Apr. 11, 2024

In Reversal, Delaware Supreme Court Enforces “Forfeiture for Competition” Conditions in Partnership Agreement

The Delaware Supreme Court recently reversed a Chancery Court decision involving important issues related to “forfeiture for competition” provisions in partnership agreements. Such provisions are often used by fund managers and others to structure deferred compensation arrangements and disincentivize senior personnel from departing and competing. In Cantor Fitzgerald, L.P. v. Ainslie (Ainslie), the Supreme Court reversed and remanded the decision we reported on in March 2023, ruling that when sophisticated parties, in a contract governed by the Delaware Revised Uniform Limited Partnership Act, “agree that a departing partner will forfeit a specified benefit should he engage in competition with the partnership, [Delaware] courts should, absent unconscionability, bad faith, or other extraordinary circumstances, hold them to their agreements.” In doing so, the Supreme Court wrote favorably of the employee-choice doctrine but did not expressly adopt it as part of Delaware law. This guest article by Friedman Kaplan partners Lance J. Gotko and Asaf Reindel discusses the key holdings of the Supreme Court’s decision, as well as updated practical considerations for fund managers in light of the reversal. For the authors’ previous article on the Chancery Court’s decision, see “Delaware Chancery Court Strikes Down Employee Restrictive Covenants in a Partnership Agreement” (Mar. 16, 2023).

Institutional Investment Managers Must Prepare for Initial Form N‑PX Filing

Form N‑PX, which the SEC adopted in 2003, requires registered management investment companies to disclose publicly their proxy voting records on an annual basis. In 2021, the SEC proposed amendments to Form N‑PX to enhance the information reported and to require institutional investment managers to report how they voted proxies on shareholder advisory votes on executive compensation matters. It adopted those new requirements in November 2022. Initial Form N‑PX filings by institutional investment managers will be due by August 31, 2024. To assist covered firms in preparing for that impending deadline, a recent Seward & Kissel program discussed the key requirements of Form N‑PX, including which firms are covered, when filings are due, the information required, joint reporting and the availability of confidential treatment. The program featured Seward & Kissel partners Daniel Bresler and Paul M. Miller, as well as associate Joseph J. Nardello. This article synthesizes their insights. See “Adviser Sanctioned for Disclosure Issues and Inadequate Proxy Voting Policies” (Dec. 8, 2022).

16 Firms Fined $81 Million in Latest SEC Electronic Communications Recordkeeping Settlements

The total fines imposed by the SEC and CFTC for violations associated with firms’ failure to monitor and capture communications by employees on unapproved devices and systems (off-channel communications) are approaching $3 billion. The SEC recently resolved enforcement proceedings involving off-channel communications against 12 broker-dealers and four affiliated investment advisers. The resolutions require the 16 respondents to pay more than $81 million aggregate in civil penalties and retain compliance consultants to review their electronic communications practices. As in prior resolutions of off-channel communications matters, the respondents all admitted the facts alleged by the SEC and acknowledged that they violated the federal securities laws. This article analyzes the latest round of settlements. See “SEC Penalizes JPMorgan for Deleting Electronic Communications” (Feb. 29, 2024); “Messaging Apps Come Under Increasing Regulatory Scrutiny” (Aug. 31, 2023); and “SEC and CFTC Continue to Penalize Firms for Electronic Communications Recordkeeping Violations” (Aug. 17, 2023).

A Guide to Article 8 and 9 Funds in Europe

The European Sustainable Finance Disclosure Regulation (SFDR), officially known as Regulation EU 2019/2088, has been in effect for nearly two years. However, the regulatory landscape for sustainable investment disclosures continues to pose challenges for participants in the financial markets. The recent implementation of Delegated Regulation EU 2022/1288 has brought about significant changes by introducing more comprehensive rules governing the disclosure requirements established under the SFDR. In addition, the European Commission (EC) conducted a comprehensive assessment of the SFDR framework and launched a public consultation on the implementation of the SFDR on September 14, 2023. The in-depth nature of the Commission’s review is surprising. Accordingly, it seems that the SFDR framework could undergo a fundamental overhaul, although the legislative process for a significant reform of the SFDR would likely take several years. This guest article by Wilkie Farr attorneys David Jansen and Claudius Straub discusses the evolving regulatory landscape of sustainable investments in Europe under the SFDR, providing guidance to fund managers considering setting up an Article 8 or9 Fund in light of the latest regulatory developments. It also touches on the emerging environmental, social and governance disclosure framework in the U.S. and its differences from the SFDR. See “The E.U. Sustainable Finance Disclosure Regulation: New Disclosures for U.S. Asset Managers” (May 6, 2021).

Avoiding Pitfalls in Cyber Insurance Applications and Claims

Cyber insurance is a critical part of cyber incident response, but it comes with some coverage challenges. This article distills insights offered during an Incident Response Forum Ransomware 2024 panel that focused on key issues around cyber insurance, including avoiding pitfalls in the application and claims processes; navigating ransom payments; retaining mitigation service providers following an attack; parsing and negotiating cyber policies; and handling issues around third-party cyber incidents. The panel was moderated by John Reed Stark, founder of John Reed Stark Consulting, and featured Scott N. Godes, partner and co‑chair of the insurance coverage and counseling practice at Barnes & Thornburg; Jennifer Coughlin, founding partner and managing member of Mullen Coughlin; and Joni Mason, senior vice president at USI Insurance Services. See “Tips for Working With Cyber Insurance Carriers Following a Ransomware Event” (Oct. 26, 2023).