Earlier this year, the NYSE submitted a proposed rule change to the SEC that would extend the period during which a SPAC that hasn’t completed a deSPAC can remain listed on the Exchange, if that SPAC has entered into a definitive agreement for its deSPAC. On Tuesday, the SEC issued a release instituting proceedings to determine whether or not to approval the rule proposal. While the SEC stressed that it hasn’t determined whether or not to approve the rule, this excerpt from the release suggests it’s heading toward a “thumbs down” of the NYSE’s proposal in its current form:
The Exchange has proposed a fundamental change to the well-established requirement that a SPAC’s Business Combination must be consummated within three years or face delisting, and is seeking to extend this time requirement to allow up to 42 months for a SPAC to complete its Business Combination if the SPAC has entered into a “definitive agreement” to consummate its Business Combination.20 In support of the proposed change, the Exchange states that once a definitive agreement is entered into, a SPAC “represents a significantly different investment” because more information will be available to investors about the operating asset the SPAC intends to own.
The three-year limit, however, was put in place to provide protection for public shareholders by restricting the time period a SPAC could retain shareholder funds without consummating a Business Combination. The Exchange does not address how the proposal would affect shareholder protection or why it is appropriate for a SPAC to retain shareholder funds past the current maximum time period of three years and how that would be consistent with the investor protection and public interest requirements of Section 6(b)(5) of the Act.
Accordingly, the Commission believes there are questions as to whether the proposal is consistent with Section 6(b)(5) of the Act and its requirements, among other things, that the rules of a national securities exchange be designed to protect investors and the public interest and whether the Exchange has provided an adequate basis for the Commission to conclude that the proposal would be consistent with Section 6(b)(5) of the Act.
The SEC also points out that the proposal to extend the listing raising concerns under the Investment Company Act, since the SEC noted in the adopting release for its SPAC disclosure rules that SPACs that hang around for an extended period with their assets invested primarily in securities start to look an awful lot like investment companies, and that this concern grows greater the longer it takes for a SPAC to complete a deSPAC deal.
According to this Arnold & Porter memo, the Newsom administration recently released proposed amendments to California’s climate disclosure legislation that would, among other things, delay implementation of the state’s climate disclosure regime for two years. This excerpt indicates that the problem is that finalizing implementing regulations by the original compliance date would be virtually impossible:
As enacted, Senate Bill 253 (SB 253), the Climate Corporate Accountability Act, required the California Air Resources Board (CARB) to develop and adopt new regulations to implement the requirements of the act by January 1, 2025, with Scope 1 and 2 emissions reporting to begin in 2026 and Scope 3 emissions reporting to begin in 2027. The Newsom administration’s proposal delays those deadlines by two years: CARB has until January 1, 2027 to adopt new regulations, with Scope 1 and 2 emissions reporting to begin in 2028 and Scope 3 emissions reporting to begin in 2029.
The new timeline would give CARB two additional years to undertake a robust rulemaking process to develop the implementing regulations. Please see our October 3, 2023 Advisory for our thoughts on what to look for in the CARB rulemaking process. Notably, CARB has not formally commenced SB 253 rulemaking and without this amendment would face a near-impossible deadline of finalizing implementing regulations by January 1, 2025.
Apparently, the Newsom administration’s amendments would also result in a two-year delay in the implementation of SB 253’s companion legislation, SB 261, which establishes the climate-related financial risk reporting requirements. That statute currently requires compliance starting on or before January 1, 2026, but the amendments would extend that compliance date to on or before January 1, 2028.
. . .SpongeBob SquarePants! Yes, I’m sorry to report that America’s favorite cartoon sponge has found himself in the crosshairs of California’s Attorney General for allegedly running afoul of the Golden State’s privacy laws. This excerpt from a WilmerHale blog explains:
On June 18, the California Attorney General (“AG”) and Los Angeles City Attorney announced a settlement with Tilting Point Media, the maker of a mobile app game called “SpongeBob: Krusty Cook-Off,” resolving allegations that Tilting Point violated the California Consumer Privacy Act (CCPA) and Children’s Online Privacy Protection Act (COPPA) by collecting and sharing children’s data without obtaining required parental consent (for users under the age of 13) or affirmative opt-in consent (for users between the ages of 13 and 16). Under the terms of the settlement, Tilting Point must pay a penalty of $500,000 and comply with a host of injunctive terms, including compliance with the CCPA and COPPA, appropriate use of age screens, and implementation of processes to ensure data minimization and the proper use of software development kits (SDKs).
The blog says that this is the third CCPA settlement that the AG has entered into this year, and that this is the first one to focus on children, which suggests that this may be an area of growing enforcement priority for the California AG. It says that the critical takeaway from this action is that companies processing data from users under 16 must have appropriate consents and authorizations.
