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Q2 2023 U.S. Legal & Regulatory Developments

July 25, 2023 Download PDF

The following is our summary of significant U.S. legal and regulatory developments during the second quarter of 2023 of interest to Canadian companies and their advisors.

  1. SEC Approves Clawback Listing Standards; Listed Companies Have Until December 1, 2023 to Adopt Compliant Policies

The United States Securities and Exchange Commission (the “SEC”) has approved the clawback listing standards of the New York Stock Exchange (the “NYSE”) and Nasdaq. The clawback listing standards will take effect on October 2, 2023, and listed companies will have until December 1, 2023 to adopt compliant policies.

NYSE-listed companies that fail to adopt a clawback policy within 60 days of the effective date of the standards (i.e., by December 1, 2023) will be required to issue a press release identifying their delinquency, the reasons for it, and, if known, the date by which they expect to be in compliance. Nasdaq-listed companies that fail to adopt a clawback policy within 60 days of the effective date of the standards (i.e., by December 1, 2023) will be eligible to submit a plan of compliance to Nasdaq staff within 45 days and will have access to cure rights, in accordance with existing Nasdaq procedures. Under both NYSE and Nasdaq clawback listing standards, listed companies will only be required to claw back incentive awards received (as therein defined) on or after the October 2, 2023 effective date.

For the full text of our memorandum, please see:

For the full text of our memorandum regarding the SEC’s initial adoption of the clawback requirements, please see:

For the SEC’s final rules, please see:

  1. FTC and DOJ Release Proposed Rulemaking to Update the HSR Form; Proposals Significantly Increase Required Disclosures

On June 27, 2023, the Federal Trade Commission (the “FTC”), in coordination with the Department of Justice’s Antitrust Division (the “DOJ,” and together with the FTC, the “Agencies”), issued a Notice of Proposed Rulemaking (“NPRM”) to amend the Hart-Scott-Rodino Act (“HSR”) Form and Instructions to require additional information in initial and refiled submissions.

The NPRM is subject to a 60-day public comment period; it remains to be seen when (and whether) all of the proposed changes will be implemented.

The NPRM proposes numerous additional requirements, including extensive information disclosures relating to areas traditionally governed by other federal agencies such as labor, defense, international trade and national security and would prove extremely burdensome and time-consuming for filers, although the Agencies expressed some willingness to balance parties’ burdens with information helpful to the Agencies’ review process in implementing amendments to the HSR Form. Some of the most significant changes to the HSR Form contemplated under the NPRM include:

  • Disclosing “subsidies” received from a “foreign entity of concern,” including governments and agencies of foreign countries that are covered under 42 U.S.C. 18741(a)(5)(C) (e.g., foreign terrorist organizations, Office of Foreign Assets Control-designated nationals or blocked persons, persons or entities which have been convicted under espionage-related acts);
  • Requiring filers to report certain contracts with defense or intelligence agencies;
  • Providing draft transaction agreements or term sheets that “provide sufficient detail about the scope of the entire transaction” if filing before there is a definitive executed agreement;
  • Requiring a written narrative describing horizontal and vertical overlaps and other competitive dynamics in transactions;
  • Expanding the scope of custodians subject to “Item 4” document disclosure to include supervisory deal team lead(s) that are not officers or directors;
  • Requiring drafts of responsive Item 4 documents to be submitted if those drafts were provided to an officer, director or supervisory deal team lead;
  • Requiring submissions of ordinary course strategic plan documents;
  • Providing verbatim English-language translations for all foreign-language documents;
  • Eliminating North American Product Classification System revenue data allocation and instead implementing new data collection methods which include commuter zone and occupational classification data regarding the filing person’s employees;
  • Requiring identification of any penalties or findings issued against the filer by the Department of Labor, National Labor Relations Board or OSHA during the previous five years;
  • Requiring the reporting of North American Industry Classification System codes for certain pipeline or pre-revenue products and expanding overlap disclosures to include pre-revenue and pipeline products anticipated to have annual revenue totaling more than $1 million within the following two years;
  • Expanding the description of the ultimate parent entity (“UPE”) and requiring, for each entity within the UPE, the identification of all current officers, directors (to facilitate the agencies’ assessment of Section 8 interlocking directorate issues), board observers or those who served in the past two years, and “other type of interest holders that may exert influence,” which could include certain creditors and option/warrant holders;
  • Expanding disclosure of prior acquisitions from the past five years to the past ten years, and eliminating any assets or revenue thresholds which may have limited prior disclosures (under the proposed rules, acquisitions of new entrants, nascent competitors or a pattern of small roll-ups would now be identified);
  • Expanding disclosures of 5%+ minority holders; notably identifying (i) limited partners in partnerships rather than just the general partner as is currently required, and (ii) minority holders of any entities within the control chain of other acquiring entity rather than just the acquiring entity and its UPE; and
  • Requiring transaction diagrams and organization structure charts.

