UCLA’s Stephen Bainbridge recently blogged about the major challenges and issues he sees facing public company boards over the next year or two. In his assessment, these include cybersecurity, risk management, shareholder activism and political risks. This excerpt addresses risk management:
Cybersecurity is a sufficiently important risk to deserve its own category. But the general problem of risk management remains an important part of what boards must do. Board-level systems designed to monitor and oversee mission-critical functions play a crucial role in showcasing the board’s fulfillment of its Caremark duties.
This was evident last year when the Delaware Court of Chancery allowed a Caremarkduty-of-oversight claim to advance against Boeing Company directors. The court’s decision was based on allegations of insufficient board involvement in safety matters and the absence of a dedicated committee with direct oversight responsibilities. Nevertheless, it’s worth noting that two subsequent cases, Hamrockand SolarWinds, have underscored the necessity of establishing bad faith rather than merely proving gross negligence for a Caremark claim to succeed.
By the way, Prof. Bainbridge is no fan of Caremark, and another one of his recent blogs summarizes his objections to it:
First, Caremark was wrong from the outset. Caremark’s unique procedural posture, which precluded any appeal, gave Chancellor Allen an opportunity to write “an opinion filled almost entirely with dicta” that “drastically expanded directors’ oversight liability.” In doing so, Allen misinterpreted binding Delaware Supreme Court precedent and ignored the important policy justifications underlying that precedent.
Second, Caremark was further mangled by subsequent decisions. The underlying fiduciary duty was changed from care to loyalty, with multiple adverse effects. In recent years, moreover, there has been a steady expansion of Caremark liability. Even though the risk of actual liability probably remains low, there is substantial risk that changing perceptions of that risk induces directors to take excessive precautions.
Join us tomorrow for the webcast – “SEC Enforcement: Priorites & Trends” – to hear Hunton Andrews Kurth’s Scott Kimpel, Locke Lord’s Allison O’Neil, and Quinn Emanuel’s Kurt Wolfe provide insights into the lessons learned from recent enforcement activities and insights into what the new year might hold.
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Some law firms have announced their own proprietary tools in the AI and software space recently — for example, Gunderson Dettmer announced a homegrown generative AI chat app for the firm’s attorneys, Cooley announced Cooley D+O, a software platform for D&O questionnaires, and Orrick recently announced The Observatory, an online platform meant to help you select technology that’s right for your organization.
These are certainly some interesting developments by firms working to lead here, but we still don’t have a great sense for what law firms and in-house legal departments are doing generally to leverage efficiencies from AI or other emerging technologies for legal tasks to stay up to date in this rapidly changing environment. To get some answers, we’ve put together a short, anonymous survey on how in-house teams and law firms are using technologies right now and what policies and oversight of AI they currently have in place. This is different from the many surveys on AI we’ve seen elsewhere focused on who it’s going to put out of a job or what industries it’s going to revolutionize. We hope this will give you current, practical & actionable insight. Please take a moment to participate!
If you are leading your team’s efforts to efficiently, safely & legally leverage AI, that would make a great podcast topic, and we’d love to hear about it.
LIBOR officially became an ex-parrot on June 30, 2023, and has been replaced by SOFR in most credit agreements. But this WilmerHale memo says that despite the fact that lenders and borrowers have known for some time that the transition away from LIBOR was coming, a surprising number of credit agreements still haven’t been amended to address the transition, and that this may prove to be a costly oversight:
Despite these preparations and legislative actions, there remains a contingent of corporate borrowers that have fallen (back) into the cracks. In many loan documents, LIBOR cessation results in a fallback to a rate based on the prime rate, also known as the base rate or reference rate, which, while based on the rate banks give to their best, most creditworthy corporate customers, has historically been more expensive than LIBOR.
Because the LIBOR Act is generally inapplicable for loan documents containing contractual fallback language that clearly specifies a replacement rate, the prime rate will become the controlling benchmark under these agreements. A recent estimate stated that approximately 8% of leveraged loans could fall back to the prime rate upon the cessation of LIBOR if action is not taken. Although public data on the topic is limited, the percentage of loans falling back to the prime rate in the venture debt and middle-market spaces is likely to be far higher.
