A few weeks ago while I was surfing the Internet, I stumbled across a very helpful new tool for tracking SEC filings developed by Emory Law School Prof. Andrew Jennings. The tool is called KFilings, and it allows users to get email alerts for relevant new filings that pop up in the SEC’s EDGAR system. Users can create unlimited free alerts for one or more registrants and/or filing types. Alerts can be scheduled to go out in real time, or in daily or weekly email digests. Check it out, because the price is sure right!
On Friday, the DOJ announced that a federal grand jury in California returned an indictment charging activist short seller Andrew Left with multiple counts of securities fraud. At the same time, the SEC announced civil charges against Left and his firm, Citron Research. The DOJ’s announcement of the indictment details Left’s alleged misconduct, but this excerpt from the SEC’s announcement does so more succinctly:
The SEC’s complaint alleges that Left, who resides in Boca Raton, Fl., used his Citron Research website and related social media platforms on at least 26 occasions to publicly recommend taking long or short positions in 23 companies and held out the positions as consistent with his own and Citron Capital’s positions. The complaint alleges that following Left’s recommendations, the price of the target stocks moved more than 12 percent on average.
According to the SEC’s complaint, once the recommendations were issued and the stocks moved, Left and Citron Capital quickly reversed their positions to capitalize on the stock price movements. As a consequence, Left bought back stock immediately after telling his readers to sell, and he sold stock immediately after telling his readers to buy.
Attached to the SEC’s complaint is an appendix cataloguing the allegedly false and misleading statements by Left and Citron Research that form the basis for the agency’s enforcement proceeding. Last month, the SEC brought settled administrative charges against Anson Research associated with its involvement in activist short reports. The DOJ’s action is the culmination of a multi-year investigation into activist short selling that began in 2021 and targeted Citron and Left, among others. Whether there are other shoes to drop from either the SEC or DOJ remains to be seen.
With the liberalization of the communications rules for public offerings in recent decades, many folks may have assumed that concerns about “gun-jumping” have largely been relegated to the ash heap of history. Unfortunately, Pershing Square’s recent announcement that it is delaying the pricing of its IPO appears to provide an example of how companies can still stub their toes on the rules governing communications during the public offering process.
The company didn’t provide any reasons for delaying the IPO in its announcement, but it did reference a communication from Pershing Square’s CEO Bill Ackman to a handful of investors. That communication contained some information that doesn’t appear to have been in the company’s preliminary prospectus, and that, in some cases, is inconsistent with information in the preliminary prospectus. This excerpt from a free writing prospectus that the company filed last Thursday explains the situation and the problematic comments made in Ackman’s communication:
On July 24, 2024, the communication attached as Appendix A was sent to a limited number of strategic institutional and high net worth investors in Pershing Square Holdco, L.P., which owns 100% of the Company’s investment manager, Pershing Square Capital Management, L.P. (the “Manager”) by William A. Ackman, the Chief Executive Officer of the Manager and the Company. Mr. Ackman sent Appendix A as an internal communication to the investors in Pershing Square Holdco, L.P. and therefore did not believe that it would require public disclosure.
You should not consider the statements in the communication attached as Appendix A in making your investment decision with respect to the Offering, including, in particular:
– The statements regarding the absence of key man risk. See “Risk Factors—Reliance on the Manager Risk—Key Personnel Risk” in the Company’s preliminary prospectus.
– The statements regarding the post-Offering trading dynamics, including with respect to market demand, trading discounts or premiums or trading volume. Shares of closed-end investment companies frequently trade at a discount from their net asset value. See “Risk Factors—Investment and Market Discount Risk” in the Company’s preliminary prospectus.
– The statements regarding the Manager’s historical performance. See “Appendix A – Supplemental Performance Information of the Affiliated Funds” to the Company’s preliminary prospectus.
– The statements regarding indications of interest from investors and any investor’s rationale for participation or non-participation in the Offering. Indications of interest are not binding agreements or commitments to purchase. Any investor may determine to purchase more, less or no Common Shares in the Offering. In addition, the underwriters may determine to sell more, less or no Common Shares in the Offering to any investor.
– The statements regarding the Pershing Square Tontine Holdings, Ltd. IPO.
The Company specifically disclaims the statements made by Mr. Ackman.
The typical remedy for gun-jumping is an SEC-imposed “cooling off” period that delays the offering for a period of time in order to allow the impact of the communication on the market to dissipate. My guess is that’s what’s prompting the delay here.
Check out our latest “Timely Takes” Podcast featuring Orrick’s J.T. Ho & his monthly update on securities & governance developments. In this installment, J.T. reviews:
– SEC Reg Flex Agenda
– SEC 2024 Disclosure Review Priorities
– SEC Guidance on Effective Cooperation in Enforcement Investigations
– Proxy Voting Advice Rules Update
– AI Disclosures in SEC Filings
This month’s podcast includes a “bonus round” featuring J.T.’s commentary on recent cybersecurity disclosure guidance and on the first criminal verdict involving a Rule 10b5-1 plan.
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 me and/or Meredith at john@thecorporatecounsel.net or mervine@ccrcorp.com.
It’s probably not an understatement to characterize many of the decisions issued by the SCOTUS in its recently completed term as “momentous” – but it may not have occurred to companies to think about the potential impact of some of those decisions when preparing risk factor disclosure for upcoming SEC filings. A recent Bryan Cave blog highlighting matters that companies should consider when preparing their second quarter 10-Q points out the potential risk factor implications of the Court’s decisions limiting the authority of federal agencies:
The recent Supreme Court term produced several landmark decisions affecting administrative agencies, including:
– Loper Bright Enterprises v. Raimondo – ending long-standing “Chevron” deference to administrative agency interpretations and requiring courts to exercise their judgment in deciding whether an agency has acted within its statutory authority, such as when determining the meaning of ambiguous statutes.
