Monthly Archives: November 2023

November 30, 2023

Whistleblower Enforcement: 10 Tips to Get Your Agreements into Compliance

I warned last month that the SEC is going after companies for allegedly sub-par whistleblower carveouts in NDAs and various other agreements, which violates Exchange Act Rule 21F-17. The spate of enforcement actions has prompted companies to revisit their forms of agreement or even undertake an internal compliance audit. This Troutman Pepper memo gives the “Top 10” tips for getting your existing & future agreements and policies into compliance:

1. Carveout for Government Agency Contact

2. Allow Voluntary Disclosure

3. Broadly Construe the Information Disclosable

4. No Representation As to Prior Reporting

5. Do Not Limit Monetary Awards

6. No Reporting Penalties

7. Take a Holistic Approach

8. Ensure Internal Consistency

9. Ensure Organization-wide Consistency

10. Consider Third Party Agreements

Check out the memo for more color on each of these steps.

Liz Dunshee

November 30, 2023

Choice of Law: VC Laster Says Companies Like Delaware Too Much

Nearly 2 million companies are incorporated in Delaware, and many of them employ “choice of law” and “exclusive forum” provisions to give themselves the benefit of the state’s specialized expertise in matters of corporate governance. Apparently, though, companies these days are liking Delaware a little too much. In response to a growing number of lawsuits that call on the Court of Chancery to rule on matters outside the scope of its mission – specifically, trying to shoehorn employment disputes into matters of internal affairs – Vice Chancellor Laster leads off this 68-page opinion with a plea to make it stop.

The dispute here related to whether incentive compensation awards were forfeited upon breach of a contractual restrictive covenant included in an LLC agreement. The various individuals and entities were scattered across 4 states (none of them being Delaware). VC Laster said it’s not the first time he’s seen this approach:

But Sunder filed suit here—in Delaware—because Sunder is a Delaware LLC and its lawyers deployed the now widespread legal technology of inserting restrictive covenants into an internal governance document. Businesses and their lawyers do that so they can invoke Delaware’s contractarian regime and argue that it should override how other jurisdictions regulate restrictive covenants.

That legal technology calls on the Delaware courts to adjudicate postemployment disputes for the country and potentially the world. In the past five years alone, the Court of Chancery has issued written decisions addressing disputes over restrictive covenants for businesses operating in Hong Kong, Italy, Alabama, Arizona,4 California, Colorado, Idaho, Illinois, Louisiana, Nebraska, New Jersey, New York, Oklahoma, and Texas. Only two businesses operated in Delaware, one of which filed two cases. That list excludes transcript rulings.

The Chancellor expresses several concerns with this trend, including: it will undermine the deference that other states accord to Delaware law, it’s unsustainable from a resource perspective, and it diverts the court’s attention from its core mission. VC Laster then notes that there are times when Delaware won’t enforce a choice of law provision:

This is an example of drafters attempting to use Delaware law to set the rules for what are effectively employment relationships. Other jurisdictions often have a more significant interest in regulating those relationships, which affect how their citizens living there can earn a living and how a business operating there can compensate its work force.

Delaware follows the Restatement (Second) of Conflict of Laws, and Delaware courts consequently will not enforce choice of law provisions when doing so would circumvent the public policy of another state that has a greater interest in the subject matter.

Consequently, when a different state’s law would govern in the absence of a choice of law provision, and if that state has established legal rules reflecting a different policy toward restrictive covenants than Delaware’s, then this court will defer to that state’s law notwithstanding the presence of a Delaware choice of law provision.

Applying that formula, VC Laster couldn’t toss this case. Here is his scream into the void:

A solution needs to be found, and the market is unlikely to provide it. This is an area where Delaware’s interests and the interests of its bar as a whole conflict with the individual interests of clients and their lawyers. For any single business, it makes sense for a lawyer to advise the client to embed restrictive covenants in an internal governance document. And for any single business faced with a dispute over those restrictions, it makes sense for a lawyer to advise the client to file a lawsuit in the Court of Chancery. In the aggregate, that is a recipe for a tragedy of the commons.

A judicial solution is also unlikely, because judges decide specific cases. Doubtless there are many combinations of fixes involving choice of law, personal jurisdiction, and subject matter jurisdiction that could address this burgeoning problem. But a cure requires the involvement of policymakers beyond the courts.

In an ideal world, this case would have been filed in Utah, Nevada, or Texas. But the case is here, and it must be decided.

