On Friday, the SEC announced that EDGAR will be closed on Tuesday and Wednesday. The announcement noted that Christmas Eve is being treated as a federal holiday this year. Here’s the other relevant info from the SEC’s announcement:
Please be aware that on December 24, 2024 and December 25, 2024:
– EDGAR filing websites will not be operational.
– Filings will not be accepted in EDGAR.
– EDGAR Filer Support will be closed.
Filings required to be made on Tuesday, December 24 and Wednesday, December 25 will be considered timely if filed on December 26, 2024, EDGAR’s next operational business day.
This is our last blog before the holidays begin, and I know that this time of year makes a lot of people nostalgic, especially geriatrics like me. So, for my fellow boomers and our Gen X readers, here’s a link to a website featuring something that many of us remember fondly from our childhoods – decades of the Sears Holiday “Wishbook” and other holiday catalogues. Even if you’re not a boomer, I bet you’ll have fun visiting the National Toy Hall of Fame’s website. You’re sure to find at least a few of your childhood favorites here.
Merry Christmas and Happy Hanukkah to all those who celebrate! We’ll be back after the 25th, but blogging will be lighter than usual over the holidays.
I shared some D&O questionnaire considerations on The Proxy Season Blog in early December that I thought would be worth distributing more widely here since, after the holidays, proxy season will be “full steam ahead!” While SEC and US stock exchange rules don’t require significant adjustments to questionnaires this year, you may want to consider some potential updates — per this Bryan Cave blog and this Thompson Hine alert — given recent developments. Here are a few:
– In the section on director independence, expand the list of examples of material relationships to include close friendships or other close social ties with management, in light of the SEC settlement with a public company director, as discussed in our October 7, 2024 post.
– In the section on director expertise, collect information sufficient to assess the board’s skills cybersecurity expertise, even though the new rules do not require discussion of board-level expertise in this area.
– In the section on beneficial ownership, highlight or clarify the need to disclose margin loans or other form of pledges of issuer securities, in light of Carl Icahn’s settlement with the SEC, as discussed in our August 20, 2024 post. In addition, companies may wish to request confirmation that insiders have either not entered into, or terminated, any 10b5-1 or non-10b5-1 trading arrangements (as defined in Reg. S-K Item 408(c)) during the preceding fiscal year.
– In the section on Forms 4 and 5, remind insiders of the importance of reporting late or missed transactions, as well as the need to timely notify the company of changes in beneficial ownership, in light of the recent SEC enforcement sweep, as discussed in our October 3, 2024 post.
– In the undertakings: include the consent of the director for the disclosure regarding diversity for purposes of the Nasdaq diversity matrix or other disclosure a company may wish to make on this topic (and consider identifying any state law disclosure requirements, if applicable); and include the consent of the director or nominee to be included in the company’s proxy materials, as well as a nominee in a dissident’s proxy materials, should that become applicable, in light of universal proxy card rules.
– The SEC recently adopted amendments (collectively referred to as “EDGAR Next”) intended to enhance EDGAR’s security. Among other new requirements, applicants for EDGAR access will be required to disclose if the applicant, the account administrator(s), or the individual signing the Form ID has been convicted of or civilly or administratively enjoined, barred, suspended, or banned as a result of a federal or state securities violation. Companies may want to consider adding a question to their D&O questionnaires to address this new EDGAR Next requirement. Additionally, as the EDGAR Next question is not limited to the past 10 years, companies should carefully consider where to place the question in their D&O questionnaires.
For Nasdaq-listed companies, don’t forget to assess your approach to board diversity disclosures and update accordingly! And, as always, for 100+ pages of practical guidance, check out our “D&O Questionnaires Handbook.”
Yesterday, the SEC posted this notice & request for comment on a proposed Nasdaq rule change that would amend Listing Rules 5405 and 5505 to:
– Require that a company listing on the Nasdaq Global Market or Nasdaq Capital Market in connection with an IPO satisfy the applicable minimum Market Value of Unrestricted Publicly Held Shares (“MVUPHS”) requirement solely from the proceeds of the offering; and
– Make similar changes affecting companies that uplist to Nasdaq from the OTC market in conjunction with a public offering.
The notice explains the rationale for the proposal:
Nasdaq Listing Rules require a company to have a minimum Market Value of Unrestricted Publicly Held Shares. For initial listing on the Nasdaq Global Market, a company must have a minimum MVUPHS of $8 million under the Income Standard, $18 million under the Equity Standard, and $20 million under either the Market Value or Total Assets/Total Revenue Standards. For initial listing on the Nasdaq Capital Market, a company must have a minimum MVUPHS of $5 million under the Net Income Standard, and $15 million under either the Equity or Market Value of Listed Securities Standards.
