The members of the House of Representatives managed to pry themselves away from the cable news networks’ microphones long enough to pass a bunch of bipartisan legislation aimed at facilitating capital formation. Here’s the intro to this Mayer Brown blog:
In early June, the US House of Representatives passed two sets of bills focused on promoting capital formation. The bipartisan effort included bills that amend the accredited investor definition in order to increase the diversity of investors participating in the private markets. In addition, as the IPO market continues to suffer, the packages include bills that would enact legislation formalizing measures that already are permitted by SEC staff, such as, for example, expanding “testing-the-waters” accommodations to all issuers. Also, the package includes a bill directing the SEC to investigate the costs associated with going public for middle market companies.
The blog includes brief summaries of each piece of legislation as well as links to the text of the bills. It says that the next stop for this package is the Senate Committee on Banking, Housing, and Urban Affairs.
– John Jenkins
Artificial Intelligence is a topic that’s really exploded into public consciousness this year, so it isn’t surprising that AI risks are also beginning to feature prominently in some corporate risk factor disclosures. This Bryan Cave blog notes that companies are addressing AI risks either through standalone risk factors or as part of broader risk factor disclosures. The blog highlights the topical areas of these broader risk factors in which AI disclosures appear and provides several examples of standalone risk factors, including this one from DoorDash’s most recent Form 10-Q:
We may use artificial intelligence in our business, and challenges with properly managing its use could result in reputational harm, competitive harm, and legal liability, and adversely affect our results of operations.
We may incorporate artificial intelligence (“AI”) solutions into our platform, offerings, services and features, and these applications may become important in our operations over time. Our competitors or other third parties may incorporate AI into their products more quickly or more successfully than us, which could impair our ability to compete effectively and adversely affect our results of operations. Additionally, if the content, analyses, or recommendations that AI applications assist in producing are or are alleged to be deficient, inaccurate, or biased, our business, financial condition, and results of operations may be adversely affected.
The use of AI applications has resulted in, and may in the future result in, cybersecurity incidents that implicate the personal data of end users of such applications. Any such cybersecurity incidents related to our use of AI applications could adversely affect our reputation and results of operations. AI also presents emerging ethical issues and if our use of AI becomes controversial, we may experience brand or reputational harm, competitive harm, or legal liability. The rapid evolution of AI, including potential government regulation of AI, will require significant resources to develop, test and maintain our platform, offerings, services, and features to help us implement AI ethically in order to minimize unintended, harmful impact.
The blog says that only about 10% of companies in the major indices (S&P 500 and Russell 3000) are currently including a discussion of AI in their risk factor disclosures, but it also points out that companies addressing AI in their risk factors represent a broad range of industries tech & software.
– John Jenkins
Verizon recently published its 2023 Data Breach Investigations Report, and one of its more interesting findings is that, when it comes to cybersecurity, a company’s senior leaders are often its weakest link – particularly when it comes to the burgeoning category of “social engineering” attacks. Here’s an excerpt from Verizon’s press release:
The human element still makes up the overwhelming majority of incidents, and is a factor in 74% of total breaches, even as enterprises continue to safeguard critical infrastructure and increase training on cybersecurity protocols. One of the most common ways to exploit human nature is social engineering, which refers to manipulating an organization’s sensitive information through tactics like phishing, in which a hacker convinces the user into clicking on a malicious link or attachment.
“Senior leadership represents a growing cybersecurity threat for many organizations,” said Chris Novak, Managing Director of Cybersecurity Consulting at Verizon Business. “Not only do they possess an organization’s most sensitive information, they are often among the least protected, as many organizations make security protocol exceptions for them. With the growth and increasing sophistication of social engineering, organizations must enhance the protection of their senior leadership now to avoid expensive system intrusions.”
Like ransomware, social engineering is a lucrative tactic for cybercriminals, especially given the rise of those techniques being used to impersonate enterprise employees for financial gain, an attack known as Business Email Compromise (BEC). The median amount stolen in BECs has increased over the last couple of years to $50,000 USD, based on Internet Crime Complaint Center (IC3) data, which might have contributed to pretexting nearly doubling this past year.
– John Jenkins
Last week, the Division of Corporation Finance named Tiffany Posil Chief of the Office of Mergers and Acquisitions. She succeeds Ted Yu, who recently was appointed to serve as Associate Director of the Division of Corporation Finance. Tiffany is currently a partner of Hogan Lovells, and previously worked for Corp Fin, where, among her other responsibilities, she was the primary drafter of the universal proxy rule proposal.