The memo recommends that borrowers review the terms of their existing debt agreements to determine whether there are potential issues with the fallback pricing provisions of those agreements. Borrowers that identify potential issue should consult with counsel as to whether the LIBOR Act applies to their debt agreements and, if those agreements fallback pricing provisions are the prime or base rate, negotiate appropriate changes to a SOFR-based benchmark rate.
During the darkest days of the pandemic, convertible debt offerings were an attractive capital raising alternative, and as we blogged at the time, even large cap issuers that traditionally shied away from converts opted to take the plunge. While the convertible debt market remained pretty robust in 2020 & 2021, interest in converts petered out last year. However, a recent Institutional Investor article says that interest in convertible debt issuances has surged again in recent months:
The market for convertible bonds, the interest-paying securities that bondholders can choose to turn into common stock, is stirring again and attracting investors.
Convertible bonds typically mature in five years and are issued by less creditworthy companies — 76 percent of issuers don’t have a credit rating and most of the others have a BBB rating or lower from one of the major agencies, according to research by Calamos Investments. But higher interest rates are causing even the healthiest companies to use convertible bonds to raise capital. Through September of this year, companies across the globe sold $61 billion worth of convertible bonds and out of the $42 billion raised by U.S. companies, almost a third of them have investment grade ratings.
“That’s a bit of a change from the previous few years in that it was a much smaller percentage than before,” said David Hulme, managing director and portfolio manager at Advent Capital Management, which specializes in convertible bonds. “I think that’s been driven partially by a change in the way companies account for the issuance of convertibles.”
Back in 2020, companies were attracted to converts as an alternative to issuing equity during a period of downward pressure on stocks. This time, it looks like it’s the ability to mitigate the impact of the current interest rate environment along with depressed stock prices that’s making companies consider convertible debt issuances. Like Mark Twain supposedly said, history never repeats itself, but sometimes it rhymes.
John & Orrick’s J.T. Ho recently recorded their latest monthly “Timely Takes” Podcast, and in it, J.T. highlights California’s recently adopted Assembly Bill 1305. This climate-related bill has gotten less attention than SB 253 and SB 261 — California’s two other climate bills approved in October — since it’s generally focused on the voluntary carbon markets and entities operating in California that market or sell voluntary carbon offsets. But, as detailed by this Orrick alert, it also “imposes various disclosure requirements on companies that make net zero, carbon neutrality, or similar claims, including through the use of voluntary carbon offsets.” “Claims” includes goals, and as we all know, that covers many companies whose businesses have nothing to do with the carbon markets! And — get this — AB 1305 is effective on January 1, 2024. Yikes! That’s less than two short months from now.
The alert details what these covered companies need to disclose. Pay attention, since failures to comply can result in civil penalties, which accrue at a rate of up to $2,500 per day that information is not available or is inaccurate, for each violation, up to a maximum of $500,000.
If a company makes claims regarding the achievement of net zero emissions, carbon neutral claims or claims regarding reduction of greenhouse gas emissions: Must publicly provide all information documenting how such a claim was determined to be accurate or actually accomplished, and how interim progress toward that goal is being measured, including:
– disclosure of independent third-party verification;
– identification of science-based targets; and
– disclosure of the relevant sector methodology.
This requirement only applies to companies that operate within or make claims within California.
If a company makes the claims described above and purchases or uses voluntary carbon offsets: In addition to the information described above, companies must publicly provide information regarding the applicable project and offsets, including:
– the offset registry or program;
– the offset project type;
– the specific protocol used; and
– whether there is independent third-party verification.
This requirement only applies to companies that operate within or purchase or use voluntary carbon offsets sold within California.
