Check out our latest “Timely Takes” podcast featuring a discussion with Barnes & Thornburg’s Jay Knight on the PCAOB’s proposed amendments to its Noncompliance with Laws and Regulations Auditing Standard. In this 20-minute podcast, Jay addressed the following topics:
1. Overview of the PCAOB’s proposed Non-Compliance with Laws and Regulations (NOCLAR) Auditing Standard and how it differs from the current standard
2. The most significant concerns about the proposed NOCLAR Standard from a lawyer’s perspective
3. Implications for audit committees and their advisers
4. Implications for the relationship between management and the outside auditors
Be sure to pay a visit to Barnes & Thornburg’s new “Practical Securities Law Blog,” which we just added to our blog roll. If you have insights on a securities law, capital markets or corporate governance trend or development that you’d like to share, I’m all ears – just shoot me an email at john@thecorporatecounsel.net.
– How to Attend: We have emailed a direct access link for the Conference to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform. Once you log in to the Conference Platform, follow the “Practical ESG Agenda” tab to enter sessions and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone.
If you are experiencing a technical issue on our conference platform and need assistance, please use the Help Desk tab on the left side of the conference platform for support or email our Operations Manager, Victoria Newton at VNewton@CCRcorp.com. If you have any other questions about accessing the conference, please email our Operations Manager, Victoria Newton (vnewton@ccrcorp.com).
– How to View Archives & Transcripts: Conference attendees will be able to access the archives of the “1st Annual Practical ESG Conference” on PracticalESG.com via a special link that we will email to conference attendees about a week after the event. Unedited transcripts also will be available via that link, beginning about 1-2 weeks after the event.
– Thanks To Our Sponsor! Our sponsor, Morrison Foerster, helped make our “2023 Practical ESG Conference” possible, and we are proud and grateful to have their support. Please visit their page!
It is not too late to register for our Conferences today! You can sign up for today’s “2023 Practical ESG Conference” by emailing sales@ccrcorp.com or by calling 1-800-737-1271. You can still sign up online for our “2023 Proxy Disclosure Conference” & “20th Annual Executive Compensation Disclosure Conference” (with the “2023 Virtual Conferences” drop-down, and the “PDEC” options) – or you can register via email or phone. Remember, you can also still bundle the conferences together to get a discounted rate!
We’re coming to the end of the SEC’s fiscal year, and that’s traditionally been a time when we’ve seen a lot of high-profile activity on the enforcement front. That looks like it may be the case this year, and it also looks like related party transaction disclosure is high on the list of the Division of Enforcement’s priorities. Last week, Meredith blogged about a recent RPT enforcement action and the SEC brought another settled enforcement action yesterday, this time targeting alleged shortcomings in related party transactions disclosure by Lyft. This excerpt from the SEC’s press release announcing the settlement summarizes the conduct alleged in its order:
According to the SEC’s order, prior to Lyft’s IPO in March 2019, a Lyft board director arranged for a shareholder to sell its shares to a special purpose vehicle (“SPV”) set up by an investment adviser affiliated with the same director. The director then contacted an investor interested in purchasing the shares through the SPV. According to the SEC’s order, Lyft, which approved the sale and secured a number of terms in the contract, was a participant in the transaction, and the director was a related person by virtue of his position and because he received millions of dollars in compensation from the investment adviser for his role in structuring and negotiating the deal. Lyft failed to disclose this information regarding the sale in its Form 10-K for 2019. The SEC’s order finds that the director left the Board at the time of the transaction.
Without admitting or denying the SEC’s allegations, Lyft consented to an order requiring it to cease and desist from committing or causing any future violations of Section 13(a) of the Exchange Act or Rule 13a-1 thereunder. The company also agreed to pay a $10,000,000(!) civil penalty.
The action provides a reminder that even if a transaction doesn’t involve payments between a company and a related party, disclosure may still be required. That’s because Item 404(a) requires a description of transactions since the beginning of the registrant’s last fiscal year in excess of $120,000 in which it was or is to be a participant, and in which a related person had or will have a direct or indirect material interest.
The SEC’s position in this enforcement action makes it clear that Lyft’s involvement in approving and negotiating some of the terms of the transaction was sufficient to characterize the company as a “participant” in it. This excerpt from p. 21 of our “Related Party Transactions Disclosure Handbook” provides additional color on the participation concept & some of the challenges it presents:
Being a participant encompasses situations where the company benefits from a transaction but is not technically a contractual party to the transaction. In response to concerns that the concept of a “participant” might be too broad and far-reaching, the SEC offered the following example of a case where disclosure might be required even if the company is not a contractual party: “[d]isclosure would be required if a company benefits from a transaction with a related person that the company has arranged and in which it participates, notwithstanding the fact that it is not a party to the contract.” See the 2006 Adopting Release at footnote 418.
This loose boundary may be problematic to monitor since it carries with it the possibility that disclosure could be required in a situation where the company does not have a “material interest” (as would be required for the related person) in the transaction. Presumably, the company would be aware of the transaction if it had a hand in “arranging” the transaction, but there may be other situations that are not as evident to those tasked with tracking potentially disclosable transactions.
