April 15, 2024

SCOTUS Decides MD&A Omissions Case

On Friday, the Supreme Court issued its decision in Macquarie Infrastructure Corp. v. Moab Partners, L.P., a case from the Second Circuit addressing the ability to rely on a failure to disclose certain information in accordance with the requirements of Item 303 of Regulation S-K as a basis to state a securities fraud claim under SEC Rule 10b-5. A unanimous Supreme Court held that “pure omissions” are not actionable under Rule 10b–5(b). The opinion, authored by Justice Sotomayor, states:

Securities and Exchange Commission (SEC) Rule 10b–5(b) makes it unlawful to omit material facts in connection with buying or selling securities when that omission renders “statements made” misleading. Separately, Item 303 of SEC Regulation S–K requires companies to disclose certain information in periodic filings with the SEC. The question in this case is whether the failure to disclose information required by Item 303 can support a private action under Rule 10b–5(b), even if the failure does not render any “statements made” misleading. The Court holds that it cannot. Pure omissions are not actionable under Rule 10b–5(b).

As a result of the Supreme Court’s decision, the judgment of the Court of Appeals for the Second Circuit is vacated, and the case is remanded for further proceedings consistent with the Supreme Court’s opinion.

The Court explained, “A pure omission occurs when a speaker says nothing, in circumstances that do not give any particular meaning to that silence.” By contrast, a half-truth occurs when a speaker says something, but “state[s] the truth only so far as it goes, while omitting critical qualifying information.” The Court held that Rule 10b-5(b) prohibits half-truths but not pure omissions, noting that the text of Rule 10b5-1(b) prohibits omitting information from a public disclosure that is “necessary in order to make the statements made … not misleading.” Liability under that provision turns on there being “statements made” that were misleading. While other provisions of the securities laws, such as Section 11 of the Securities Act, prohibit pure omissions, neither Rule 10b-5(b) nor Section 10(b) contains this express prohibition. The Court made clear that it was not opining on other issues not presented to it, such as “what constitutes ‘statements made’” and “when a statement is misleading as a half-truth.”

– Dave Lynn

April 15, 2024

SEC Small Business Forum Happening This Week

The SEC’s 43rd Annual Government-Business Forum on Small Business Capital Formation will take place in three virtual sessions April 16-18 from 1:00 -2:30 p.m. Eastern Time. The SEC’s Office of the Advocate for Small Business Capital Formation will host the Forum. The SEC’s announcement notes:

The Forum is a unique event where members of the public and private sectors gather to provide feedback to improve capital-raising policy. The event will feature appearances by each of the Commissioners and an exciting lineup of speakers with fresh perspectives on capital raising. Sessions will focus on the following topics:

– Tuesday, April 16: Amplifying Early-Stage Stories
– Wednesday, April 17: Opening the Dialogue on Investing
– Thursday, April 18: Catching up with Small Caps

At the end of each day’s session, registered participants will have the opportunity to prioritize capital-raising policy recommendations to the Commission and Congress. After the event, a report with the recommendations will be delivered to Congress.

Participants must register for the Forum and will be able to attend the virtual sessions, prioritize policy recommendations and ask questions. The SEC also accepted policy recommendations through last Friday.

– Dave Lynn

April 15, 2024

Skadden’s Updated “Compensation Committee Handbook”

As Meredith recently noted on the Advisors’ Blog on, the 2024 update to Skadden’s Compensation Committee Handbook is now available — now in its 10th edition, it reflects key developments since last spring, including updates for the clawback rules and developments in pay-versus-performance disclosures. In the discussion of clawbacks, it briefly touches on the interplay with other legal requirements, including SOX and state laws:

Committees should keep in mind that certain states, such as California, have laws that generally prohibit the recovery of wages that have already been paid. While the Dodd-Frank clawback rules are currently expected to preempt conflicting state law, litigation activity may be on the horizon to definitively confirm this.

CEOs and chief financial officers (CFOs) remain subject to the clawback provisions of the Sarbanes-Oxley Act of 2002 (SOX), which provide that if a company is required to prepare an accounting restatement because of “misconduct,” the CEO and CFO are required to reimburse the company for any incentive or equity-based compensation and profits from selling company securities received during the year following issuance of the inaccurate financial statements. To the extent that a Dodd-Frank Clawback Policy and SOX cover the same recoverable compensation, the CEO or CFO would not be subject to duplicative reimbursement. Recovery under the Dodd-Frank Clawback Policy will not preclude recovery under SOX to the extent any applicable amounts have not been reimbursed to the issuer.

