The PCAOB issued its list of inspection priorities in a staff report issued earlier this week. Here’s the full list of priorities, which are laid out in the press release accompanying the report:
– Risk of fraud
– Auditing and accounting risks
– Risk assessment and internal controls
– Financial services specific considerations
– Broker-dealer specific considerations
– M&A, including de-SPAC transactions
– Digital assets
– Use of the work of other auditors
– Quality control (particularly talent retention and its impact on audit quality, and independence)
Other areas of inspection (critical audit matters, cybersecurity, and use of data and technology in the audit)
The report says that the PCAOB is working to enhance its inspection program, and that part of that effort includes expanding the number of public company audits that it selects for review. Factors influencing the number of audits selected for inspection each year include prior inspection results and emerging risks relating to a particular audit firm or industry. The report says that the PCAOB’s staff will continue to apply an approach to selecting audits for review under which some are selected based on risk and some audits are selected randomly.
The SCOTUS heard oral arguments yesterday in the Slack Technologies case, which focuses on whether Section 11 of the Securities Act applies to direct listings. If you haven’t been following the proceedings closely, check out this recent post on SCOTUSblog, which will get you up to speed pretty quickly. SCOTUSblog notes that the SEC is sitting this one out and hasn’t filed a brief in the case. This excerpt explains why the SEC may have opted to do that, and also discusses another interesting point raised in an amicus brief:
Perhaps the most interesting aspect of the briefing is the “dog that does not bark.” Remarkably, the SEC does not appear in this case, though it participated directly in the process of approving the direct listing process, and so the solicitor general will not appear at oral argument. The justices well might suppose that the clarity of the text made it impossible for the SEC to file a brief in support of Pirani. It also might matter that the SEC filed a forceful brief in Barnes, recommending the result that Friendly reached. A brief calling for the opposite result now would be an eye-opener.
One other detail of the briefing warrants attention. Slack takes the position that Pirani cannot possibly prove that the shares he purchased were registered. An amicus brief from a group of law and business professors forcefully argues that under the practices and technology of the modern securities industry, Pirani well might be able to identify the seller of his shares, and thus successfully make out a claim under Sections 11 and 12 even under Slack’s reading of the statute. Those professors do not support Pirani’s reading of Sections 11 and 12, but they do urge the court not to overstate the difficulty of Pirani successfully proving the source of his shares.
The blog’s reference to the SEC’s position in “Barnes” refers to Barnes v. Osofsky, the 2nd Cir.’s landmark 1967 decision that held that only purchasers of shares covered by the registration statement had standing to make claims under Section 11 and Section 12 of the Securities Act. The amicus brief referred to in this excerpt is one of many filed in the case, all of which are available here.
The March-April 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:
– Non-GAAP Financial Measures: The Pendulum Swings
– Layoff Season – Are Your Disclosure Controls Ready?
– Capital Markets Alternatives: At-the-Markets Offerings
If you’re not already a subscriber, you can subscribe online to this essential resource or email sales @ccrcorp.com.
In the past two weeks, the Staff of the Division of Corporation Finance issued responses to no-action requests addressing two substantively similar “culture war” proposals submitted by the conservative National Center for Policy Research. Both recipients sought to exclude these proposals under Rule 14a-8(i)(7)’s ordinary business exclusion, but despite their transparently similar objectives, the Staff reached different conclusions about their excludability.
The differences in the way the proposals were worded seems to have made all the difference in the Staff’s response. The fact that words matter in evaluating proposals under Rule 14a-8 isn’t exactly news to anyone who’s dealt with these over the years, but I think it’s still pretty interesting all it takes is some wording tweaks for a single proponent to render a proposal that deals with ordinary business operations into one dealing with a public policy issue that transcends the ordinary business exclusion.
Anyway, on December 22, 2022, the NCPR submitted a proposal to Kroger that called for the company to do the following:
Shareholders request the Kroger Company (“Kroger”) issue a public report detailing the potential risks associated with omitting “viewpoint” and “ideology” from its written equal employment opportunity (EEO) policy. The report should be available within a reasonable timeframe, prepared at a reasonable expense and omit proprietary information.
Pointing to the company’s actions to promote acceptance among employees of LGBTQ+ people and the removal of certain patriotic and pro Second Amendment merchandise, the proposal’s supporting statement alleged that there was ample evidence that “individuals with conservative viewpoints may face discrimination at Kroger.” In arguing that the proposal could be excluded, the company noted that proposals dealing with workforce management issues had been specifically identified by the Staff as being excludable under Rule 14a-8(i)(7). The Staff ultimately permitted the Kroger to exclude the proposal on the basis that it related to its ordinary business operations.
Ten days before submitting its proposal to Kroger, the NCPR submitted the following proposal to PayPal:
Resolved: Shareholders request the Board of Directors conduct an evaluation and issue a report within the next year, at reasonable cost and excluding proprietary information and disclosure of anything that would constitute an admission of pending litigation, evaluating how it oversees risks related to discrimination against individuals based on their race, color, religion (including religious views), sex, national origin, or political views, and whether such discrimination may impact individuals’ exercise of their constitutionally protected civil rights.
