December 2, 2021

Volume XI, Number 336

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If One Bad Actor Spoils The Whole Barrel, What’s An Issuer To Do? Re: Securities

The Jackson Five had it wrong.  Under the SEC’s recently adopted Rule 506(d), one bad actor can indeed spoil the whole bunch.  To some extent issuers can exercise some control over who becomes or remains a covered persons.  However, an issuer may not be able to rid itself of all bad actors.  For example, the SEC has included within the category of “covered persons” any beneficial owner of 20% or more of the issuer’s outstanding voting securities.   Thus, an issuer may find itself suddenly disqualified because one of its shareholders has committed some bad act.  Issuer’s can, of course, screen their investors for prior “bad acts” but they can’t control whether their investors will stay on the straight and narrow.

One solution may be to provide for repurchase rights either by agreement or in the articles of incorporation in the event that a shareholder goes astray and carries the corporation into disqualification.   This device was employed two years ago when Wynn Resorts Limited invoked a charter provision to forcibly redeem the shares held by its largest shareholder on the grounds that he was unsuitable and threatened the company’s Nevada gaming license. La. Mun. Police Emples. Ret. Sys. v. Wynn, 2013 U.S. Dist. LEXIS 14013 (Feb. 1, 2013).

Other steps that might be considered are board qualification requirements and “for cause” termination provisions in executive officer employment agreements.

‘Tis Like the Breath of an Unfeed Lawyer – You Can Make No Use of it

As a reminder, this blog is a forum for discussion of ideas, it is not legal advice.  Consult with a lawyer before acting on anything that you read here.

Another Reason Why One Bad Apple Does Spoil the Whole Barrel

Apples and other fruit naturally emit Ethylene gas (C2H4) which causes fruits to ripen.  See Cornelius Barry, James Giavannoni et al., Ethylene and Fruit Ripening, 26 J. Plant Growth Regulation 143 (2007).

© 2010-2021 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume III, Number 275
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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