Here’s something that John blogged yesterday on DealLawyers.com:
Last month, Vice Chancellor Laster refused to dismiss claims challenging a controlled corporation’s decision to move its jurisdiction of incorporation from Delaware to Nevada. In reaching that decision, the Vice Chancellor concluded that because the reincorporation would reduce the litigation rights of stockholders, it involved a non-ratable benefit to the controller & the decision should be evaluated under the entire fairness standard.
On Thursday of last week, Vice Chancellor issued a subsequent decision in the case denying the defendants’ application for an interlocutory appeal of the decision. In doing so, he clarified that a controlled corporation’s decision to move from Delaware won’t invariably be subject to entire fairness review:
The defendants also seek to bolster their argument for interlocutory appeal by asserting that the Opinion “precludes any allegedly controlled company from leaving the State without satisfying entire fairness review . . . .” The defendants reach that conclusion by observing that to satisfy the MFW standard, a controlled company must form a special committee of disinterested directors. The defendants argue that “under the Court’s reasoning, it is unclear when, if ever, there would be directors who are disinterested in a decision to move to a jurisdiction that provides greater litigation protection to those directors.”
The taint of alleged self-interest that the Opinion credited resulted from the inferably material reduction in litigation exposure that a fiduciary who otherwise would continue to serve under a Delaware regime could achieve by moving to a Nevada regime. The equation has two variables: (i) serving as a corporate fiduciary under Nevada law in lieu of (ii) otherwise serving as a corporate fiduciary under Delaware law. To remove the taint, remove one variable.
Vice Chancellor Laster then went on to illustrate how the company could address either of these variables. First, the transaction could be approved by a committee of directors who had submitted resignations that would become effective upon reincorporation in Nevada. Since those directors would not benefit from the enhanced protection Nevada provided, they wouldn’t be interested in the transaction.
Alternatively, the Vice Chancellor the board could add new directors who would serve as a committee to consider the reincorporation proposal, and who would submit resignations that would become effective if the reincorporation was not approved. These directors would also recuse themselves from any other matters acted upon by the board, thus eliminating their exposure to liability for those decisions.
The Vice Chancellor concluded that the new directors wouldn’t have served meaningfully as fiduciaries of the Delaware entity (other than with respect to the reincorporation), and that “it would be hard for a plaintiff to argue that the new directors were gaining any relative benefit from moving to the new jurisdiction, because the new directors would never face the prospect of continuing to serve unless the corporation moved to the new jurisdiction.”
Join us tomorrow at 2 p.m. Eastern for our webcast on “The SEC’s Climate Disclosure Rules: Preparing for the New Regime” – to hear Orrick’s J.T. Ho, Goodwin’s and TheCorporateCounsel.net’s Dave Lynn, Chevron’s Rose Pierson, and Persefoni’s Kristina Wyatt cut through the morass of information on the new rules. They’ll explain what you need to know about the new disclosure requirements – and they’ll share practical advice on building the controls & infrastructure to comply with them.
Members of this site are able to attend this critical webcast at no charge. 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. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
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Earlier this month, SEC Enforcement continued its series of “related party transaction” cases, by announcing a settlement with a footwear & fashion company that defined my ’90s style. Here’s an excerpt:
According to the SEC’s order, from 2019 through 2022, Skechers did not comply with related person transaction disclosure requirements when it failed to disclose its employment of two relatives of its executives and did not disclose a consulting relationship involving a person who shared a household with one of its executives. Furthermore, according to the SEC’s order, for multiple years, Skechers failed to disclose that two of its executives owed more than $120,000 to the company for personal expenses that had been paid for by Skechers but not yet reimbursed by the executives.
The alleged violations resulted from omitting RPT disclosure from proxy statements, which were incorporated into the company’s reports on Form 10-K. The difficulty with RPT disclosures is that not only do you need to accurately describe the relationships you know about, but you also need to put controls in place to learn about the relationships in the first place. Sometimes it can come as a surprise to directors and officers that the compensation arrangements of their gainfully employed relatives must be disclosed. The disclosure consequences of expense reimbursement timing also may not be front-of-mind.
Reading between the lines of this 5-page order, which notes the company’s cooperation and remedial policies & procedures (including training), and the relatively light $1.25 million penalty, these items may have fallen between the cracks despite overall good policies and no other skeletons in the closet. The company agreed to the order and penalty without admitting or denying the findings.
Not every company is so “lucky” when Enforcement comes knocking. As you finalize your proxy statement, this case gives you the opportunity to revisit any nagging doubts about your RPT disclosures. You can get practical pointers about how to go about doing that from the transcript of our December webcast, “Related Party Transactions: Refresher & Lessons Learned from Enforcement Focus.”