We also have a bunch of Q&As beginning on p. 48 of the Handbook that address specific situations where “participation” is an issue that you may find helpful. The bottom line is that Item 404 of Reg S-K is designed to cast a very wide net, and the SEC expects companies to be mindful of that fact when preparing disclosure documents. In her blog last week, Meredith suggested that it may be time for companies to consider refreshing their disclosure controls and procedures for related party transactions. That seems like an even better idea this week.
Earlier this year, Liz blogged about a cert petition seeking clarification from the SCOTUS of the extent to which the failure to comply with the MD&A line-item disclosure requirements set forth in Item 303 of Reg S-K can serve as the basis for a securities fraud claim. That’s an issue that the circuits are split on, and earlier this month, a federal district judge in the Northern District of Illinois threw another log on this particular fire with his opinion in Phoenix Ins. Co. v. ATI Physical Therapy, (ND Ill.; 9/23). This excerpt from a recent Jim Hamilton blog on the decision summaries the Court’s analysis:
The Seventh Circuit has not yet decided whether a Section 10(b) or 14(a) claim can be premised on a violation of Item 303. In the Second Circuit, “positive law” (statutes or regulations, like Item 303) can give rise to an affirmative duty to disclose under Exchange Act Section 10(b) or 14(a). The Ninth Circuit, though, held otherwise, reasoning that Item 303’s disclosure requirement varies from the Basic test for materiality.
In the Illinois district court’s view, the Ninth Circuit conflated the distinct concepts of duty to disclose and materiality. The district court thus adopted the reasoning of the Second Circuit that failure to comply with Item 303 can give rise to Section 10(b) fraud liability if the omission is material under Basic and the other elements of the securities fraud claim are established. “That reasoning, which recognizes the difference between the legal concepts of duty to disclose and materiality, makes sense,” the Illinois court wrote. “It also likely—though not definitely—squares with an earlier case that the Ninth and Second Circuits both cite.”
The Court also held that non-compliance with Item 303 can serve as the basis of a claim under Rule 14a-9, which prohibits false or misleading statements in proxy materials, provided that Basic’s materiality standard is satisfied.
Although the Northern District of Illinois held that non-compliance with Item 303 can serve as a basis for a Rule 14a-9 claim, it’s becoming increasingly difficult to find a court that will entertain such a claimt. Earlier this year, in Lee v. Fisher, the 9th Cir. upheld a forum selection bylaw at Gap that designated the Delaware Court of Chancery as “the sole and exclusive forum for . . . any derivative action or proceeding brought on behalf of the Corporation.” Because Exchange Act claims can only be brought in federal court, that ruling had the effect of precluding stockholders in Delaware corporations with that exclusive forum language from bringing derivative Rule 14a-9 claims.
Now, Prof. Ann Lipton has cited a recent decision by a Texas federal magistrate that tightens the screws on Section 14(a) claims even more. Here’s an excerpt from her Twitter thread on the decision:
Shareholders of an acquiring company sued under Section 14, claiming the proxy statement misled them into approving the merger. A federal magistrate court just said Delaware law governs the direct/derivative distinction, though the injury is direct, the damages from a stock price drop are derivative, and therefore, plaintiff cannot bring claims directly. Edwards v. McDermott, 4:18-cv-04330 SD Tex.
This is the next step in allowing Delaware law to supersede federal securities law. Previously, CA9 held that derivative 14(a) claims – – can functionally be waived in bylaws, bc they really shouldn’t exist at all. Which means, if this decision stands, we’re really cutting off most avenues for Section 14 claims, outside the target-side merger context.
The bottom line is that the SCOTUS has done everything but formally overrule its 1964 decision in J.I. Case v. Borak finding an implied private right of action under Section 14(a), and it looks like the federal courts are determined to finish the job.
In a recent blog, Perkins Coie’s Allison Handy points out that rumors of ESG fatigue are greatly exaggerated – at least when it comes to ISS’s Globla Benchmarking Survey:
Globally and in the US, the main focus of this year’s survey is on “Environmental & Social” topics with 15 questions addressing a range of issues, including:
– Application of E&S policies on a global basis or using a market-specific approach.
– How organizations consider “double” or “dynamic” materiality.
– Assessments of company responses to and disclosures regarding environmental and social risks.
– Assessment of GHG reduction targets and climate transition plans, both with respect to management plans and shareholder proposals.
The survey period closes on September 21st, so if you want to weigh in on these or other topics raised in the survey, you’d better get moving.
Monday is Labor Day, which is traditionally the day that we bid farewell to summer. Unlike almost everywhere else in the country, we here in Northeast Ohio have been blessed with a really nice, temperate summer (well, aside from the 12 tornadoes that hit us last Thursday), so I’m a little sorry to see it go. On the other hand, I know that for my CCRcorp colleagues in the “Sun’s Anvil” formerly known as Austin, Texas, fall can’t come soon enough.
