E-Minders October 2021

In This Issue:

E-Minders is our monthly e-mail newsletter containing the latest developments and practical guidance for corporate & securities law practitioners.

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This Month! Our "Proxy Disclosure & Executive Compensation Conferences": Now's the time to register for our "Proxy Disclosure" & "Executive Compensation Conferences" - which will be held virtually October 13th - 15th. We're excited to offer a format that can be either "live & interactive" or "on-demand" (your choice! or do both!) - to deliver candid & practical guidance, direct from the experts.

These Conferences will help you tackle ESG & executive pay issues that will be essential to your proxy disclosures and engagements. Check out the agendas - 17 panels over three days.

Anyone who subscribes to one of our sites will get a special "member discount" when they register for these Conferences (both of the Conferences are bundled together with a single price). Register online or by mail/e-mail today to make sure that you'll have access to all of the latest guidance.

It's Here! 2022 Edition of "Proxy Season Disclosure Treatise": Liz Dunshee has wrapped up the 2022 Edition of the "Proxy Season Disclosure Treatise" — the definitive guidance on proxy season disclosure. The entire treatise spans 1900 pages and 34 chapters - all carefully organized for easy navigation. It includes updates from the SEC's flurry of 2020 rulemaking, as well as fresh insights on the SEC comment process from former Corp Fin Staffers Sonia Barros and Sara von Althann. Here's the "Detailed Table of Contents" listing the topics so you can get a sense of the Treatise's practical nature. Order today on TheCorporateCounsel.net so that you can have your copy in time for the upcoming proxy season.

It's Here! 2022 Edition of "In-House Essentials Treatise": Liz Dunshee & Lynn Jokela have wrapped up the 2022 Edition of the definitive guidance on securities law for the in-house lawyer: "In-House Essentials Treatise." It's here and is available now. With over 2000 pages - spanning 22 chapters - you will need this practical guidance for the challenges ahead. Here's the "Detailed Table of Contents" listing the topics so you can get a sense of the Treatise's practical nature. Order on TheCorporateCounsel.net!

It's Here! New Edition of "Practical Corporate Governance Treatise": The latest edition of our "Practical Corporate Governance Treatise" is here. With nearly 1700 pages of well-organized guidance - in the form of over 300 checklists - this is an essential resource for in-house and outside counsel alike. Order today on TheCorporateCounsel.net to get your copy now!

It's Almost Here! 2022 Edition of "Executive Compensation Disclosure Treatise": The highly anticipated 2022 Edition of Lynn & Borges' "Executive Compensation Disclosure Treatise" is almost here. With heightened attention being paid to executive & director pay, and responsiveness to say-on-pay votes being more important than ever, the latest edition is critical for the upcoming proxy season. Here's the "Detailed Table of Contents" listing the topics so you can get a sense of the Treatise's practical nature. Order a hard copy on CompensationStandards.com. As always, Dave Lynn and Mark Borges have ensured that the treatise is comprehensive and practical.

Our Enhanced "In-House Accelerator": If you're relatively new to being in-house - or you want to improve your client work by gaining that perspective - take advantage of our "In-House Accelerator." We're now offering an enhanced version as an add-on exclusively to members of TheCorporateCounsel.net, which makes practical guidance from across the site accessible - all in one place. This training consists of 221 FAQs from our "In-House Accelerator" paperback (here's the "Table of Contents") - which you can either read online or listen to via our podcast series. Then, test your knowledge with our quizzes!

"Deal Tales" - A Three Volume Set! Education by entertainment! This "Deal Tales" series of three paperback books teaches the kind of things that you won't learn at conferences, nor in treatises or firm memos. Here's the "Table of Contents" for each volume rolled into one. With the set containing over 600 pages, John Jenkins - a 30-year vet of the deal world - brings his humorous M&A stories to bear. Order "Deal Tales" today!

Upcoming Webcasts on TheCorporateCounsel.net: Join us October 28th for the webcast - "Investment Stewardship: Understanding the 'New Era' of Expectations and Engagement" - to hear T. Rowe Price's Donna Anderson, Davis Polk's Ning Chiu, BlackRock's Michelle Edkins and Vanguard's Adrienne Monley take stock of how "investment stewardship" has changed...and how it's stayed the same. This program will help you understand how stewardship teams are operating these days - and what that means for your board, your engagements, and your voting outcomes.

And join us on December 8th for the webcast - "Understanding LTSE Listings" - when LTSE Services' Martin Alvarez and Jane Storero, Asana's Katie Colendich and Eleanor Lacey, and Twilio's Mariam Sattar share practical tips about the listing process and what it means to be traded on the LTSE.

And join us on January 13th for the webcast - "ISS Forecast for 2022 Proxy Season" - when Davis Polk's Ning Chiu and Gunster's Bob Lamm join Marc Goldstein of ISS to recap what transpired during the 2021 proxy season - and predict what to expect for 2022.

