthy aspects of the recently enacted Jumpstart Our Business Startups (JOBS) Act are the legislation’s crowdfunding provisions. These provisions are intended to allow small businesses a new means of raising funds directly from investors using the Internet. But many commentators are concerned about these provisions. Among other things, some have noted that the transaction costs that the Act required fund-raising companies to incur may deter start-ups from using crowdfunding. And a number of other commentators have raised concerns about fraud.

The possibility of crowdfunding fraud, and some suggestions about possible means of preventing the fraud, is discussed in an August 22, 2012 Thomson Reuters News & Insight article entitled “Crowdfunding: Small-Business Incubator or Securities Fraud Accelerator?” (here), written by Lyndon Tretter of the Hogan Lovells law firm. The author notes that many commentators are “concerned that the potential for fraud on the crowd may outweigh the promise of new financing for legitimate startups.” Among other reasons for these concerns is that with crowdfunding, “the risk of fraud increases because the pool of investors includes those who have no personal relationship with the business owner and who may be geographically remote from and thus unable to oversee the business itself.”

The author notes that, while the JOBS Act expressly provides investors the opportunity to seek a recovery if they believe they have been misled, because each crowdfunding investor will only have a relatively small stake in the enterprise, they may lack the incentive or resources to pursue a recovery. Even in the aggregate, the investors’ collective investments may not be enough to attract the interest of the traditional class action attorney, so the civil liability provisions “may not prove to be very useful in practice.”

To address these concerns, the author proposes that the SEC promulgate rules designed to address the likeliest sources of abuse: the promise of unrealistic returns on investment and the ability of insider to use the money they raise for themselves of their own benefit. The author specifically proposes that the SEC use its rulemaking to require the fund raisers to state the personal investments that the insiders have made in the enterprise; require particularized disclosure of the anticipated use of the offering proceeds; require disclosure of any salary, benefits or compensation the issuer is expected to pay in the next year; and require disclosure of any transaction with a related party that the issuer anticipates in the coming year. The author also suggests that the SEC encourage investors to consider the benefits of investing locally, under circumstances when investors might have a better chance to monitor the company directly.

The author also proposes augmenting the JOBS Act’s civil liability provisions, among other things by allowing claimants to recover their attorneys fees incurred in pursuing a claim if the claimant can show that an individual insider intended the issuer’s disclosure to be misleading.

I think the author has done a commendable job of trying to think of ways to protect investors and to try to make the crowdfunding less susceptible to fraud. Unfortunately, it seems inevitable that there will be those who abuse the crowdfunding mechanism. It is bad enough that the crowdfunding procedure specified in the JOBS Act will be cumbersome and costly, as I noted in a prior post. But if there are highly publicized instances where crowdfunding is abused and investors are defrauded, prospective investors may be deterred altogether, and in the end the process could not only be costly but ineffective.

It will be interesting to see the SEC’s rules when they are finally released. But it will be even more interesting to see what becomes of the crowdfunding mechanism – in particular, what kinds of companies use the process, whether they process becomes a standard means of fundraising, and whether or not there are problems with fraud or other abuse. I wonder whether with all of the potential problems crowdfunding will prove to be an important and useful innovation or a just another failed initiative.

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In order to try to boost the number of companies going public, the recently enacted JOBS act provides for certain procedural and reporting advantages for “Emerging Growth Companies,” which are defined in the Act as companies within five years of their IPO and with revenues less than $1 billion. A number of companies planning IPOs are already taking advantage of the new provisions. But at the same time, those same companies are warning investors that their status as Emerging Growth Companies may itself be a risk of which investors should be aware.

As discussed at greater length here, the JOBS Act contains a number of IPO “on ramp” procedures designed to ease the process and burdens of the “going public process” for Emerging Growth Companies (EGCs). The “on ramp” advantages are intended to ease the going public process. For example, EGCs can elect to submit their IPO registration statement for SEC review on a confidential, nonpublic basis, although the registration statement must be publicly filed at least 21 days before the IPO roadshow.