Still, regardless of whether the end of summer makes you a little melancholy or just makes you look forward to a lower risk of heat stroke, it seems appropriate to have a nice cool drink to give it a proper send-off this holiday weekend. If your preference for refreshment includes something with a little booze in it, then I’ve got a cocktail recommendation to pass along.
About a decade ago, I was at a soiree at a more sophisticated local watering hole than I’m accustomed to frequenting. The bartender was pushing a rum-based concoction that I’d never tried before. It was delicious. I asked what it was, and she told me that it was something called a “Dark ‘n Stormy.” To make a long story short, I’ve been happily quaffing them every summer since.
For my money, the Dark ‘n Stormy is close to a perfect summer drink. It’s not too sweet, but it’s very refreshing. It’s apparently Bermuda’s national cocktail, and the recipe is ridiculously simple – it’s a classic boat drink, just dark rum and ginger beer, with a squeeze of lime if you like. The only thing that’s a little complicated is that the name “Dark ‘n Stormy” is a registered trademark of Gosling’s Rum in Hamilton, Bermuda, and is only supposed to be made with their product, which can sometimes be hard to find. It’s worth the effort though because other dark rums don’t taste anything like Gosling’s, and you won’t appreciate the drink nearly as much.
If you’re looking for an alternative to the usual summer weekend gin or vodka & tonic or one of those hop-bomb IPAs that you kids can’t seem to get enough of, give a Dark ‘n Stormy a try. I think you’ll like it. If you prefer something non-alcoholic, then maybe give one of these summer mocktails a try. In any case, have a safe and enjoyable Labor Day weekend. Our blogs will be back on Tuesday.
As part of the SEC’s recent share repurchase disclosure amendments, it implemented a new Form F-SR, which foreign private issuers must use to provide the required quarterly tabular disclosure about their buyback activity. Yesterday, Corp Fin issued three new Exchange Act Forms CDIs on issues relating to the new form:
Question 113.01: Is a Form F-SR required to be filed if, during the covered fiscal quarter, the foreign private issuer or affiliated purchaser did not repurchase any of its equity securities registered under Exchange Act Section 12?
Answer: No, a Form F-SR is not required to be filed under these circumstances. Note, however, there is no de minimis exception to the Form F-SR filing requirement; even the repurchase of a very small number of equity securities would trigger a Form F-SR filing. [August 30, 2023]
Question 113.02: A foreign private issuer or affiliated purchaser did not conduct any repurchases that would trigger the requirement to file a Form F-SR. Is a Form F-SR nevertheless required solely to check the box under “Registrant Purchases of Equity Securities” section of Form F-SR for the covered purchases or sales of securities by a director or member of senior management who would be identified pursuant to Item 1 of Form 20-F?
Answer: No. [August 30, 2023]
Question 113.03: Is a Form F-SR required to be filed for the final quarter of the fiscal year?
Answer: Yes, if a foreign private issuer or affiliated purchaser engaged in repurchases during the final quarter of the fiscal year, then a Form F-SR would be required for that final quarter and must be filed within 45 days after the end of the quarter. Foreign private issuers are not permitted to wait to report the repurchases during the final quarter of the fiscal year in the Form 20-F for that fiscal year. See Exchange Act Release No. 34-97424 (May 3, 2023) at fn. 185. [August 30, 2023]
Corp Fin also issued a new Regulation AB CDI. The CDI relates to when documents and agreements must be filed to be considered timely for purposes of Form SF-3 eligibility. If the Reg AB CDI is helpful to you or means anything to you at all, well – you’re welcome! Even though I was once named “Ohio Securitization Lawyer of the Year” by what seemed to be a very sketchy (or at least a very confused) British lawyer rating service, I never did an asset-backed deal in my entire career, so this stuff isn’t exactly in my wheelhouse.
A few months ago, Dave blogged about Kirschner v. JPMorgan Chase Bank, N.A., a potentially significant case pending before the Second Circuit which presented the issue of whether syndicated loans were “securities” for purposes of the Securities Act. The SDNY previously held that they were not, and last week, the Second Circuit affirmed that decision. This excerpt from Debevoise’s memo on the case said that the Supreme Court’s decision in Reves v. Ernst & Young featured prominently in the Court’s reasoning:
In affirming the district court’s decision, the Second Circuit’s analysis focused on the Reves test. The court found that three factors—the plan of distribution, the reasonable expectations of the public and the existence of other risk-reducing factors—favored a conclusion that the term loan should not be classified as a security. The court found that only one factor, the investment-focused motivation of the sophisticated parties to whom the term loan was syndicated, favored classifying the term loan as a security. However, the court determined this motivation was outweighed by the other three Reves factor.
This is a case that attracted a lot of attention because as Dave said in his earlier blog, concluding that syndicated loans involved the issuance of securities could’ve really upended the $2.5 trillion market for those loans. A coalition of business groups that included the U.S. Chamber of Commerce and SIFMA filed an amicus brief in support of the position that syndicated loans weren’t securities. Interestingly, the SEC chose to sit this one out. In July, the agency said that it would not file an amicus brief in the case.