He’s right that things are unlikely to change. Delaware is just too good.

Liz Dunshee

November 30, 2023

Farewell to Charlie Munger, the “Abominable No-Man”

The tributes are pouring in for Charlie Munger, who passed away earlier this week at age 99. Warren Buffett nicknamed Munger the “abominable no-man” due to his willingness to disagree with Buffett’s ideas. He was also notably committed to maintaining Berkshire Hathaway’s corporate culture. This MarketWatch column from Mayer Brown’s Larry Cunningham discusses Munger’s impact in that regard, and the succession planning that has gone into filling that gap:

People have long pondered the fate of Berkshire without Buffett, who is 93. Now we face an equally difficult question of what Berkshire will be like without Munger — or perhaps what Buffett will be like without his alter ego, the person uniquely able to identify his blind spots.

After all, these longtime business partners complemented each other in a nearly ideal way: Buffett tended to lean in while Munger tended to lean out. Munger was Buffett’s essential no-man because Buffett runs amiable and optimistic while Munger embodied a curmudgeonly cynicism.

Yet the two obviously have far more traits in common — such as being learned, loyal, patient, rational, trustworthy and long-term focused. The good news for Berkshire is that the two built a culture on these values that will sustain itself: the result is a deep managerial bench at Berkshire that offers reassuring answers about Berkshire’s future beyond Munger as well as beyond Buffett.

Multiple individuals will together assume various parts of the roles those two traditionally played. Buffett has been board chairman, chief executive officer, and chief investment officer, roles that Buffett has said will be filled by his son Howard as chairman, Greg Abel as CEO and both Todd Combs and Ted Weschler as co-chief investment officers.

Munger’s role as Berkshire’s No. 2, with the official title of vice chairman, has been partner to the CEO while saying no as needed. Just as Buffett’s role will be split among his successors, so will Munger’s. The duty of sustaining the culture — saying no to threats to its rational, acquisitive, decentralized, autonomous, trust-based strengths — will fall to all of their successors.

Liz Dunshee

November 29, 2023

Artificial Intelligence: Tackling Disclosure Compliance

If your leadership team is in the midst of considering the impact of AI on your business – which many are – it may be time to ask, “What, if anything, should we say about this in our SEC reports?” If you raise that notion, you also inevitably will be asked, “What are our peers doing?” This 14-page Weil memo will give you a great head-start on that analysis. Based on an informal survey, it says that over 40% of S&P 500 companies and 30% of Russell 3000 companies included AI-related disclosures in their Form 10-K this year. The Weil team also looked at 10-Qs and proxy statements.

The memo shares examples of how tech-based companies – as well as companies outside of the tech sector – are discussing the impact of AI in response to various disclosure line items. It also shows common risk factors that are being updated to reflect AI risks, and notes that some companies (mostly in the tech industry) are adding standalone risk factors – again, with a sample. The memo urges companies to take these steps to enhance AI disclosure compliance:

Conduct a Thorough Review. Reexamine the company’s AI-related disclosure to ensure that disclosures are accurate, and consider whether additional disclosures are necessary given this emerging disclosure trend and the SEC’s disclosure requirements.

Assess Material Impact. Identify foreseeable AI issues that could affect your company’s performance and that may be material to an investor’s understanding of your company’s business and financial condition.

Update Risk Factors. Consider areas of risk related to AI and, for calendar fiscal-year end companies update risk factors in the upcoming Form 10-K to be filed in 2024. Risks should be specific to the company and should not be presented as hypothetical if the risk actually has materialized itself.

Consider Featuring Management Expertise. Consider whether to highlight management’s experience with AI, particularly as it relates to cybersecurity. As a reminder, new Item 106 of Regulation S-K requires in Form 10-K a description of management’s role in assessing and managing material risks from cybersecurity threats.

Monitor Regulatory Developments. Stay vigilant to regulatory developments related to AI to ensure ongoing compliance and evaluate for disclosure in SEC filings.

Going beyond disclosure, the memo also suggests steps to take to approach the corporate governance aspects of AI issues and to ensure that you have the right company policies in place.

While we’re on the topic, take a minute to participate in our survey about how your own legal team is using AI.