The Act also provides for reduced disclosure and reporting burdens for EGCs for as long as five years after an IPO - as long as the company continues to meet the definitional requirements. For example, an EGC will not be subject to Section 404(b) of the Sarbanes Oxley Act requiring an outside auditor’s attestation report on the company’s internal controls. Similarly, an EGC would be exempt from the requirements under the Dodd-Frank Act to hold shareholder advisory votes on executive compensation and on golden parachutes.

Since the enactment of these provisions, a number of commentators have noted that while these JOBS Act provisions may serve the laudable goal of easing the IPO process, these provision also introduce risks for investors. Nor are these remarks just coming from sideline commentators. Indeed many of the most specific warnings are coming from the companies themselves.

In her May 15, 2012 CFO.com article entitled “A New Risk Factor: The JOBS Act” (here), Sarah Johnson reports that for many of the companies taking advantage of the JOBS Act IPO on-ramp provisions, the fact that the companies are relying in the JOBS Act “is itself a risk factor.” Her article notes that in recent days, at least 13 companies “have warned investors in their prospectuses filed with the Securities and Exchange Commission that the JOBS Act’s breaks on SEC rules could actually be a turnoff.” By way of example, she quotes Cimarron Software’s recently filed S-1, in which the company states that “we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.”

In a May 14, 2012 post on his CorporateCounsel.net blog entitled “JOBS Act: EGC Status as a Risk Factor” (here), Broc Romanek takes a detailed look at one of the recent IPO filings, the S-1 that LegalZoom filed in connection with its proposed initial public offering. He notes that right on the cover page of the filing, the company warns that “we are an ‘emerging growth company’ under the federal securities laws, and will be subject to reduced public company reporting requirements.” Among other things, the company notes in its filing that it will be taking advantage of the JOBS Act reporting exemptions as long as the company qualifies to do so, adding that “we cannot predict if investors will find our common stock less attractive because we rely on these exemptions.” The company further notes that “if some investors find our common stock less attractive as a result, there may be less active trading for our common stock and our stock price may be more volatile.”

These disclosures not only have the virtue of warning investors that the companies’ status as emerging growth companies may make their stock less attractive. The warnings may, according to one commentator quoted in the CFO.com article, provide "cheap insurance” that could help the company if it later runs into trouble. As the commentator noted, if the emerging growth company is later sued, the company can say “We warned you that there weren’t auditors looking independently at this.”

These emerging growth companies advisory statements may indeed represent good precautionary disclosure. But it is fair to ask whether the cautionary statements go quite far enough. It is one thing to say that the company’s reduced reporting requirements may make the company’s stock less attractive. What the companies don’t seem to be saying, at least not directly, is that the reduced reporting requirements could make their reported financial results less reliable. As a plaintiff’s lawyer quoted in the CFO.com article notes, the emerging growth companies’ precautionary disclosure may forewarn that their stock may not trade as high or as frequently as it might otherwise, but they are not saying that as a result of the reduced reporting requirements you “may get a nasty surprise” when the company no longer qualifies for the exemptions.

All of which says that while companies are now just trying to adjust to the newly enacted IPO process and reporting provisions, we will have to wait to see how all of this plays out in the securities litigation arena. For now, the companies taking advantage of the new rules do seem to be recognizing that while the new processes do present certain advantages, they do involve possibly increased risks as well.

The one thing that is certain is that because of the JOBS Act’s broad definition of “emerging growth companies,” a very larger percentage of companies going public will be eligible to take advantage of the new rules. Indeed, according to one report, of the 113 companies that went public in 2011, only 15 (or 13%) would not have qualified for the JOBS Act’s IPO on-ramp procedures.

In other words, the disclosure issues discussed above, and the related liability concerns, could be an issue for a significant number of companies. Indeed, if the JOBS Act achieves its fundamental goals, these considerations could be a concern for an increasingly larger number of companies.  