We will apply for CLE credit in all applicable states for these 1-hour webcasts. You must submit your state and license number prior to or during the program, which you can do by visiting the landing page for the program(s) you plan to attend. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.

There is no cost for these webcasts if you are a member of TheCorporateCounsel.net. If you are not a member, sign up online, send us an email at info@ccrcorp.com - or call us at 800.737.1271.

Upcoming Webcasts on CompensationStandards.com: Join us on CompensationStandards.com January 19th for the webcast - "The Latest: Your Upcoming Proxy Disclosure" - to hear the latest guidance on how to use your executive & director pay disclosure to improve voting outcomes and protect your board, as well as how to handle the most difficult issues on oversight, engagement and disclosure of executive & director pay.

We will apply for CLE credit in all applicable states for this 1-hour webcast. You must submit your state and license number prior to or during the program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.

No registration is necessary - and there is no cost - for this webcast for CompensationStandards.com members. If you are not a member, sign-up now to access the programs. You can sign up online, send us an email at info@ccrcorp.com - or call us at 800.737.1271.

Upcoming Webcasts on Section16.net: Join us on Section16.net on January 26th for the webcast - "Alan Dye on the Latest Section 16 Developments" - to hear Alan Dye of Hogan Lovells annual Q&A webcast to make sure you are equipped to comply with all the latest Section 16 pitfalls & quagmires.

No registration is necessary - and there is no cost - for this webcast for Section16.net members. If you are not a member, sign-up now to access the programs. You can sign up online, send us an email at info@ccrcorp.com - or call us at 800.737.1271.

Climate Change: Corp Fin Gives a Heads Up on Potential Comments

Earlier this year, Acting SEC Chair Allison Herren Lee issued a directive to the SEC's Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings. In mid-September, Corp Fin posted a sample letter identifying some of the "climate change" comments that companies should expect to receive during the filing review process. Not surprisingly, the sample letter includes comments seeking additional risk factor disclosure concerning climate change-related risks, but it's also pretty clear that the Staff expects the MD&A section to do a lot of heavy lifting on climate change disclosure.

In fact, the bulk of the sample letter addresses MD&A disclosures. Specific areas where additional MD&A disclosure is sought include:

— the material impact of climate change-related legislation, regulation or international accords, historical and anticipated cap ex for climate-related projects;

— the indirect consequences of climate-related regulation or business trends, such as changes in demand for products and services, increasing competition to develop new lower-emission products, increases in demands for alternative energy & the reputational risks associated with operations or products that produce material greenhouse gas emissions;

— the physical effects of climate change on operations and results, including the impact of severe weather, quantification of weather-related damages and weather-related impacts on the cost of insurance;

— quantification of increased compliance costs and disclosure concerning the purchase and sale of carbon credits and any material effects on the company's business, results of operations or financial condition.

Another topic addressed in the sample letter was discrepancies between the level of disclosure provided in corporate sustainability reports and in SEC filings. Companies should expect to be asked to what consideration they gave to providing the same type of climate-related disclosure in their SEC filings as they provided in their sustainability reports. Not to blow our own horn, but in our March issue, we told subscribers to The Corporate Counsel to keep an eye on this issue in preparing for Staff scrutiny of their climate change disclosures:

Look Beyond SEC Filings. Many companies have addressed climate change in sustainability reports and other publications beyond their Exchange Act reports. Those communications and third-party publications should be reviewed with an eye toward determining whether what is said in them is appropriately addressed in the company's SEC filings.

Climate Change: What Do the Staff's Comments Look Like So Far?

While it's helpful to know what kind of climate comments the Staff says companies should expect to receive, it's also good to have some insight into what comments the Staff's provided to date. Our colleague Lawrence Heim addressed that topic in this recent PracticalESG.com blog, and it turns out that those comments are pretty consistent with what the Staff is telling companies to expect.

Lawrence cites this Gibson Dunn alert that reviews these comments & provides advice on how to prepare for them, but he also adds the following additional thoughts:

The alert walks through recommendations to prepare for the possibility of a comment on this topic. I would add to those - validate the data and assumptions on which you relied in (a) quantifying your emissions and (b) making future reduction commitments. At a minimum, consider using an internal team of environmental and internal audit staff, augmented with other internal functions as needed. Alternatively, it may be worth considering engaging a qualified external climate emissions quantification and/or risk management expert.

Enforcement: SEC Investigates Human Capital Disclosures

In late September, Activision Blizzard confirmed media reports that it was the subject of an SEC investigation concerning "the company's disclosures regarding employment matters and related issues." Regardless of its outcome, the SEC's decision to pursue such an investigation has proven to be controversial. After all, when was the last time that allegations relating to employment practices caught the eye of the Division of Enforcement?