Liz Dunshee

November 29, 2023

Insider Trading: SEC’s Novel “Shadow Trading” Suit Moves Forward

The SEC’s novel “shadow trading” case has been creeping forward for a couple of years now. When I blogged about it in 2021, I called out an article about the theory that was co-authored by Joe Bankman, who is now famous for other reasons. Anyway, the Commission cleared another hurdle last week, when a California district court dismissed the defendant’s motion for summary judgment. This Proskauer blog reminds us why the litigation matters:

The Panuwat decision does not appear to break new ground under the misappropriation theory of insider trading in light of the particular facts alleged. But the “shadow trading” theory warrants attention because it can potentially have wide-ranging ramifications for traders by broadening the scope of the types of nonpublic information that might be deemed material.

Absent an intervening settlement, the case will go to a jury trial, where regular folks will hear the facts about misappropriation, breach of duty, and scienter. The Proskauer blog goes on to explain why the unique facts of this case may have affected the court’s decision to let it move forward:

For example, the materiality analysis depended on evidence that (i) the third-party issuer (Incyte) was one of only a limited number of companies in the acquisition target’s business and financial space; (ii) the third party had been specifically cited as a company that could be affected by the acquisition target’s transaction; and (iii) the trader had been directly involved in the underlying corporate discussions and presentations concerning the employer’s sale. Changing these variables could conceivably produce different results. At what point does “a limited number” of comparable companies become too big a number for information about Company A to be material to Company B (or C, D, or E)? How comparable do Companies A and B need to be? Would the court have reached a different conclusion if analysts and insiders had not mentioned Incyte as a comparable company, or if Panuwat had not been aware of those references?

The summary judgment decision does potentially change – and perhaps expand – the scope of the court’s prior analysis of the breach-of-duty element of insider trading. When the motion to dismiss was decided, many commentators focused on the fact that Medivation’s insider-trading policy had expressly covered “the securities of another publicly-traded company” (apart from Medivation itself), and they speculated on whether the absence of such language might have produced a different result. The summary judgment decision suggests otherwise. The court has now held that, even apart from the Insider Trading Policy and the Confidentiality Agreement, Panuwat had a duty to his employer under “traditional principles of agency law” not to use his employer’s confidential information “for his own personal benefit without disclosing that fact to [the employer].” That duty does not depend on the breadth of the Insider Trading Policy.

The blog says it’s still worth understanding whether your insider trading policies & procedures prohibit trading in third-party companies, because that could end up affecting the “breach of duty” analysis. The blog also says that the “Investor Choice Advocates” piled on to the trend of challenging SEC authority, by filing an amicus brief to say the “shadow trading” theory violates the “major questions” doctrine. (The court didn’t find the brief persuasive.)

Liz Dunshee

November 29, 2023

SEC Powers: SCOTUS Hears ALJ Arguments Today

Speaking of jury trials – or rather, the lack of them – today is the day that the SCOTUS will hear arguments in SEC v. Jarkesy, which may pare back the SEC’s ability to use “Administrative Law Judges” to enforce securities laws and levy fines. This Bloomberg article notes that Mark Cuban and Elon Musk, who have both won jury trials relating to alleged securities law violations & fraud, have filed an amicus brief to support Jarkesy.

This isn’t the first time the SEC has faced challenges to its ALJ system. But commentators are calling this case “the most direct challenge yet to the legitimacy of the modern federal government,” because the decision will have wide-ranging implications for federal agency enforcement and potentially even rulemaking. Here are predictions on that front from Bloomberg’s Matt Levine:

I don’t think that’s necessarily a likely outcome here. The Supreme Court could rule against Jarkesy, or it could rule for him on the jury-trial stuff without bothering with the nondelegation argument, or it could rule for him on the nondelegation argument in a narrow way, saying that this particular delegation is not allowed without undercutting all of the SEC’s rules. Or it could rule against him on the nondelegation argument (saying that this is not a legislative decision, for instance) while ruling for him on the jury-trial stuff. In some ways that is the easiest outcome: The Supreme Court has several justices who would love to revive the nondelegation doctrine, but this is a somewhat silly case to do it in.

But the Supreme Court does have several justices who would love to revive the nondelegation doctrine in a way that really would undermine most of securities regulation, and while this is a silly case to do it in, it is a case to do it in. You never know! Tomorrow could be a big day for the SEC.