The NPRM also contemplates requiring additional information regarding the terms of the transaction, investors and employees, additional transaction and strategic documents, as well as certain ordinary-course business documents that discuss competition in the markets that may be affected by the transaction; information about other reviewing jurisdictions, including a voluntary waiver option to permit cross-jurisdictional sharing of information submitted in the HSR process; and identification of any communication or messaging systems on any device used by the filer.

The Agencies will accept public comments until August 28, 2023. The Agencies will then consider comments and eventually publish a final rulemaking. This process could take several months or longer to complete. Note the FTC’s September 2020 NPRM relating to the HSR Form and Rules so far has not been implemented after the public comment period.

For the full text of our memorandum, please see:

For the FTC and DOJ’s 2023 Notice of Proposed Rulemaking, please see:

For the FTC and DOJ’s 2020 Notice of Proposed Rulemaking, please see:

  1. Delaware Court of Chancery Upholds Covenant Not to Sue for Breach of Fiduciary Duty

In New Enterprise Associates 14, L.P. v. Rich, the Delaware Court of Chancery, in an opinion by Vice Chancellor Laster, held that a contractual covenant by stockholders not to sue for breach of fiduciary duty in connection with a drag-along sale is enforceable under Delaware law if it is narrowly tailored and reasonable under the circumstances. In doing so, the court cautioned that the case under consideration presented an “optimal” circumstance for enforcement because it involved a clear, specific covenant bargained for by sophisticated parties, and that such provisions may not be enforceable in other contexts. To that end, the court indicated that such a covenant may not be enforced in the case of intentional breach of duty, and thus the court denied the defendants’ motion to dismiss with respect to allegations that preferred stockholders acted intentionally and in bad faith to benefit themselves and harm the common stockholders during the lead-up to the challenged drag-along sale.

Court’s Ruling

The court discussed whether covenants not to sue for breach of fiduciary duty are enforceable under Delaware law. This included reviewing numerous aspects of trust, agency, contract and corporation law (including certain provisions of the Delaware General Corporation Law (“DGCL”)) that permit parties to tailor fiduciary relationships. The court also cited the Delaware Supreme Court’s opinion in Manti Holdings, LLC v. Authentix Acquisition Co. (“Manti”) permitting stockholders to waive statutory appraisal rights by contract. Ultimately, the court concluded that contractual agreements by stockholders not to sue for breach of fiduciary duty are not facially invalid under Delaware law, but a court must scrutinize them closely under a two-part test derived from Manti:

  • First, the provision must be narrowly tailored to address a specific transaction that otherwise would constitute a breach of fiduciary duty. As to the required level of specificity, the court wrote that it must “compare favorably with what would pass muster for advance authorization in a trust or agency agreement, advance renunciation of a corporate opportunity under [DGCL] Section 122(17), or advance ratification of an interested transaction like self-interested director compensation.”
  • Second, the provision must survive close scrutiny for reasonableness based on non-exclusive factors set forth in Manti, including (i) the existence of a written contract formed through actual consent, (ii) the clarity of the provision, (iii) the sophistication of the parties and whether they understood the provision’s implications, (iv) the covenanting party’s ability to reject the provision and (v) the presence of bargained-for consideration.

