After investigation, legal experts conclude Kodak, executives did not violate any laws

An independent legal review of Eastman Kodak Co.’s actions during and ahead of a July announcement that the Rochester manufacturer was in line to receive a massive loan to produce pharmaceuticals has concluded that the company and its executives broke no laws.

As a result, Kodak shares (NYSE: KODK) were up more than 40 percent midday Wednesday at $8.80.

The review, conducted by Akin Gump Strauss Hauer & Feld LLP and released on Tuesday, concluded that Kodak and its officers, directors and senior management “did not violate the securities regulations or other relevant laws, engage in a breach of fiduciary duty or violate any of Kodak’s internal policies and procedures.”

Akin Gump was retained by a special committee formed by Kodak’s board of directors to look into allegations of impropriety surrounding the July 28 signing of a letter of interest between the U.S. International Development Finance Corp. and Kodak that would result in a $765 million loan.

The potential windfall would allow Kodak to reinvent itself with a new division, Kodak Pharmaceuticals, that would manufacture components of generic drugs and enabling the U.S. to rely less on China for its pharmaceuticals.

The July 28 letter of interest noted that it was not a done deal and that the loan could be any dollar amount up to $765 million. Both Kodak and the DFC said at the time that they could continue due diligence.

But within days of the announcement, the U.S. Securities and Exchange Commission said it would investigate the transaction. Kodak Chairman and CEO Jim Continenza had been issued 1.75 million stock options by the board the day before the loan announcement, triggering an outcry from analysts and investors. SEC filings also showed that Continenza purchased 46,700 additional shares of Kodak stock, while board member Philippe Katz purchased 5,000 shares on the same day. Additionally, board member George Karfunkel the day after the July 28 announcement had gifted a large number of shares to a charity.

Each of those actions raised eyebrows and suspicion.

On Aug. 7, the DFC suspended the loan until an investigation could be completed. Kodak share price has ranged from $2.62 on the day before the official announcement to a one-time high of $60, with a July 29 closing price of $33.20. But in recent weeks, shares had languished at around $6 while the public awaited results from several investigations.

Specifically, Akin Gump was retained to investigate:

• Whether Katz or Continenza engaged in insider trading, violated Kodak’s internal policies and procedures or otherwise acted improperly in purchasing Kodak shares in June 2020.
• Whether Kodak’s award of stock options to Continenza and other members of Kodak’s senior management team on July 27, 2020, the day prior to the DFC announcement, violated Kodak’s internal policies and procedures or the federal securities laws or constituted a breach of fiduciary duty under applicable state law.
• Whether board member Karfunkel violated the federal securities laws or Kodak’s internal policies and procedures by donating 3 million Kodak shares to an affiliated charity the day after the DFC announcement, while Kodak’s trading window remained closed.
• Whether Moses Marx, the father-in-law of board member Katz, or Southeastern Asset
Management, a large Kodak investor that had nominated two of Kodak’s board members, sold shares of Kodak after the DFC Announcement while in possession of material nonpublic information obtained from any of Kodak’s officers, directors or employees.
• Whether Kodak was responsible for the early release of information related to the LOI on July 27, 2020, the day before the DFC Announcement, and, if so, whether that release violated Regulation Fair Disclosure, promulgated by the SEC.

The Akin Gump investigation revealed that both Katz and Continenza sought and obtained preclearance to trade from Kodak’s general counsel, in compliance with the company’s insider trading policies.

Additionally, the July 27, 2020 options grants complied with the terms of Kodak’s
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. 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, according to the investigation.

The investigation also found that Karfunkel’s gift the day after the announcement was a bona fide gift and therefore did not constitute a sale of securities for insider trading purposes.

As a result of Akin Gump’s findings, Kodak’s Special Committee has recommended that the company 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.

“The board and I are grateful for the diligence and care that was taken by the Special Committee and by its counsel to perform such a thorough independent review. Kodak is committed to the highest levels of governance and transparency, and it is clear from the review’s findings that we need to take action to strengthen our practices, policies and procedures,” Continenza said in a statement late Tuesday. “Expeditiously implementing these recommended measures will be critical as we continue to execute on our long-term strategy and transform our business for the future.”

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