University of Michigan Law Prof Chris Walker and U. Penn’s David Zaring say the remedy here could come in the form of a “right to remove”…

Liz Dunshee

November 28, 2023

SEC’s Repurchase Disclosure Rule: Court Signs Death Warrant

In what may be an ominous sign for the SEC’s share repurchase disclosure rule, the 5th Circuit has denied the Commission’s motion to request more time to substantiate its decision to adopt the new requirements. I blogged yesterday that the SEC issued a stay order for the rule at the same time that it filed this court motion. This Gibson Dunn blog explains what will happen next:

As a result, the SEC has until November 30 to correct the deficiencies the court had found with the SEC’s rulemaking, after which we expect the court will consider a renewed motion from the petitioners to vacate the Repurchase Rule.

The blog points out that companies can rely on the stay until the SEC or the Fifth Circuit take additional action on the Repurchase Rule. ​See this blog from Cooley’s Cydney Posner for more details about the litigation.

Liz Dunshee

November 28, 2023

Just in Time for the Holidays: More PvP CDIs Are Here!

Last week was an incredibly active holiday week for Corp Fin, with several rounds of CDIs that Dave covered in this blog. But there’s more! Here’s something Meredith blogged yesterday on

Just before Thanksgiving, the SEC gave us even more to be thankful for — eight new and two revised CDIs on the pay-versus-performance disclosure requirements. I’ve paraphrased each new CDI and linked to the full text below.

1. New Question 128D.23 – Dividends or dividend equivalents paid that are not already reflected in the fair value of stock awards or included in another component of total compensation must be included in the calculation of executive compensation actually paid.

2. New Question 128D.24 – If a registrant uses more than one published industry or line-of-business index for purposes of Item 201(e)(1)(ii), the registrant may choose which index it uses for purposes of its PvP disclosure and should include a footnote disclosing the index chosen. If the registrant chooses to use a different published industry or line-of-business index from that used by it for the immediately preceding fiscal year, it is required to explain the reasons for the change in a footnote and provide a comparison against both the newly selected peer group and the peer group used in the immediately preceding fiscal year.

3. New Question 128D.25 – A registrant may not use the broad-based equity index it uses to determine the vesting of performance-based equity awards based on relative TSR as its peer group for purposes of Item 402(v)(2)(iv).

4. New Question 128D.26 – Market capitalization-based weighting is required for purposes of Item 402(v)(2)(iv) only if the registrant is not using a published industry or line-of-business index pursuant to Item 201(e)(1)(ii).

5. New Question 128D.27 – If a registrant uses a benchmarking peer group and adds or removes companies, is it required to footnote the changes and compare its cumulative total shareholder return with that of both the updated peer group and the peer group used in the immediately preceding fiscal year. However, if an entity is omitted solely because it is no longer in the business or industry or the changes were made pursuant to pre-established objective criteria, presenting both comparisons is not required, but a specific description of the change and the basis for the change must be disclosed, including the names of the companies removed. This is consistent with CDI 206.05 regarding disclosure under Item 201.

6. New Question 128D.28 – The staff will not object if a registrant that loses SRC status as of January 1, 2024 continues to include scaled disclosure under 402(v)(8) in its proxy filed not later than 120 days after its 2023 fiscal year end, forward incorporated into the 10-K. The PvP disclosure must cover fiscal years 2021, 2022, and 2023.

Unless the registrant subsequently regains SRC status, any other proxy filed after January 1, 2024 must include non-scaled PvP disclosure. However, a registrant generally is not required to revise disclosure for prior years to conform to non-SRC status, and the staff will not object if the registrant does not add disclosure for a year prior to those included in the first filing with PvP disclosure. But the registrant should include peer TSR — measured from the market close on the last trading day before the registrant’s earliest fiscal year in the table — and its numerically quantifiable performance under the Company-Selected Measure for each fiscal year in the table, and disclosure provided for all fiscal years must be XBRL tagged.

7. New Question 128D.29 – The registrant is required to include PvP disclosure in any proxy or information statement filed after it loses its EGC status, but may apply the transitional relief in Instruction 1 to Item 402(v) (that disclosure may be provided for three years instead of five in the first filing with PvP disclosure and an additional year in each of the two subsequent annual filings).

8. New Question 128D.30 – When multiple individuals served as PFO during one covered fiscal year, for purposes of calculating average compensation for the NEOs other than the PEO, the registrant may not treat the PFOs as the equivalent of one NEO. Each must be included individually in the calculation of the average, but additional disclosure regarding the impact on the calculation should be considered.

I’ve also included marked versions of the revised CDIs.