In defending the investigation, some have observed that the workplace misconduct allegations against the company may call into question the accuracy of the human capital disclosures that appeared in its Form 10-K. But UCLA's Stephen Bainbridge suggests that the SEC's investigation represents a revival of the agency's long-ago abandoned efforts to persuade courts to compel disclosure of uncharged wrongdoing. Here's an excerpt from his recent blog on the investigation:

Obviously, the SEC will claim that it is about Activision's allegedly deficient disclosures relating to its Human Resources practices. But even if we accept that risible claim at face value, the SEC is still overstepping its bounds. It's critical that Activision management has not been convicted of any civil or criminal violations. If they had been, it would be arguable that failing to disclose those convictions would be a material omission (obviously, I realize that one is not convicted of civil violations, but I'm using it as a shorthand).

Where plaintiff complains of noncriminal conduct allegedly constituting mismanagement, courts have been unwilling to require disclosure. In Amalgamated Clothing and Textile Workers Union, AFL-CIO v. J. P. Stevens & Co., 475 F. Supp. 328 (S.D.N.Y.1979), for example, plaintiffs argued that the board of directors had either knowingly violated the labor laws or, at least, failed to prevent management from doing so. According to plaintiffs, this alleged misconduct had harmed the corporation's reputation and exposed it to liability. The failure to disclose these purported facts in connection with the election of the directors allegedly constituted an omission of material facts. In rejecting plaintiff's argument, the court held that it would be "silly" to "require management to accuse itself of antisocial or illegal policies."

Yet, that is precisely what the SEC investigation of Activision assumes management is required to do.

We're inclined to sympathize with this argument, and we agree that efforts to expand the SEC's authority beyond financial regulation involve the kind of "mission creep" that threatens its credibility. But we think there's an important difference between the SEC's 1970s "qualitative materiality" crusade and situations like this one. Instead of trying to pluck disclosure duties from the ether, this time the SEC has a line-item in its quiver.

Risible or not, that line-item creates a duty to disclose material human capital information, which puts the substance of the disclosure that Activision provided squarely within the SEC's jurisdiction. The SEC isn't investigating an omission in search of some amorphous duty to disclose, but whether there were potential misstatements or omissions in response to line-item disclosures that the company was obligated to make.

There's some irony in the fact that this "principles based" disclosure requirement is being cited as a jumping-off point for a renewed foray by the SEC into the qualitative materiality morass. After all, it was conservatives who championed this "DIY" approach to human capital disclosure, while liberals called for detailed line-item requirements addressing specific metrics. The SEC's reliance on the new disclosure requirement to investigate conduct that's pretty far from the core focus of the securities laws suggests that, in the end, the flexibility provided by principles based disclosure requirements may give companies just enough rope to hang themselves.

Risk Oversight In the Era of "Easier" Caremark Claims

In early September, Vice Chancellor Zurn of the Delaware Court of Chancery determined that the shareholder derivative litigation against Boeing's board of directors could proceed, based on allegations that the directors breached their duty of loyalty by not making a good faith effort to implement an oversight system and monitor it. The court dismissed the shareholders' claims against the officers, and against the board for compensation decisions.

In light of the tragic loss of life that formed the basis for this lawsuit, the allegations here about the shortcomings in director decision-making are troubling, and that may have affected the opinion. The court noted that:

— Meeting minutes didn't indicate rigorous director discussions of safety issues

— No board committee was charged with direct responsibility to monitor safety

— The board didn't direct management to provide regular safety updates - it "passively" received updates at management's discretion

— The Board publicly lied about whether & how it monitored the 737 MAX's safety in order to preserve its reputation

Based on this, VC Zurn held that the board came up short on both Caremark prongs: it failed to establish a monitoring system and failed to respond to red flags. She also found that the plaintiffs adequately alleged scienter. Alarmingly for companies and their advisors, VC Zurn determined that the board's remedial step of creating a safety committee after the crashes was evidence that, before the crashes, it had no oversight process at all - and knew it.

For 25 years, it was notoriously difficult for a Caremark claim to survive a motion to dismiss, even though the court has to accept the plaintiffs' allegations as true at that stage of litigation. VC Zurn even acknowledged in her opinion that it's extremely difficult to plead an oversight failure. Yet, a series of Caremark claims have proceeded past the motion to dismiss stage in just the past couple of years. As this Wachtell Lipton memo notes, that's a big deal for the company and the board:

The company's directors now face the prospect of intrusive document discovery, extensive depositions, and either an expensive settlement or a trial to defend the effectiveness of their oversight.