Here, the court concluded that the covenant met the first requirement of the test, as it only applied to certain sale transactions meeting contractually specified criteria. The covenant also met the reasonableness test; it was a clear, express provision appearing in the voting agreement that was agreed to by the plaintiffs, who were sophisticated parties that could have rejected the covenant. The court also explained that invalidating the covenant would alter the bargained-for exchange, as the plaintiffs agreed to the provision to induce Rich and the other investors to fund the recapitalization.

Importantly, the court applied a public policy limitation to this framework, namely, that contracting parties cannot exempt a party from tort liability for intentional conduct. Analogizing breach of fiduciary duty to a type of equitable tort, the court also ruled that a covenant not to sue for breach of fiduciary duty cannot prevent a party from asserting a claim for an intentional or bad faith breach.

Key Takeaways

  • Covenants not to sue for breach of fiduciary duty would be facially valid in common M&A situations involving sophisticated parties, but may not be enforceable depending on the particular facts. The court noted that this case was an “optimal scenario for enforcement,” given, among other things, the clear and specific nature of the covenant and the sophistication of the plaintiffs. But, according to the court, a similar covenant adopted in different context “would face deep skepticism and a steep uphill slog,” including, among others, in the context of an agreement with a retail stockholder, an employee stock grant, a dividend reinvestment plan, an employee stock compensation plan or a stock transmittal letter.
  • The exception for intentional or bad faith breach of fiduciary duty is broad. While the court clarified that covenants not to sue for breaches of fiduciary duty are, in the right context, enforceable in Delaware, the public policy limitation applied by the court significantly curtails the universe of claims that such covenants can effectively foreclose. Because fiduciaries are typically exculpated for monetary damages for breach of the duty of care, such covenants are most useful to foreclose claims for breach of the duty of loyalty. But, to be foreclosed, the fiduciary must have believed in good faith that the nevertheless self-interested transaction was not contrary to the best interests of the company, which may apply in fewer circumstances and be difficult for litigants to dismiss on the pleadings without a developed factual record.

For the full text of our memorandum, please see:

For the Delaware Court of Chancery’s opinion in New Enterprise Associates 14, L.P. v. Rich, please see:

  1. Supreme Court Limits Who May Sue Under Section 11 of the Securities Act

On June 1, 2023, the Supreme Court unanimously held in Slack Technologies v. Pirani that Section 11 of the Securities Act of 1933, as amended (the “Securities Act”), requires plaintiffs to plead and prove that they bought shares registered under the registration statement they claim is materially misleading. The Supreme Court remanded the case to the Ninth Circuit to decide whether the plaintiff stated a claim under Section 11, as well as to interpret Section 12(a)(2) of the Securities Act in the first instance. The decision represents a significant limitation on the ability of purchasers of unregistered shares to pursue Section 11 claims against companies that go public through a direct listing, as well as in other contexts where registered and unregistered shares have become commingled. The decision nevertheless leaves open several important questions, including the level of factual detail necessary to plead traceability and the scope of liability under Section 12(a)(2).


Federal securities law generally requires securities to be registered. There are several exemptions, including one for shares held by nonaffiliates of a company for at least a year. Both registered and unregistered shares may not be sold on an exchange until the company has filed a registration statement under the Securities Act.

For at least half a century, plaintiffs suing under Section 11 have been required to allege and prove that they purchased shares that were issued pursuant to the allegedly false or misleading registration statement. The leading decision is Barnes v. Osofsky, 373 F.3d 269 (2d Cir. 1967) (“Barnes”), in which Judge Friendly explained that only purchasers of newly registered shares could bring an action under Section 11. Other courts of appeals have similarly required plaintiffs to “trace” their shares to the allegedly false or misleading registration statement. All of those appellate decisions, however, arose in the context of successive registration statements, not direct listings.

In 2018, the SEC approved direct listings of shares. A direct listing is different from a traditional initial public offering (“IPO”) in several respects. In an IPO, a company files a registration statement to issue new shares. In a direct listing, the company files a registration statement to permit shareholders to sell their shares. Unlike in an IPO, where unregistered shares are “locked up” and cannot be sold on the exchange for a period of time, both registered and unregistered shares are immediately tradeable in a direct listing. Accordingly, it would be difficult for a shareholder to know whether a share purchased after a direct listing was registered or unregistered.