Delaware Seminar on Corporate and LLC Law: On Tuesday May 22, 2012, I will be participating in a panel the Delaware State Bar Association Corporate Law Section’s annual “Recent Developments in Delaware Corporate and Alternative Entity Law” seminar. The seminar will be co-chaired by Francis Pileggi of the   Eckert Seamans firm and also the author of the Delaware Corporate and Commercial Litigation Blog, and his law partner Kevin F. Brady and R. Montgomery Donaldson of the Montgomery McCracken Walker & Rhoads firm. Pileggi’s recent post on his blog about the event can be found here. 

The panel I will be participating in is entitled “Corporate Law Updates Via Blogs,” and my fellow panelists will include Doug Batey of the Stoel Rives law firm and the author of theLLC Law Monitor blog; University of Illinois Law Professor Christine Hurt, of  The Conglomerate blog; and Boston College Law Professor Brian Quinn, of  The M&A Law Prof blog. Batey’s recent blog post about our upcoming panel can be found here.

Our panel should afford the panelists an opportunity to reflect and comment upon the blogging process and experience. Along those lines, in an interesting May 18, 2012 post entitled “What Then is Blogging” (here),   Dick Cassin of the indispensable The FCPA Blog sets out some of his views and thoughts about blogs and blogging. (Thanks to Cassin for quoting one of my prior blog posts).

Looking for Life in All the Wrong Places?: A May 18, 2012 Wall Street Journal article entitled “Searching a Billion Planets for Life” (here) describes scientists’ efforts to write a recipe for “perfect planet”—that is, a place that is “not too cold, not too hot, not too toxic and chemically suitable for life as we know it” as a way to aid in the search for “potentially habitable alien worlds.”

The challenge for the scientists is that the process of trying to come up with the recipe leaves them “grappling with the nature of life itself.” Perhaps the most fundamental problem is that the analysis depends on presumptions “based on life as we know it” – that is, life on Earth.

The potential limitations of this Earth-biased analysis are revealed most dramatically just by looking at what has happened in recent years to our knowledge about life on Earth. Through a series of interesting discoveries, our awareness of the range of conditions in which life on Earth can thrive has expanded far beyond what was previously thought possible.

An interesting article in the May/June 2012 issue of The Economist’s Intelligent Life magazine entitled “Some Like it Very Hot” (here) takes a look at the scientific advances that have revealed the teeming existence of “hyper-resilient microbes,” organisms that can survive “levels of heat, cold, pressure, radiation and salt or acid concentrations that previously would have been thought fatal to all living things.” These previously unknown organisms, now known as extremophiles, have been found deep beneath the sea floor; in the depths of Mexican caverns; in the core of nuclear reactors; in hydrothermal vents on the sea bed; and are constantly being discovered in ever more unlikely and seemingly inhospitable environments.

Among many other things, these discoveries show that “life can sustain itself in many more environments than was previously thought possible.” This realization not only has enormous implications for the study of life on Earth; it has also given new life to the “idea that life is dispersed throughout the universe and is disseminated on meteorites or asteroids.” Or to put it another way, “the bandwidth of survivable environments – and therefore, forms of life, has broadened enormously.”

The implication for scientists hoping to increase their chances of finding life beyond Earth by narrowing their search only to the “perfect planets,” may be that by narrowing their search, they may actually diminish their chances of finding outside our planet. But on the positive side, the likelihood that life outside of earth might exist and someday might actually be discovered both seem to have increased significantly.

Personally, I find all of this quite fascinating and even exciting. The possibility that life in the universe is not rare but could actually be quite common and even widely dispersed represents an entirely new way of looking at things. Instead of the Earth as a lone life-bearing vessel whirling through an empty, heartless void, it could instead be one of countless places where life is thriving. Of course, the possibility that life elsewhere might be merely microbial might not satisfy the most febrile science fiction fantasies. It would of course be much more exciting if there seemed to be a greater likelihood of discovery of intelligent life beyond earth. But it may be too much to hope for, to expect to find intelligent life beyond earth. After all, think of how hard it is to find intelligent life on our own planet.  

