From SEC Website: With respect to the June Trades, both Katz and Continenza sought and obtained preclearance to trade from Kodak’s General Counsel, in compliance with the Company’s insider trading policies (to which they were and are subject). Kodak’s General Counsel had a firm grasp of the information that was available to the Company regarding the status of the DFC loan application at the time he precleared the trades. He concluded that preclearance was appropriate because the DFC loan application process was at a highly uncertain stage and was therefore not MNPI for purposes of the insider trading laws. Kodak’s General Counsel reached this conclusion in good faith and Katz and Continenza reasonably relied on his decision. Katz and Continenza also provided explanations for their decisions to purchase shares, which were credible and unrelated to the DFC loan application.
The July 27, 2020 options grants complied with the terms of Kodak’s Omnibus Incentive Plan (the “Executive Compensation Plan”) and were approved by a group of disinterested directors acting in their capacity as members of Kodak’s Compensation, Nominating and Governance Committee (“CNG Committee”). The grants – and in particular the grant to Continenza – had been discussed with the Board well in advance of the start of the DFC loan application process and were awarded for legitimate business purposes unrelated to the DFC Announcement. Furthermore, as described in more detail below, while granting options to company management ahead of positive news can be controversial, it is not prohibited by SEC regulations and can only give rise to state law breach of fiduciary duty claims under certain circumstances not present here. However, we did identify several flaws in the process that Kodak’s General Counsel followed with respect to the grants. As a result, Kodak’s Board and the CNG Committee were not warned that the timing of the grants could give rise to concerns about so-called options “spring loading,” regardless of whether these particular options grants were ultimately determined to be legal.
Based on the information provided by Karfunkel during his interview, it does not appear that his charitable gift of Kodak shares the day after the DFC Announcement violated the federal securities laws.2 Akin Gump’s conclusion on this issue is premised on the following. First, under existing regulations, a bona fide gift of shares does not constitute a sale of securities for insider trading purposes. Akin Gump’s analysis of the relevant regulations and legal opinions on this issue is described in Section IV.A.3 of this report. Second, as a factual matter Karfunkel has represented that: (1) the gift of shares was bona fide and not in return for anything of value; and (2) the charity has not sold any of the gifted shares. Our conclusions rely heavily on these two facts, which we assume to be accurate based on Karfunkel’s representations to Akin Gump. In addition, Kodak’s policies and procedures did not clearly prohibit Karfunkel from making the gift, even though it occurred during a closed trading window. However, the circumstances of the gift raise significant concerns from a corporate
Akin Gump’s ability to fully investigate the bona fides of the gift or the charity that received it was limited because we did not have access to the records of the charity and were unable to interview any of its officers or directors, with the exception of Karfunkel. The potential tax implications of Karfunkel’s gift are outside of the scope of Akin Gump’s investigation.
governance perspective, which are addressed in the Special Committee’s recommendations in this report.
On July 27, 2020, Kodak circulated a media advisory to certain members of the press to invite them to the LOI signing ceremony that was being planned in conjunction with the DFC Announcement. While the intention was that the media advisory would be embargoed, due to a misunderstanding, a version of the advisory was sent out with language indicating that it was for immediate release. As a result, two local Rochester, New York, news outlets tweeted information about a pending announcement related to Kodak working with the government on July 27, 2020, the day before the DFC Announcement. While this early release of information was not in accordance with best practices, it did not violate Reg FD.
In July and August 2020, after the DFC Announcement, but while Kodak’s trading window for its officers and directors remained closed, two parties with connections to Kodak board members sold Kodak shares. First, Marx sold 250,303 shares on July 29, 2020. Second, on July 28, 2020, after the DFC Announcement was made public, a Southeastern-affiliated entity sold 4 million shares. On August 3, 2020, several entities affiliated with Southeastern exercised their contractual rights to convert Kodak notes that they had acquired in May 2019 into approximately 30 million shares of the Company’s stock. According to public filings, Southeastern sold substantially all of these shares soon thereafter. Akin Gump’s review found no evidence that Marx or Southeastern were given any information about Kodak that was not already publicly disclosed by the time of these transactions. As a result, we have no reason to believe that Marx or Southeastern engaged in insider trading. Furthermore, Kodak’s insider trading policies do not apply to Marx or Southeastern, as they are not officers, directors, or employees of Kodak.
In connection with its findings, the Special Committee, in consultation with Akin Gump, has recommended that Kodak adopt corporate governance and procedural changes with respect to its executive compensation practices, insider trading policies, and procedures regarding the disclosure of information about the Company to the public. These recommendations are described in detail at the conclusion of this report.
