While we’re on the topic of SEC staffing, Democratic senators Elizabeth Warren and Mark Warner have asked the GAO to investigate the impact of staffing cuts and related actions on the SEC’s ability to protect investors and comply with its statutory mandates. According to USA Today, the GAO is on the case:
The U.S. Government Accountability Office plans to scrutinize changes at the U.S. Securities and Exchange Commission, including any led by the White House or Elon Musk’s Department of Government Efficiency, according to a letter sent to Democratic lawmakers on Capitol Hill.
The GAO, Congress’ nonpartisan research arm, told Sens. Elizabeth Warren and Mark Warner it will review the SEC’s recent efforts to cut staff, end leases and consolidate its work, according to a copy of the April 8 letter seen by Reuters.
The lawmakers last month pressed the watchdog to investigate after Reuters and other media reported DOGE’s arrival and other major changes at the regulator, which oversees U.S. capital markets.
The report says that the GAO would begin its work within the next three months.
The senators’ letter also asked the GAO to conduct a detailed review of actions taken by SEC leadership, including acting leadership, to pause or halt enforcement and supervisory actions that were ongoing at the agency as of January 20, 2025, and to look into the involvement of the White House and DOGE in any of those decisions.
I don’t think there’s a more intimidating moment in a corporate lawyer’s career than the first time they’re asked to make a presentation to a board of directors. Heck, even experienced lawyers get a little nervous when they’re presenting to a board they haven’t worked with in the past or addressing a particularly complex topic. In this month’s issue ofThe Boardroom Insider, Ralph Ward offers some tips from personal development coach T.J. Walker on making more effective board presentations. I think this one is particularly relevant for lawyers:
You are the expert on the topic you’re addressing to directors, so the temptation is to stuff in every factoid and data bit you’ve accumulated. “The biggest problem I see is trying to cover too many facts. You don’t want them to think you’re stupid or unprepared, so you tell them everything you know.” This overwhelms the directors, and sets them to checking their cell phones. Write up your board talking points. Condense them. Then condense them some more.
Walker also cautions against being too formal in your approach – writing out and memorizing your comments will put the board to sleep. It’s okay to make a verbal slip every now and again, because trying to perfectly script yourself will cause any stumble to throw you off and will make you less flexible in responding to questions from directors.
In prior blogs, Liz and Dave touched on risk factor and MD&A disclosure issues arising out of President Trump’s tariff-related actions. However, I wanted to address those issues again, because if you’re preparing your first quarter Form 10-Q, the timing of the President’s actions and the potential for another shoe to drop in less than 90 days create almost perfect conditions for companies to stumble into traps for the unwary when addressing these line-item disclosure requirements.
“Liberation Day” occurred on April 2nd, shortly after calendar year companies completed their first fiscal quarter. As a result, the financial statements for the first quarter that will appear in Form 10-Q filings typically won’t reflect the impact of the current tariff regime or the one that may be in place in 90 days. However, it’s pretty clear that most companies are already experiencing the impact of the change in tariff policy on their business – and that’s where the potential traps for the unwary start to unfold.
Under Item 105 of Regulation S-K, the fact that tariffs only began to impact a company’s business after the end of the quarter means that drafters should be particularly conscious of the “hypothetical” risk factor issue when updating risk factor disclosure. With events unfolding so rapidly, today’s risk may be tomorrow’s reality, and those responsible for drafting the 10-Q need to pay even closer attention to developments in the business than they have for previous filings.
There’s reason to think that in its current configuration, the SEC may be less enthusiastic about hypothetical risk factors as a basis for enforcement actions, but the same probably can’t be said for the plaintiffs’ bar. Since that’s the case, in updating risk factor disclosure companies should remember the Fifth Circuit’s admonition that “[t]o warn that the untoward may occur when the event is contingent is prudent; to caution that it is only possible for the unfavorable events to happen when they have already occurred is deceit.” Huddleston v. Herman & MacLean, 640 F. 2d 534, 544 (5th Cir. 1981). If you make disclosure in a risk factor, you need to be very clear about events that have occurred and those that may occur – otherwise you’re likely only digging a deeper hole.
Second, events that are currently impacting a company’s business but that are not reflected in the financial statements included in a periodic report are precisely what Item 303’s “known trends” disclosure requirement is intended to capture. What’s more, companies aren’t just dealing with the current tariff regime, but the more draconian one that may be in place a few months from now. That future tariff regime is a contingency, and when it comes to contingencies, the SEC’s position is that known trends disclosure under Item 303 is triggered by any contingent event that is “reasonably likely” to occur and would be material if it did. Here’s how the SEC characterized its standard in its 2020 MD&A Release:
[W]hen applying the “reasonably likely” threshold, registrants should consider whether a known trend, demand, commitment, event, or uncertainty is likely to come to fruition. If such known trend, demand, commitment, event or uncertainty would reasonably be likely to have a material effect on the registrant’s future results or financial condition, disclosure is required.
