The members of the House of Representatives managed to pry themselves away from the cable news networks’ microphones long enough to pass a bunch of bipartisan legislation aimed at facilitating capital formation. Here’s the intro to this Mayer Brown blog:
In early June, the US House of Representatives passed two sets of bills focused on promoting capital formation. The bipartisan effort included bills that amend the accredited investor definition in order to increase the diversity of investors participating in the private markets. In addition, as the IPO market continues to suffer, the packages include bills that would enact legislation formalizing measures that already are permitted by SEC staff, such as, for example, expanding “testing-the-waters” accommodations to all issuers. Also, the package includes a bill directing the SEC to investigate the costs associated with going public for middle market companies.
The blog includes brief summaries of each piece of legislation as well as links to the text of the bills. It says that the next stop for this package is the Senate Committee on Banking, Housing, and Urban Affairs.
Artificial Intelligence is a topic that’s really exploded into public consciousness this year, so it isn’t surprising that AI risks are also beginning to feature prominently in some corporate risk factor disclosures. This Bryan Cave blog notes that companies are addressing AI risks either through standalone risk factors or as part of broader risk factor disclosures. The blog highlights the topical areas of these broader risk factors in which AI disclosures appear and provides several examples of standalone risk factors, including this one from DoorDash’s most recent Form 10-Q:
We may use artificial intelligence in our business, and challenges with properly managing its use could result in reputational harm, competitive harm, and legal liability, and adversely affect our results of operations.
We may incorporate artificial intelligence (“AI”) solutions into our platform, offerings, services and features, and these applications may become important in our operations over time. Our competitors or other third parties may incorporate AI into their products more quickly or more successfully than us, which could impair our ability to compete effectively and adversely affect our results of operations. Additionally, if the content, analyses, or recommendations that AI applications assist in producing are or are alleged to be deficient, inaccurate, or biased, our business, financial condition, and results of operations may be adversely affected.
The use of AI applications has resulted in, and may in the future result in, cybersecurity incidents that implicate the personal data of end users of such applications. Any such cybersecurity incidents related to our use of AI applications could adversely affect our reputation and results of operations. AI also presents emerging ethical issues and if our use of AI becomes controversial, we may experience brand or reputational harm, competitive harm, or legal liability. The rapid evolution of AI, including potential government regulation of AI, will require significant resources to develop, test and maintain our platform, offerings, services, and features to help us implement AI ethically in order to minimize unintended, harmful impact.
The blog says that only about 10% of companies in the major indices (S&P 500 and Russell 3000) are currently including a discussion of AI in their risk factor disclosures, but it also points out that companies addressing AI in their risk factors represent a broad range of industries tech & software.
Verizon recently published its 2023 Data Breach Investigations Report, and one of its more interesting findings is that, when it comes to cybersecurity, a company’s senior leaders are often its weakest link – particularly when it comes to the burgeoning category of “social engineering” attacks. Here’s an excerpt from Verizon’s press release:
The human element still makes up the overwhelming majority of incidents, and is a factor in 74% of total breaches, even as enterprises continue to safeguard critical infrastructure and increase training on cybersecurity protocols. One of the most common ways to exploit human nature is social engineering, which refers to manipulating an organization’s sensitive information through tactics like phishing, in which a hacker convinces the user into clicking on a malicious link or attachment.
“Senior leadership represents a growing cybersecurity threat for many organizations,” said Chris Novak, Managing Director of Cybersecurity Consulting at Verizon Business. “Not only do they possess an organization’s most sensitive information, they are often among the least protected, as many organizations make security protocol exceptions for them. With the growth and increasing sophistication of social engineering, organizations must enhance the protection of their senior leadership now to avoid expensive system intrusions.”
Like ransomware, social engineering is a lucrative tactic for cybercriminals, especially given the rise of those techniques being used to impersonate enterprise employees for financial gain, an attack known as Business Email Compromise (BEC). The median amount stolen in BECs has increased over the last couple of years to $50,000 USD, based on Internet Crime Complaint Center (IC3) data, which might have contributed to pretexting nearly doubling this past year.
Last week, the Division of Corporation Finance named Tiffany Posil Chief of the Office of Mergers and Acquisitions. She succeeds Ted Yu, who recently was appointed to serve as Associate Director of the Division of Corporation Finance. Tiffany is currently a partner of Hogan Lovells, and previously worked for Corp Fin, where, among her other responsibilities, she was the primary drafter of the universal proxy rule proposal.
