May 17, 2022

California Board Gender Diversity Law Ruled Unconstitutional

Last week, Judge Maureen Duffy-Lewis of the Superior Court of California, County of Los Angeles, found that SB 826, the California law requiring that California-headquartered companies have a minimum number of women directors, violates the Equal Protection Clause of the California Constitution. The decision states:

As to the claimed interest that S.B. 826 was passed to remedy discrimination, defendant has not met its burden to show that this is necessary nor narrowly tailored. Therefore, for all the above stated reasons and analysis the Court determines that S.B. 826 violates the Equal Protection Clause of the California Constitution and is thus enjoined.

As noted in this L.A. Times coverage, in her decision, Judge Duffy-Lewis found the state could not prove that the “use of a gender-based classification was necessary to boost California’s economy, improve opportunities for women in the workplace, and protect California taxpayers, public employees, pensions and retirees.” Further, she found that the state could not provide any evidence of a specific corporation that discriminated against any woman and would have been subject to the law.

Last month, Judge Terry A. Green of the Superior Court of California, County of Los Angeles, granted plaintiffs’ motion for summary judgment in a case challenging the legality of AB 979, which required California-headquartered companies to have a specified minimum number of members on their boards of directors that were from specified underrepresented communities.

– Dave Lynn

May 17, 2022

Headed to the Supremes: The Court to Consider the SEC’s ALJs (Again)

Yesterday, the U.S. Supreme Court agreed to review whether the SEC’s Administrative Law Judges are unconstitutionally protected from removal. The case is Securities and Exchange Commission v. Michelle Cochran. The question in the case is:

whether a federal district court has jurisdiction to hear a suit in which the respondent in an ongoing [SEC] administrative proceeding seeks to enjoin that proceeding, based on an alleged constitutional defect in the statutory provisions that govern the removal of the administrative law judge who will conduct the proceeding.

The Supreme Court is expected to hear arguments in these this case and a related FTC case in the Fall. You may recall that, in its June 21, 2018 opinion in Lucia v. Securities and Exchange Commission, the Supreme Court held that SEC ALJs are “Officers of the United States” under the Appointments Clause of the U.S. Constitution, and are not mere employees. I have been very interested in these SEC ALJ cases because I started out my career at the SEC as a clerk in the Office of Administrative Law Judges.

– Dave Lynn

May 17, 2022

Trying to Keep Up: Check Out our Proxy Season Blog!

With proxy season in full swing, it can be difficult to keep up with all of the developments. I encourage you to check out the Proxy Season Blog, where we cover the latest proxy season and corporate governance developments. Some of the recent topics include:

  • Rounding Up Shareholder Support Through Climate Action Flagging Tool
  • Preparing for Surprises in Your Annual Meeting’s Q&A Session
  • Shareholder Proposals: BlackRock Draws a Line on Climate
  • Human Rights Diligence: Proposals Shine Spotlight on ESG Oversight
  • ESG Proposals: Knocked Out By a “One-Two Punch”?

You definitely do not want to fall behind at this critical time – check out the Proxy Season Blog today. If you do not have a subscription to the, be sure to email our sales team at

– Dave Lynn

May 16, 2022

SEC Enforcement Director Criticizes Defense Bar (Again)

In a speech at the Securities Enforcement Forum West 2022 Conference, SEC Enforcement Director Gurbir Grewal discussed the factors that can contribute to delays in SEC investigations, and he laid the blame on the tactics used by defense counsel, including Division of Enforcement alums. His remarks echoed warnings about defense counsel delaying tactics that Robert Khuzami had made when he was the Director of Enforcement a decade ago – apparently not much has changed during that time in the Staff’s view.

The tactics that Director Grewal finds troubling include: (i) blowing through document production deadlines, document dumps or trickling in the document production; (ii) overly coaching witnesses and lodging in objections or otherwise interrupting testimony; (iii) making questionable privilege claims; and (iv) representing multiple clients when conflicts are inevitable. Grewal encourages defense counsel to act in a manner that facilitates cooperation, stating:

Now, I’m often asked to further explain what I mean by cooperation. To me, cooperation is more than the absence of obstruction; it’s an affirmative behavior.

If you’re delaying our investigation by slow-walking document productions, trying to put off witness testimony for an excessive time, or being obstructive during testimony, you’re not cooperating, no matter what your client’s 8-K may say.

There’s no exhaustive checklist of what constitutes cooperation, though as described in the Seaboard report, behaviors such as self-reporting and remediation fall within the cooperation rubric.

But here are some more examples of good cooperation: when your clients are involved in an investigation, you can make documents or witnesses available to us on an expedited basis, highlighting “hot” documents or providing translations of key documents where applicable.

You can flag documents that you know we’re interested in, even if they might arguably, under a certain reading, fall outside the scope of a subpoena.

You can make presentations to the staff during an investigation that are not simply advocacy pieces, but that meaningfully illuminate events.

