If One Bad Actor SpoilsThe Whole Barrel, What’s An Issuer To Do?

The Jackson Five had it wrong.  Under the SEC’s recently adopted Rule 506(d), one bad actor can 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 include 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.


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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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