While the proponent’s supporting statement focused on the potential for the company to unlawfully discriminate in providing services to its customers based on their religious beliefs and points of view, the resolution itself was broad enough to encompass discrimination against employees on this basis as well. But it’s worth noting that neither the proposal nor the supporting statement contained a single reference to “individuals with conservative viewpoints.”
In arguing for the proposal’s exclusion, PayPal noted that proposals dealing with customer relationships and workforce management had both been viewed by the Staff as excludable under Rule 14a-8(i)(7), and argued that the proposal did not raise important public policy issues that transcended ordinary business. In support of this latter argument, PayPal noted that despite the proposal’s broad laundry list of potential targets of discrimination, its supporting statement clearly indicates that the proposal is “’particularly concerned with recent evidence of religious and political discrimination,’” which, to our knowledge, the Staff has not determined to be significant policy issues.” The Staff rejected these arguments noting that, “in our view, the Proposal transcends ordinary business matters.”
Corp Fin apparently isn’t the only SEC division that’s on a hiring spree. According to a recent CoinDesk article, the Division of Enforcement is also looking to add attorneys to its crypto & cyber enforcement team:
The U.S. Securities and Exchange Commission is hiring general attorneys for its crypto enforcement division in New York, Washington, D.C., and San Francisco, according to a job posting. The call for attorneys to join the regulator’s Crypto Asset and Cyber Unit, or CACU, comes after the agency said in March that it was “planning to add additional staff” to the unit, which was initially meant to be a 20-person operation but has since doubled in size.
Under Chairman Gary Gensler, the SEC has been cracking down on the crypto industry with renewed vigor since the 2022 market turmoil saw the collapse of big firms in the sector, crypto exchange FTX among them.
The attorneys joining the CACU are expected to conduct investigations involving “crypto asset securities,” develop litigation plans, draft legal documents including subpoenas and conduct depositions. The CACU “exercises the full range of the Division’s investigative and law enforcement powers, and focuses on violations of the federal securities laws,” the job posting said.
If you want to lob your resume in for one of these positions, you’ve got until April 17th. You can certainly see why the SEC is looking to add staff here. In recent testimony before Congress, SEC Chair Gary Gensler said that the agency’s ability to investigate the crypto industry is “stretched thin” – and in April alone, the agency added contested enforcement actions against Beaxy Digital and Terraform Labs to its already busy crypto docket.
Here’s a heads up from the Radical Compliance blog about one potential problem arising out of the SVB implosion and related banking sector uncertainties that you might not have considered:
You might see an increase in phishing attacks from hackers claiming to be vendors that need to change their bank account details with your accounts payable team, so you may want to give your accounting team a refresher training course in cybersecurity. Even better, if you’re more ambitious: redesign your accounts payable processes so that if vendors want to update their bank account data, they’ll need to log into a portal and do it themselves. Clearly that raises access control issues you’ll need to address somehow, but assuming you figure those out, it takes the phishing risk off your plate. I’d take that trade any day of the week, since falling for a phishing attack always makes you look like an idiot.
Earlier this month, the DOJ announced that five directors resigned from four corporate boards and one company declined to exercise board appointment rights in response to the Antitrust Division’s efforts to enforce Section 8 of the Clayton Act’s prohibition on interlocking directorates.
That proceeding follows one last October, in which the Antitrust Division’s Section 8 enforcement efforts prompted the resignation of seven directors. It also follows close on the heels of a letter from Senate Judiciary Committee Chair Dick Durbin (D-IL) urging the DOJ & FTC to investigate interlocks in the life sciences industry.
This Norton Rose Fulbright memo addresses the DOJ’s enforcement program and the recent Congressional interest in interlocking directors. This excerpt notes the DOJ’s broad interpretation of the prohibition and the potential implications for companies singled out for enforcement:
DOJ’s recent enforcement is significant beyond the numerical increase in resignations. Importantly, it illustrates the agencies’ commitment to a broad interpretation of Section 8. DOJ has not limited enforcement to the most obvious interlocks, such as where a director serves simultaneously on competitor boards or a company nominates its own officer to a competitor’s board. DOJ secured a resignation under Section 8 against an interlocked director who was nominated to both boards by an investment firm8 and also secured resignations of two directors where the alleged interlocks were only “affiliated” with the competitor (i.e. not officers or directors).9
Although enforcement of Section 8 is mostly limited to resignation of board members or abstention from exercising appointment rights, interlocking directors are relatively low-hanging fruit that can serve as the launch pad for a broader antitrust investigation.
The memo says that with the uptick in enforcement and antitrust regulators’ commitment to a broad interpretation of the prohibition on interlocks, Sen. Durbin’s letter “serves as a reminder for companies in the life sciences industry: a compliance program to actively monitor board membership and appointments is a crucial precautionary step to avoid Section 8 liability.” Sen. Durbin may have targeted the life sciences industry, but given the current climate, the memo’s advice about the need for a solid compliance program addressing interlocks is something that companies in all industries should heed.