UCLA's Stephen Bainbridge blogged that this case is another sign that Caremark claims are getting easier. He notes that the court took a much closer - and less favorable - look at board decisions than what you'd expect. Yet, as Kevin LaCroix blogged, the crashes at issue here "dramatically highlighted the critical importance of safety issues for Boeing." And - hopefully - these types of events are rare. So, it's too early to declare that every duty-of-oversight claim will proceed to the merits. But Kevin notes:

All of that said, I do think the recent spate of breach of the duty of oversight cases will encourage plaintiffs to pursue these kinds of claims and to include claims of breach of the duty of oversight in cases in which companies have experienced significant adverse circumstances in important operations. I suspect we are going to see an increase of claims of this type.

That makes it all the more important for other boards to review their risk management processes right now. Helpful steps could be:

— Document the board's oversight of enterprise risk management, its process for asking questions & reviewing risks, and its evaluation of which functions are "mission critical"

— Ensure the board has a robust oversight process for key functions that create significant risk - and consider forming a dedicated board committee

— Document regular risk reporting to the committee & board, directors' rigorous discussions & questions about risks, and board-directed risk reports

Caremark & Beyond: The Risks of "Cost-Cutting" Culture

In her Boeing opinion, Vice Chancellor Zurn also made note of the lengthy tenure of many of Boeing's directors and their skill-sets as "political insiders or executives with financial expertise." She then discussed at length the transformation of the company from an organization run by engineers to one run by finance folks - recounting how the company moved its headquarters from Seattle 20 years ago in order to "escape the influence of the resident flight engineers." The focus on cost-cutting allegedly impacted quality and resulted in more safety violations.

This is only the latest iteration of a story that keeps repeating. In his Radical Compliance blog, Matt Kelly highlighted that a cost-cutting culture was also to blame in late September's SEC enforcement action. Here's an excerpt:

Our point today, however, is that 3G made cost-cutting a strategic goal for the company. It tied employees' performance metrics and compensation to their ability to cut costs. Procurement division employees said internally that the former COO "push[ed] like crazy" for them to meet cost savings goals, and increased cost savings targets to unreasonable levels.

Faced with that relentless pressure to cut costs, employees then engaged in the prebate chicanery we mentioned above, and lots more.

That's the lesson for internal control and compliance officers. If your business is based on a misguided strategic goal, eventually it will warp your corporate culture to the point where misconduct is the only way to execute the strategy - and then, all the internal controls in the world won't do you any good.

Direct Listings: 9th Cir Says Purchasers May Bring Section 11 Claims

Some commenters have suggested that one of the advantages of a direct listing might be the ability to insulate companies & other potential IPO defendants from Section 11 liability by making it impossible to satisfy the statutory requirement to trace the shares purchased to those sold in the offering. Last year, a California federal court rejected that argument and the 9th Circuit has affirmed the lower court's ruling.

Section 11 provides that if the registration statement for a security contains an untrue statement or omission, any person acquiring "such security" may bring an action against the parties enumerated in the statute. Courts have generally interpreted the "such security" language to mean the securities issued under the particular registration statement, and have thus imposed an obligation on plaintiffs to "trace" their securities to those issued in the offering.

In Pirani v. Slack Technologies, (9th Cir.; 9/21), the 9th Circuit observed that the case involved an issue of first impression - "what does 'such security' mean under Section 11 in the context of a direct listing, where only one registration statement exists, and where registered and unregistered securities are offered to the public at the same time, based on the existence of that one registration statement?" It concluded that the term encompassed both the securities that were registered in connection with the direct listing and those that were unregistered:

Slack's unregistered shares sold in a direct listing are "such securities" within the meaning of Section 11 because their public sale cannot occur without the only operative registration in existence. Any person who acquired Slack shares through its direct listing could do so only because of the effectiveness of its registration statement. Because this case involves only one registration statement, it does not present the traceability problem identified by this court in cases with successive registrations. . . All of Slack's shares sold in this direct listing, whether labeled as registered or unregistered, can be traced to that one registration.

In her Twitter thread about the decision, Prof. Ann Lipton suggests that the case could have implications for Section 11 claims that go beyond direct listings. For instance, she says that "the same logic could equally be applied to companies that release shares from lockup early; those shares, too, are only trading on the exchange because of the earlier-filed registration statement."

NY Court Enforces Federal Forum Bylaw

In response to the SCOTUS's 2018 Cyan decision upholding the ability of plaintiffs to bring Securities Act claims in state court, many companies have adopted federal form bylaws providing that federal courts will be the exclusive forum for bringing claims arising under the Securities Act. Last year, the Delaware Supreme overruled the Chancery Court and held that these federal forum bylaws were permissible under Delaware law. Since that time, federal forum bylaws have served as the basis for several California state courts to dismiss Section 11 claims. Now, this recent blog from Kevin LaCroix reports that a New York court has joined them. Here's the intro:

In an important development affirming the use of federal forum provisions (FFP) to avoid duplicative parallel state court securities lawsuits, a New York state court judge has granted the securities suit defendants' motion to dismiss based on the FFP in the corporate defendant's charter. The ruling appears to be the first in New York - indeed, the first outside of California - to enforce an FFP. The New York court's enforcement of the FFP is a significant step in companies' efforts to try to avoid the duplicative litigation problems caused by the U.S. Supreme Court's March 2018 decision in Cyan.