– Corner Post, Inc. v. Board of Governors, FRS – allowing “facial challenges” of regulations governed by the Administrative Procedure Act within six years after “injury” – even if more than six years after the regulation became effective and where the plaintiff was newly-created specifically to challenge the regulation.
– Ohio v. EPA – among other things, faulting EPA for failing to provide a “reasoned response” to certain comments viewed by the agency as not significant or pertinent when adopting final regulations under an arbitrary and capricious review.
The effect of these decisions will play out over time as litigation develops, with some commenters predicting “hundreds and hundreds of challenges to very old rules”. Companies that operate in regulated industries, as well as those that rely on established regulatory environments, should evaluate potential risks of future challenges to agency rules or interpretations – particularly by competitors that operate at a regulatory disadvantage. Note that some regulations may not be vulnerable under Corner Post because they governed by statutes with their own distinct limitations provisions.
The blog also recommends that companies consider the potential implications of elections in the United States and Europe when drafting risk factor disclosure. In addition to its commentary on risk factors, the blog also reminds companies of their disclosure obligations with respect to trading plans and the need to review director nomination bylaws in light of pending litigation in Delaware.
We’ve been covering the controversy surrounding the 2024 amendments to the DGCL over on the DealLawyers.com Blog, but the CII has recently submitted a letter to Del. Gov. John Carney urging him to veto the amendments, which the Delaware Legislature passed late last month, and I thought it was worth sharing with the readers of this blog.
One of the most controversial aspects of the amendments is new Section 122(18), which permits a board to agree to governance arrangements giving a stockholder veto powers over a range of corporate actions that traditionally have been solely within the ambit of the board’s authority. That provision is intended to address Vice Chancellor Laster’s decision invalidating such an arrangement in West Palm Beach Firefighters v. Moelis, (Del. Ch.; 2/24). This excerpt from the CII’s letter argues that Section 122(18) raises many of the same concerns for its members as dual class capital structures:
For CII and its members, we strongly believe that permitting stockholder agreements to contain the provisions at issue in the Moelis case as authorized by S.B. 313 would disadvantage long term investors. One of the core principles of corporate governance is the principle of one share, one vote. Currently, for a powerful founder to have full control rights — of the sorts granted to Mr. Moelis and authorized by S.B. 313 — a company generally must put these provisions into the certificate of incorporation and go public with a multi-class capital structure.
Because this is such an important protection for investors, both the New York Stock Exchange and the Nasdaq Stock Market prohibit companies traded on those exchanges from engaging in a “midstream” recapitalization that would create a new class of super-voting stock. However, it appears that under the provisions of S.B. 313, a company could instead go public with a single class capital structure and then, after the company is already public, confer comprehensive control rights by contract without any shareholder vote.
We believe many CII members and other long-term investors – whether they object to multi-class capital structures or not – would find very troubling this post-IPO transformation to a type of multi-class capital structure without a shareholder vote.
I think the CII raises a legitimate concern, but I also think that it overstates that concern when it points to the possibility of companies entering into such an agreement post-IPO. Despite the authority granted by Section 122(18), boards still owe fiduciary duties to their stockholders, and entering into such an agreement with an affiliated stockholder or one which has the effect of changing control of the company could subject the board’s decision to heightened scrutiny. My guess is that boards are going to proceed with caution when considering such a governance agreement post-IPO.
Despite the objections from the CII and others, all the reporting I’ve seen says that Gov. Carney is likely to sign the legislation. The changes that are being made to the DGCL are pretty seismic, and even if you’re not an M&A lawyer, you should definitely check out our DealLawyers.com webcast – “2024 DGCL Amendments: Implications & Unanswered Questions” – on Tuesday, July 23rd at 2 pm eastern.
Thank you to all our loyal blog readers who participated in our second anonymous poll to help us prepare for a game show featuring our SEC All-Stars as contestants at our Proxy Disclosure and Executive Compensation Conferences. In the interest of full disclosure, I pushed hard for a “Hunger Games” format for this thing but was outvoted by my more civilized colleagues who were set on a “Family Feud”-style competition. I never get to have any fun.
Anyway, we’re coming back to you again to seek your response to one of the securities law-adjacent questions we’ll be submitting to our contestants. In case you recently arrived from a distant galaxy and don’t know how Family Feud works, the contestants will need to identify the most popular answers that you provided in order to win fabulous prizes absolutely nothing! If you have a few seconds to spare, please type in a response to this anonymous poll. We’ll gather and rank responses by popularity. Responses will be hidden, so you’ll have to join day 1 of our Conferences (in San Francisco or virtually) to hear whether your response made the “most popular” list.
Speaking of our Conferences, our “early bird” deal for individual in-person registrations ($1,750, discounted from the regular $2,195 rate) ends July 26! We hope many of you decide to join us in San Francisco, but if traveling isn’t in the cards at that time, we also offer a virtual option (plus video replays & transcripts for both in-person and virtual attendees!) so you won’t miss out on the practical takeaways our speaker lineup will share. (Also check out our discounted rate options for groups of virtual attendees!)
You can register now by visiting our online store or by calling us at 800-737-1271.
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.
