Monthly Archives: April 2023

April 28, 2023

SVB’s Auditors Get Sued

CFO Dive recently reported that a new lawsuit against SVB now names KPMG as one of the defendants, noting that the firm’s audit opinion issued only a few weeks before the bank’s collapse was silent on whether there was any doubt about SVB’s ability to continue as a going concern. Here’s an excerpt from the article, highlighting that the claims have renewed conversations about long-tenure and independence:

Even prior to the lawsuit, the short window between the audit and the bank run raised questions of how SVB’s auditors could have missed the signs of its impending doom so close to the collapse.

Previously KPMG has defended its work and CFO Dive reported that a KPMG spokesperson wrote that the firm conducts its audits in accordance with professional standards and noted that audit opinions are based on evidence available up to and at the date of the opinion.

However, the Silicon Valley matter has also spotlighted KPMG’s long tenure of 29 years working for SVB, raising the specter of whether cozy auditor-client relationships can cut into the rigor of audits. Although there are no regulations in the U.S. that limit the number of years that auditors can provide their services to clients, U.S. regulators have long contemplated limiting how long auditors can do so.

– Meredith Ervine

April 28, 2023

CAMs: Not Living Up to PCAOB Hopes

KPMG has also been criticized for its audit opinion failing to identify SVB’s unrealized losses on its bond portfolio as a critical audit matter, as reported by the Wall Street Journal.  As noted in this Value Edge Advisors blog, PCAOB advisors are concerned that CAM disclosure in general has been less useful to investors than intended.

During a meeting of the PCAOB’s Standards and Emerging Issues Advisory Group on March 30, 2023, Jeffrey Mahoney, general counsel of the Council of Institutional Investors (CII), expressed concern that subsets of Auditing Standard (AS) 3101 aren’t being addressed in CAM disclosures—specifically, an indication of the outcome of the audit procedures with respect to the CAM and the auditor’s related key observations. Reuters also reports that the number of CAMs per audit has decreased over the years. With CAMs in the spotlight, perhaps that trend will reverse.

– Meredith Ervine

April 28, 2023

Auditor Independence—It’s Not Just a Checklist

As we’ve noted previously on this blog, auditor independence is an issue that audit committees, in addition to auditors, need to stay on top of since violations of the independence rules can pose a serious risk to the audit client as well. This post from the CPA Journal has a good reminder that auditor independence considerations go beyond the list of specific relationships that render an auditor and the auditor’s firm as not independent—there is also a general standard to consider.

The post provides one case study where the CAO favored—and provided confidential information to—one firm in a bid for audit work, which resulted in the audit committee terminating the CAO’s employment and the audit firm’s engagement once it learned of the conduct. It also cites several other independence violations that involved a failure to comply with the SEC’s general standard rather than any of the specific prohibitions. Here’s an excerpt:

A lead engagement partner developed and maintained a close personal relationship with the CFO of an audit client and the CFO’s family. This relationship included frequent social events, gifts, and overnight out-of-town trips that involved lavish spending. The activities violated the audit firm’s policies, which identified such extensive relationships as creating “independence issues from an appearance perspective.” The SEC sanctioned the partner for his independence violations, and the firm for failing to act on red flags regarding the partner’s relationship with the CFO (AAER 3802, September 19, 2016).

An audit partner had a close personal and romantic relationship with the CAO of an audit client. The SEC sanctioned the audit partner and the CAO for the independence violation as well as the lead engagement partner and the audit firm for failing to act on red flags about the relationship (AAER 3803, September 19, 2016).

An audit firm conducted microcap conferences for several years at which the firm touted a group of companies that included audit clients as high-quality investment opportunities. The PCAOB sanctioned the audit firm and the partner responsible for the firm’s compliance with independence requirements for the client-advocacy-related independence violations, as well as for violation of quality control standards (PCAOB Release 105-2019-022, September 10, 2019).

– Meredith Ervine

April 27, 2023

Share Repurchase Disclosure—On SEC’s Agenda for Next Wednesday!

We realize the SEC’s Reg Flex Agenda is—as its title suggests—flexible. Still, we’ve been anxiously awaiting upcoming open meetings over here given the number of highly-anticipated rulemaking topics teed up for spring 2023 in the latest Reg Flex Agenda. Yesterday the SEC announced an open meeting scheduled for next Wednesday, and one of the items the Commission will consider is share repurchase disclosure.