Tiffany should also be familar to many of our members. She participated in our “Universal Proxy: Preparing for the New Regime” webcast last year & has also authored an article on universal proxies for our Deal Lawyers Newsletter. Congratulations to Tiffany!
– John Jenkins
As you might have already guessed, I’m among those who are skeptical about claims that retail investors should be encouraged to become more involved in corporate governance, and that governance will be enhanced if they do. Some of the objections filed to AMC’s recent class action settlement filed by retail investors with the Chancery Court suggest that this skepticism may be well founded.
AMC was one of the companies to warmly embrace its meme stock “apes”, at least until it proved impossible for the company to get the quorum needed to approve a charter amendment to increase its authorized shares, which in turn inhibited its ability to raise additional capital. Since “meme stocks gotta meme”, AMC needed a fix for this problem. As Liz blogged earlier this year, the company found a solution through the creative use of blank check preferred stock. Of course, any solution to a corporate problem that’s labeled “creative” inevitably leads to class action litigation, and AMC’s fix was no exception. Last month, the company reached an agreement with the plaintiffs to settle that litigation, and that’s when the fun began.
AMC’s retail “apes” responded to the proposed settlement with an outpouring of outrage that was significant enough that the Chancery Court set up a procedure for them to submit their comments on the proposed settlement – which they did, in droves. However, while there were plenty of objections to the settlement, many didn’t inspire a lot of confidence. Here’s an excerpt from Tulane professor Ann Lipton’s recent blog on the objections:
While some of the letters inspire a lot of sympathy – many investors appear to have endured significant losses – a lot of the comments are, well, uninformed, to put it mildly. There are some fairly odd conspiracy theories floating around regarding AMC shares, and, in particular, something about an inflated share count and “synthetic” shares that are improperly voting. Many of the objecting shareholders buy into those theories. For example, in a report filed on May 17, the special master recommended against one shareholder’s attempt to intervene, which was predicated on the “synthetic share” theory.
Ann goes on to confront the fundamental question raised by the some of the more unhinged AMC objections:
So this is the elephant in the room: What does this tell us about the wisdom of encouraging greater retail involvement in corporate governance? While no doubt some retail shareholders are highly informed, many are not, and if AMC demonstrates anything, it’s that in some cases, the technological tools that enable retail shareholders to coordinate and share information may also cause the rapid spread of misinformation.
In other words, social media may have the same kind of implications for corporate governance that it has had for our political discourse. That’s a point that UCLA professor Stephen Bainbridge picks up on in this excerpt from his own blog on the AMC situation:
Many retail investors are deeply engaged with social media and increasingly exhibit the pathologies associated with social media. In the AMC Entertainment litigation, for example, one of the two lawsuits challenging the plan was filed by an individual Usbaldo Munoz. The AMC Apes have been viciously attacking Munoz. Things apparently got so bad that Munoz has now ghosted his own lawyers, leaving them without guidance as to how to proceed.
Oh, goodie! It’s nice to know that one possible outcome of the “rise of the retail investor” might be the establishment of a Q-Anon corporate governance division – “where we go one to a shareholders’ meeting, we go all.”
– John Jenkins
Check out the latest edition of our “Timely Takes” Podcast featuring my interview with Charles Glick, Chairman & CEO at Corporate Governance Partners, Inc., the makers of Foresight BoardOps. In this 15-minute podcast, Charles addressed the following topics:
– How can the chairperson ensure efficient decision-making during board and committee meetings?
– What strategies can be employed to handle conflicts or disagreements among directors?
– What should you consider when setting a board’s first-ever meeting agenda?
– How should you prioritize board agendas?
– What are some common mistakes when setting agendas?
My interview with Charles was based upon Foresight’s recent publication, A Brief Guide for Board and Committee Chairs, which members of TheCorporateCounsel.net can access in our “Board Meetings” Practice Area. 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.
– John Jenkins
The May-June issue of “The Corporate Counsel” newsletter is in the mail. It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. This issue includes the following articles:
– SEC Adopts Amendments Requiring More Detailed Share Repurchase Disclosure
– What’s in a Name? Postponement, Adjournment and Recess of Stockholders’ Meetings
If you’re not already a subscriber, you can subscribe online to this essential resource or email sales @ccrcorp.com.