This Perkins Coie blog provides an overview of the role that fairness opinions can play in helping boards of directors fulfill their fiduciary duties. This excerpt summarizes why boards should consider fairness opinions in appropriate circumstances:
Courts give special deference to Boards that seek truly independent third-party advice, such as that of an investment bank, valuation consultant or law firm, to assist disinterested directors in assessing a transaction. An opinion from a reputable third-party financial advisor that a transaction is fair to the company and its shareholders from a financial point of view may substantially reduce the risk of a successful challenge to the Board’s decision under any standard of review. A fairness opinion can also help independent directors make an informed decision.
Fairness opinions are typically thought of as coming into play in connection with M&A, but in some cases they may also have a role to play in the board’s evaluation of related party transactions. As someone who represented investment banks in a lot of fairness opinion engagements over the years and who sat in on more fairness opinion committee meetings than I care to recall, I would like to throw in a few caveats when it comes to fairness opinions.
The reason for engaging an investment bank to furnish a fairness opinion is that, in fulfilling their fiduciary duties, state corporate statutes typically permit boards to rely in good faith on expert guidance, but only if the directors reasonably believe that the matter is within the expert’s professional competence. That can be a problem when it comes to framing what the opinion will cover.
Many lawyers representing boards want the banker to opine as broadly as possible about the fairness of the deal. This “sprinkling holy water on the deal” approach to the opinion is counterproductive and – in the unlikely event that the bank would agree to do that – could undermine the board’s ability to rely on the bank’s opinion, because it’s easy to challenge whether the bank is truly an expert with respect to such matters. Investment banks’ expertise is in the financial aspects of a transaction, and so what they are generally willing to address is the fairness, from a financial point of view, of the price to be paid or received in the transaction. And that’s really what it’s appropriate for boards to ask them to cover.
Another issue that sometimes comes up in negotiating a fairness opinion is the “fair to whom?” question. Some lawyers will press for the opinion the fairness of the consideration to the company’s stockholders in situations that don’t involve a sale of the company.
That’s standard language in an opinion addressing a sale, but bankers usually won’t agree to this in buy side or other opinion engagements addressing transactions in which stockholders aren’t being paid. The bankers’ position is that whether the transaction is in the best interests of stockholders is a board decision, and so their opinion should address only the fairness to the company of the consideration to be paid or received.
This recent Lowenstein Sandler memo highlights the obligation that certain companies with foreign investors have to submit BE-12 survey filings to the Dept. of Commerce’s Bureau of Economic Analysis. The BE-12 benchmark survey is required for all U.S. entities in which a foreign investor directly or indirectly owns or controls a 10% or greater voting interest and asks for information related to fiscal year 2022. This excerpt from the memo provides additional details about what companies are required to file:
All U.S. business enterprises (including real estate held for nonpersonal use) in which a foreign individual or entity owns or controls, directly or indirectly, at least 10 percent of the voting interest or equivalent. Complex business structures file on a consolidated basis, so U.S. affiliate entities should be included in a parent company’s filing when a parent holds at least 50 percent of the affiliate’s voting rights.
Even if a business is contacted by the BEA to submit a filing, exemptions are available if foreign ownership is less than 10 percent, the business is consolidated with another U.S. affiliate, or the business was liquidated or dissolved. Note, the business must still file a form to claim the exemption.
Additionally, certain private funds1 that do not hold direct or indirect interests in any operating companies2 may be automatically exempt or may qualify to file a claim for exemption. When assessing the direct or indirect voting interest of foreign entities in funds, note that limited partner interest is not considered to be voting interest.
The survey is due by May 31, 2023, and the memo also provides an overview of what the information is used for and what other BEA filing requirements might apply to particular companies.
Yesterday, Vice Chancellor Laster issued an oral ruling holding that companies with multiple classes of stock don’t have to hold a separate class vote on officer exculpation charter amendments. This Wilson Sonsini memo addresses the plaintiff’s allegations and the Vice Chancellor’s reasoning:
The plaintiffs argued that the right to sue is a “power” of stock and that the defendants’ charter amendments adversely affected that power of the non-voting stock, such that a separate class vote of such stock was required. The court rejected that argument, determining that the companies did not need class votes and could instead rely on a majority of stockholder voting power to adopt officer exculpation.
The court concluded that the case was controlled by established Delaware case law interpreting Section 242 and also cited the expectations of practitioners and the market based on that case law. Under that case law, and accompanying legislative history, the phrase “powers, preferences, or special rights” of a class refers to the intrinsic, peculiar rights assigned to a class or series in the corporation’s capital structure, and Section 242(b)(2) is designed to protect class- or series-based interests.
For example, a liquidation preference given to a particular class of stock or the right of a particular class of stock to elect a board seat would be a class-based power, preference, or special right. Applying that precedent here, the right to sue and seek monetary damages against officers is not a peculiar “power” or “special right” of any given class but is instead a generalized right of all stockholders that exists at common law.
The decision provides some certainty to multi-class companies that are seeking to adopt these amendments and avoids opening the kind of can of worms with respect to prior charter amendments that many SPACs have had to deal with as a result of Vice Chancellor Zurn’s decision in Garfield v. Boxed(Del. Ch.; 12/22).