In Case You Missed It: For the second weekend in a row, a major European soccer title has been determined in a last-minute come from behind victory. Last Sunday, it was Manchester City scoring two goals in stoppage time in their final game of the season to capture the English Premier League crown. This Saturday, Chelsea, playing against Bayern Munich on the German team’s home field, won the UEFA Champions League club team title in almost equally dramatic fashion, winning in a penalty kick shootout.

Bayern Munich had many chances to put the game away, and seemingly had the game won when they finally scored on a Thomas Müeller header in the 82^nd minute. But then with just two minutes left in regulation, on Chelsea’s first corner kick of the game, Didier Drogba scored on a header to tie the game. As regulation time expired the game went into extra time (a thirty minute overtime period).

Drogba’s fine goal to tie the game looked like it might have been naught when early in extra time he committed a foul by tripping Franck Ribèry in the penalty area. It seemed like another golden opportunity for Bayern Munich to put the game away, but Chelsea’s goalie, Petr ČechArjen Robben’s penalty kick. The 30-minute period ended with the teams still tied, setting up a penalty kick shootout. , stopped

Bayern Munich once again appeared to have the advantage as its goalie, Manuel Neuer, stopped the first Chelsea penalty kick from Juan Mata. After each team had attempted three penalty kicks, Bayern had made all three of its attempts, while Chelsea had only made two. Bayern substitute, Ivica Olic  then missed his team’s fourth shot while Ashley Cole made the next shot for Chelsea, bringing the two teams even. On Bayern Munich’s fifth and final shot, Bastian Schweinsteiger , who looked as if taking the penalty kick was about the last thing in the world he wanted to do, hit the post. Drogba, looking calm and confident, smashed his kick into the corner of the net, securing Chelsea’s improbable victory. The game-winner might be the 34-yearold Drogba’s last act for Chelsea, as his contract with the team expires this summer.

It was a great game, although the Bayern Munich fans are not the only ones unhappy about the outcome. Tottenham Hotspurs, who finished fourth in the English Premier League and therefore otherwise qualified for the UEFA Champtions League competition, were dispossessed of the spot by Chelsea’s win. Chelsea, which didn’t otherwise qualify for the Champions league (since they finished sixth in the Premier League), secured an automatic spot in next year’s Champions League competition with their win on Saturday. Since only four teams from each participating country can compete, that meant that Chelsea’s win forced Tottenham out of its spot.

With all of this great end of season soccer just completed, it is even more exciting to look forward to the Euro 2012 national team championship competition, which kicks off on June 8, 2012 in Poland and Ukraine. 

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Among the features of the recently enacted JOBS Act that has attracted the most attention are the legislation’s provisions for “crowdfunding.” Under these provisions, a company is permitted to raise up to $1 million during any 12-month period through an SEC-registered crowdfunding portal. While these provisions have attracted a great deal of discussion and even controversy, a more basic question is – who will actually be taking advantage of this new fundraising procedure?

A common assumption about the new crowdfunding procedure is that it will be most beneficial to start-up companies. But at least according to a May 9, 2012 CFO.com article (here), due to the procedural burdens and costs associated with the JOBS Act’s crowdfunding provisions, crowdfunding is unlikely to be an attractive alternative for start-up companies.

According to the article, the crowdfunding provisions in the JOBS Act may be “too complex and onerous” and “not very cost-effective“  for an early-stage company. Among other things, entrepreneurs launching a new venture “may lack the financial acumen and robust business plans they’ll need to comply with the JOBS Act” and they also “may not have the cash to hire the accountants and lawyers they will need to navigate the law.” 

Instead, the companies likeliest to be using crowdfunding will be “more mature firms” that “have the experience of searching for sources of capital” and that are “able to show, based on financial information, performance metrics and forecasts, that they are heading in the right direction.”  Among other things, the crowdfunding process will require a certain amount of rigor, if for no other reason than the company using the process will have to provide financial statements.