And, where your client may have violated the law, you can counsel them to own that violation and work in good faith to remedy it.

In short, you can take steps that enable us to efficiently conduct our investigations, protect investors, and rebuild trust in our markets and the law.

We shall see how this message is received this time around.

– Dave Lynn

May 16, 2022

Climate Change Proposal: The Individual Comments

Notwithstanding the SEC’s extension of the comment period for its climate change disclosure rule proposal, comment letters continue to stream in, but most at this point are coming from individuals. I am really not sure what happened to the SEC comment process, but some individuals appear to be confusing commenting on an SEC rule proposal with commenting on a Facebook post about the latest conspiracy theory. For example, one commenter wrote:

As an Alaskan resident I want you to know that I OPPOSE your “Woke Climate Disclosure Scheme”! Alaska’s bit to bring to the table to build back this disastrous Biden induced economy is energy. And Alaskans want energy independence, not more shaming of our oil and gas companies!

Another commenter was more to the point, simply stating:

Please stop this madness

I tend to feel that way about a lot of things these days, not just SEC rule proposals. Finally, many commenters understood the assignment, but just ran into trouble with the execution, giving insight into the instructions these commenters must have received from somewhere:

Please use this section to write your comment to the SEC telling them Americans want energy independence, not more shaming of our oil and gas companies! We have oil and gas here!!!!!

I do feel bad for the SEC staffer who has to painstakingly go through each and every one of these comments from individuals and try to categorize them based on the “form” that the individuals purportedly used. My guess is that these letters won’t do much to convince the SEC to change course on the climate change disclosure rulemaking, but they can certainly be entertaining!

– Dave Lynn

May 16, 2022

Climate Change Proposal: The SEC’s Authority in the Spotlight

In my view, one of the more interesting letters submitted to date on the climate change rulemaking is a very thoughtful piece from a group of professors who examine the SEC’s authority to adopt the climate change disclosure rules. As John mentioned in this blog, the SEC’s authority will no doubt be one of the areas that future litigants may seek to challenge if and when the proposed rules are adopted. The letter notes:

The enthusiasm of many Commissioners and Staff of the Securities and Exchange Commission (the “SEC”) to participate in the global debate about climate change is understandable. After all, protecting the earth’s sustainability is perhaps the most compelling issue of our time. It’s an issue all must take seriously and everyone must do their part. But each of us, and particularly governmental authorities, must always act in accordance with law and fairness.

The undersigned, a group of professors of law and finance, are concerned that the SEC’s recent proposal to impose extensive mandatory climate-related disclosure rules on public companies (the “Proposal”) exceeds the SEC’s authority. In addition, rather than provide “investor protection,” the Proposal seems to be heavily influenced by a small but powerful cohort of environmental activists and institutional investors, mostly index funds and asset managers, promoting climate consciousness as part of their business models.

The letter goes on to discuss the concept of “investor demand” versus “investor protection,” the authority of the EPA and state corporate law, the risk of unconstitutional compelled political speech, and other statutory considerations, such as the high costs versus speculative benefits, the impact on competition and the extent to which added burdens may discourage companies from going public.

It is hard to say whether this letter will have any more impact on the SEC than the “please stop this madness” comment, but it certainly provides food for thought for those who may seek to challenge the rules down the line.

– Dave Lynn

May 13, 2022

Privilege: Shielding Information from Your Directors?

Directors are fiduciaries and have the responsibility for overseeing the business and affairs of the company. In keeping with those responsibilities, directors generally have a right to see any corporate information they want, including information that’s subject to the attorney-client privilege. But this ArentFox Schiff memo says that right is subject to certain exceptions. This excerpt explains:

In many jurisdictions—including Delaware, Illinois, Virginia, D.C., and Massachusetts—a director cannot obtain privileged company records where the director seeks them for an improper purpose. Jurisdictions such as Delaware and Massachusetts also restrict a director’s access to privileged communications where the director is acting adversely to the company’s interests. Similarly, under California law, a director generally cannot obtain the company’s privileged communications relating to a lawsuit the director filed against the company.

Courts conduct a fact-intensive inquiry to determine whether a director has an improper purpose for Courts conduct a fact-intensive inquiry to determine whether a director has an improper purpose for inspection or is acting adversely to the company. That inquiry involves considering whether the company has specific evidence—beyond anticipating the director may sue the company—of an improper purpose or adversity. For example, evidence that a director seeks to access privileged company records to harass the company or to force a buyout of the director’s shares at a premium may be sufficient to prevent the director from accessing those records.

Further, it is not sufficient for the company to show that the director is acting adversely to other directors. Instead, the company must show that the director is acting adversely to the company.

The memo goes on to offer several proactive steps that companies might take to shield corporate records from directors in order to avoid the fact-intensive inquiry described above. These include appointing a special committee to deal with a dispute involving a director as soon as it arises and having that committee retain its own counsel.

