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CALIFORNIA CORPORATE & SECURITIES LAW

Three Considerations For Drafting A Code of Business Conduct

Although the Securities and Exchange Commission does not require that a company adopt a code of business conduct and ethics, I would be very surprised to hear of an SEC reporting company that has not adopted such a code.  Item 406 of Regulation S-K requires a reporting company to disclose whether it has “adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions”.  If a company has not adopted a code, it must explain why it hasn’t.  Companies with securities listed on either the NYSE or the Nasdaq stock exchanges don’t have a choice.  Both of exchanges require the adoption of a code applicable to all directors, officers and employees.  NYSE Listed Company Manual Section 303A.10 and Nasdaq Rule 5610.  Over the years, I’ve had occasion to draft or review numerous codes.  Below are some

  • Banning all conflicts of interest.  Codes invariably address conflicts of interest, if for no other reason than Item 406 defines a “code of ethics” in part as written standards designed to promote honest and ethical conduct, including “the ethical handling of actual or apparent conflicts of interest between personal and professional relationships”.  Section 303A.10 requires that a code address “conflicts of interest”.  I sometimes see codes that literally ban any and all actual and potential conflicts of interest with prior approval.  If applied literally, an employee of a retail company could not make a retail purchase at a company store since the employee’s interests would be adverse to the company’s interest in the transaction.
  • Promising to keep reports confidential.  Some codes appear to promise complete confidentiality to persons who report suspected violations.  Recently, for example, I came across the following statement in a code: “All reports and disclosures you make under this Code of Ethics will remain confidential unless required to be disclosed by applicable law.”  Making such a promise may be counterproductive.  In some cases, for example, it may be impossible to investigate a report and maintain confidentiality.
  • Limiting outside activities.  Codes often limit outside activities of employment.  These provisions should be reviewed by labor and employment counsel.  California’s Labor Code, for example, includes various restrictions on an employer’s ability to control the lawful, off-duty activities of an employee.  See California Labor Code Sections 96(k), 98.6, 1101 and 1102.

 Once again, an LLC is not a corporation

I recently came across the following in a Washington Court of Appeals opinion:

NRS 86.489 that applies to shareholder derivative actions. Roil Energy was formed in Nevada.

Roil Energy, LLC v. Edington, 2016 Wash. App. LEXIS 1819 (Aug. 2, 2016).  The problem with this statement is that NRS 86.489 applies to derivative actions by members of an LLC, not to actions by shareholders.

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