Tune in at 2pm Eastern tomorrow for the webcast – “The SEC’s Rule 10b5-1 Amendments: What Issuers & Insiders Need to Know” – to hear Brian Breheny of Skadden, Ning Chiu of Davis Polk, Meredith Cross of WilmerHale, Dave Lynn of Morrison Foerster and TheCorporateCounsel.net, and Ron Mueller of Gibson Dunn discuss the changes to Rule 10b5-1 & the adoption of disclosure obligations and provide insights about what companies and insiders should do to prepare for the new regime.

If you attend the live version of this 90-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program. All credits are pending state approval.

Members of TheCorporateCounsel.net are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.

– John Jenkins

I blogged last fall about a reason to be cautious when amending advance notice bylaws in response to the SEC’s newly effective universal proxy card rules: hedge fund activists aren’t going to take these amendments lying down. Now, as we continue to await the views of proxy advisors and institutions on this topic, well-known shareholder proponent Jim McRitchie is proactively encouraging “guardrails.” Jim recently announced that he has filed shareholder proposals with 29 companies on the topic of “fair elections.”

The proposals request that the companies adopt a bylaw amendment that would require shareholder approval for advance notice bylaws that go beyond the “norms” that existed before the SEC’s new universal proxy card rules went into effect. Specifically, for advance notice bylaw amendments that:

1. Require the nomination of candidates more than 90 days before the annual meeting,

2. Impose new disclosure requirements for director nominees, including disclosures related to past and future plans, or

3. Require nominating shareholders to disclose limited partners or business associates, except to the extent such investors own more than 5% of the Company’s shares.

When it comes to the case that I mentioned at the outset of this blog, the Delaware Chancery Court ruled against the company in late December. If you’re going down the “amendment” path, John recently shared a few tips on DealLawyers.com. This Proxy Season Blog from last week gives even more guidance on meeting conduct in the event of a contested election.

– Liz Dunshee

This blog from Gunster’s Bob Lamm zeroes in on a trend plaguing many companies these days: too many chiefs. As Bob points out, when too many people are responsible, nobody is accountable. Here’s an excerpt that explains why an expanding C-suite needs to be handled with care:

From a broader governance perspective, one would like to think that before a company creates some of the more unusual and/or duplicative chiefdoms above, the board or the comparable authority would have a clear understanding of where each chief’s responsibilities begin and end, and how the responsibilities of each relate to other chiefs’ areas.  However, my experience suggests that may not be the case, which means that accountability is difficult to determine both internally and externally.  Perhaps this isn’t a problem when things are going well, but when they’re not?

There are many other areas of concern to a nerd like me.  For example, which chiefs are deemed to be “executive officers” under SEC rules?  Are they also deemed Section 16 officers?  What’s the rationale for each?  (As an aside, it’s hard enough to explain to clients why someone who is an “executive officer”  may not be a “Section 16 officer,” or vice versa.  This plethora of chiefdoms doesn’t help.)  There seem to me to be compensation issues as well – are all chiefs created equal?  The answer must be “no,” because the traditional chiefs – the CEO, CFO, etc. – do not have identical compensation.  But how do you weigh compensation levels when presumably each chief oversees a significant area?

– Liz Dunshee

In this “D&O Diary” blog, Kevin LaCroix analyzes two recent dismissals that show that SPAC-related securities class actions aren’t always cut & dry. In a January 10th ruling involving DraftKings, the court found that a complaint based on a short seller report wasn’t adequate to move past the pleadings stage. And in a January 11th ruling involving Lucid Motors, the court dismissed a case based on statements made prior to the announcement of merger discussions. Here’s Kevin’s analysis:

Judge Engelmayer’s skepticism of the plaintiff’s allegations here based on nothing more than the short seller report suggests that the plaintiffs in these other cases could face an uphill battle in trying to establish that their complaints meet the fundamental pleading requirements To be sure, Judge Engelmayer did not say that complaints based on short seller reports could never meet the requirements – but the standards are high, and Judge Engelmayer’s analysis suggests that many of the short-seller based complaints may not make it past the pleading stage.