– John Jenkins
Yesterday, Corp Fin issued three new Exchange Act Rules CDIs addressing the SEC’s recent Rule 10b5-1 amendments. The CDIs clarify the compliance dates for the new disclosure requirements & address the need for a cooling off period in situations involving an individual with two Rule 10b5-1 plans who terminates the earlier-commencing plan:
Question 120.26
Question: When are companies required to begin providing the quarterly Item 408(a) disclosures and the annual Item 402(x) and Item 408(b) disclosures (Item 16J of Form 20-F disclosures for foreign private issuers) in periodic reports?
Answer: Release No. 33-11138 states that companies other than smaller reporting companies will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F “in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.” Therefore, the following compliance dates apply:
– December 31 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-Q for the period ended June 30, 2023, and should continue to be provided in the Form 10-Q for the period ended September 30, 2023 and the Form 10-K for the fiscal year ended December 31, 2023.
– June 30 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended June 30, 2023.
– December 31 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended December 31, 2024.
– June 30 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended June 30, 2024.
Smaller reporting companies must comply with these new disclosure and tagging requirements in the first filing that covers the first full fiscal period that begins on or after October 1, 2023. Therefore, the following compliance dates apply:
– December 31 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended December 31, 2023.
– June 30 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-Q for the period ended December 31, 2023.
– December 31 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended December 31, 2024.
– June 30 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended June 30, 2025. [May 25, 2023]
Question 120.27
Question: When are companies required to begin providing the disclosures in proxy or information statements?
Answer: For transition purposes only, companies other than smaller reporting companies must first provide this information in proxy statements for the first annual meeting for the election of directors (or information statements for consent solicitations in lieu thereof) after completion of the first full fiscal year beginning on or after April 1, 2023. Smaller reporting companies must first provide this information in proxy statements for the first annual meeting for the election of directors (or information statements for consent solicitations in lieu thereof) after completion of the first full fiscal year beginning on or after October 1, 2023.[May 25, 2023]
Question 120.28
Question: The Rule 10b5-1(c) affirmative defense generally is not available if a person has multiple Rule 10b5-1 contracts, instructions, or plans in place. However, Rule 10b5-1(c)(1)(ii)(D)(2) permits a person (other than the issuer) to maintain two separate Rule 10b5-1 plans at the same time so long as trading pursuant to the later-commencing plan is not authorized to begin until after all trades under the earlier-commencing plan are completed or have expired without execution. If an individual terminates the earlier-commencing plan (i.e., the earlier-commencing plan does not end by its terms and without any action by the individual), when can trading begin under the later-commencing plan?
Answer: Pursuant to Rule 10b5-1(c)(1)(ii)(D)(2), if an individual terminates the earlier-commencing plan, the later-commencing plan will be subject to an “effective cooling-off period.” The effective cooling-off period will begin on the termination date of the earlier-commencing plan and will last for the time period specified in Rule 10b5-1(c)(1)(ii)(B). On the other hand, if the earlier-commencing plan ends by its terms without action by the individual, the cooling-off period for the later-commencing plan is not reset and trading may begin as soon as the plan’s original cooling-off period is satisfied. Depending on when the later-commencing plan was adopted, this could be as soon as immediately after the earlier-commencing plan ends. See Footnote 180 of Release No. 33-11138.[May 25, 2023]
– John Jenkins
Monday is Memorial Day. This year, I want to leave you with a story about a Marine Corps officer who was awarded the Congressional Medal of Honor posthumously for his heroism during the Battle of Okinawa. Less than 20% of Medals of Honor have been awarded posthumously – but one of those recipients was a young lawyer named Henry Courtney, Jr. Here’s a link to his bio on the Defense Department’s website, and this is his Medal of Honor citation:
For conspicuous gallantry and intrepidity at the risk of his life above and beyond the call of duty as executive officer of the 2d Battalion, 22d Marines, 6th Marine Division, in action against enemy Japanese forces on Okinawa Shima, in the Ryukyu Islands, 14 and 15 May 1945. Ordered to hold for the night in static defense behind Sugar Loaf Hill after leading the forward elements of his command in a prolonged firefight, Maj. Courtney weighed the effect of a hostile night counterattack against the tactical value of an immediate marine assault, resolved to initiate the assault, and promptly obtained permission to advance and seize the forward slope of the hill. Quickly explaining the situation to his small remaining force, he declared his personal intention of moving forward and then proceeded on his way, boldly blasting nearby cave positions and neutralizing enemy guns as he went.