Defendant Slack Technologies, LLC (“Slack”), went public on the NYSE in 2019 through a direct listing. Slack filed a Form S-1 registration statement on April 26, 2019, which it amended three times in May of that year. On June 20, 2019, Slack filed a prospectus and began to sell Slack Class A common stock to the public. At the time of the direct listing, there were approximately 118 million registered shares and approximately 165 million unregistered shares.

Plaintiff Fiyyaz Pirani purchased Slack shares on the NYSE on the day of the direct listing. He later sued Slack and other defendants under Sections 11 and 12(a)(2) of the Securities Act. Under Section 11, if “any part of the registration statement” is materially false or misleading, “any person acquiring such security” may generally sue certain individuals involved with the registration statement. Under Section 12(a)(2), if a “prospectus or oral communication” is materially false or misleading, a “person purchasing such security” may generally sue the person who offered or sold the security. Pirani did not allege that he purchased registered shares. He instead alleged only that he “purchased or otherwise acquired Slack common stock pursuant and/or traceable to the Offering Materials issued in connection with the Company’s Offering.”

Supreme Court Decision

In a unanimous decision written by Justice Gorsuch, the Court vacated the judgment of the Ninth Circuit and remanded for further proceedings. The Court held that Section 11 requires plaintiffs to plead and prove that they bought shares registered under the registration statement they claim is materially misleading. The Court explained that, in context, the word “such” refers to a security registered under “the particular registration statement alleged to be misleading.” The Court relied on other uses of “such” in Section 11 and elsewhere in the Securities Act. The Court also found it significant that Section 11(e) “ties the maximum available recovery to the value of the registered shares alone” by capping damages against an underwriter at the “total price at which the securities underwritten by him and distributed to the public were offered to the public.” The Court further observed that Judge Friendly reached the same conclusion in Barnes and that every other court of appeals to address the question had agreed. Finally, the Court rejected Pirani’s policy arguments, noting that the Securities Act is “limited in scope.”

The Court did not address the meaning of Section 12. Because the Ninth Circuit viewed its interpretation of Section 12 as “‘follow[ing] from’ its analysis of [Pirani’s] §11 claim,” the Supreme Court remanded for the Ninth Circuit to decide that question “in the light of [the] holding today about the meaning of §11.” The Court “express[ed] no views about the proper interpretation of §12 or its application to this case.” The Court also declined to “endorse the Ninth Circuit’s apparent belief that §11 and §12 necessarily travel together, but instead caution[ed] that the two provisions contain distinct language that warrants careful consideration.”


The Supreme Court’s decision significantly limits the ability of purchasers of unregistered shares to pursue Section 11 claims against companies that go public through a direct listing. In so doing, the Court’s decision may incentivize direct listings by reducing associated litigation exposure.

The decision is also likely to have implications beyond direct listings. The same difficulties in pleading and proving traceability likely apply to shareholders who purchase shares after a lockup period expires or after there have been multiple offerings pursuant to multiple registration statements.

At the same time, the limited decision leaves open several important questions. One such question is how a plaintiff may plead and prove traceability, and in particular what amount of factual support is necessary to survive a motion to dismiss. Another unresolved question is the scope of Section 12 liability. Both issues are likely to be contested on remand in the Ninth Circuit and in other cases.

For the full text of our memorandum, please see:

For the Supreme Court’s opinion in Slack Technologies v. Pirani, please see:

  1. SEC Amends Share Repurchase Disclosure Requirements

On May 3, 2023, the SEC adopted amendments requiring additional quarterly disclosures by issuers when repurchasing their shares, including:

  • expanded disclosures about share repurchases conducted each quarter, to be broken out by trading day;
  • identification by checkbox whether trading by certain officers and directors occurred within four days before or after any issuer repurchase plan announcements;
  • greater narrative detail about the structure of any issuer repurchase program; and
  • disclosure of material details about any issuer Rule 10b5-1 plans adopted or terminated in a quarter.