The court’s ruling in the Lucid case is interesting because the underlying allegations related to statements made by the CEO of the merger target company, before the merger was completed . Many of the SPAC-related securities suits have involved allegations based on alleged pre-merger statements. However, what arguably makes the Lucid case distinct is that the supposedly misleading statements were made not only pre-merger, but before the later merger had even been announced. Moreover, the widespread public conjecture about a possible merger was “speculative” (and for that matter could not even be attributed to the defendants). While the court’s ruling underscores the challenge of basing securities claims on statements made before a merger is announced, the ruling arguably has less relevance to claims based on alleged statements after the merger announcement.

One final observation is that with the dismissals granted in these and other SPAC-related securities suits, the alternative vehicle of Delaware state court direct action breach of fiduciary duty cases (like, for example, the Gig3 case in which the Delaware Court of Chancery recently denied the motion to dismiss, as discussed here), may look to the plaintiffs’ lawyers like a more attractive option that the pursuit of securities class action lawsuits.

– Liz Dunshee

As John blogged a few weeks ago, the clock is now running on the SEC’s recent Rule 10b5-1 amendments – and we’ll be covering what you need to do right now in a webcast coming up next Tuesday, January 24th at 2pm ET. To get a jump on thinking about all of that, I’m happy to share this guest blog from Orrick’s JT Ho, Carolyn Frantz, and Bobby Bee:

The adopting release for the SEC’s recent Rule 10b5-1 amendments has now been published in the Federal Register and 10b5-1 plans that are adopted by non-issuers on or after February 27, 2023 must comply with the new rules. While a lot of attention has been paid to the new requirement that, for directors and officers, the first trade under a plan can occur no sooner than 90 days after the plan is entered into, there are other considerations that can significantly impact planning.

First, in some circumstances, the cooling-off period can be longer than 90 days – the rule provides that the first trade under a new plan occur after the later of 90 days or two days after filing the 10-Q or 10-K for the fiscal quarter in which the plan was adopted. In some circumstances, this could significantly lengthen the applicable period before the first trade can occur, particularly for plans entered into near the end of the fiscal year, given the amount of time between the end of the fourth quarter and the filing of the 10-K. In addition, many issuers restrict the adoption, or amendment, of 10b5-1 plans during a blackout period around earnings for a group, which typically includes directors and officers. The combination of the impact of the cooling-off period and the blackout period restrictions, however, limit flexibility for planning initial trades using 10b5-1 plans.

For example, consider a Large Accelerated Filer with a fiscal year end of December 31 and blackout periods starting on the last day of the second month of each fiscal quarter and running through a period two days past the earnings announcement. Directors and officers wishing to enter plans would only have the following options for entering into plans and commencing trades in 2023:

The date of first trade could be even later than this, however, if an existing 10b5-1 plan is terminated during a newly adopted 10b5-1 plan cooling-off period – which is possible under the new rule, given that overlapping plans are allowed so long as the time in which trades are being made does not overlap. In such a case, the cooling-off period for the newly adopted 10b5-1 plan would restart at the termination of the prior plan.

It is wise to ensure that your directors and officers understand the impact of these restrictions on their planning, and in particular, understand any trades they want to execute under a new 10b5-1 plan before year end must be planned in the summer.

– Liz Dunshee

I blogged last summer about the SEC’s first-ever insider trading case involving cryptocurrency – which foreshadowed the broader “crypto crackdown” that is now playing out. I’m not aware of the SEC announcing a resolution to this civil matter, but in the DOJ’s parallel criminal charges, one of the defendants pled guilty last fall and has now been sentenced to 10 months in prison. This WSJ article shares more detail:

U.S. District Judge Loretta Preska said in handing down the sentence that Nikhil Wahi made about 40 trades and tried to conceal the illicit proceeds using anonymous crypto wallets.