The financial statement requirements will impose a cost-benefit analysis on companies considering a crowdfunding financing, due to the Act’s sliding scale requirements. Companies raising up to $100,000 need provide only a financial statement signed by the company’s directors. But companies raising between $100,000 and $500,000 must provide financials reviewed by a CPA. And for companies raising between $500,000 and $1 million, audited financials must be provided. Companies will have to decide whether their financing requirements justify the expense of having their financials reviewed or audited. In addition, the Internet platforms through the crowdfunding offerings will be conducted will also be charging fees, which will add to the cost.

As I have previously noted (refer here), the JOBS Act’s crowdfunding features also expressly include liability provisions. The potential liability exposures mean that issuers trying to raise money through a crowdfunding offering “will probably need to get a lawyer involved,” which, as a commentator quote in the article notes, is “not ever cheap.”

There is also the possibility that the SEC will add even greater burdens and expense when it releases its crowdfunding rules in January 2013. Among other things, the SEC could add additional burdens in the way that it regulates the funding portals. The SEC has also no secret of its concerns about the possibility of scam artists using crowdfunding to try to con investors, as a result of which, as a commentator quote in the article notes, the SEC might “layer on more regulation.” For example, the SEC might require disclosure after the crowdfunding offering, which “could make crowdfunding potentially cost prohibitive.”

The Venue That Suits You Best: Where is the best place in the world to file a lawsuit? Well that depends on the kind of lawsuit you want to file. Want to sue for libel? Then you want to file in the U.K. Thinking of suing for patent infringement? Then you should file in Germany. All of this is according to the “best and worst places to sue” atlas published on May 10, 2012 in BusinessWeek, and which can be found here.

More Thoughts on Asia: As I discussed in a blog post summing up my observations of my recent Asia trip, there is an incredible amount going on now in Asia. The present and future business opportunities in Asia are enormous – so much so that I really regretted during my trip that my children were not there to see what I was seeing.

It is in this context that I note an article that appeared on May 11, 2012 Wall Street Journal. The article, entitled “P&G Unit Bids Goodbye to Cincinnati, Hello to Asia” (here), describes how Proctor & Gamble is moving its cosmetics and personal-care unit from Cincinnati to Singapore. The company is making the move based on its “decision to base the business in the fast-growing Asia beauty market,” as part of a larger plan to move employees and manufacturing facilities closer to its key customer bases. The article goes on to note that the Asia-Pacific region already accounts for half of the world’s market for skin care, and is also by far the fastest growing region.

The article includes a sidebar identifying a number of similar moves developed-world companies have made recently. For example, GE has moved its X-ray unit from Wisconsin to Beijing; Halliburton has set up a separate headquarters in Dubai; DSM Engineering Plastics has moved its headquarters from the Netherlands to Singapore: and Rolls-Royce has moved its global marine headquarters to Singapore from London. (As I understand it, AON’s recent decision to move its headquarters from Chicago to London is in part explainable as part of this same phenomenon, because so much of its business and growth is outside the U.S.)

Maybe I am giving too much significance to these developments I am overly focused on Asia so soon after my return home from Asia.  Even allowing for that possibility, these companies’ moves still seem significant. These companies are re-orienting themselves because the world is re-orienting.   It seems pretty clear to me that the path to future business success is going to run through Asia. Those of us doing business in the U.S. and in Europe now need to prepare for the fact that our clients, or at least those who are likeliest to succeed, are going to be positioning themselves to participate in Asian opportunities. Provides of services will need to be prepared to adjust as the companies reposition.

China in Ten Words: Another observation from my Asia trip is how vast, complex and enigmatic China is. Since returning home, I have read several books about China and its history, trying to get a better sense of the country and the changes it has been through in recent years. The country is so large and the changes it has been through have been so momentous that it seems nearly impossible to briefly summarize it all. For that reason, the slim, readable book China in Ten Words by Yu Hua, a Chinese author who lives in Beijing, is so interesting and impressive.

Yu’s book is divided into ten short chapters, each of which has a single word as a theme. The ten chapters are: people; leaders; reading; writing; Lu Xun (a pre-revolutionary Chinese author); revolution; disparity; grassroots; copycat; and bamboozle. Yu took this thematic approach because, as he says, if he tried to capture everything about China, the result would be a book so long that no one could ever read it. By limiting himself to just ten words, he gives us “ten pairs of eyes” to scan the contemporary Chinese scene.

