Insider Trading, Delaware Courts and SEC Regulation Get Lively Airing at M&A and Corporate Governance Conference

Insider trading law may be headed for even more disruption, as federal and state watchdogs press broad theories that include hacking and so-called Insider Trading 2.0, the early release of information for a fee, a panel of legal experts said on April 20.

Speaking at the M&A and Corporate Governance Conference in New York, the panel of lawyers and regulators tested the bounds of rules against insider trading in response to a series of hypotheticals posed by Professor John C. Coffee, Jr. of Columbia Law School. An attorney with the U.S. Securities and Exchange Commission said, for example, that the agency was looking to bring more cases against hackers who steal and trade on valuable information, even though, as other panelists pointed out, such cases may not satisfy certain elements of illegal insider trading, such as a breach of duty to the information’s owner.

“It’s still deception,” stressed Bridget Fitzpatrick, acting co-chief litigation counsel of the SEC’s enforcement division. She noted that the U.S. Court of Appeals in New York had in 2009 found liability under similar circumstances in SEC V. Dorozkho.

The day-long conference sponsored by Columbia Law School and law firm Gibson, Dunn & Crutcher and hosted by Coffee covered an array of other subjects, including Delaware M&A developments, the future of M&A, global antitrust, and hot topics in SEC public company regulation. Chancellor Andre Bouchard of the Delaware Court of Chancery gave the keynote presentation on disclosure settlements, appraisal rights and other Delaware litigation issues in conversation with Coffee and Jack Jacobs, a former justice of the Delaware Supreme Court and senior counsel at Sidley Austin LLP.

On the insider trading panel, Katherine Milgram, chief of the New York Attorney General’s Investor Protection Bureau, said her office would be focusing on electronic trading, “dark pool” securities exchanges, and what her boss, Attorney General Eric Schneiderman, has dubbed Insider Trading 2.0. In the past several years, the office has persuaded Thomson Reuters to quit selling early release of an influential economic survey and asset manager BlackRock to stop asking financial analysts about their views before those views become public. The legality of these and similar practices has not been tested in court, but New York’s Martin Act gives the attorney general broad power to pursue financial fraud without, for example, having to show the conduct was even intentional.

The hacking and Insider Trading 2.0 discussion prompted pushback from other members of the panel, including lawyer Stephen Crimmins, who wondered at the “expanding universe” of anti-insider trading law and asked whether the U.S. was moving toward a European Union-stye approach of ensuring investors equal access to information. Lawyer and Columbia Law School lecturer Edward Greene noted that the EU prohibits insider trading through a statute that is not based on misconduct and requires continuous disclosures.

In his presentation, Chancellor Bouchard suggested that the Chancery Court’s ruling last year in Trulia Stockholder Litigation, which sharply limited disclosure-only settlements, was almost inevitable, given that lawsuits had proliferated to the point that nearly every deal was subject to litigation. Bouchard also said there were still questions about the Delaware Supreme Court’s 2015 decision in Corwin v. KKR Financial Holdings, which essentially held that the deferential business judgment standard of review applies in post-closing challenges to transactions that were “not subject to the entire fairness standard of review” and had been  “approved by a fully informed, uncoerced majority of the disinterested stockholders.” Many companies now argue that a shareholder vote in those circumstances sweeps away any claim for breach of fiduciary duty, but Bouchard questioned that view, suggesting issues that shareholders did not specifically vote on may survive.

Bouchard went on to predict that Delaware lawmakers would not soon step in to further limit M&A appraisal actions as a way for stockholders to extract a higher price for their shares.  He noted that the state Supreme Court was poised to decide whether to create a presumption that the deal price was the fair price in arm’s length and otherwise reasonable transactions. The chancellor also predicted that so-called alternative entities — limited liability companies and partnerships — would receive more court scrutiny in the coming years.

Reynolds Holding is a senior fellow at Columbia Law School and editor-at-large of the Blue Sky Blog.