The SEC’s proposal for issuer repurchases dates back to December 2021. Under the proposed repurchase rules, the SEC would: (i) require daily repurchase disclosure on a new Form SR, which would be furnished to the SEC one business day after execution of a company’s share repurchase order; (ii) amend Item 703 of Regulation S-K to require additional detail regarding the structure of a company’s repurchase program and its share repurchases; and (iii) require information disclosed pursuant to Item 703 of Regulation S-K and pursuant to Form SR to be reported using Inline XBRL.

As a reminder of the history here, at that same December 2021 meeting, the SEC also proposed amendments to Rule 10b5-1. Subsequently, the SEC reopened the comment period on the share repurchase proposal—twice—and then, in December 2022, adopted the Rule 10b5-1 amendments without acting on the share repurchase proposal. Further, in the final Rule 10b5-1 amendments, the SEC did not address Rule 10b5-1 plans for issuer share repurchase programs and refrained from adopting a cooling-off period for issuers, noting that the need for regulatory action regarding issuer use of Rule 10b5-1 plans, such as in the share repurchase context, was still under consideration.

Meredith Ervine

April 27, 2023

Accounting Lawsuits—Probably More Expensive than Investing in ICFR

Cornerstone Research recently released a report, Accounting Class Action Filings and Settlements—2022 Review and Analysis, that reviewed lawsuits related to financial restatements, material weaknesses in ICFR and other accounting issues and concluded that companies are paying a lot more to settle these types of suits. Here’s an excerpt from their press release:

The total value of accounting case settlements grew by more than 67% in 2022 to $1.4 billion, up from $817 million the previous year. Key contributors to the significant jump in total settlement value were an increase in the average settlement amount to $31.7 million in 2022 from $24.7 million in 2021, coupled with a 30% year-over-year increase in the number of settled cases to 43 from 33 the prior year.

Over on Radical Compliance, Matt Kelly’s blog reminds anyone lobbying their CFO for more investment in internal controls not to forget the legal costs in your plea since accounting cases settled in 2022 also took longer to reach settlement:

These numbers add up. Even if your company wins dismissal of the case — are those millions spent on legal fees really going to be less than whatever it costs to configure your ERP software correctly or to automate your key accounting controls? Of course not.

That’s the real argument in favor of investing in strong internal accounting controls, including automation and audit management software and all the rest. Configuring all those systems is a tedious, exacting pain in the neck, but it’s still going to be less expensive than the damage of a half-baked set of internal controls that finally collapses.

– Meredith Ervine

April 27, 2023

March-April Issue of Deal Lawyers Newsletter

The March-April Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This issue includes the following articles:

– Insights from Experience – Acquiring Public Benefit Corporations

– Private Company Mergers of Equals: A Primer for Companies and Investors

– Sale of Business Non-Competes: On the Way Out?

The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without in order to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at or call us at 800-737-1271.

– Meredith Ervine

April 26, 2023

Dodd-Frank Clawbacks: SEC Extends Period to Act on Exchange Rules

Here’s some good news Liz shared yesterday for members of

Yesterday, the SEC posted notice – for the NYSENasdaq and other SROs – that it would designate a longer period for taking action on proposed listing standards to implement Dodd-Frank clawback rules. This action follows comment letters that were submitted earlier this month to urge a longer lead-time – and it’s welcome news to anyone trying to keep up with the demands of recent SEC rulemaking.

That said, don’t get too excited. For each exchange, the Commission has designated June 11th as the date by which it will either approve or disapprove – or institute proceedings to determine whether to disapprove – the proposed rule change. Under Section 19(b)(2) of the Exchange Act, that’s the outside date of 90 days from the date the notices of these proposals were published in the Federal Register. If the Commission hadn’t designated this longer period, it would have had to act by April 27th.

The lingering issue presented by this June date is that the original proposals from the exchanges said that they’d be effective on the date approved by the SEC (see pg. 31 of the NYSE’s proposal and pg. 31 of Nasdaq’s proposal). So, unless the exchanges amend that portion of their proposed listing standards, if the SEC approves them in June, that’s when they’ll go effective. That will start the 60-day clock for listed companies to adopt a compliant clawback policy – putting the deadline in early August. That’s still a lot earlier than many folks originally expected, and means you can’t delay work on your clawback policy.

We’ll continue to cross our fingers that this plays out more in line with the originally expected timeframe of a November effective date for the exchange listing standards and a January 2024 compliance date. Keep following this blog for updates & practical guidance as the date nears (one way or the other) – and make sure to use the resources available in our “Clawbacks” Practice Area (including a sample policy). And, mark your calendars for our “Proxy Season Post Mortem” webcast – 2pm ET on Tuesday, June 27th, as we’ll touch on this as a “hot topic.” As always, an archive replay and transcript will be available to members following the live program.