Kevin points out that the decision is significant because the vast majority of the post-Cyan state court securities class action lawsuits were filed in either California or New York. If federal forum bylaws are enforceable in both of these jurisdictions, Section 11 plaintiffs may find themselves in a bit of a box.

ESG: The Mega Asset Managers Crack the Whip

According to a recent CFO Dive article, everybody's largest shareholder is running out of patience with the pace of ESG disclosures. Here's an excerpt:

BlackRock, the world's largest asset manager, is losing patience with companies that are slow to disclose the details of their adherence to environmental, social and governance (ESG) principles, according to Jessica McDougall, a director for investment stewardship at BlackRock. "We don't have patience much longer for these disclosures to be forthcoming," McDougall said Tuesday in a webcast sponsored by Diligent, adding "we are increasingly seeing the impacts of climate change not only across our portfolios but also across the global economy."

BlackRock, which manages $9 trillion in assets, has pressed for more disclosure in recent years, "but this was the year that we really started to take more concerted action based on what companies were providing us" before the 2021 proxy season, McDougall said. "Where we felt that companies were falling short for a variety of ESG issues, we were more inclined to support those [shareholder] proposals this year."

Value Edge Advisors blogged that, during this same webcast, T. Rowe Price's head of corporate governance said that the big asset managers are feeling the heat from their own clients, regulators & the media, so they're ratcheting up the pressure on their portfolio companies. Specifically, they're looking for inconsistencies between those companies' stated ESG priorities and their political advocacy:

Large asset managers are feeling acute pressure on ESG from clients, the press and regulators, explained Donna Anderson, vice president and head of corporate governance at T. Rowe Price. She said the fund firm is developing analytical and tracking tools to help portfolio managers and stewardship teams identify gaps between companies' stated ESG priorities that are undermined or canceled out by political spending or membership in trade associations that lobby state and federal legislators for regulations contrary to companies' official positions.

"If you're doing business as usual but your [corporate social responsibility] departments are generating tons of reports, assertively staking claim to these various goals, but they're not being operationalized, it's going to become evident," said Anderson during the event. "That's a real problem in our view."

According to BlackRock's recent Stewardship Report, its support for shareholder proposals doubled this year from 17% to 34%, and it voted against 10% of incumbent directors this year, up from 8.5% last year. These recent comments suggest that there's more bludgeoning to come from the mega asset managers if companies don't get religion when it comes to both ESG disclosure & operationalizing their stated ESG priorities.

ESG Ratings: "Therefore Is The Name Of It Called Babel..."

While BlackRock & T. Rowe ramp up the heat, companies that dutifully churn out the kind of detailed ESG disclosure investors say they want may find themselves in for an unpleasant surprise from the ESG ratings industry, at least according to a new study discussed in this HBS newsletter:

Receiving more information can clarify the complex, but not when it comes to environmental, social, and governance (ESG) scores. A recent study shows that the more information a company discloses about its ESG practices, the more rating agencies disagree on how well that company is performing along these dimensions. According to the research, a 10 percent increase in corporate disclosure is associated with a 1.3 to 2 percent increase in ESG score variation among major ratings providers, which all interpret and process disclosures differently.

With more than $30 trillion in sustainable investment capital on the line, the stakes are high for companies and investors. Institutions, such as asset managers, pension funds, and endowments, often rely on ESG ratings to make investment decisions. Divergent scores hurt firms, investors, and markets, the research findings suggest, and these effects appear to be worsening over time.

"People are being sold on money being invested responsibly by using these ratings that nobody really understands," says Harvard Business School Assistant Professor Anywhere "Siko" Sikochi, who co-authored the paper Why Is Corporate Virtue in the Eye of the Beholder? The Case of ESG Ratings with HBS professor George Serafeim and Dane Christensen of the University of Oregon. "That's where the danger is in having all these different ratings not being aligned in some way."

You know, there's something about this problem that's strangely familiar - where have we heard something like it before? Oh yeah, that's right - in the Book of Genesis:

And the Lord said, Behold, the people is one, and they have all one language; and this they begin to do: and now nothing will be restrained from them, which they have imagined to do. Go to, let us go down, and there confound their language, that they may not understand one another's speech. So the Lord scattered them abroad from thence upon the face of all the earth: and they left off to build the city. Therefore is the name of it called Babel; because the Lord did there confound the language of all the earth: and from thence did the Lord scatter them abroad upon the face of all the earth.