Here’s something that my colleague Zach blogged today over on PracticalESG.com:
Wow – things are moving fast with the SEC’s Climate-related Disclosure Rules. Despite being less than a month old and not even effective, they are already being litigated by a variety of plaintiffs. That litigation has already jumped through several procedural hoops. First, the Fifth Circuit Court of Appeals stayed the Rule, then the SEC moved to consolidate the cases, landing the consolidated litigation in the Eighth Circuit. Now, the Fifth Circuit has lifted their stay as a procedural matter. A recent Cooley blog states:
“Today, the Fifth Circuit ordered the transfer of the petition to the Eighth Circuit and the dissolution of the administrative stay. It’s worth noting that one of the three judges, Judge Jones, indicated her belief that the docket should stay as is pending transfer. Whether the stay will be reinstituted by the Eighth Circuit remains to be seen.”
It is worth noting that lifting the stay was not an action of the Eighth Circuit Court of Appeals but of the Fifth Circuit in transferring the case, essentially giving the Eighth Circuit a blank slate to work from. This means that the stay could very well be reimplemented by the Eighth circuit once proceedings ramp up. Normally we would expect that to take some time, but litigation of this rule seems to have warp engines.
In this 17-minute episode of the “Women Governance Trailblazers” podcast, Courtney Kamlet & I interviewed former SEC Acting Chair and Commissioner Allison Herren Lee, who is now Of Counsel at Kohn, Kohn & Colapinto and a Senior Research Fellow at NYU Law. We discussed:
1. Allison’s career path – including what drew her to becoming a securities lawyer and what she’s doing now.
2. Surprises that Allison experienced when she transitioned from being an SEC Staffer to being a Commissioner.
3. Allison’s proudest moment as a Commissioner.
4. Allison’s thoughts on how the Commission can balance the goals of investor protection and consistent disclosure with the risk of pushing capital formation to private markets.
To listen to any of our prior episodes of Women Governance Trailblazers, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.
The Eight Circuit Court of Appeals won the lottery that was used to determine the court that will hear the challenges to the SEC’s climate disclosure rules. As this Bloomberg Law article notes, the Judicial Panel on Multidistrict Litigation selected the Eighth Circuit based on its lottery system, and the challenges that have been filed in six different circuits will all be consolidated in the Eighth Circuit. The Eight Circuit covers Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. The Eighth Circuit was likely not one of the venues that the SEC was hoping for when the lottery was conducted. The Bloomberg Law article notes:
Litigation over whether the SEC can require public companies to disclose their greenhouse gas emissions and other climate-related information to investors will be consolidated and reviewed by the conservative-leaning Eighth Circuit, as the result of a lottery drawing Thursday.
The Judicial Panel on Multidistrict Litigation lottery selected the US Court of Appeals for the Eighth Circuit as the venue for hearing a case consolidating nine lawsuits against the March 6 Securities and Exchange Commission regulations filed in six different circuits, according to an order. Of the St. Louis-based court’s 17 judges, only one was appointed by a Democratic president.
Among the matters for the Eighth Circuit to consider will be whether the stay on the SEC’s rules that was ordered by the Fifth Circuit should remain in place going forward. If you want to get in on some lottery action yourself, consider the buying a ticket for Saturday’s Powerball drawing, where the jackpot has soared to an estimated $750 million!
For more details on developments with the SEC’s climate disclosure requirements, be sure to check out our coverage on PracticalESG.com. If you’re not yet a member of PracticalESG.com, subscribe online, email sales@ccrcorp.com or call 800.737.1271.
Back at the beginning of the 2023 proxy season, new SEC rules went into effect to require the furnishing of a PDF of the company’s Rule 14a-3 annual report via the EDGAR system under the header submission type “ARS,” replacing a requirement to send hard copies of the annual report to the SEC (which the Staff had thankfully deemed satisfied by posting the annual report on the company’s website). Perhaps given the timing of this new requirement, the implementation was a bit rocky last proxy season, and questions continue to persist. The 2024 Annual Meeting Handbook published by Latham and DFIN describes the requirement as follows:
In 2022, the SEC adopted amendments to Rule 101 of Regulation S-T that mandate the electronic submission of annual reports to shareholders in .pdf format on “EDGAR,” the SEC’s Electronic Data Gathering, Analysis, and Retrieval system. Effective from January 2023, the amended rule applies to both standalone “glossy” annual reports and annual reports that use the “10-K wrap” approach, under which several “glossy” pages — such as a cover page and a letter to shareholders — are wrapped around the Form 10-K. The annual report should be filed on EDGAR as an “ARS” filing. The ARS submission is due no later than the date on which the annual report is first sent or given to shareholders. The amendments replace the previous requirement that such reports be furnished in paper form to the SEC or on a company’s corporate website. While publishing the annual report on a company’s corporate website is now optional under the amended rules, companies are still required to post a copy of the annual report to a website other than EDGAR pursuant to Rule 14a-16(b) of the Exchange Act.
For the 2024 proxy season, companies should now have factored the ARS submission into their proxy filing and annual meeting timeline. The PDF that is submitted as the ARS is usually filed right after the DEF 14A has been filed. These days, many companies use the “Form 10-K Wrap” approach to the annual report, where the additional Rule 14a-3 requirements are met by appending additional pages to the Form 10-K. Unlike a Form 10-K filing, the ARS submission is not required to be tagged using XBRL. Note that the new EDGAR submission requirement does not affect anything about the delivery of the Rule 14a-3 annual report. In this regard, Rule 14a-3(b) requires that the proxy statement be “accompanied or preceded by an annual report,” and, under Rule 14a-16, the proxy statement and annual report have to both be posted online at the same time.