For at least a generation, the idea that large public companies should be run by boards dominated by people with no experience in the business they’re running has been a cornerstone of our concept of good corporate governance. Even if you buy into that idea, I’ve always thought that there are good reasons for management representation on a public company’s board to consist of more than just the CEO. According to this recent Jenner & Block survey of non-independent directors on S&P 500 boards, at least some of those public companies seem feel the same way.
The survey identified 161 S&P 500 companies with more than one non-independent director as of March 25, 2024. That’s about 1/3rd of the S&P 500, but the question is – as Butch Cassidy put it – “Who are those guys?” Here’s what the survey had to say about that:
– Almost 20% of the S&P 500 has two non-independent directors while approximately 12% of the S&P 500 has three or more non-independent directors.
– Companies with multiple non-independent directors were split evenly between companies with solely multiple management directors and companies with one management director and one or more non-management non-independent directors. Approximately half of the 161 companies identified consisted solely of management directors while the other half consisted of one management director and other, non-independent directors.
– The most common combination of management directors was the CEO and executive chairman combination (48 companies), while the CEO-“second in command” combination was the second most common (27 companies).
– Non-independent directors who weren’t members of management consisted of a founder or co-founder (20 companies), a former CEO (26 companies), family members (15 companies had at least one family member on the board, and six companies had multiple family members on the board), and stockholder designees or former designees (eight companies). Rounding out the list were six companies with directors who weren’t independent due to related party transactions.
A group of business trade associations that include the Business Roundtable, the US Chamber of Commerce & the Investment Company Institute recently published a report titled “Investors and the Markets First: Reforms to Restore Confidence in the SEC,” which offers a series of proposed reforms to the SEC’s rulemaking process. The report contends that, over the past three years, the SEC has “undertaken an unprecedented and often unlawful rulemaking agenda that, without sound justification, will radically redesign the foundation of our capital markets. The majority of the proposed changes are non-investment–, non-investor–, and non-market–oriented changes that limit choice and flexibility.”
The report then identifies six specific sins that it claims that the SEC has committed when it comes to rulemaking, including ignoring its obligations under the Administrative Procedure Act, adopting final rules that differ drastically from proposals, and exceeding its statutory authority. The report recommends a variety of reforms to the rulemaking process, which are summarized in this excerpt from a Mayer Brown blog:
– Require the SEC to affirmatively conduct an analysis of all interrelated and interconnected rules for each proposed rule and then amend or repeal rules as necessary to account for such interconnectedness;
– Require the SEC to provide comment periods for proposals with a minimum of 60 days, calculated from the Federal Register publication date, unless there is an emergency;
– Require a third party to perform and publish for public comment no later than 90 days from the date of enactment a post-adoption cost impact assessment for each major rule the SEC has adopted in the past three years;
– Integrate and expand on the mission of several offices of the SEC, including, for example, the Office of the Advocate for Small Business Capital Formation; and
– Require the SEC to publish an annual report on the number of exemptions granted or exemptive rules adopted to promote capital formation and innovation and the actions the SEC has taken to promote financial security and review and adjudicate exemptive applications under the Investment Company Act of 1940 for relief in no more than 180 days.
Several of these reform proposals sound like they’re the equivalent of the “Paperwork Production Act of 2024,” and appear designed to simply throw sand in the gears of the rulemaking process. For their proponents, that may be more of a feature than a bug, but the proposals also ignore the problem of legislative gridlock, which I think is the real issue.
The simple truth is that Congress can’t get its act together to pass legislation, so whatever party controls the White House is going to use federal agency rulemaking to accomplish its legislative objectives. Until that’s addressed, rulemaking is going to be a highly partisan and sometimes ugly process, no matter what “reforms” are on the table.
Over on the “Delaware Corporate & Commercial Litigation Blog”, Francis Pileggi recently flagged a concurring opinion by federal appellate judge Kevin Newsom in Snell v. United Specialty Ins. Co., (11th Cir.; 5/24). In that opinion, Judge Newsom explains how he used generative AI tools to help determine the “ordinary meaning” of terms at issue in a piece of litigation. In this particular case, the issue he sought to resolve was whether the installation of a trampoline involved “landscaping” within the meaning of a liability insurance policy.
After unsuccessfully trying to resolve this question by turning to the dictionary and photographs of the (very cool – see the pic on p. 7 of the opinion) in-ground trampoline itself, he decided to take a flyer on Chat GPT. After being intrigued by Chat GPT’s response to the general question “What is the ordinary meaning of ‘landscaping’?” the judge got more specific:
Suffice it to say, my interest was piqued. But I definitely didn’t want to fall into the trap of embracing ChatGPT’s definition just because it aligned with my priors. (Bad.) So, in what might have been a mistake—more on that later—we went ahead and asked it the ultimate question: “Is installing an in-ground trampoline ‘landscaping’”? ChatGPT responded as follows:
Yes, installing an in-ground trampoline can be considered a part of landscaping. Landscaping involves altering the visible features of an outdoor area for aesthetic or practical purposes, and adding an in-ground trampoline would modify the appearance and function of the space. It’s a deliberate change to the outdoor environment, often aimed at enhancing the overall landscape and usability of the area.