Known trends, demands, commitments, events, or uncertainties that are not remote or where management cannot make an assessment as to the likelihood that they will come to fruition, and that would be reasonably likely to have a material effect on the registrant’s future results or financial condition, were they to come to fruition, should be disclosed if a reasonable investor would consider omission of the information as significantly altering the mix of information made available in the registrant’s disclosures.
The TL;DR version of this standard is that if a contingent event likely would be material if it occurred and management can’t conclude that it isn’t reasonably likely to occur, then the MD&A discussion must address the consequences of that event assuming that it occurred. So, when assessing their MD&A disclosure obligations, companies should consider the implications of the current tariff regime and, unless they conclude that it’s not reasonably likely to be implemented, the more draconian one that may come into effect in a few months.
ISS-Corporate has a new report on the number of women serving as named executive officers in Russell 3000 companies. The report says that while there’s been some slow improvement in recent years, women are underrepresented among NEOs. Here are some of the key findings:
– Women occupy less than 17% of the NEO positions at Russell 3000 companies, and over the last five years that percentage has only grown by about 1% per year.
– The good news is that over the past 10 years, the percentage of women serving in NEO positions has doubled, going from 9.5% to 16.4%.
– The industries with the highest percentage of female NEOs are Household & Personal Products (25.2%), followed by Utilities (24.2%) and Consumer Discretionary Distribution & Retail (23%). The laggards are Semiconductors & Semiconductor Equipment (11%), Energy (12.2%), and Automobiles and Components (13.1%).
The report also found that women are least likely to hold the CEO position (7%), and most likely to hold a Human Resources position (68%).
The last few weeks have been a rollercoaster ride for investors, but a recent Financial Times article says that despite the wild gyrations that have followed “Liberation Day,” so far markets haven’t experienced a liquidity crisis. The article says that last year’s move to T+1 settlement is a big part of the reason they haven’t:
Shorter settlement time not only cuts the collateral that traders have to put up, but also reduces the risk that counterparties have disappeared by the time a trade settles. During periods of extended volatility, that fear can lead to a reduction in liquidity that, in turn, leads to even more volatility.
The article also notes that in addition to the direct benefit of a shorter settlement time, the investments made in preparation for T+1 improved communications among market participants and allowed them to better identify and address risks before they escalated out of control.
Yesterday, just over a year after adopting its climate change disclosure rules, the SEC announced that it had voted to discontinue its defense of those rules. The announcement went on to say that a letter had been sent to the court stating that the agency was withdrawing its defense of the rules and that its counsel was no longer authorized to advance the arguments in the brief that the SEC had filed. Here’s an excerpt from the SEC’s press release:
SEC Acting Chairman Mark T. Uyeda said, “The goal of today’s Commission action and notification to the court is to cease the Commission’s involvement in the defense of the costly and unnecessarily intrusive climate change disclosure rules.”
The rules, adopted by the Commission on March 6, 2024, create a detailed and extensive special disclosure regime about climate risks for issuing and reporting companies.
States and private parties have challenged the rules. The litigation was consolidated in the Eighth Circuit (Iowa v. SEC, No. 24-1522 (8th Cir.)), and the Commission previously stayed effectiveness of the rules pending completion of that litigation. Briefing in the cases was completed before the change in Administrations.
Commissioner Crenshaw filed a blistering dissenting statement to the Commission’s decision. Here’s an excerpt:
By its letter, we are apparently letting the Climate-Related Disclosures Rule stand but are withdrawing from its defense in court. This leaves other parties, including the court, in a strange and perhaps untenable situation. In effect, the majority of the Commission is crossing their fingers and rooting for the demise of this rule, while they eat popcorn on the sidelines. The court should not take the bait.
Rather, the SEC should do its job. It should defend its existing rule in litigation. If the agency chooses not to defend that rule, then it should ask the court to stay the litigation while the agency comes up with a rule that it is prepared to defend (be it by rescission or otherwise, but certainly in accordance with APA mandates). At the very least, if the court continues without the Commission’s participation, it should appoint counsel to do what the agency will not – vigorously advocate in the litigation on behalf of investors, issuers and the markets.