Domestic issuers will be required to make these disclosures in their Securities Exchange Act of 1934, as amended (the “Exchange Act”), periodic reports commencing with the filing covering the first full fiscal quarter that begins on or after October 1, 2023.

Foreign private issuers will have an additional six months before they are required to make, on a new Form F-SR, the quarterly share repurchase disclosures and disclosure regarding transactions by directors and officers within four days of any share repurchase plan announcement. Foreign private issuers will be required to include the additional narrative details starting in the first Form 20-F filed after their first Form F-SR has been filed. 

Multijurisdictional disclosure system (“MJDS”) issuers are not subject to these amendments.

Expanded Quarterly Repurchase Disclosures

The amended rules will require expanded disclosures by issuers regarding their repurchases of registered equity securities in any given quarter. Departing from the SEC’s initial proposal, issuers will not be required to make such disclosure each day that they conduct repurchases; domestic issuers will instead file a breakdown by day of repurchase information as an exhibit to their periodic report on Form 10-Q or 10-K. Foreign private issuers, excluding MJDS issuers, will be required to make these disclosures quarterly on a new Form F-SR which will be due 45 days after the end of their fiscal quarter.

The new amendments will require issuers to disclose, in tabular form and for every day they conducted repurchases in the quarter:

  • the class of equity securities purchased;
  • the total number of shares (or units) purchased, including all issuer repurchases whether or not made pursuant to publicly announced plans or programs;
  • the average price paid per share (or unit);
  • the aggregate total number of shares (or units) purchased on the open market;
  • the aggregate total number of shares (or units) purchased in reliance on the Rule 10b-18 safe harbor; and
  • the aggregate total number of shares (or units) purchased pursuant to a Rule 10b5-1 plan (including, in a footnote to the table, the date such Rule 10b5-1 plan was adopted or terminated).

The data will be required to be tagged using Inline XBRL, and, in a departure from the SEC’s initial proposal, this information will be considered filed (rather than furnished).

In addition, issuers will be required to disclose, by checking a box, whether any officers or directors required to file reports under Section 16(a) of the Exchange Act purchased or sold the securities that are the subject of the repurchase program within four business days before or after the announcement of the program.

Amendments to Item 703 of Regulation S-K

Under amended Item 703 of Regulation S-K, issuers will also be required to provide, on a quarterly basis, additional narrative disclosures about their repurchase programs regarding:

  • the objectives or rationales for their share repurchases and process or criteria used to determine the amount of repurchases;
  • any policies and procedures relating to purchases and sales of their securities by their officers and directors during a repurchase program, including any restriction on such transactions;
  • whether they made repurchases pursuant to a Rule 10b5-1 plan, and if so, the date that the plan was adopted or terminated; and
  • whether repurchases were made in reliance on the Rule 10b-18 non-exclusive safe harbor.

The amendments eliminate the existing requirement to include a monthly repurchase table in each Form 10-Q and 10-K. Issuers will continue to be required to provide information, in narrative form, regarding the purchase of shares outside of a publicly announced repurchase plan or program (including the number of shares and nature of the transaction – e.g., whether the shares were repurchased through open-market transactions, tender offers or other transactions), and regarding publicly announced repurchase plans (including the date of announcement, the dollar or share/unit amount approved, the expiration date, which repurchase plans or programs expired or were terminated during the quarter, or under which the issuer does not intend to make any further purchases).

The SEC also adopted amendments to Form 20-F to implement these disclosure requirements for foreign private issuers.

New Item 408(d) of Regulation S-K

The amendments also create a new Section 408(d) of Regulation S-K, which will require issuers to disclose quarterly the material terms of any issuer Rule 10b5-1 plan adopted or terminated in the most recent quarter, including:

  • the date of adoption or termination;
  • the duration; and
  • the aggregate amount of securities to be sold or purchased thereunder.