Unrestricted Publicly Held Shares are shares that are not held by an officer, director or 10% shareholder of the company and which are not subject to resale restrictions of any kind. In the case of a company listing in conjunction with a public offering, previously issued shares registered for resale (“Resale Shares”), and not held by an officer, director or 10% shareholder of the company, are counted as Unrestricted Publicly Held Shares in addition to the shares being sold in the offering. . . .
Nasdaq has observed that the securities of companies that meet the applicable MVUPHS requirement by including Resale Shares have experienced higher volatility on the date of listing than those of similarly situated companies that meet the requirement with only the proceeds from the offering. Nasdaq believes that the Resale Shares may not contribute to liquidity to the same degree as the shares sold in the public offering.
The latest Issue of the Deal Lawyers newsletter was just sent to the printer. It is also available now online to members of DealLawyers.com who subscribe to the electronic format. This issue includes the following articles:
– 2024 Survey of Trends and Key Components of CVRs in Life Sciences Public M&A Deals
– Comment Letter Trends: Contested Election Disclosures for the 2024 Proxy Season
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without 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 sales@ccrcorp.com or call us at 800-737-1271.
Programming Note: We are now entering end-of-year mode! With the holidays just around the corner, our blogging will be more limited the next few weeks. We will be back in full force in January. Happy holidays, everyone!
Last week, Gibson Dunn released this survey of annual report cybersecurity disclosures by S&P 100 companies. The report notes that there is significant variation among the disclosures — at least partially reflecting necessary variability due to differences in company size & complexity, nature & scope of activities, industry, regulation, sensitivity of data and risk profile. Since disclosure in this area requires a special balancing act of providing investors decision-useful information and not revealing sensitive data that could be exploited, the Gibson Dunn team expects these disclosures will continue to change with the evolving cyber threat landscape and as disclosure practices converge.
To that end, the data in the report may be useful to consider as you decide whether and how to ‘tune-up’ your 10-K cyber disclosures for your next annual report filing. Here is the executive overview from the report describing the key disclosure trends:
– Materiality. The phrasing used by companies for this disclosure requirement varies widely. Specifically, in response to the requirement to describe whether any risks from cybersecurity threats have materially affected or are reasonably likely to materially affect the company, the largest group of companies (40%) include disclosure in Item 1C largely tracking Item 106(b)(2) language (at times, subject to various qualifiers); 38% vary their disclosure from the Item 106(b)(2) requirement in how they address the forward-looking risks; and 22% of companies do not include disclosure specifically responsive to Item 106(b)(2) directly in Item 1C, although a substantial majority of these companies cross-reference to a discussion in Item 1A “Risk Factors.”
– Board Oversight. Most companies delegate specific responsibility for cybersecurity risk oversight to a board committee and describe the process by which such committee is informed about such risks. Ultimately, however, the majority of surveyed companies report that the full board is responsible for enterprise-wide risk oversight, which includes cybersecurity.
– Cybersecurity Program. Companies commonly reference their program alignment with one or more external frameworks or standards, with the National Institute of Standards and Technology (NIST) Cybersecurity Framework being cited most often. Companies also frequently discuss specific administrative and technical components of their cybersecurity programs, as well as their high-level approach to responding to cybersecurity incidents.
– Assessors, Consultants, Auditors or Other Third Parties. As required by Item 106(b)(1)(ii), nearly all companies discuss retention of assessors, consultants, auditors or other third parties, as part of their processes for oversight, identification, and management of material risks from cybersecurity threats.
– Risks Associated with Third-Party Service Providers and Vendors. In line with the requirements of Item 106(b)(1)(iii), all companies outline processes for overseeing risks associated with third-party service providers and vendors.
– Drafting Considerations. Most companies organize their disclosure into two sections, generally tracking the organization of Item 106, with one section dedicated to cybersecurity risk management and strategy and another section focused on cybersecurity governance. Companies typically include disclosures responsive to the requirement to address material impacts of cybersecurity risks, threats, and incidents in the section on risk management and strategy.
The average length of disclosure among surveyed companies is 980 words, with the shortest disclosure at 368 words and the longest disclosure at 2,023 words. The average disclosure runs about a page and a half.
And don’t forget to take a look at your disclosures outside of Item 106 of Reg. S-K. The SEC enforcement actions targeting cybersecurity disclosures in the wake of an incident are continuing to roll in — with a new cease-and-desist order posted just this week focused on allegations of misleading hypothetical risk factor disclosure and omissions of material information (for example, failing to include that the accessed customer data included customer PII).