The Commission’s actions are inconsistent with the APA, historical practice, and they embody bad governance. We do not have license to wholesale abandon agency action simply because the now-constituted Commission would not have supported the rule when it passed. The new majority cannot now rewrite history to change the outcome of a properly held Commission vote.
The SEC’s action does appear to leave things in some kind of weird judicial limbo, but I’m sure we’ll hear more about what happens next on the climate change disclosure rules – from the court and others – over the weeks and months to come.
By the way, if you’re wondering whether the fact that yesterday was Opening Day had anything to do with the title of this blog, the answer is of course it did!
Earlier this week, Delaware Gov. Matt Meyer signed the highly contested 2025 amendments to the DGCL into law. The legislation amends Section 144 of the DGCL to establish broad safe harbors for transactions with directors and officers and controlling stockholders. It also significantly narrows the information available pursuant to a books & records demand under Section 220 of the DGCL.
The new safe harbor for transactions with directors and officers is contained in Section 144(a) of the DGCL and departs from existing Delaware precedent by allowing a transaction approved by a special committee of directors to qualify for the safe harbor no matter when that committee was formed. Delaware case law previously required such a committee to be established ab initio, before any economic terms of the proposed transaction were discussed. The new safe harbor also departs from the requirement that the special committee must be comprised entirely of disinterested directors.
The statute also creates a rebuttable presumption that a director of a public company is disinterested if the board determines that the director satisfies applicable stock exchange standards. In order to rebut this presumption, the plaintiff must show “substantial and particularized facts” indicating that the director was conflicted.
These are significant changes, but the provisions of the legislation that have generated the most heated debate are those establishing safe harbors for transactions involving a controlling stockholder. Here’s an excerpt from Troutman Pepper Locke’s memo on the amendments describing the safe harbor for non-going private transactions with a controlling stockholder:
Under amended Section 144(b) of the DGCL, a conflict transaction involving a controlling stockholder (but other than a go-private transaction) may not be the subject of equitable relief or monetary damages against an officer, director, or the controlling stockholder by reason of a fiduciary breach if:
1. The facts as to the transaction are disclosed to a committee to which the board has expressly delegated the authority to negotiate and to reject the transaction, and such transaction is approved (or recommended for approval) in good faith and without gross negligence by a majority of the disinterested directors then serving on the committee (and the committee must consist of at least two directors, each of whom has been determined by the board to be disinterested);
2. The transaction is conditioned, at the time it is submitted to stockholders for their approval or ratification, on the approval of, or ratification by, disinterested stockholders, and the controlling stockholder transaction is approved or ratified by an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders; or
3. The transaction is fair as to the corporation and its stockholders (essentially invoking Delaware’s “entire fairness” standard of review)
Under current Delaware law, a conflicted controlling stockholder transaction must be approved by both a majority of the disinterested directors and by a majority of the disinterested stockholders. Why is this controversial? Well, among other things, the ability to authorize such a transaction with a disinterested director vote would likely insulate compensation arrangements like the one at issue in Tornetta v. Musk from attack.
What’s more, Elon Musk’s compensation arrangements wouldn’t even be subject to challenge as a conflicted controller transaction under the new regime, because the statute precludes a stockholder owning less than one-third of the voting power of the company from being regarded as a controlling stockholder.
For going private transactions, the statute preserves some of the existing MFW regime by allowing controllers to avoid satisfying the entire fairness standard only if the deal is approved by both a disinterested special committee and the disinterested stockholders. However, all the changes set forth in Section 144 with respect to the timing of the special committee’s formation & its composition apply to going private transactions as well, and that’s a big departure from recent case law interpreting MFW.
We’re posting memos on the 2025 DGCL amendments in our “Delaware Law” Practice Area.
If you’re working with a company that is considering migrating from Delaware to Texas or Nevada, a recent Woodruff Sawyer blog highlights a potential advantage that those states’ corporate statutes provide over the DGCL that I haven’t seen addressed before – the potential for less expensive Side A D&O coverage:
As we explained in our article last year, a company’s state of incorporation has not historically been a material factor in D&O insurance rates or coverage terms. The wildcard here is the extent to which companies, lawyers, and insurers talk in out-loud voices about the framework for indemnification of derivative settlements and judgments. This is, of course, prohibited in Delaware, making Side A D&O insurance particularly important for directors and officers.
By contrast, indemnification of derivative suit settlements and judgments appears to be permitted in some forms in Nevada and Texas. Where companies are permitted/have an indemnification obligation for derivative settlements, and if directors are also subject to significantly more generous standards of liability, such as in Nevada, Side A D&O insurance really should be easier for insurers to write. It should also cost less than it does for a Delaware corporation. We’ll be watching this space closely.