Tiffany should also be familar to many of our members. She participated in our “Universal Proxy: Preparing for the New Regime” webcast last year & has also authored an article on universal proxies for our Deal Lawyers Newsletter. Congratulations to Tiffany!
As you might have already guessed, I’m among those who are skeptical about claims that retail investors should be encouraged to become more involved in corporate governance, and that governance will be enhanced if they do. Some of the objections filed to AMC’s recent class action settlement filed by retail investors with the Chancery Court suggest that this skepticism may be well founded.
AMC was one of the companies to warmly embrace its meme stock “apes”, at least until it proved impossible for the company to get the quorum needed to approve a charter amendment to increase its authorized shares, which in turn inhibited its ability to raise additional capital. Since “meme stocks gotta meme”, AMC needed a fix for this problem. As Liz blogged earlier this year, the company found a solution through the creative use of blank check preferred stock. Of course, any solution to a corporate problem that’s labeled “creative” inevitably leads to class action litigation, and AMC’s fix was no exception. Last month, the company reached an agreement with the plaintiffs to settle that litigation, and that’s when the fun began.
AMC’s retail “apes” responded to the proposed settlement with an outpouring of outrage that was significant enough that the Chancery Court set up a procedure for them to submit their comments on the proposed settlement – which they did, in droves. However, while there were plenty of objections to the settlement, many didn’t inspire a lot of confidence. Here’s an excerpt from Tulane professor Ann Lipton’s recent blog on the objections:
While some of the letters inspire a lot of sympathy – many investors appear to have endured significant losses – a lot of the comments are, well, uninformed, to put it mildly. There are some fairly odd conspiracy theories floating around regarding AMC shares, and, in particular, something about an inflated share count and “synthetic” shares that are improperly voting. Many of the objecting shareholders buy into those theories. For example, in a report filed on May 17, the special master recommended against one shareholder’s attempt to intervene, which was predicated on the “synthetic share” theory.
Ann goes on to confront the fundamental question raised by the some of the more unhinged AMC objections:
So this is the elephant in the room: What does this tell us about the wisdom of encouraging greater retail involvement in corporate governance? While no doubt some retail shareholders are highly informed, many are not, and if AMC demonstrates anything, it’s that in some cases, the technological tools that enable retail shareholders to coordinate and share information may also cause the rapid spread of misinformation.
In other words, social media may have the same kind of implications for corporate governance that it has had for our political discourse. That’s a point that UCLA professor Stephen Bainbridge picks up on in this excerpt from his own blog on the AMC situation:
Many retail investors are deeply engaged with social media and increasingly exhibit the pathologies associated with social media. In the AMC Entertainment litigation, for example, one of the two lawsuits challenging the plan was filed by an individual Usbaldo Munoz. The AMC Apes have been viciously attacking Munoz. Things apparently got so bad that Munoz has now ghosted his own lawyers, leaving them without guidance as to how to proceed.
Oh, goodie! It’s nice to know that one possible outcome of the “rise of the retail investor” might be the establishment of a Q-Anon corporate governance division – “where we go one to a shareholders’ meeting, we go all.”
Check out the latest edition of our “Timely Takes” Podcast featuring my interview with Charles Glick, Chairman & CEO at Corporate Governance Partners, Inc., the makers of Foresight BoardOps. In this 15-minute podcast, Charles addressed the following topics:
– How can the chairperson ensure efficient decision-making during board and committee meetings?
– What strategies can be employed to handle conflicts or disagreements among directors?
– What should you consider when setting a board’s first-ever meeting agenda?
– How should you prioritize board agendas?
– What are some common mistakes when setting agendas?
My interview with Charles was based upon Foresight’s recent publication, A Brief Guide for Board and Committee Chairs, which members of TheCorporateCounsel.net can access in our “Board Meetings” Practice Area. If you have insights on a securities law, capital markets or corporate governance trend or development that you’d like to share, I’m all ears – just shoot me an email at john@thecorporatecounsel.net.
The May-June issue of “The Corporate Counsel” newsletter is in the mail. It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. This issue includes the following articles:
– SEC Adopts Amendments Requiring More Detailed Share Repurchase Disclosure
– What’s in a Name? Postponement, Adjournment and Recess of Stockholders’ Meetings
If you’re not already a subscriber, you can subscribe online to this essential resource or email sales @ccrcorp.com.