The podcast & alert detail some action items that covered companies need to add to their priority year-end to-do list to prepare for and draft this disclosure. When reviewing your goals for achievability and to confirm appropriate plans are in place, in addition to general greenwashing considerations and securities-related risk, J.T. recommends that companies consider the FTC’s Green Guides (including potential amendments) and state-level consumer protection & marketing laws.
PwC’s latest publication on non-GAAP measures summarizes the topics covered in recent non-GAAP comment letters, particularly focused on comment letters since the staff’s 2022 updates to non-GAAP C&DIs. But what caught my eye the most was this blurb related to earlier guidance:
In March 2020, the SEC staff issued disclosure guidance related to COVID-19, including how non-GAAP measures could be impacted by the pandemic and what companies should consider in their non-GAAP disclosures. One topic discussed was when a non-GAAP measure is reconciled back to a comparable GAAP measure that is still provisional in nature because the measure may be impacted by adjustments that may require additional information and analysis. The SEC staff has recently stated that this guidance is not specific to COVID-19 and should be applied to other situations that could impact a company’s non-GAAP measures as well. Companies should continue to consider this guidance.
With the ever-increasing geopolitical uncertainty companies continue to face, it’s not surprising that COVID-related guidance may still be applicable in other contexts. In the 2020 guidance, while the Staff stated that “the Division would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results,” it described the limited circumstances when that may be acceptable and explained the Staff’s expectations for contextual disclosure:
In addition, if a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures in reliance on the above position, it should limit the measures in its presentation to those non-GAAP financial measures it is using to report financial results to the Board of Directors. We remind companies that we do not believe it is appropriate for a company to present non-GAAP financial measures or metrics for the sole purpose of presenting a more favorable view of the company. Rather we believe companies should use non-GAAP financial measures and performance metrics for the purpose of sharing with investors how management and the Board are analyzing the current and potential impact of COVID-19 on the company’s financial condition and operating results.
If a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, it should explain, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting.
John & Orrick’s J.T. Ho took the Halloween theme to heart in their latest monthly “Timely Takes” Podcast on securities and governance hot topics recorded at the end of October. Some of J.T.’s updates are truly frightening, including his discussion of the recent climate legislation in California that I blogged about today with a compliance date that’s right around the corner. If you haven’t read that blog or listened to this podcast and you’re thinking “I’m not afraid”…you will be.
John and J.T. cover the following topics:
– New California Climate Legislation
– Amendments to Beneficial Ownership Reporting Rules
– IAC’s Recommendations on Human Capital Management Disclosure
– 5th Circuit Panel’s Decision Upholding Nasdaq’s Board Diversity Disclosure Rules
– NYSE Clawback Policy Affirmation Requirement
As always, if you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share in a podcast, we’d love to hear from you. You can email us at mervine@ccrcorp.com or john@thecorporatecounsel.net.
Programming note: In observance of Veterans Day, we will not be publishing a blog tomorrow. We will be back on Monday!
A lot has been written about President Biden’s sweeping Executive Order on AI and its significance, especially considering the roadblocks making federal AI legislation unlikely to be passed in the near term. Liz noted the importance of considering third-party risk and that it’s not a stretch to think this developing issue is on the SEC’s radar. Beyond that, I must admit that I had a hard time wrapping my head around what this means for public companies from the fact sheet — especially those that aren’t government contractors or AI/technology companies.
Thankfully, we’ve gathered numerous client alerts on the Executive Order in our “Artificial Intelligence” Practice Area and many of them have helpful explanations. In this alert, DLA Piper explains expected forthcoming regulatory changes as a result of the Executive Order and the short timeframe for these:
The EO requires the development (mostly within three to twelve months) of standards, practices, and even new regulation for the development and use of AI across most aspects of the economy and in significant regulated areas such as consumer finance, labor and employment, healthcare, education, national security, and others, as discussed more fully below.