Last week, as expected from oral arguments (and for the second time this term!), SCOTUS dismissed cert as “improvidently granted” in NVIDIA Corp. v. E. Ohman J:or Fonder AB. Full disclosure, this may have happened more than twice this term, but I’m aware of these two instances because both could have impacted the way we draft risk factors and cautionary disclaimers. Here’s more from the D&O Diary:
At the outset of the current U.S. Supreme Court term, corporate and securities law observers and commentators were excited that the Court had agreed to take up two securities law cases that had significant potential to provide insights about securities lawsuit pleading standards and processes. However, as noted here, in November, the court dismissed the Facebook Cambridge Analytica case, one of the two cases the Court was to take up this term. Now, in a terse, one-line December 11, 2024, order, the Court dismissed the Nvidia case, the second of the two cases it had agreed to take up, meaning that instead of addressing two securities law cases this term, it will now not consider any securities cases.
… A dismissal on these grounds means that the Court has decided that it should not have agreed to review the case. A dismissal of this type typically occurs when the Court realizes, upon further examination, that the case does not meet the criteria for Supreme Court review or that there was some procedural or substantive issue that makes the case unsuitable for their consideration.
What is the practical implication of this outcome? Continued uncertainty.
The Supreme Court’s dismissal of the case also means that the Court now will not weigh in on the interesting and important issues that the case presented. The question of what a plaintiff relying on internal documents in support of a securities law claim must plead is a recurring one. The question of the extent to which a plaintiff can rely on expert witness testimony to support the sufficiency of a securities law claim also is recurring. The lower courts must now deal with these questions without Supreme Court guidance on the issue, and in that regard must deal with the split in the circuit on these issues that Nvidia has cited in support of its petition for the writ of certiorari.
The split in the circuits, usually of such significant concern to the Supreme Court, is a particularly noteworthy concern with respect to these questions; Nvidia had argued in its petition for the writ that the positions of the Second and Ninth Circuits on these issues diverge, meaning that, with diverging positions in the two Circuits with the greatest volume of securities litigation activity, resulting in potentially diverging case outcomes.
Last week, the SEC announced settled enforcement proceedings against Cantor Fitzgerald for its alleged role in causing two SPACs that it controlled to make misleading statements to investors about the status of their discussions with potential acquisition targets ahead of their initial public offerings (IPOs). This excerpt from the agency’s press release summarizes the allegations:
The SEC’s order finds that Cantor Fitzgerald caused the SPACs in their SEC filings to deny having had contact or substantive discussions with potential business combination targets prior to their IPOs. However, the Order finds that at the time of each SPAC’s IPO, Cantor Fitzgerald personnel, acting on behalf of the SPACs, had already commenced negotiations with a small group of potential target companies for the SPACs, including with View and Satellogic, the companies with which the SPACs eventually merged.
Without admitting or denying the SEC’s allegations, Cantor Fitzgerald agreed to a cease & desist order and a civil money penalty of $6.75 million.
What makes this proceeding interesting isn’t really the allegations themselves, but a dissenting statement issued by Commissioner Uyeda covering several SPAC-related enforcement actions. In that statement, the Commissioner argues that SPACs are different than operating companies in ways that matter to deciding when preliminary merger negotiations should be regarded as “material”:
The U.S. Supreme Court in Basic v. Levinson adopted the probability/magnitude test for assessing the materiality of preliminary merger negotiations. The Second Circuit case cited by Basic for this test involved a small corporation that would be merged out of existence. For this corporation, the Second Circuit stated, and Basic agreed, that its merger was “the most important event that can occur in [its] life, to-wit, its death” and accordingly, information about the merger “can become material” before there is an agreement on the acquisition price and structure.
Unlike the corporation discussed in Basic, each SPAC respondent’s stated purpose was to acquire a target company. The SPAC’s “death” is planned for and sought after from the time the SPAC is formed. Given this distinction, the probability/magnitude test, as applied to information concerning a SPAC’s preliminary merger negotiations, should result in such information not becoming material until a time much closer to the SPAC and target company reaching a binding agreement on the acquisition price and structure. Any discussions prior to such time, even if they are “substantive,” are part of the day-to-day operations of a SPAC.
With the upcoming change in administrations, my guess is that Commissioner Uyeda’s views on this topic may be more influential – and that today’s dissenting statement could well become tomorrow’s policy.