Inspired by his courage, every man followed him without hesitation, and together the intrepid marines braved a terrific concentration of Japanese gunfire to skirt the hill on the right and reach the reverse slope. Temporarily halting, Maj. Courtney sent guides to the rear for more ammunition and possible replacements. Subsequently reinforced by 26 men and an LVT load of grenades, he determined to storm the crest of the hill and crush any planned counterattack before it could gain sufficient momentum to effect a breakthrough. Leading his men by example rather than by command, he pushed ahead with unrelenting aggressiveness, hurling grenades into cave openings on the slope with devastating effect. Upon reaching the crest and observing large numbers of Japanese forming for action less than 100 yards away, he instantly attacked, waged a furious battle, and succeeded in killing many of the enemy and in forcing the remainder to take cover in the caves.
Determined to hold, he ordered his men to dig in and, coolly disregarding the continuous hail of flying enemy shrapnel, to rally his weary troops, tirelessly aided casualties and assigned his men to more advantageous positions. Although instantly killed by a hostile mortar burst while moving among his men, Maj. Courtney, by his astute military acumen, indomitable leadership, and decisive action in the face of overwhelming odds, had contributed essentially to the success of the Okinawa campaign. His great personal valor throughout sustained and enhanced the highest traditions of the U.S. Naval Service. He gallantly gave his life for his country.
If you visit the Congressional Medal of Honor Society’s website, you can read the citations for each recipient of our nation’s highest award for valor. This Memorial Day, I’d encourage you to take a few moments to read a few of the citations for posthumous awards, and if you do, maybe keep these words from Archibald MacLeish in mind:
Whether our lives and our deaths were for peace and a new hope
Or for nothing, we cannot say, it is you who must say this
They say we leave you our deaths, give them their meaning
We were young, they say, we have died, remember us.
Have a safe and enjoyable holiday weekend. Our blogs will be back on Tuesday.
– John Jenkins
Earlier this month, in Alliance for Fair Board Recruitment v. Weber, a California federal court struck down the state’s board diversity statute, which required publicly traded companies based in California to have board members from underrepresented communities. In a 7-page order, Judge John Mendez granted the plaintiff’s motion for summary judgment and held that the statute was unconstitutional on its face and also violated 42 U.S.C. Section 1981. This excerpt from Kevin LaCroix’s blog on the case summarizes Judge Mendez’s ruling:
The Alliance moved for summary judgment. In opposition to the motion, the state argued that the statute satisfied strict scrutiny, or in the alternative, should have its unconstitutional provisions severed from the rest of the bill. The state argued that the bill’s racial classification was permissible because it remedied past discrimination. The state also argued that the bill did not create preferred racial and ethnic classes because individual board candidates must still compete with others.
In a May 15, 2023, decision, Eastern District of California Judge John Mendez granted the Alliance’s motion for summary judgment, holding that while the state argued that the statute’s diversity requirements were flexible, the statute’s requirements represented a facially invalid racial quota.
In reaching his decision, Judge Mendez did not even reach the “strict scrutiny” arguments that the state had raised, instead finding that the statute was unconstitutional on its face. Citing the U.S. Supreme Court’s 2003 decision in Grutter v. Bollinger, Judge Mendez noted that a quota is “a program in which a certain fixed number or proportion of opportunities are reserved exclusively for certain minority groups.”
Judge Mendez found that AB 979 is a “racial quota” under this definition because it “requires a certain fixed number of board positions to be reserved exclusively for certain minority groups,” in violation of the U.S. Constitution’s Equal Protection Clause. Judge Mendez also ruled that the statute violated Section 1981, because, under Supreme Court precedent, “ a violation of the Equal Protection Clause of the Fourteenth Amendment also constitutes a violation of Section 1981.”
Kevin also notes that the plaintiff in this case is also the same entity that’s currently challenging Nasdaq’s board diversity listing standard in the 5th Circuit.
The decision is the latest in a series of rulings invalidating California’s statutory efforts to promote board diversity. In April 2022, a state court judge invalidated the same statute at issue in the federal court case on the grounds that it violated California’s constitution. California’s board gender diversity statute hasn’t fared any better – another state court judge struck down that law on state constitutional grounds in May of last year.
– John Jenkins