This guide is posted along with checklists, sample charters and memos in our “Compensation Committees” Practice Area on

– Dave Lynn

April 12, 2024

Shareholder Proposals: ExxonMobil’s Proxy Disclosure Brings the Hammer Down

ExxonMobil filed its definitive proxy statement yesterday, and – Holy Smokes! – it’s quite a read. The company devotes three full pages to a scorching diatribe against the current shareholder proposal process and those proponents and representatives whom it believes abuse that process.  Here’s a taste of what ExxonMobil had to say:

The proposal process is being abused by those who treat shareholder democracy as a venue for activism and counter-activism, from self-styled “green” or “progressive” groups to the “anti-ESG” organizations that oppose them. In recent years, ExxonMobil has seen proposals that target Board members for their public statements, cherry pick key performance indicators to be alternately used or not used by the Company, redefine risk based on each proponent’s narrow view of the energy transition, and demand dozens of often contradictory actions – all driven more by ideology than shareholder value. When these proposals come to a vote, the low shareholder support they receive makes it clear that they do not add value, except perhaps to the proponents or their representatives in driving their marketing and fundraising efforts while they advance their individual agendas.

Over the past two years, proposals have been submitted to ExxonMobil seeking more than 19 new reports – including 13 such proposals that are or were on topics the Company already covers in its reporting. Many of these prescribe metrics and approaches that are inconsistent with the realities of the Company and the industry; advance unproven and poorly defined notions of materiality; or seek reports based on narrow, remote, or unlikely future scenarios to advance a specific agenda, not to enhance shareholder value.

Many of the proponents and representatives work with each other or other activist organizations, and hijack the shareholder proposal process to advance their own agenda, which often conflicts with growing investors’ value.

ExxonMobil goes on to identify the various proponents and representatives by name and highlights their efforts to collaborate on shareholder proposals. The company concludes this part of its smackdown with the following statement: “We are increasingly seeing a number of proposals each year, backed by the same activist organizations, submitted by different named shareholders. We believe that this is a misuse of the shareholder proposal process, which is designed to allow a shareholder to submit a single proposal each year.”

The company’s lawsuit seeking to exclude proposals submitted by Arjuna Capital and Follow This – which also gets a fairly lengthy mention in this part of the proxy – already signaled that ExxonMobil was prepared to play hardball with shareholder proponents this season, and its proxy disclosure makes it clear that it isn’t backing off.

Whether ExxonMobil’s strategy is a good one is an open question, but as someone who dealt with a few very frustrating shareholder proposals and proponents in a prior life, I’d be willing to bet that drafting this disclosure must have been a truly cathartic experience for everyone involved!  (Thanks to Rhonda Brauer for tipping us off to this filing).

John Jenkins

April 12, 2024

Securities Litigation: SDNY Refuses to Dismiss Claims Based on Internal Controls Statements

Remember the Barclays PLC over-issuance debacle from a few years ago? Unfortunately, the SDNY’s recent decision in In re Barclays PLC Sec. Litig., (SDNY 2/24) refusing to dismiss Rule 10b-5 claims against the company indicates that the repercussions from that incident continue to unfold. In that decision, the Court concluded that the plaintiff had adequately alleged that the company’s failure to appropriately track the amount of securities it had available under its shelf registration statement demonstrated that statements it made about its internal controls were misleading. This excerpt from Shearman’s blog on the case explains the Court’s reasoning:

The Court first considered the company’s general statements relating to internal controls before the alleged over-issuances were revealed, including that the company was “committed to operating within a strong system of internal control” and had “frameworks, policies and standards” that enabled the company “to meet regulators’ expectations relating to internal control and assurance.” The Court rejected defendants’ argument that these statements were too “simple and generic” to be actionable, explaining that, according to the complaint’s allegations, the company allegedly did not have any control mechanism in place to prevent the over-issuance of securities and the supposed omission of this lack of a control system was adequately alleged to be material.

The Court stressed that, in its view, the allegations were not merely that the company’s systems underperformed; rather, the allegations were that no system for tracking the company’s securities issuances existed at all. The Court further held that because it concluded that these statements were actionable, plaintiff could also pursue claims challenging the company’s Exchange Act compliance certifications.