On a related topic, be sure to check out Keith Bishop’s blog on the issue of whether directors of a corporation are “joint clients” of a lawyer for the company.

John Jenkins

May 13, 2022

Privilege: Sharing Information with Your Auditors?

If you’ve ever been involved in an internal investigation involving a potentially substantial issue, you know that it’s virtually impossible to avoid sharing information about that investigation with the company’s independent auditors.  But if you do that, do you risk losing privilege in the event of subsequent litigation? This Perkins Coie blog says that at least some courts have answered that question in the affirmative:

Although not in the majority, courts have concluded that independent auditors in fact have an inherently adversarial relationship with the companies they audit. Compare Medinol, Ltd. v. Boston Scientific Corp., 214 F.R.D. 113, 116 (S.D.N.Y. 2002). As a consequence, companies have a solid basis for fearing a downstream assertion that they waived work product protection over the subject of the information disclosed to their outside auditors. These cases, and the more generally unsettled state of the law on this key issue, create a non-trivial risk that turning over their search terms today could create privilege waiver arguments tomorrow.

The blog says that the good news is that it’s not a foregone conclusion that a court will find that privileged has been waived under these circumstances. This is an issue that has been litigated, and only a minority of courts have taken the position that sharing such information with auditors results in a waiver of work product protection.

John Jenkins

May 13, 2022

Non-GAAP: Adjustment for Public Co. Expenses Involves “Tailored Accounting”

Bass Berry’s Jay Knight recently blogged about a comment letter exchange in which the Staff objected to a company’s presentation of a non-GAAP measure adjusted for expenses incurred in transitioning to public company status. Here’s an excerpt:

We found particularly interesting this recent comment letter exchange (see here and here) where the SEC Staff took issue when a company, which had recently gone public, included an adjustment in its Adjusted EBITDA non-GAAP financial measure for “public company expenses” related to “additional headcount to build infrastructure and support the operations of a public company (i.e., public company directors & officers liability insurance, investor relation and public listing fees, additional legal and accounting fees, and additional independent board members).”

In the Staff’s view, these expenses were normal, recurring expenses associated with public company status and efforts to back them out of Adjusted EBITDA involved inappropriate “tailored accounting.” The company agreed to remove the adjustment in future filings.

John Jenkins

May 12, 2022

Risk Factors: Coinbase Pummeled for Required SAB 121 Disclosure

On Tuesday, Coinbase announced disappointing first quarter earnings. In the midst of a crypto crash, that would’ve been enough by itself to result in a big hit to the company’s stock price, but to make matters worse, the addition of new language to an existing risk factor prompted a firestorm of negative media reports about the company’s prospects. What caught the eye of many analysts was an updated version of a risk factor relating to issues associated with safeguarding client assets that appeared on p. 40 of its latest Form 10-K. The company’s first quarter Form 10-Q tacked on the following sentences to the first paragraph of that risk factor, which appears on p. 83 of the filing:

Moreover, because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors. This may result in customers finding our custodial services more risky and less attractive and any failure to increase our customer base, discontinuation or reduction in use of our platform and products by existing customers as a result could adversely impact our business, operating results, and financial condition.

That language was added in response to the SEC Accounting Staff’s issuance of SAB 121, which addressed accounting for safeguarded digital assets and noted that “disclosures regarding the significant risks and uncertainties associated with the entity holding crypto-assets for its platform users may also be required outside the financial statements under existing Commission rules, such as in the description of business, risk factors, or management’s discussion and analysis of financial condition and results of operation.”

My guess is that Coinbase probably viewed this disclosure as not being particularly material. It likely concluded that it was simply making explicit something that was implicit in its existing risk factor disclosure or at least widely known among crypto investors. But the market freaked out after media reports suggested that the new language implied that the company was facing the risk of bankruptcy. To make matters worse, some of those reports accused the company of hiding this allegedly apocalyptic disclosure. Ultimately, Coinbase’s CEO felt compelled to respond with a Twitter thread explaining the fact that the disclosure was prompted by the adoption of SAB 121.

I think there are a couple of takeaways from the Coinbase situation. First, sometimes a perfect storm of negative events surrounding a company and its industry can transform what a company thinks is a non-controversial risk factor update into a five-alarm fire – and the possibility of that kind of perfect storm needs to be kept in mind when drafting disclosure and considering its possible impact.

Second, as we point out in the discussion on p. 9-10 of our Risk Factors Disclosure Handbook, companies take different approaches to updating risk factors.  Some opt to simply set forth the risk factors that are being updated in the filing, while others, like Coinbase, include the entire set of risk factors that appeared in the 10-K.  We recommend that companies that repeat the entire section highlight the updated language in some fashion. Highlighting the new language might not stop an unexpected firestorm from happening, but it might help avoid accusations of attempting to bury the disclosure if one does break out.

John Jenkins