Welcome to SPACtivism!

Activists are nothing if not opportunistic, and this Sidley memo says that the huge piles of cash currently sloshing around in SPACs are likely to serve as "chum in the water" for activists. This excerpt says that activists may not even wait for the de-SPAC before targeting a SPAC:

Activism is present at all stages of the SPAC life cycle, but the risk and nature of activism varies depending on the stage. The potential for activism increases immediately after the SPAC's IPO. Before the time a target is found, an activist may attempt to influence the choice of the target. It is also possible that an activist may at the same time have a stake in a potential target company that they wish to be targeted by the SPAC.

The risk of this activism increases as the SPAC approaches its expiration, which has a punitive impact on the sponsor. As a result, the SPAC sponsor is likely to become more desperate and perhaps less discerning in evaluating acquisitions. Activism risk continues after a target is selected during the de-SPAC process. Any time there is a shareholder vote on a substantial economic transaction, there is the potential for an investor to agitate against the deal.

In the late 2000s, there was a wave of activism against SPACs prior to a de-SPAC where activists would purchase shares of a SPAC at a discount with the intent of voting down any proposed merger and redeeming their shares for par value. While current SPAC structures have been modified to deter this specific type of activism, the risk of activism prior to a de-SPAC remains.

The memo also addresses the risks of "SPACtivism" following a de-SPAC transaction, and offers tips on how to prepare for activism both before and after the de-SPAC.

Enforcement: The SEC's First Crowdfunding Case Targets a Portal

A few months ago, we blogged about a recent study suggesting that there was an epidemic of non-compliance when it came to crowdfunded offerings. So, maybe it isn't surprising that in its first Regulation Crowdfunding enforcement proceeding, the SEC's Division of Enforcement targeted not only alleged fraudsters, but a crowdfunding portal that the SEC claims ignored "red flags" and otherwise failed to comply with its obligations to protect investors. Here's an excerpt from the SEC's press release:

According to the SEC's complaint, Robert Shumake, alongside associates Nicole Birch and Willard Jackson, conducted fraudulent and unregistered crowdfunding offerings through two cannabis and hemp companies, Transatlantic Real Estate LLC and 420 Real Estate LLC. Shumake, with assistance from Birch and Jackson, allegedly hid his involvement in the offerings from the public out of concern that his prior criminal conviction could deter prospective investors. The complaint alleges that Shumake and Birch raised $1,020,100 from retail investors through Transatlantic Real Estate, and Shumake and Jackson raised $888,180 through 420 Real Estate. Shumake, Birch, and Jackson allegedly diverted investor funds for personal use rather than using the funds for the purposes disclosed to investors.

As alleged, TruCrowd Inc., a registered funding portal, and its CEO, Vincent Petrescu, hosted the Transatlantic Real Estate and 420 Real Estate offerings on TruCrowd's platform. Petrescu allegedly failed to address red flags including Shumake's criminal history and involvement in the crowdfunding offerings, and otherwise failed to reduce the risk of fraud to investors.

In its complaint filed with a Michigan federal court, the SEC contends that portal's alleged shortcomings violated Section 4A(a)(5) of the Securities Act and Rule 301(c)(2) thereunder, which obligates an intermediary to deny access to its platform if the intermediary "has a reasonable basis for believing that the issuer or the offering presents the potential for fraud or otherwise raises concerns about investor protection."

Bad News Bundling: Commissioner Crenshaw Renews Criticism of Enforcement Penalty Policy

In a statement published in early September, SEC Commissioner Caroline Crenshaw says that a recent Kraft Heinz settlement shows why "corporate benefits" shouldn't be part of SEC Enforcement's penalty equation. She first caused a stir with this position at a March CII speech that called into question the 15-year enforcement policy.

Commissioner Crenshaw says that when Kraft announced the SEC investigation back in February 2019, it "bundled" that news with other negative information - a dividend cut and a $15.4 billion write down of goodwill. That makes it hard to tell whether any part of the resulting stock price drop was a reaction to the investigation news. She also says that the company initially estimated that the procurement issues would only increase cost of products sold by $25 million, but by mid-2019, the reporting errors ended up totaling $208 million.

Because this chain of events could make it more difficult for private litigants to recover damages, Commissioner Crenshaw believes that the SEC's penalties should be more closely linked to misconduct & deterrence. Here's her conclusion:

A recent analysis determined that it results in dramatically fewer successful recoveries by private securities litigants who, unlike the SEC, must prove that corporate stock price losses were directly attributable to the specific bad news. In this study researchers also concluded that information bundling resulted on average in $21.17 to $23.45 million lower recoveries for shareholders.

