Iran Threat Reduction and Syria Human Rights Act-Outside Directors and "Affiliate" Status

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Securities Exchange Act of 1934. Under Section 13(r), any issuer of securities that is required to file quarterly or annual reports under Section 13(a) of the Exchange Act must make specific disclosure in its public filings if it or an affiliate has knowingly engaged in certain activities listed in Section 13(r). The new disclosure requirement applies to all Exchange Act reports required to be filed on or after February 6, 2013.

In this memorandum we consider whether outside directors and the companies on whose boards they serve should be deemed affiliates for purposes of Section 13(r). Based on relevant case law and the limited related SEC guidance, we conclude that (1) there is a strong basis for the view that an outside director of a company should not, based solely on her status as director, be deemed for purposes of Section 13(r) to be an affiliate of the company, and (2) a company is not required, for the purposes of Section 13(r), to treat another company as its affiliate if the only relationship between those two companies is that an affiliate of the first company is an outside director of the second.