For good measure, I posed the same questions to Google’s Bard (since replaced by Gemini). The precise details aren’t particularly important, but the upshot is that both models’ answers indicated that the trampoline-related work Snell had performed—the excavation of the pit, the construction of the retaining wall, the installation of the mat, and the addition of the decorative wooden cap—just might be landscaping.
Judge Newsom then provides a thoughtful appraisal of some of the pros and cons of using AI large language models as a tool for resolving interpretive issues like this, and suggests that they may have a constructive role to play in judicial efforts to determine “the common, everyday meaning of the words and phrases used in legal texts.”
Francis wraps up his blog by summarizing the key takeaway from Judge Newsom’s opinion: “AI in the law is now mainstream when an appellate court includes references to how it was used as part of an analysis in connection with a published opinion.” Stay tuned.
The SEC’s Spring 2024 Reg Flex Agenda was released yesterday, and it looks like most of its rulemaking activity has been pushed out to after the election. Here’s where things stand on some of the potential SEC rules that we’ve been following:
As a reminder, these dates signify general timeframes. New final or proposed rules could come before or after the dates suggested in the agenda. The Reg Flex Agenda only gives insight into the priorities of the Chair as of the date it was submitted — it’s not a definitive guide for anyone trying to predict SEC rulemaking for purposes of specific board agendas, budgets and workflows.
In a recent issue of her “Deep Quarry” newsletter, Olga Usyvatsky noted that although comments on Schedule 13D and 13G filings have been relatively uncommon in the past, the Staff did recently issue a comment letter to Kimmeridge Energy Management LLC questioning the timing of a Schedule 13D filing. Kimmeridge responded to the comment and the Staff apparently didn’t have further comments on the issue, but Olga suggests that this may represent the start of a trend:
While SEC’s comments to Kimmeridge may look like a one-off, Corp Fin’s Director Erick Gerding highlighted compliance with the beneficial ownership rules as one of the priorities for the 2024 disclosure review program:
“Beneficial Ownership Reporting
On October 10, 2023, the Commission adopted amendments to modernize the rules governing beneficial ownership reporting.The Division staff is closely monitoring the implementation of these new rules. The Division staff will review selected beneficial ownership reports to assess compliance with the new, shortened filing deadlines and issue comments as necessary to improve required disclosures.”
Say it differently – we will likely see more SEC comments on 13D and 13G filings.
Jim McRitchie recently blogged about “Campaign GM” – a 1970 Ralph Nader-led shareholder proposal initiative and one of the earliest examples of shareholder ESG activism targeting a major corporation. The blog provides an overview of the campaign and discusses its long-term effects on governance at General Motors and its impact on the broader debate over corporate governance-related issues. It’s a really interesting introduction to a piece of corporate history that I knew very little about. Check it out if you get a chance.
Meredith blogged last week about the demise of the Chevron doctrine and some of its potential implications for the SEC. The conventional wisdom seems to be that the SCOTUS’s Loper decision is a “gut punch” to federal regulatory authority, and the decision has prompted wailing & gnashing of teeth on the Left and jubilation on the Right. However, a recent Law360 article by Dan Berkovitz says that the SCOTUS’s decision isn’t likely to have much of a practical impact on the SEC. Here’s the intro:
The demise of Chevron deference in Loper Bright Enterprises v. Raimondo will not make much of a difference for either the US Securities and Exchange Commission or the Commodity and Futures Trading Commission. The federal courts have a long history, both pre- and post- Chevron, of interpreting the federal securities and commodities laws without deference to the views of the SEC or the CFTC. These interpretations have ebbed and flowed between restrictive and expansive, depending on the philosophical composition of the courts.
In almost all major cases over at least the past two decades, especially in reviews of agency rulemaking, the courts have not granted Chevron deference to these agencies. Rather than charting a new approach, the court’s opinion in Loper reflects the current reality of judicial review for these agencies.
Dan Berkovitz isn’t alone in his assessment. This excerpt from a blog on the decision from the conservative think tank R Street Institute says that there was always less to Chevron deference than meets the eye:
There is also what you might call the dirty secret of judicial deference. Under Chevron, if a judge didn’t like an agency rule, they could usually just say that the rule was unreasonable (or that the statute wasn’t ambiguous) and achieve the same result as if there had been no deference. By contrast, even with the formal Chevron doctrine gone, it’s likely that judges will tend to implicitly defer to an agency’s interpretation more than they would if they had to come up with an interpretation of the rule from scratch.