In considering the appropriate penalty to impose in actions brought by the SEC, I am concerned about corporate issuers benefiting from information bundling. To the extent corporations thereby make it more difficult to measure corporate benefit, that merely reinforces my inclination in setting penalties to focus more heavily on other factors, such as punishing misconduct and effectively deterring future violations.

Falling Off the Rule 15c2-11 Cliff

A now-effective SEC rule change could cause the quotation of the securities of some non-listed issuers in the over-the-counter markets to abruptly cease. Back in September 2020, the SEC adopted a number of amendments to Rule 15c2-11 that the Commission believed were necessary to protect investors in securities that are traded over-the-counter, and compliance with the amendments must generally be achieved by September 28, 2021. As this Baker & Hostetler memo notes:

The Amendment adds additional investor protections by mandating that investors have access to the current and publicly available information of issuers whose securities trade on the OTC markets, and it further requires broker-dealers to confirm that certain information about the issuer and its security is current and publicly available before quoting that security.

As amended, Rule 15c2-11 provides a broker-dealer with two ways to satisfy this obligation: (i) independently obtaining such information from issuers (or their agents) and reviewing it for material accuracy and reliability or (ii) relying on a publicly available determination by a qualified interdealer quotation system (an "IDQS"). OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.) is an IDQS, and the old OTC Bulletin Board (which is a facility of FINRA) is an IDQS (FINRA filed with the SEC to shutter the OTCBB back in September 2020, after the SEC adopted the Rule 15c2-11 amendments.

For the so-called "catch-all issuers" that are not subject to disclosure and reporting requirements under the federal securities laws, broker-dealers and the IDQSs will have to review an expanded list of financial and nonfinancial information about the catch-all issuers that is likely difficult for many such issuers to provide. Further, Rule 15c2-11 requires broker-dealers to be able to provide such information upon the request of any person who expresses an interest in a proposed transaction in the issuer's security with the broker-dealer. SEC-reporting issuers that are delinquent in their filing obligations (and therefore without current, publicly available information) are also treated as catch-all issuers, but only for purposes of initiating or resuming a quoted market in such issuers' securities.

With the compliance date of the rule now here, catch-all issuers without current and publicly available information that broker-dealers and the IDQSs can review will find themselves in a position of no longer being quoted in the over-the-counter markets (unless some exception to Rule 15c2-11 applies), and the investors in such issuers will be in for a rude awakening when they are unable to get quotes such issuers' securities.

The SEC Staff Says No Go to an Expert Market Alternative

Following adoption of the Rule 15c2-11 amendments, OTC Link LLC - responding to suggestions made by the Commission itself that a so-called "expert market" could "enhance liquidity for sophisticated or professional investors in grey market securities" - submitted a request on behalf of certain broker-dealers for an exemption from certain of Rule 15c2-11's requirements for quotations made on electronic platforms where the distribution of such quotations is limited to sophisticated or professional investors. In December 2020, the SEC proposed to grant OTC Link LLC's request for exemptive relief and issue a conditional exemptive order, and solicited public comment on that proposal.

The hopes for an expert market alternative were dashed in August, when the Staff of the Division of Trading & Markets put out a statement which said:

This proposed order is not on the Chair's agenda in the short term. Accordingly, on September 28, 2021, the compliance date for the amendments to Rule 15c2-11, we expect that broker-dealers will no longer be able to publish proprietary quotations for the securities of any issuer for which there is no current and publicly available information, unless an existing exception to Rule 15c2-11 applies.

Without the expert market alternative available, those issuers who fall into the category of "OTC Pink - No Information" (i.e., those issuers who cannot or will not provide current and publicly available information) will fall off the Rule 15c2-11, with nowhere to land.

September-October: "Deal Lawyers" Newsletter

The September-October issue of the Deal Lawyers print newsletter is now available. Topics include:

— Recasting a Boilerplate Provision: Exclusive Form Provisions for Private Delaware LLC After a Decade of Public Corporate Developments
— Buyer Loses an MAE Claim (again) in Delaware
— Discounted Cash Flow: "I'm Not Dead Yet!"

Remember that - as a "thank you" to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter - we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called "Back Issues" near the top of DealLawyers.com - 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com - and only one person subscribes to the print newsletter - everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.