The Court also found that the plaintiffs had adequately alleged that the company was reckless in failing to implement controls to appropriately track shelf issuances after the company lost its WKSI status. In reaching that conclusion, the Court noted the magnitude of the over-issuances and the fact that they had been uncovered through a simple inquiry from a low-level employee to the legal department.

John Jenkins

April 12, 2024

Climate Disclosure: Comparison of Reporting Regimes

With so many different jurisdictions imposing climate disclosure and reporting obligations, it’s very hard to keep track of what must be disclosed and to whom it must be disclosed. That’s why I think those of you who are struggling to deal with the brave new world of multiple climate disclosure regimes will find this Freshfields memo to be a helpful resource.

The memo includes a chart comparing the requirements under the SEC’s final rules, the ISSB standards, the EU’s CSRD & ESRS rules, and California’s SB 253 and SB 261 legislation. That chart is accompanied by a narrative discussion highlighting some of the differences between the regimes. This excerpt discusses the differences in the way each of these regulatory schemes approaches disclosures about transition plans and targets and goals:

Under the Final Rules, companies are only required to disclose climate-related targets that have materially affected or are reasonably likely to materially affect the company’s business, results of operations or financial condition as well as information necessary to understand the material impact or reasonably likely material impact of the target or goals and provide annual updates on actions taken to achieve such targets or goals.

Companies subject to the CSRD are required to disclose their climate-related targets and transition plans, if any, to ensure their business model is compatible with, among other things, the objectives of limiting global warming to 1.5°C in line with the Paris Agreement. The California Rules’ broader standard only requires disclosure of a company’s measures adopted to reduce and adapt to climate-related financial risk disclosed.

The memo says that companies developing transition plans and targets and goals need to consider the disclosure implications under each of these regimes and consider the potential liability, reputational and other risks arising out of the need to comply with differing disclosure requirements.

John Jenkins

April 11, 2024

Financial Reporting: Why are Accounting Errors on the Rise?

According to a recent Glass-Lewis blog, the number of SEC enforcement actions related to issuer reporting, audit and accounting from 70 in 2021 to more than 100 in 2023. The blog identifies a number of factors that are contributing to the increase, including the SPAC & IPO boom and the lack of qualified accountants. However, this excerpt also points the finger at audit committees:

At the same time that auditors are struggling with staffing, audit committees are being asked to take on a broader remit. As the responsibilities associated with the board expand to cover external risks stemming from new technologies and environmental and societal changes, as well as increased disclosure and reporting requirements, so do expectations around committee performance – with much of that responsibility placed on the audit committee. The core expectation of audit committees to oversee accounting and financial reporting remains, but for many companies, the scope of these expectations has grown to include oversight of issues such as cybersecurity and ESG.

A 2023 survey of 164 companies by audit firm Deloitte showed that 53% of respondents delegated cybersecurity oversight to the audit committee, with 26% delegating to the board and 11% to the risk committee. Though the margin was narrower for ESG oversight, a plurality of respondents also delegated that responsibility to the audit committee.

The blog says that the trend toward delegating cyber & ESG oversight to audit committees is understandable, given the fact that many of these committees have general risk oversight responsibilities. But it goes on to observe that absent sufficient additional resources, these new areas of oversight might also divert audit committee members’ attention from their core responsibilities for the integrity of the financial statements.

Although the blog doesn’t mention the PCAOB’s breathtaking NOCLAR auditing standard proposal, it strikes me that if that’s implemented in anything close to the form in which it was proposed, the demands on audit committees in the area of their core responsibilities are going to significantly increase.

John Jenkins

April 11, 2024

Cybersecurity: Proposed CISA Incident Reporting Rule Casts a Wide Net

On April 4, 2024, the Cybersecurity Infrastructure and Security Agency (“CISA”) issued a proposed rule to implement the reporting requirements imposed by the Cyber Incident Reporting for Critical Infrastructure Act of 2022 (“CIRCIA”). The proposed rule would impose cyber incident & ransom payment reporting obligations on “covered entities”, and this Venable memo says it casts a very wide net:

The regulation would encompass a wide range of “covered entities” in critical infrastructure sectors. Importantly, CISA makes clear that “covered entities” would be broader than owners and operators of critical infrastructure systems and assets. Instead, entities that are active participants in critical infrastructure sectors may be considered “in the sector,” even if the entity itself is not critical infrastructure. [Sec. IV.B.i] CISA welcomes your organization’s outreach if you are unsure whether you are part of a critical infrastructure sector. [Sec. IV.B.ii]