Yesterday, ISS announced updates to its benchmark voting policies that will apply to shareholder meetings taking place on or after February 1, 2025. As previewed when the proposed changes were released for comment, the updates are pretty light. Here are the highlights from the executive summary with the updated policy language from the updates document following each topic:
– Poison Pills – Updates the policy to increase transparency of the factors considered in the case-by-case evaluation of poison pills.
Vote case-by-case on nominees if the board adopts an initial short-term pill (with a term of one year or less) without shareholder approval, taking into consideration:
▪ The trigger threshold and other terms of the pill;
▪ The disclosed rationale for the adoption;
▪ The context in which the pill was adopted, (e.g., factors such as the company’s size and stage of development, sudden changes in its market capitalization, and extraordinary industry-wide or macroeconomic events);
▪ A commitment to put any renewal to a shareholder vote;
▪ The company’s overall track record on corporate governance and responsiveness to shareholders; and
▪ Other factors as relevant.
– SPAC Extensions – Updates the policy to codify current policy application to recommend support for extension requests of up to one year from the original termination date.
Generally support requests to extend the termination date by up to one year from the SPAC’s original termination date (inclusive of any built-in extension options, and accounting for prior extension requests).
Other factors that may be considered include: any added incentives, business combination status, other amendment terms, and, if applicable, use of money in the trust fund to pay excise taxes on redeemed shares.
– Natural Capital – Terminology update to replace the reference to “General Environmental Proposals” by the updated reference of “Natural Capital-Related and/or Community Impact Assessment Proposals”.
Vote case-by-case on requests for reports on policies and/or the potential (community) social and/or environmental impact of company operations, considering where relevant:
▪ Alignment of current disclosure of applicable policies, metrics, risk assessment report(s) and risk management procedures with relevant, broadly accepted reporting frameworks;
▪ The impact of regulatory non-compliance, litigation, remediation, or reputational loss that may be associated with failure to manage the company’s operations in question, including the management of relevant community and stakeholder relations;
▪ The nature, purpose, and scope of the company’s operations in the specific region(s);
▪ The degree to which company policies and procedures are consistent with industry norms; and
▪ The scope of the resolution.
Mark your calendars now for our upcoming webcast scheduled for Wednesday, January 22, 2025 at 2 pm Eastern, “ISS Policy Updates and Key Issues for 2025.” Marc Goldstein, ISS’s Head of US Research, will share insights with the corporate community. Davis Polk’s Ning Chiu and Jasper Street Partners’ Rob Main will join Marc to provide color commentary.
As John shared last week, the 5th Circuit held that the SEC exceeded its authority when it approved Nasdaq’s board diversity rule in Alliance for Fair Board Recruitment v. SEC (5th Cir.; 12/24) — applying a narrow interpretation of the scope of the authority granted by the Exchange Act. On the Business Law Prof Blog, Tulane Law Prof Ann Lipton comments on the potentially broader implications of this narrow reading:
[W]hile there surely are those who approach things differently – I’d argue the mainstream view today is that the meta purpose of the securities laws is to ensure that investors have sufficient information to accurately price securities (according to risk/return), with the broader goal of ensuring efficient capital allocation throughout the economy. We want investors to give money to useful and productive businesses, and not to businesses that will set resources on fire, and the securities laws facilitate that. (Here are two cites; there are countless more)
Fraud prevention suggests a much narrower scope for SEC disclosure regulation than does regulation for accuracy in pricing.
So, it’s not surprising that the Fifth Circuit went from there to hold that the diversity disclosure rule does not serve the narrow purpose of preventing fraud. At one point, it went so far as to suggest the rule might be barred even if it provided financially useful information to investors:
“Moreover, SEC may have asked the wrong question. SEC considered evidence respecting the effects of diversity on firm performance. See JA9. But it is not clear what firm performance has to do with the Exchange Act. Of course, investors generally like it when firms make more money, but Congress did not pass the Exchange Act for the purpose of maximizing shareholder wealth. It passed the Act to protect investors from fraud, manipulation, speculation, and anticompetitive exchange behavior. Firm performance has little to do with those objectives.”
Ann says she expected this broad rhetoric suggesting a “dramatic curtailment of all securities disclosure requirements” to be applied to the climate rules (in the event of a decision striking them down) resulting in “spillover effects to other, more traditional securities disclosure rules, which would damage the entire system.” “How ironic,” she continues, “that the Fifth Circuit did that anyway with the diversity rules – only it did so, as far as I can see, quite intentionally, in what looks like the first step in a project to pare back the securities laws across the board.”
It seems that the securities laws may be in for a dramatic shift in the coming years — not just because of the incoming administration.