Mintz recently released a quantitative analysis of the SEC’s climate and ESG-focused comment letters issued from July 1, 2021 to March 31, 2023. The article categorizes the comments according to the nine topics identified by the SEC in its sample letter plus one additional topic — “greenwashing” — and considered the qualities of the reporting entities who received these letters to identify key characteristics. Here’s an excerpt from the summary:
Overall, a relatively limited number of these comment letters were issued by the SEC. Specifically, 104 reporting entities received comment letters echoing the topics in the SEC’s Sample Letter, and a further 167 reporting entities received a comment letter relating solely to greenwashing. It should also be noted that an overwhelming majority (86%) of the reporting entities receiving a letter solely concerning greenwashing were “Investment Entities” — funds, trusts, or other vehicles solely focused on investing in other companies or assets, rather than traditional companies.
And, while the SEC has continued to focus on the issue of greenwashing, most of the SEC comment letters concerning the climate change topics identified in the Sample Letter were issued either in September 2021 (when the Sample Letter was published) or in a second burst of activity from May–September 2022 — the SEC does not appear to have inquired about those topics since November 2022. Finally, it is also noteworthy that the reporting entities receiving a comment letter aligned with the topics identified in the Sample Letter were concentrated in the Energy & Transport or Manufacturing sectors — about two-thirds of the total.
The analysis found that once the SEC was sending a comment letter it took an “in for a penny, in for a pound” approach and covered a lot of ground in each.
Overall, it appears that the reporting entities that received questions corresponding to the topics identified in the Sample Letter were usually asked about a majority of those topics, and that Physical Effects, Capital Expenditures, Indirect Consequences, Compliance Costs, and Carbon Offsets were the most frequent climate change topics that were the subject of inquiry.
The findings on greenwashing seem to be the most surprising results of this analysis and possibly the most important as a takeaway, as the SEC’s comment letter focus with respect to climate change will eventually shift to the mandatory climate rules, if and when adopted.
But this analysis also revealed a consistent focus on issues pertaining to greenwashing — and the SEC’s inquiries into greenwashing, while concentrated on Investment Entities, were also spread among a number of Companies in a wide variety of industries. This focus by the SEC, despite the recent decline in the number of letters, may well persist.
In a recent opinion in New Enterprise Associates 14, L.P. v. Rich, (Del. Ch.; 5/23), Vice Chancellor Laster found a stockholder covenant not to sue for breach of the duty of loyalty—in the context of a sale of the company that triggered the drag-along provision in a stockholders’ agreement—partially enforceable. Here’s an excerpt from this Duane Morris blog discussing the opinion:
Conducting a deep-dive into the history and philosophical underpinnings of fiduciary law, the Court reasoned that specific, limited, and reasonable covenants not to sue are valid, but that Delaware abhors pre-dispute waivers of suit for intentional harms. The Court laid out a two-part test, sure to join the corporate practitioner’s lexicon of eponymous capital-t Tests swiftly:
“First, the provision must be narrowly tailored to address a specific transaction that otherwise would constitute a breach of fiduciary duty. The level of specificity must compare favorably with what would pass muster for advance authorization in a trust or agency agreement, advance renunciation of a corporate opportunity under Section 122(17), or advance ratification of an interested transaction like self-interested director compensation. If the provision is not sufficiently specific, then it is facially invalid.
. . .Next, the provision must survive close scrutiny for reasonableness. In this case, many of the non-exclusive factors suggested in Manti point to the provision being reasonable. Those factors include (i) a written contract formed through actual consent, (ii) a clear provision, (iii) knowledgeable stockholders who understood the provision’s implications, (iv) the Funds’ ability to reject the provision, and (v) the presence of bargained-for consideration.”
Emphasizing the placement of the convent in a stockholder-level agreement (versus the charter or bylaws) and that it only applied to a drag-along sale, which had to meet a list of eight criteria, VC Laster found the covenant to be enforceable, except to the extent it would relieve defendants of tort liability for intentional harm, which would be contrary to Delaware public policy. To make a successful public policy argument, the plaintiff must show bad faith.
This is neither here nor there, but the blog’s reference to VC Laster’s over-1,200-word footnote reminded me of Infinite Jest, the endnotes of which (fun fact!) have their own audio file on audible.com.
In late May, the SEC celebrated — by posting this video — the 90th birthday of the Securities Act! To commemorate this milestone year, I thought I’d highlight some of the fun, historical “stuff” posted on TheCorporateCounsel.net that I didn’t know was here until I joined as an Editor. If you’re a securities nerd or history buff — or both — I hope you enjoy!