Revised Question 128D.07

Question: In each of 2020 and 2021, a registrant provided the same list of companies as a peer group in its Compensation Discussion & Analysis (“CD&A”) under Item 402(b) but provided a different list of companies in its CD&A for 2022. With respect to a registrant providing initial Pay versus Performance disclosure in its 2023 proxy statement for three years (as permitted by Instruction 1 to Item 402(v) of Regulation S-K), may the registrant present the peer group total shareholder return for each of the three years using the 2022 peer group?

Answer: No. In this situation, the registrant should present the peer group total shareholder return for each year in the table using the peer group disclosed in its CD&A for such year. In the 2024 proxy statement, if the registrant uses the same peer group for 2023 as it used for 2022, the registrant should present its peer group total shareholder return for each of the years in the table using the 2023 peer group. If it changes the peer group in subsequent years, it must provide disclosure of the change in accordance with Regulation S-K Item 402(v)(2)(iv).

Revised Question 128D.18

Question: Some stock and option awards allow for accelerated vesting if the holder of such awards becomes retirement eligible. If retirement eligibility was the onlysole vesting condition, would this condition be considered satisfied for purposes of the Item 402(v) of Regulation S-K disclosures and calculation of executive compensation actually paid in the year that the holder becomes retirement eligible?

Answer: Yes. However, for awards with additional substantive conditions, in addition to if retirement eligibility, such as a market is not the sole vesting condition as described in Question 128D.16, those, other substantive conditions must also be considered in determining when an award has vested. Such conditions would include, but not be limited to, a market condition as described in Question 128D.16 or a condition that results in vesting upon the earlier of the holder’s actual retirement or the satisfaction of the requisite service period.

Liz Dunshee

November 28, 2023

The SEC’s Mission: Lawmakers Propose a Makeover

During its 89 years of existence, the SEC has operated under a 3-part mission that many of us have committed to heart:

– Protect investors

– Maintain fair, orderly, and efficient markets

– Facilitate capital formation

A bill that’s in its early stages in Congress is looking to “modernize” that mission by expressly adding the word “innovation” to 15 USC 77b and 15 USC 77c (and the corresponding provisions under the Investment Company Act), so that they would read as follows:

Consideration of promotion of efficiency, innovation, competition, and capital formation

Whenever pursuant to this chapter the Commission is engaged in rulemaking, or in the review of a rule of a self-regulatory organization, and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, innovation, competition, and capital formation.

The primary focus of this bill is to provide for a system of regulation of digital assets by the CFTC and the SEC, so you might think that this wording change is simply encouraging special rules for digital assets, as those in the crypto space have been urging for quite some time. But the author of this op-ed in The Hill says the change would go further than that:

Such a small change might have a monumental impact, requiring the SEC to consider whether its actions promote or harm innovation.

Greater oversight or even an SEC overhaul might be needed, but better prioritization of innovation is a good place to begin. It could moderate the SEC’s noted perceptions of hostility towards novel sectors of the economy and move the agency’s focus away from social issues outside its intended domain.

Under this reading, if the bill progresses, folks looking to rein in – or dismantle – the SEC’s ability to adopt rules & issue interpretations would get another tool in their toolbox. Maybe the SEC will become the Post Office after all?

Liz Dunshee

November 27, 2023

SEC’s Repurchase Disclosure Rule: Officially Stayed (For Now)

Last Wednesday, holiday magic arrived early for securities lawyers, when the SEC officially stayed the repurchase disclosure rule that would call for detailed disclosures in upcoming Form 10-Ks. The Thanksgiving Eve announcement followed a court ruling last month in which the 5th Circuit held that the rulemaking was “arbitrary & capricious” and ordered the Commission to fix it by November 30th. The rule had been challenged by the US Chamber of Commerce and other business groups.

The Commission issued the stay on the same day that it filed a motion with the court. The motion states that since the remand, the SEC’s staff has worked diligently to ascertain the steps necessary to comply with the court’s remand order and has determined that doing so will require additional time. Accordingly, the motion is for the court to extend the period of the remand – without in the meantime the court vacating the rule. The SEC’s motion stated that if the court grants the requested extension, the SEC will provide an update to the court within 60 days on the status of the SEC’s efforts to remedy the rule’s defects.

The court hasn’t ruled on the motion, and the Chamber is opposed to the extension. While we await that ruling, it’s important to note that this order doesn’t vacate the rule – it merely stays the compliance date pending further SEC action. Stay tuned.

Update: Cooley’s Cydney Posner blogged this morning that the court denied the SEC’s order over the weekend. We may know the fate of the rule later this week…

Liz Dunshee