April 12, 2021

COVID-19: Corp Fin Extends Leniency for Presentation of Shareholder Proposals

On Friday, Corp Fin updated its guidance for conducting shareholder meetings in light of COVID-19 concerns. Here’s the new stuff:

Exchange Act Rule 14a-8(h) requires shareholder proponents, or their representatives, to appear and present their proposals at the annual meeting. In light of the possible difficulties for shareholder proponents to attend annual meetings in person to present their proposals, the staff encourages issuers, to the extent feasible under state law, to provide shareholder proponents or their representatives with the ability to present their proposals through alternative means, such as by phone, during the 2020 and 2021 proxy seasons.

Furthermore, to the extent a shareholder proponent or representative is not able to attend the annual meeting and present the proposal due to the inability to travel or other hardships related to COVID-19, the staff would consider this to be “good cause” under Rule 14a-8(h) should issuers assert Rule 14a-8(h)(3) as a basis to exclude a proposal submitted by the shareholder proponent for any meetings held in the following two calendar years.

Some have noted that encouragement falls short of a mandate – but companies are already reacting. Following the Staff’s announcement, Reuters reported that Berkshire Hathaway is now permitting As You Sow to present a diversity-related proposal remotely for the company’s upcoming annual meeting. As You Sow welcomed the accommodation and said Berkshire cited the updated Staff guidance when it contacted As You Sow.

SPACs: Less Risky Than IPOs? Corp Fin Chief Says “Don’t Bet On It”

Last week, John Coates, Acting Director of Corp Fin issued a statement titled “SPACs, IPOs and Liability Risk under the Securities Laws.”  John blogged about it on – here’s his post (and also make sure to check out footnote 7):

As I’ve previously blogged, some commentators have suggested a driving force behind the SPAC boom may be the availability of the PSLRA safe harbor for a de-SPAC merger. The availability of the safe harbor supposedly provides greater freedom for sponsors to share projections than would be the case in an IPO, to which the safe harbor doesn’t apply. The presumed availability of the safe harbor is one reason why some have suggested that a de-SPAC transaction involves less risk than a traditional IPO.

In a statement issued yesterday, the Acting Director of Corp Fin, John Coates, called the assumption that de-SPAC deals involve less liability risk than traditional IPOs into question. Here’s an excerpt:

It is not clear that claims about the application of securities law liability provisions to de-SPACs provide targets or anyone else with a reason to prefer SPACs over traditional IPOs. Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst. Indeed, in some ways, liability risks for those involved are higher, not lower, than in conventional IPOs, due in particular to the potential conflicts of interest in the SPAC structure.

More specifically, any material misstatement in or omission from an effective Securities Act registration statement as part of a de-SPAC business combination is subject to Securities Act Section 11. Equally clear is that any material misstatement or omission in connection with a proxy solicitation is subject to liability under Exchange Act Section 14(a) and Rule 14a-9, under which courts and the Commission have generally applied a “negligence” standard. Any material misstatement or omission in connection with a tender offer is subject to liability under Exchange Act Section 14(e).

De-SPAC transactions also may give rise to liability under state law. Delaware corporate law, in particular, conventionally applies both a duty of candor and fiduciary duties more strictly in conflict of interest settings, absent special procedural steps, which themselves may be a source of liability risk. Given this legal landscape, SPAC sponsors and targets should already be hearing from their legal, accounting, and financial advisors that a de-SPAC transaction gives no one a free pass for material misstatements or omissions.

Director Coates also highlighted the limitations of the PSLRA’s safe harbor for forward-looking statements.  Among other things, he noted that it only applies in private litigation, not SEC enforcement proceedings, applies only to forward-looking statements, and doesn’t apply to statements that are made with actual knowledge of their falsity.  He also suggested that a de-SPAC merger may well be regarded as an “initial public offering” not subject to the safe harbor, and raised the possibility of clarifying rulemaking from the SEC concerning the scope of the safe harbor and its application to SPAC transactions.

PCAOB Issues Audit Committee Resource About 2021 Inspections

The PCAOB recently issued an Audit Committee Resource aimed at helping audit committees engage with their auditors about the PCAOB’s planned focus areas for 2021 inspections of public company audits. The resource provides a list of questions for audit committees as suggestions to spur dialogue between the audit committee and the company’s auditor. The suggested questions relate to the auditor’s risk assessments, auditor quality control systems, how auditors comply with auditor independence requirements, fraud procedures, critical audit matters, implementation of new auditing standards and supervision of audits involving other auditors.

Also, the PCAOB will continue to seek feedback from audit committee chairs as part of its effort to support improvements in audit quality. Like it has done in previous years, the PCAOB will seek feedback from audit committee chairs of companies where the PCAOB conducted inspections of the audit.

– Lynn Jokela