If you aren’t already a member with access to these resources, start a no-risk trial today! 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 – or call us at 800.737.1271.

– Meredith Ervine

April 26, 2023

Many Lessons to Come from Suit Against Fox Board

The first of what may be many shareholder derivative suits related to the Fox News coverage of the 2020 Presidential election was filed on April 11, and multiple legal minds have already weighed in on why this may be one for the books. Over on the Business Law Prof Blog, Ann Lipton discusses whether these allegations should appropriately be the basis of a Caremark claim.

She points out that Caremark’s original principle—that that a corporation might fail to comply with the law, and suffer related penalties, due to bad faith neglect by the directors—was subsequently expanded to encompass the concept that illegal conduct can’t be permissible corporate behavior even if the directors reasonably concluded that lawbreaking could have been profitable. Massey claims, she points out, can apply when directors are pursuing the best interest of the corporation but doing so in an impermissible way, and this view represents the outer limit of shareholder primacy in that it’s “rooted in concern for the welfare of nonshareholder constituencies.”

But the derivative claims against the Fox directors and officers involve defamation. Here’s an excerpt from her blog:

Given this frame, the question becomes, where does “defamation” fit on this scale?  Does it count as illegal, ultra vires conduct?  Or can it be a legitimate business decision that becomes a breach of duty only in “prong one” situations, or, I could imagine, if defamation is permitted not because directors believe it to be wealth-maximizing for the firm, but because directors are advancing their own political commitments?  In the Fox case, the stockholder plaintiff alleges that the Fox Corp board intentionally permitted false claims to air because it was fearful of losing viewers.  In other words, the actual allegation is that the board was trying to maximize shareholder wealth – not that it neglected its duties, and not even that false political claims benefitted board members personally.

Further, Delaware allows “efficient breach” of contract—directors can choose to break a contract if they decide it’s profitable to do so. In asking whether it’s logical to treat tort law differently than contract law, she points out that tort claims permit punitive damages, so perhaps defamation should be treated as unauthorized behavior and a contract breach can be distinguished as priced behavior.

Following last week’s announcement that Fox agreed to settle with Dominion, Kevin LaCroix also blogged about these claims on The D&O Diary. He notes that, while Caremark claims are notoriously difficult to sustain, after the settlement, there’s more support for the argument that the alleged misconduct harmed Fox.

 Meredith Ervine

April 26, 2023

Slack Direct Listing Appeal—The SEC is in Good Company

John recently blogged about one notable group missing from the Slack direct listing appeal—the SEC. If you’re into the inside baseball here, Cydney Posner’s Cooley PubCo blog thoroughly and compellingly covers the oral arguments, including how some of the Justices may be leaning. It seems that the SEC’s absence was giving SCOTUS some heartburn and, to the extent the SEC struggled with this case, it was in good company:

When it came to considering the practical impact of any decision, the Justices seemed, to some extent, caught between Scylla and Charybdis—overturning the 9th Circuit to mandate tracing to the registration statement, as Slack requested, could mean allowing a mechanism to avoid Section 11 liability completely; taking the broad approach that Pirani advocated (and the 9th Circuit took) could mean substantially expanding and extending liability. The challenge was how to navigate those waters?

. . . Justice Sotomayor said that she had “read some commentators suggesting that the [SEC] is having trouble with this case and doesn’t know what to do.”  Chief Justice Roberts added that they “[m]ay not be the only one.”

– Meredith Ervine

April 25, 2023

Companies with Multi-Class Share Structures Now Eligible for S&P 500

Back in 2017, S&P announced that it would not add any new companies with “multi share class structures” to the S&P Composite 1500 Index and its component indices, including the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600.  As highlighted by this Simpson Thacher alert, under S&P’s restrictive eligibility criteria, this meant that companies going public with an “UP-C” structure with multiple classes—even with equal voting rights—were excluded, in addition to companies going public with high vote/low vote class structures.

S&P reversed course in a recent announcement, effective immediately. Here’s Simpson Thacher’s take:

Following a consultation with market participants that commenced in late 2022, on April 17, 2023, S&P announced that companies with multiple share classes will again be considered eligible for inclusion in the S&P Composite 1500 Index and its component indices provided they meet all other eligibility criteria. We believe this is the right outcome for investors who are looking to broad-based market indices to track the entire investable universe and permits companies seeking to go public to adopt the capital structures that best suit their circumstances without adversely impacting eligibility for future inclusion in the S&P Composite 1500 Index and its component indices.

– Meredith Ervine