“The defendant knew it was wrong and did not see it as a no-harm, no-foul course of conduct,” she said. He must also pay $892,500 in forfeiture, she said.

The DOJ is continuing to aggressively pursue alleged crypto criminals …and there appear to be plenty to choose from. The SEC is also continuing its enforcement of regulatory violations by crypto companies and related individuals (many folks are predicting that the Commission is just getting started). The SEC is spotlighting all of its crypto asset & cyber enforcement actions on this page.

– Liz Dunshee

Last week, the SEC announced that it had charged Genesis Global Capital and Gemini Trust Company for the unregistered offer & sale of securities to retail investors via their crypto asset lending program. Based on the SEC’s 22-page complaint and a Twitter response from Gemini co-founder Tyler Winklevoss, the SEC appears to have had its eye on the program for the past 17 months – and was spurred to action on the enforcement front when the firm “paused” withdrawals (the pause has not been lifted; a Genesis bankruptcy filing is reportedly imminent). According to Bloomberg, the SEC and federal prosecutors are also investigating internal financial dealings of related entities.

This is only the tip of the iceberg for current crypto enforcement actions. A report out yesterday from Cornerstone research points out that in 2022 (the first full year under SEC Chair Gary Gensler), crypto-related enforcement actions increased by 50%. Here are highlights from Cornerstone’s press release:

In 2022, the SEC charged a total of 79 defendants or respondents in cryptocurrency enforcement actions, of which 56 (71%) were individuals and 23 (29%) were firms. The proportion of enforcement actions charging only individuals has grown under the Gensler administration from nearly 20%, on average, in the 2013‒2020 period to 35% in 2021 and 50% in 2022.

Of the 30 total enforcement actions in 2022, 14 involved initial coin offerings (ICOs), and over half (57%) of these ICO-related actions included a fraud allegation. In addition, the SEC brought first-of-their-kind charges in 2022 in the cryptocurrency space related to insider trading and market manipulation. …

Since its first cryptocurrency-related enforcement action in 2013 through the end of 2022, the SEC has brought 127 enforcement actions, including 82 litigation actions and 45 administrative proceedings against digital-asset market participants.

Over the same period, the SEC has imposed approximately $2.61 billion in total monetary penalties, of which $242 million were settlements the agency reached in 2022.

As we embark on what may be the “golden era” of SEC crypto enforcement, the SEC continues to await a ruling (or settlement) on its Ripple case, which we’ve blogged about a few times. That high-profile case may help answer whether the SEC has jurisdiction to regulate this asset class, if Congress doesn’t step in to answer the question. In the latest tussle, the SEC lost a request to keep private a preliminary draft of a 2018 speech from Bill Hinman that shared his view that Ether was not a security. And of course, lots of folks are watching the headline-grabbing SBF prosecution.

You can continue to keep up with recent regulatory developments and guidance in our “Crypto” Practice Area.

– Liz Dunshee

The US is expected to reach its statutory debt ceiling tomorrow, unless both the House and the Senate can agree to a solution. This Politico article says that the looming fight will be one for the ages. It will likely drag on for months while the Treasury Department is left to cut certain contributions to avoid immediate sovereign default on US debts. The article says there’s not even the “hint of an endgame” right now.