Conference Calendar

What's New on Our Websites

Among other new additions, we have posted:

  • An "Inside Track with Liz" podcast featuring Jolie Yang, the corporate counsel at Coinbase, discussing:

    • How it feels coming from established BigLaw firms to a high-profile, new public company where things might move more quickly and processes might still be getting worked out
    • Advice for other in-house folks whose companies might be considering going public via a direct listing
    • What's it like being a securities lawyer in an industry that's innovating and disrupting the very definition of "securities"
    • One thing that more "traditional" securities lawyers would benefit from understanding about crypto and fintech

  • An "Inside Track with Liz" podcast featuring Marc Steinberg, the Radford Professor of Law at Southern Methodist University's Dedman School of Law, about his book, "Rethinking Securities Law." This 30-minute interview covers:

    • What led Marc to write a book about "Rethinking Securities Law"
    • Why the securities laws should impose an affirmative duty to disclose material information
    • How market confidence would improve if insiders were required to make Section 16 filings *before* they trade, and if Rule 10b5-1 reforms were adopted
    • Federal corporate governance concepts including independent board chairs, employee representatives on the compensation committee, and more
    • Giving "say-on-pay" more teeth
    • Why the SEC's current focus on ESG disclosure is misplaced
  • "Deep Dive with Dave" podcasts in which Dave Lynn takes a deep dive with his special guests as they explore the latest developments in securities laws and corporate governance. Check out these episodes:

    – An Electronic Signatures Workshop with Jim Brashear of McKesson Corporation - topics include:

    • Background of Signature Requirements
    • The SEC's Regulation S-T Rule Changes
    • How to Authenticate an Individual's Identity
    • Addressing Non-Repudiation
    • Initial Electronic Signature Authentication Document
    • Retention of Electronic Signatures

    – A Confidential Treatment Workshop with Dave Meyers of Troutman Pepper - topics include:

    • Overview of the Confidential Treatment Process
    • The 2019 SEC Rule Changes - The "Ask for Forgiveness" Approach
    • The Filing Review Process
    • Seeking Extensions of Confidential Treatment Requests
    • Farewell to Competitive Harm

    – A podcast series - "Women Governance Gurus" - that Liz has been hosting with Courtney Kamlet of Vontier. Many illustrious guests have joined Liz & Courtney to talk about their careers in the corporate governance field - and what they see on the horizon. Recent episodes include:

The following memos & insights:

- Memos: Corp Fin Climate Disclosure Comments
- "Social Media Compliance Guide" - Mayer Brown (9/21)
- "Employee Turnover & Talent Management: Example SEC Filing Disclosures" - DFIN (9/21)
- "Boeing's MAX Woes Reach the Boardroom" - Wachtell Lipton (9/21)
- "COVID-19 Vaccine & Testing Mandates Coming for Most Employers" - McGuire Woods (9/21)
- "Impact of 'Benefit Corporation' Status & ESG Focus on Int'l Trade Disputes" - White & Case (9/21)
- "Proxy Season Review & Fall Engagement Guide" - DF King (9/21)
- "Green and Sustainability-Linked Loans: What Corporates Need to Know" - Covington (9/21)
- Memos: NYSE Related Party Pre-Approvals
- "SEC Committee Supports Chair's Call to Reform Rule 10b5-1" - McDermott (9/21)

People: Who's Doing What & Where

Erik Gerding named Deputy Director, Legal and Regulatory Policy: The SEC announced that Erik Gerding has been named Deputy Director, Legal and Regulatory Policy, for the Division of Corporation Finance, effective on October 4, 2021. Gerding joins the SEC from the University of Colorado Law School, where he was a Professor of Law and a Wolf-Nichol Fellow. Prior to joining the University of Colorado, Professor Gerding taught at the University of New Mexico School of Law. He also practiced in the New York and Washington, D.C., offices of Cleary Gottlieb Steen & Hamilton LLP, representing clients in the financial services and technology industries in an array of financial transactions and regulatory matters.

The SEC gets a New General Counsel: The SEC announced that John Coates, who served as Acting Director of the Division of Corporation Finance and then as Acting SEC General Counsel, will leave the SEC in October to return to teaching at Harvard University. Dan Berkovitz, who now serves as a Commissioner of the CFTC, has been named SEC General Counsel. Michael Conley, currently the SEC's Solicitor, will serve as Acting General Counsel until Berkovitz joins the agency. As noted in the SEC's announcement, SEC Chair Gary Gensler and Berkovitz previously worked together when Berkovitz served as the CFTC's General Counsel from 2009 to 2013.

Justin P. Klein Named Director of UD's Weinberg Center: The University of Delaware's John L. Weinberg Center for Corporate Governance announced Justin P. Klein as its new director effective September 20, 2021. Klein was a partner at Ballard Spahr LLP from 1992 through 2019 and most recently has served as senior counsel at the firm. Klein replaces the founding director of the Weinberg Center, Charles Elson.

Farewell to Jim Cheek: All of us at TheCorporateCounsel.net were saddened to learn of the passing of Jim Cheek, of Bass, Berry & Sims and extend our sincere condolences to his family. He was a role model and inspiration for many securities law practitioners in the "flyover states." Despite the concentration of legal talent on the coasts, Jim's example showed those of us who weren't in major east or west coast markets that we also could make meaningful contributions to the national dialogue on securities and corporate law issues. Here's a remembrance from Bass, Berry & Sims.

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