For the full text of our memorandum, please see:

For the SEC’s amendments, please see:

  1. FTC Orders Divestiture in Vertical Merger Case, Setting Up Federal Court Appeal
  • The FTC recently reversed its administrative law judge and found that Illumina Inc.’s (“Illumina’s”) acquisition of GRAIL, LLC (“GRAIL”) was illegal under Section 7 of the Clayton Antitrust Act of 1914 (the “Clayton Act”). The commission ordered that Illumina divest GRAIL.
  • The commission’s opinion is notable for its discussion of how the FTC analyzes vertical mergers and proposed deal “fixes,” both of which are increasingly coming under scrutiny by the U.S. antitrust agencies.
  • Illumina has appealed, presenting an opportunity for a federal court of appeals to weigh in on vertical merger analysis.

In a lengthy opinion, the FTC, by a vote of 4-0, determined that Illumina’s acquisition of GRAIL was illegal under Section 7 of the Clayton Act and may substantially lessen competition in a market for the “research, development, and commercialization of [multi-cancer early detection] tests” and ordered Illumina to divest GRAIL. In doing so, the commission overruled its administrative law judge, who had earlier found that FTC complaint counsel failed to prove a prima facie case. Illumina has appealed the FTC’s decision to the U.S. Court of Appeals for the Fifth Circuit, arguing that the decision “suffers from many flaws – including that it is unconstitutional, misconstrues the antitrust laws and cherry picks from the administrative record.”

For the full text of our memorandum, please see:

For the FTC’s opinion regarding Illumina’s acquisition of GRAIL, please see:

For the FTC’s final order requiring Illumina to divest GRAIL, please see: 

  1. Ninth Circuit En Banc Panel Enforces Exclusive Forum Provision That Prevents Shareholders From Pursuing Derivative Claims Under Federal Securities Laws

Last year, the Ninth Circuit enforced a corporation’s exclusive forum provision that required “any derivative actions” to be brought in the Court of Chancery of the State of Delaware, despite the plaintiff’s assertion of a federal securities claim under the Exchange Act, for which there is exclusive jurisdiction in federal courts.

On June 1, 2023, an en banc panel of the Ninth Circuit reached the same conclusion on a 6-5 vote, notwithstanding the fact that its decision left the plaintiff with no forum in which to assert derivative claims arising under the Exchange Act. The en banc decision is a significant development for officers and directors of Delaware corporations, who have increasingly been forced to defend derivative actions outside of Delaware courts, as shareholder plaintiffs have strategically tacked on federal claims to derivative lawsuits in an attempt to secure jurisdiction outside of the Court of Chancery. The en banc decision also deepens a circuit split with the Seventh Circuit, which refused to enforce a similar exclusive forum provision in similar circumstances, and increases the possibility of Supreme Court review.


In September 2020, Gap Inc. (“Gap”) shareholder Noelle Lee filed a derivative lawsuit nominally on behalf of Gap, against its directors and officers, alleging that they failed to create meaningful diversity within company leadership and made false statements in Gap’s proxy statements about the level of diversity the company had achieved. The company’s bylaws contain a forum selection clause requiring “any derivative action or proceeding brought on behalf of the Corporation” to be filed in the Delaware Court of Chancery. Plaintiff asserted both state law fiduciary duty claims and a federal securities claim alleging a violation of Section 14(a) of the Exchange Act, which prohibits misleading statements in proxy materials. Because federal courts have exclusive jurisdiction over claims arising under the Exchange Act, plaintiff filed her lawsuit in federal court in the Northern District of California, notwithstanding the company’s exclusive forum provision requiring derivative lawsuits to be filed in the Delaware Court of Chancery. The district court dismissed the complaint on forum non conveniens grounds, holding that the shareholder was bound by the company’s forum selection clause with respect to all of her claims and needed to file in the Court of Chancery.

The plaintiff appealed to the Ninth Circuit, arguing that enforcement of the forum selection clause was unlawful and against public policy because it left her with no forum in which to assert her Section 14(a) claim derivatively because the Court of Chancery does not have jurisdiction over Exchange Act claims. In 2022, a three-judge panel of the Ninth Circuit affirmed the district court’s dismissal on forum non conveniens grounds. The Ninth Circuit granted Lee’s petition for rehearing en banc.

En Banc Opinion

A six-judge majority of the Ninth Circuit’s en banc panel reached the same conclusion as the earlier panel and affirmed the district court’s dismissal.