The stalemate isn’t doing companies any favors. A new memo from Davis Polk outlines what you need to be thinking about as we face the prospect of dysfunctional US credit & capital markets – which the memo cautions is a threat at this point regardless of whether a sovereign debt default actually occurs. The Davis Polk team shares action items for:

– Board risk oversight

– Access to liquidity – capital markets & drawing on revolvers

– Annual reporting cycle – including guidance, annual reports currently underway, risk factors and forward-looking statements, and MD&A trends

– Other disclosure & market communications – potential Form 8-K triggers and insider trading issues

– Opportunistic acquirers & activist interest

– Impact on pending transactions

– Stock buybacks & 10b5-1 plans

– Executive & director compensation and other HR considerations

– D&O coverage

The memo points out that 2011 could be a good reference point for risk factor updates. Here’s more detail:

Companies will need to take a fresh look at their risk factors and forward-looking statement disclosure to ensure they adequately address the threat of a U.S. sovereign default, particularly if a company has not engaged in this exercise since 2011 when the United States first lost its triple-A credit rating.

While the SEC does not expect companies to include generic risk factors about events that affect companies broadly, companies should consider any specific impact on their own activities that could require such disclosure.

– Liz Dunshee

The debt ceiling isn’t the only threat on the minds of executives and investors right now. According to PwC’s annual CEO survey, 73% of global CEOs believe economic growth will decline this year – the most pessimistic outlook in a decade. What’s even more surprising is that 40% of CEOs believe their companies will go under within the next decade if they continue on their current path. Wow.

In line with that mood, yesterday’s NYT Dealbook shares that the key word at Davos this week has been “polycrisis” – the “swirl of global emergencies that include economic slowdowns and rising inflation, the war in Ukraine and more.” The World Economic Forum’s Global Risks Report and summary delve into the near-term and longer-term risks that are keeping execs up at night. Lawrence observed last week on PracticalESG.com that boards, execs & advisors are not only facing immediate risks, but also can’t take their eye off the ball when it comes to longer-term issues. The PwC survey reinforces that:

Climate change exemplifies a time-horizon challenge that comes into clearer focus when we look at a broader set of external threats to the global economy. Over the next 12 months, CEOs feel most exposed financially to inflation, economic volatility and geopolitical risk. All three are immediate, headline-grabbing issues that can reinforce and compound one another, as, for example, the war in Ukraine pushes up prices, encouraging central banks worldwide to intervene through growth-dampening interest rate hikes.

The picture changes for CEOs’ medium-term (five-year) outlook. Over that time frame, cyber risks and climate change join inflation, macroeconomic volatility and geopolitical conflict in the top tier of risk exposure.

The question that will come to mind for securities lawyers is, “Do we need to update corporate disclosures to reflect this ‘polycrisis’?” It’s a sensitive area, but this environment does seem to be calling out for a careful overview and update of risk factors, forward-looking statements, and MD&A “known trends & uncertainties” disclosures. If the company knows of specific risks & consequences, it can protect itself by warning shareholders (in a “non-hypothetical” way). I blogged a few months ago about risk factor tips – and we have lots of practical resources in these Practice Areas:

– “Risk Factors”

– “Risk Management”

– “MD&A”

Also check out our deep dive into the practical aspects & process for updating your risk factors in the January-February 2018 issue of The Corporate Counsel newsletter – which recommends using your risk management program, minutes, and analyst reports as a resource for your risk factor review.

If you don’t already have access to our Practice Area resources or electronic back issues of newsletters, reach out to sales@ccrcorp.com for a no-risk trial.

– Liz Dunshee

Tune in at 2pm Eastern tomorrow for the webcast – “The Latest: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia and CompensationStandards.com, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of Morrison Foerster and TheCorporateCounsel.net, and Ron Mueller of Gibson Dunn discuss all the latest issues to consider as you prepare your upcoming proxy disclosures – including how to present newly required pay vs. performance data. Understand what to expect for the upcoming proxy season, so that you can prepare your directors and C-suite – and handle the challenges that 2023 will throw your way.

We are making this CompensationStandards.com webcast available on TheCorporateCounsel.net as a bonus to members – it will air on both sites. And because there is so much to cover, we have allotted extra time for this program! It’s scheduled to run for 90 minutes.

If you attend the live version of this 90-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program. All credits are pending state approval.

Members of TheCorporateCounsel.net are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.

– Liz Dunshee