Yu’s method has a very specific purpose, which he explains in his introduction:

“The arrow hits the target, leaving the string,” Dante wrote, and by inverting cause and effect he impresses on us how quickly change can happen. In China’s breathtaking changes during the past thirty years we likewise find a pattern of development where the relationship between cause and effect is turned in its head. Practically every day we find ourselves surrounded by consequences, but seldom do we trace those outcomes back to their roots. The result is that conflicts and problems –which have sprouted everywhere like weeds during these past decades – are concealed amid the complacency generated by our rapid economic advances. My task here is to reverse normal procedure; to start from the effects that seem so glorious and search for their causes, whatever discomfort that may entail.

In tracing the current outcomes back to their roots, Yu tells the story of contemporary China from the perspective of his own personal experiences. What quickly becomes apparent is not only how much Yu has seen and experienced in his life, but how much everyone in China older than, say, forty or so, has seen and experienced. The dramatic and appalling details of the scenes he witnessed during the Great Leap Forward and the Cultural Revolution, which took place during his childhood and adolescence, provide an almost incredible backdrop to China’s current prosperity and economic growth.  As Yu says, “in this quest to follow things back to their source, we cannot help but stumble on one misfortune after another.”

The unexpected and interesting message that emerges from Yu’s account is the directness of the connection between the events during the Great Leap Forward and the Cultural Revolution and contemporary circumstances. Yu finds parallels between the excesses of those earlier eras and many of the excesses of modern China. In his chapter titled “Revolution,” he shows how the propaganda deceptions of the Great Leap Forward era and the revolutionary violence of the Cultural Revolution era continue to shape behavior and events.

The consequences for China emerge Yu’s book progresses; his final four chapters – disparity, grassroots, copycat and bamboozle – portray a country beset with “moral bankruptcy and confusion of right and wrong.” For example, in discussing the “copycat” phenomenon – whereby, as a result of an engrained revolutionary era ethos, counterfeiting and infringement are accepted as part of the “anarchist spirit” – Yu characterizes the trend as “a sign of something awry in China’s social tissue.”

In the same vein, in the book’s final chapter, Yu explains how the word “bamboozle” has come to gain such broad acceptance in modern China, as its particular usage “throws a cloak of respectability over deception and manufactured rumor.” Yu describes a society where the people routinely bamboozle the government and the government routinely bamboozles the people  Yu recounts several different tales illustrating this process in action, and then comments that “there is really no end to these stories of fraud and chicanery, for ‘bamboozle’ has already insinuated itself into every aspect of our lives.”

Yu concludes that “the rapid rise in popularity of the word ‘bamboozle,’ like that of ‘copycat,’ demonstrates to me a breakdown of social morality and a confusion in the value system in China today,” which he says is “an aftereffect of our uneven development these past thirty years.” Yu ends his book with a personal anecdote showing how the attempt to bamboozle can backfire. (Yu recounts how as a child he faked a stomachache to get out of doing chores and wound up getting his appendix removed.) Yu doesn’t expressly connect the link between his personal experiences and China, but the implicit message seems to be that China could wind up as the victim of its own bamboozlement.

Yu writes simply and clearly, and his many anecdotes humorously illustrate his themes. Using ten words, Yu manages to provide an interesting and though-provoking picture of contemporary China. In the portrait he paints, China is a troubled giant still struggling to recover from the painful events of the country’s early history.

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On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (commonly referred to as the JOBS Act). This legislation, which enjoyed strong bipartisan support in Congress, is intended to ease the IPO process for emerging growth companies and to facilitate capital-raising by reducing regulatory burdens and disclosure obligations. Among other things, the Act also introduces changes that could impact the potential liability exposures of directors and officers of both public and private companies. These changes could have important D&O insurance implications.

In the latest issue of InSights, I take a detailed look at the provisions of the JOBS Act and consider the Act’s possible impact on D&O liability and insurance. The InSights article can be found here.

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