First, the court rejected the argument that the forum provision violates the Exchange Act’s anti-waiver provision, which prohibits stipulations or provisions that waive the right to enforce compliance with the Exchange Act. The court held that Gap’s forum provision did not waive such rights because shareholders could still enforce compliance with Section 14(a) through a direct action in federal court.

Second, the court held that enforcing Gap’s forum selection clause does not violate a supposed “strong public policy of allowing a shareholder to bring a Section 14(a) derivative action.”

Third, the court held that Gap’s forum selection clause is valid under Delaware law, and that the Delaware case law and statutory provisions cited by plaintiff did not limit the scope of permissible forum-selection clauses under Delaware General Corporation Law Section 109(b).


The Ninth Circuit’s en banc decision is an important development for companies with exclusive forum provisions in their charters and bylaws, and particularly for Delaware corporations with provisions requiring that derivative lawsuits be brought in the Delaware Court of Chancery. Such companies will have even stronger case law to support the enforceability of those provisions, even if that means plaintiffs are left with no forum in which to pursue their Exchange Act claims derivatively. And it is a reminder to Delaware companies that have not implemented such forum selection clauses of their significant potency.

For the full text of our memorandum, please see:

For the Ninth Circuit’s 2023 En Banc opinion in Noelle Lee v. Robert Fisher, et al., please see:

For the full text of our memorandum outlining the 2022 Ninth Circuit decision in Noelle Lee v. Robert Fisher, et al., please see:

For the Ninth Circuit’s 2022 opinion in Noelle Lee v. Robert Fisher, et al., please see:

  1. SEC Adopts Amendments to Form PF for Private Equity and Hedge Fund Advisers

On May 3, 2023, the SEC adopted amendments to Form PF that require:

  • quarterly event reporting by all private equity fund advisers regarding certain triggering events including the removal of a general partner (“GP”), certain fund termination events and the occurrence of an adviser-led secondary transaction;
  • additional annual reporting by large private equity fund advisers (i.e., private equity fund advisers with at least $2 billion in private equity assets under management), including reporting on the occurrence of any GP clawback or limited partner clawback, as well as more detailed information on fund investment strategies, fund-level borrowings, events of default, bridge financings to controlled portfolio companies and geographic breakdowns of investments; and
  • current reporting by large hedge fund advisers (i.e., hedge fund advisers with at least $1.5 billion in hedge fund assets under management) within 72 hours of certain triggering events including extraordinary investment losses, significant margin and default events, terminations or material restrictions of prime broker relationships, operations events and events associated with withdrawals and redemptions.

The amendments are designed to enhance the Financial Stability Oversight Council’s ability to monitor systemic risk as well as bolster the SEC’s regulatory oversight of private fund advisers and investor protection efforts.

The amendments will become effective on December 11, 2023 for current and quarterly event reporting and on June 11, 2024 for the remainder of the amendments. Current reports and quarterly private equity event reports will be filed through the Private Fund Reporting Depository, the same non-public filing system used to file the rest of Form PF.

For the full text of our memorandum, please see:

For the SEC’s amendments to Form PF, please see:

  1. Reopening of Advance Notice Window Requires Activists to Show “Radical Shift” at Company

In Sternlicht, et al. v. Hernandez, et al. (“Sternlicht”), the Delaware Court of Chancery clarified the high standard that activists must overcome to reopen the director nomination window of an otherwise valid advance notice bylaw – namely they must show that there has been a “radical shift” in company position caused by the board after the deadline for director nominations had passed. The court held that the plaintiffs did not overcome this standard, despite numerous alleged “radical shifts” that occurred after the deadline. As a result, in a holding favorable for the company, the court enforced the deadline for nominations established by the company’s advance notice bylaw and prevented the plaintiffs from nominating a competing slate of directors at the upcoming annual meeting. The opinion strengthens advance notice bylaws as a means of providing certainty around the annual meeting and election process for companies and protecting against activist attacks. 