To establish what qualifies as “critical infrastructure sectors,” CIRCIA draws from Presidential Policy Directive 21 (PPD-21). [Sec. IV.B.i] PPD-21 enumerates 16 sectors, encompassing services across large swathes of the economy. The critical infrastructure sectors are 1) Chemical, 2) Commercial facilities, 3) Communications, 4) Critical manufacturing, 5) Dams, 6) Defense industrial base, 7) Emergency services, 8) Energy, 9) Financial services, 10) Food and agriculture, 11) Government facilities, 12) Healthcare and public health, 13) Information technology, 14) Nuclear reactors, materials, and waste, 15) Transportation systems, and 16) Water and wastewater systems.

Umm, that’s a whole lot of sectors! CISA’s definition of “critical infrastructure sectors” kind of reminds me of James Joyce’s famous definition of the Catholic Church – “here comes everybody.” Anyway, the memo says that the comment period will expire on June 3, 2024 and CISA expects to have a final rule in place in early 2026.

John Jenkins

April 11, 2024

Board Minutes: Delaware’s Former Chief Justice Offers Some Advice

Former Delaware Chancellor & Chief Justice Leo Strine has authored a forthcoming law review article addressing the importance of good board minutes and offering up some advice on good minuting and documentation practices. Here’s the abstract:

In this article, which was originally the basis for the 21st Annual Albert A. DeStefano Lecture on Corporate, Securities & Financial Law on February 27, 2024, at Fordham University School of Law, the importance of good corporate minuting and board documentation practices is addressed. Using lessons from Delaware cases where the quality of these practices has determined the outcome of motions and cases, the article identifies effective and efficient practices to better address this decidedly not sexy, but unquestionably essential, corporate governance task. The recent Delaware cases underscore the importance of quality and timely documentation of board decision-making, the material benefits of doing things right, and the considerable downside of sloppy, tardy practices.

The article’s less than 40 pages long (double spaced) and is written in Strine’s always engaging conversational style. In short, if you’re involved in preparing or reviewing board minutes, it’s definitely worth your time.

John Jenkins

April 10, 2024

SEC Climate Disclosure Rules: Pencils Down?

The SEC’s order staying its climate disclosure rules pending the resolution of challenges currently pending in the 8th Circuit has some companies questioning whether they can take a “pencils down” approach to their compliance efforts.  This recent Ropes & Gray memo weighs in with some thoughts on this topic:

It’s likely pencils down for now on compliance with the SEC climate rules. It’s hard to envision many registrants devoting time and resources to preparing for compliance with rules that have been stayed.

The case is likely to go on for some time. The litigation concerning the SEC’s conflict minerals rule went on for more than four years (see our earlier post here). The climate rules stay order cites two other rules stayed by the SEC pending judicial review in similar circumstances: a rule establishing a transaction fee pilot in NMS stocks and proxy access rules. It took approximately a year for the appellate court decision on the proxy access rules. In the transaction fee pilot case, the court took slightly under a year-and-a-half. The current stay order contemplates that the challenges to the climate rules may extend beyond 2025.

If the SEC prevails in the litigation, we expect it will push back at least some of the disclosure requirements. Large accelerated filers will not be in a position to make their first disclosures for 2025 (due in 2026) if they do not begin their supporting work well in advance. It seems unreasonable for the SEC to expect registrants to move forward with their compliance preparation while the stay is in effect.

These are all valid points, but for many companies a “go slower” approach may be preferrable to a “pencils down” alternative. For now, the SEC hasn’t said anything about pushing back compliance dates, and the panelists in our recent webcast on the rules made it clear that building the climate disclosure infrastructure necessary to comply with them is going to be a heavy lift. Furthermore, even if the SEC ultimately decides to extend the compliance dates, it’s unclear how long they’ll give companies to get their acts together.

Also, keep in mind that the compliance dates vary depending on filer status and the provisions of the rules in question, and there’s no telling whether later compliance dates would also be pushed out as part of any extension. Finally, even if you’re betting on the rules being thrown out, the SEC isn’t the only game in town. For many companies, building out their climate disclosure infrastructure will be necessary to comply with the EU’s CSRD or with California’s climate disclosure laws (assuming they survive their own legal challenges).

John Jenkins