Earlier this week, I highlighted Chair Gensler’s YouTube video describing the SEC’s concerns with “AI washing.” As this Morrison & Foerster alert notes, the SEC recently took action against two investor advisers for their alleged AI washing activities. The alert states:
On March 18, 2024, the SEC announced—in videos posted on YouTube and Twitter—regulatory actions against two investment advisers for “AI washing,” a practice defined by the SEC as “making false artificial intelligence-related claims.” Coming on the heels of the SEC proposing new rules in 2023 for investment advisers and broker-dealers using “predictive data analytics,” and the SEC’s joint alert with the Financial Industry Regulatory Authority (FINRA) and the North American Securities Administrators Association (NASAA) flagging concerns about increasing investment frauds involving the use of artificial intelligence, it is clear that the SEC will be focused on artificial intelligence in the months ahead.
Indeed, SEC Enforcement Director Gurbir Grewal confirmed as much in remarks made at the annual gathering of securities practitioners hosted by the Securities Industry and Financial Markets Association (SIFMA), where he called attention to the AI washing cases on the very day they were announced. Given widespread reports in 2023 that the SEC launched a sweep of investment advisers to gather information regarding their use of artificial intelligence, we expect additional AI-related cases to follow. Just as the SEC announced its focus on the ESG space by bringing “greenwashing” cases based on precedent established in other contexts, the Commission has now applied similar precedent to remind regulated entities that representations about the use of AI will face scrutiny.
While these recent actions were focused on SEC-regulated entities, it would not be surprising if the SEC announces actions against public companies in the near future, given the SEC’s professed focus on this area amidst all of the AI hype. I wonder if AI can be instructed to craft disclosure that does not involve AI washing? That is perhaps an existential question for us all.
Earlier this week, the SEC adopted technical amendments to the share repurchase disclosure requirements that were originally adopted in May 2023 for the purpose of reflecting the Fifth Circuit’s vacatur of the rule amendments in the regulatory text that appears in the Code of Federal Regulations (CFR).
As I had noted in the blog last month, the vacated rule amendments were still showing up in the text of the regulations, prompting Corp Fin to issue an unusual announcement pointing folks in the direction of the pre-amendment rule text.
Now, the Commission has officially adopted these technical amendments to revise the CFR to reflect the court’s vacatur of the May 2023 share repurchase disclosure amendments, dialing the text of the rules back to pre-amendment language. These technical amendments will go into effect when the adopting release is published in the Federal Register, but of course the “old” rule text is already in effect by virtue of the Fifth Circuit’s December 19, 2023 decision to vacate the May 2023 rule amendments.
In my blog series this week on the SEC’s climate disclosure rules, I have been tackling various aspects of the new rules (and the subsequent fallout) that I find interesting, recognizing that a more complete discussion of the requirements will be addressed in our upcoming webcast next Wednesday and in the next issue of The Corporate Counsel. Today I want to tackle the new safe harbor that the SEC adopted to cover certain portions of the climate disclosure requirements.
Whenever I ponder safe harbors, I always think about the rant that my old friend Marty Dunn would inevitably engage in whenever the topic of safe harbors came up. In his best whiny lawyer voice, he would talk about how when lawyers were given broad principles-based rules or statutory requirements to work with, they would say “this is too hard to figure out, we really need a safe harbor,” but then if you adopt a more detailed requirement, the whiny lawyers would say “this is too prescriptive, you haven’t given us enough flexibility to apply this to particular situations.” Such are the laments of a man who spent almost twenty years of his life working on rulemakings and providing interpretative guidance at the SEC!
In the case of the climate disclosure rulemaking, the SEC ended up with a safe harbor that was not originally proposed. The Commission had proposed a safe harbor for Scope 3 emissions data to mitigate potential liability concerns that companies would have had about providing emissions information derived largely from third parties in a company’s value chain. The proposed safe harbor would have provided that disclosure of Scope 3 emissions by or on behalf of the company would have been deemed not to be a fraudulent statement, unless it was shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith. Obviously, this safe harbor approach was no longer necessary once the Commission did not proceed with a Scope 3 disclosure requirement.
In the proposing release, the Commission did actually solicit comment on whether to provide a safe harbor for disclosures related to a company’s use of internal carbon pricing, scenario analysis, and a transition plan, while also requesting comment on whether it should adopt a provision similar to Item 305(d) of Regulation S-K that would apply the PSLRA safe harbors to forward-looking statements made in response to specified climate-related disclosure items, such as proposed Item 1502 pertaining to impacts of climate-related risks on strategy. Marty’s “whiny lawyers” out there responded in the affirmative, essentially on the principle that “everybody loves a safe harbor, right?” The Commission obliged, adopting Item 1507 of Regulation S-K to provide a safe harbor from private liability for climate-related disclosures (excluding historical facts) pertaining to transition plans, scenario analysis, the use of an internal carbon price, and targets and goals.