Based on what we’ve seen so far, Delaware probably will be watching this space closely too. Stay tuned for the 2026 DGCL amendments.
Apparently, the SEC’s buyout offer to its employees has been remarkably successful – perhaps a little too successful. This excerpt from a Politico article indicates just how big the voluntary exodus of SEC staffers may turn out to be:
Hundreds of SEC staffers have agreed to voluntarily leave the agency, according to three people familiar with the matter, an exodus that stands to substantially shrink the ranks of the top Wall Street regulator.
Through a mix of different programs, including the SEC’s recently offered $50,000 buyout, more than 10 percent of the agency’s roughly 5,000-person staff is expected to leave in the coming weeks and months, said the people, who were granted anonymity to discuss the private information.
One of the people said they expect the tally will be close to if not more than 15 percent, or 750 people, as the $50,000 offer is still available to staff who voluntarily resign or retire through the end of Friday.
That’s a very big hit, and to make matters worse, Politico says these departures involve some of the agency’s most experienced staff members. Of course, all this is happening before DOGE shows up to swing a scythe through Elon Musk’s favorite federal agency.
The current commissioners have stressed that they want to make the SEC more responsive to public companies and those seeking to raise capital. For example, Commissioner Peirce has said that the SEC wants Corp Fin and OCA to engage more with public companies on difficult disclosure issues, and to communicate early and often on the timing of reviews of registration statements in order to permit issuers to have increased confidence in their offering timelines.
Those are great goals, but the agency needs lots of experienced people around if it is going to have any hope of achieving them. Right now, it looks like whether the SEC will have enough of those people to do that is an open question. In fact, it’s fair to ask just how limited the SEC’s capabilities might be once Musk finishes with them. That’s a question that Hunton’s Scott Kimpel addressed last year, and his answer isn’t comforting to companies that need guidance on difficult disclosure issues or that hope to navigate the review process for offerings without significant delay.
We’ll have to see how this all plays out, but the attrition at the SEC is a source of legitimate concern for public companies and the lawyers who advise them. It’s also incredibly ironic to think that an agency that actually makes money for the federal government may see budget cuts that jeopardize its ability to accomplish the laudable objectives that its commissioners have laid out.
The only silver lining for members of TheCorporateCounsel.net is that whatever happens at the SEC, at least we have each other – just like we have for the past 50 years.
Every day, I’m awed by the willingness of the best and brightest lawyers in the country to share their insights with our community. Their expertise has allowed us to develop the high-quality resources that our members rely upon – and that they may need to rely upon even more in the days to come. If you’re not a member, consider joining today by subscribing online, emailing us at sales@ccrcorp.com or calling us at 800-737-1271.
Under the JOBS Act, emerging growth companies are given a phase-in period to come into full compliance with certain disclosure and accounting requirements under SEC rules. A recent WilmerHale memo (p. 24) looks at the extent to which EGCs are electing to take advantage of the relief from these requirements during this phase in period.
The memo says that the percentage of EGCs opting to take advantage of the ability to submit confidential draft registration statements and to provide reduced executive compensation disclosure has remained consistently high. In contrast, practices with respect to relief available for financial disclosure and changes in accounting principles have varied over the years. This excerpt addresses how and why practices with respect to these items have varied:
– Reduced Financial Disclosure. Overall, the percentage of EGCs electing to provide only two years of audited financial statements has increased dramatically, from 27% in 2012 to 98% in 2024. From the outset, life sciences companies—for which older financial information is often irrelevant—were likely to provide only two years of audited financial statements, with the percentage choosing this option reaching 100% each year since 2022.
Technology companies—which generally have substantial revenue and often have profitable operations—were slower to adopt this practice, but the percentage providing only two years of audited financial statements grew from 22% in 2012 to 91% in 2022 and 100% in both 2023 and 2024.
– Accounting Standards Election. Through 2016, the vast majority of EGCs opted out of the extension of time to comply with new or revised accounting standards. At that time, the decision appears to have been motivated by the uncertain value of the deferred application of future, unknown accounting standards and concerns that a company’s election to take advantage of the extended transition period could make it more difficult for investors to compare the company’s financial statements to those of its peers.
Starting in 2017, a major shift occurred, with the percentage of EGCs adopting the extended transition period jumping from 11% through 2016 to 50% between 2017 and 2019 and to 93% between 2020 and 2024. This trend appears to have been motivated by the desire of many EGCs to delay the application of new revenue recognition and lease accounting standards (which became mandatory for public companies in 2018–2019) or, at a minimum, to take more time to evaluate the effects of these standards before adopting them.