Except for new reporting requirements for developers of large language models and computing clusters, most of the EO’s provisions do not immediately change regulatory requirements. The EO does, however, urge federal regulators and agencies to use their existing authority to stress test the security of AI systems, prevent harms such as discrimination, loss of employment, foreign threats to critical infrastructure, and talent vacuums. It makes clear that the resources and authority of the federal government will be focused on the safe, secure, and ethical use of AI in every major aspect of commerce and societal affairs. We anticipate that as these mandates are fulfilled, and guidelines, standards, and rules are developed over the next twelve months, significant new requirements will be forthcoming.
Also, this Goodwin alert explains the wide-ranging implications for government contractors and beyond and how the Executive Order will impact the many current and potential applications of AI:
The EO applies directly to federal government agencies and will significantly impact the way the government funds AI development and procures AI products and services; however, its impacts also will be felt by the private sector, including those companies providing services and supplying materials to the US government and throughout the federal procurement supply chain. The EO may ultimately create “de facto” standards and practices in the private sector given the size and influence of the US government as a customer to major technology companies, a funding source for and regulator of research and development, and payer in the healthcare space.
On the reporting front, this may be an important development to consider if you disclose AI-related risk factors or known trends/uncertainties or plan to do so in your next 10-K. To that end, this Intelligize blog from July discussed how certain companies addressed risks related to AI in their disclosures to date and links to those disclosures.
Important news! Corp Fin has updated its “shareholder proposal no-actions page” to include a new form that companies and proponents are required to use for all 14a-8 no-action requests & supplemental correspondence that they submit to the Division. Previously, correspondence was submitted by email.
This form doesn’t transmit your no-action request or other submissions to the other party. Companies and proponents are still required to send their correspondence to the other party by mail or email (but remember that last year, email correspondence caused some bickering over whether procedural requirements had been satisfied). You need to check a box on the form to attest that you’ve sent the correspondence to the counterparty.
While the form doesn’t change the information that must be submitted, it does include a field to enter the company’s “anticipated proxy print date” right off the bat. Corp Fin’s landing page continues to include this reminder, which is repeated in part on the form:
Under Rule 14a-8(j), a company seeking to exclude a shareholder proposal must file its reasons with the Commission no later than 80 calendar days before it files its definitive proxy statement and form of proxy with the Commission. The staff will endeavor to respond to all requests within this time frame.
My understanding right now is that the Staff really is asking for the “print date” versus the “filing date” in this field, to help manage workflow. Many companies had to follow up last year to nudge the Staff for a response in time to print. But you should know that even though the Staff understands that the print date is typically prior to the date the proxy is filed with the SEC, they also notice if there’s a wide gap between the date you give them and the filing date, and they want companies to be forthcoming with accurate info.
The form also emphasizes that no-action responses represent “informal” advice:
The Division of Corporation Finance undertakes to aid those who must comply with Exchange Act Rule 14a-8 by offering informal advice and determining, generally, whether or not it may be appropriate in a particular matter to recommend enforcement action to the Commission. In connection with a shareholder proposal under Rule 14a-8, the Division’s staff considers the information furnished to it by the company in support of its intention to exclude the proposal from the company’s proxy materials, as well as any information furnished by the proponent or the proponent’s representative.
Although Rule 14a-8(k) does not require any communications from shareholders to the Commission’s staff, the staff will always consider information concerning alleged violations of the statutes and rules administered by the Commission, including arguments as to whether or not activities proposed to be taken would violate the statute or rule involved. The receipt by the staff of such information, however, should not be construed as changing the staff’s informal procedures and proxy review into a formal or adversarial procedure.
It is important to note that the staff’s no-action responses to Rule 14a-8(j) submissions reflect only informal views. The determinations reached by the staff in connection with these submissions do not and cannot adjudicate the merits of a company’s position with respect to the proposal. Only a court, such as a U.S. District Court, can decide whether a shareholder proposal can be excluded from a company’s proxy materials. Accordingly, a discretionary determination not to recommend or take Commission enforcement action does not preclude a proponent, or any shareholder of a company, from pursuing any rights he or she may have against the company in court should the company’s management omit the proposal from the company’s proxy materials.
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