The plaintiffs were three of nine Cano Health, Inc. (“Cano”) directors who resigned over perceived governance failures, including the full board’s refusal to discipline the CEO for company performance issues and multiple violations of the company’s conflict policies. At the time of the resignations, the bylaw-imposed deadline for director nominations at the company’s upcoming annual meeting had passed, and plaintiffs sent a letter to the company’s outside counsel arguing that certain events that occurred after the deadline constituted material changes that required the board to reopen the nomination window, including, among others, the appointment of a new board chair and failure to disclose a company-commissioned report revealing CEO performance issues. The company did not respond, and the plaintiffs sued, seeking to enjoin the company from enforcing the deadline and to adjourn the upcoming annual meeting so that they could nominate a competing slate of directors.

Court’s Ruling

In an opinion by Vice Chancellor Fioravanti, the court cited the long-standing principle from Schnell v. Chris-Craft Industries, Inc. (“Schnell”) that “inequitable action does not become permissible simply because it is legally possible.” Cases challenging the application of an otherwise valid advance notice bylaw present a context-specific application of Schnell. These include Hubbard v. Hollywood Park Realty Enterprises, Inc. (“Hubbard”), in which the court held that a board has a duty to waive an advance notice bylaw under Schnell where a “radical shift in position, or material change in circumstances” occurs after the deadline for nominations. Later, the court in AB Value Partners, LP v. Kreisler Manufacturing Corp. (“AB Value”) distilled the Hubbard test into three determinations: (i) whether the change in circumstances occurred after the advance notice deadline; (ii) whether the change was “unanticipated” and “material”; and (iii) whether the change was caused by the board of directors. AB Value further clarified that a “material” change in circumstances requires a “radical shift in position.”

The court in Sternlicht considered what is required by the “radical” standard from Hubbard. It rejected plaintiffs’ argument that the showing only required the same materiality standard governing proxy disclosures to stockholders (i.e., that there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available). Rather, the court concluded that the standard was higher, requiring that the board and material actions taken by the board must “substantially alter the direction of the company.” The court concluded that each of the following, either considered together or separately, did not constitute a “radical shift” justifying the reopening of the advance notice window because, among other things, there was no board-level action or changes in board allegiances:

  • A failure to notify plaintiffs about a meeting among board committee chairs that had occurred several months prior to the nomination deadline to discuss a loan that the CEO received from the later-appointed COO. Plaintiffs alleged not to have known about the meeting until after the advance notice deadline, but the court concluded that the evidence suggested that at least one plaintiff knew about it;
  • Creation of a “shadow board” prior to the advance notice deadline that determined not to renominate one of the plaintiffs to the board and allegedly concealed the results of a company-commissioned report on the CEO’s performance from the plaintiffs until after the advance notice deadline;
  • Creation of a board special committee after the advance notice deadline that was formed in response to one of the plaintiff’s threatened noisy resignation if the CEO was not removed and adoption of the committee’s recommendations;
  • Appointment of a new board chairman after the advance notice deadline who plaintiffs alleged was beholden to the CEO; and
  • A potential sale by the CEO’s wife of her interest in a dental business that was abandoned several months prior to the advance notice deadline, with which company Cano had a dental services administration agreement.

Key Takeaways

  • The burden of demonstrating a “radical shift” in business or management of the company required to reopen an advance notice nomination window is significant. Even if an activist plaintiff can demonstrate that the alleged radical shift was taken by the board, and not some subset thereof or management, and was taken after the close of the advance notice window, they must still demonstrate a clear showing of a radical change in the direction of the company. This will be heavily dependent on the facts and is more onerous than the materiality standard applicable to proxy disclosures to stockholders.
  • Advance notice bylaws are critical defensive tools for public companies and Delaware courts remain willing to enforce the terms of otherwise valid advance notice bylaws. The Sternlicht decision is a clear indication that Delaware courts will enforce these provisions and only reopen the nomination window upon the showing of inequitable board conduct that leads to a substantial alteration in the direction of the company. Therefore, they can provide significant certainty around the director election process and protections for public companies against attacks from activists.

For the full text of our memorandum, please see:

For the Delaware Court of Chancery’s opinion in Sternlicht, please see:


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