Remember the SEC’s Reg FD enforcement proceeding against AT&T? Well, a SDNY judge recently rejected AT&T’s bid to dismiss the SEC’s case against it. Among other things, the defendants contended that Reg FD is a content-based restriction on speech that must be narrowly tailored to advance a compelling governmental interest or, alternatively, compelled speech subject to strict 1st Amendment scrutiny. The judge rejected those claims, and this excerpt from Cydney Posner’s blog on the case summarizes his reasoning:
With respect to the contention that Reg FD compels speech, the Court determined that it is not political speech or opinion, subject to strict scrutiny, but rather is “more akin to the interest in avoiding consumer deception that underlies numerous statutory and regulatory disclosure requirements. These historically have been upheld provided they are reasonably related to preventing the deception of consumers.” The SEC contended that Reg FD was instead comparable to compelled commercial speech—“expression related solely to the economic interest of the speaker and its audience,” and subject to rational-basis review under SCOTUS’s decision, Zauderer v. Office of Disciplinary Counsel (1985). . .
However, although there were similarities, according to the Court, “case law to date has stopped short of equating the two.” While the commercial speech doctrine was a “closer fit,” in the Court’s view, it has “centered on advertisements or speech otherwise proposing a commercial transaction,” and is thus “ultimately also a mismatch for the speech covered by Reg FD.” Reg FD involves broader communications, the Court said, and rejected the SEC’s invocation of compelled commercial speech cases as “inapposite” or only “lightly instructive.” The Court concluded that “Reg FD’s idiosyncratic quality makes it an imperfect fit for any existing familiar First Amendment framework.”
The Court instead applied an intermediate scrutiny standard to Reg FD and the blog points out that it concluded that the “asserted government interest in combatting selective MNPI disclosures was substantial and directly advanced the government interest asserted—market integrity and protection of investors.” It’s worth noting that this is just one of the issues addressed in the Court’s 129-page opinion, and if you’re interested in reading more about the case, check out Cydney’s blog, which takes a deep dive into the decision.
Jim McRitchie recently blogged about his review of a survey on virtual annual meeting practices conducted by the Interfaith Center for Corporate Responsibility. One of the questions asked by the survey was “How many seconds did shareholders have to vote after the last proposal was presented?” Jim says that the answer is “not many”:
The ICCR survey documents that 10 out of 31 companies allowed 0-10 seconds to vote at annual meetings after proposals were presented. 5 allowed up to 30 seconds. 6 allowed 50-60 seconds and 10 allowed 2 minutes or more to vote.
As someone who did annual meetings for public company clients for 35 years, I can’t say I’m surprised at the results. Pre-COVID, once you got outside the realm of the Fortune 500, it was the rare annual meeting that attracted more than a handful of people – and most of them were the company’s service providers. That meant that the top priority for the management & the company’s lawyers wasn’t shareholder engagement, but instead making sure that all the required legal boxes were checked off as quickly and painlessly as possible. That’s certainly how I approached the process.
I think this traditional approach is becoming increasingly obsolete as virtual or hybrid meetings become ever more prevalent. With many more eyes on what happens in the meeting than there used to be, fairness points like the one Jim raises will become an increasingly important factor in how investors perceive a company.
The potential risks of litigation that might arise out of the SEC’s climate change proposals are among the greatest concerns that public companies & their advisors have about the adoption of these sweeping new disclosure obligations. This Cleary memo provides an overview of some of the specific federal and state claims that might arise under the new disclosure regime, and also discusses some of hurdles that plaintiffs might face in bringing those claims. This excerpt addresses the challenges of establishing the “materiality” of the new disclosures:
At least in the near term, the materiality element may pose the most significant challenge for potential plaintiffs. Disclosures are considered “material” for these purposes if there is a substantial likelihood that a reasonable investor would consider the disclosed information important in deciding how to vote or make an investment decision. Under this standard, the impact of any given piece of information on a company’s stock price generally is a key element of the materiality analysis under current law.
But it is not clear that the market would necessarily consider all of the disclosures required by the SEC’s proposed rules to be important so as to make them “material” under this historical test. Indeed, certain disclosure requirements seem to be based not on what a “reasonable investor” would view as important, but instead on what general stakeholders and the greater public would find significant. For example, the Scope 3 emissions disclosures seem to be based on general concern over climate accountability, rather than the company’s own long-term financial value.
I think this is a great point, but there’s also some authority out there to the effect that information required by SEC line-items is presumptively material. See, e.g., Howing Co. v. Nationwide, (6th Cir. 1991); In re Craftmatic Securities Litigation, (3d. Cir. 1989) (“[d]isclosures mandated by law are presumably material”). Like the author of this law review article, I think these courts are confusing materiality with the duty to disclose, but as Sgt. Phil Esterhaus used to say in the great 1980s cop drama Hill Street Blues – “let’s be careful out there.”
Cleary’s memo doesn’t address claims that the SEC’s proposed climate disclosure rules are unconstitutional, but this recent WSJ opinion piece shows that opponents of the proposal continue to make that argument.
I’m far from a crypto enthusiast, so what little I know about “Digital Autonomous Organizations,” or DAOs, is pretty much attributable to my efforts to keep tabs on The Wu-Tang Clan’s entrepreneurial activities. I suspect that some of you may be in the same boat. Fortunately, this Fried Frank “DAO Primer” offers all of us a chance to get more up-to-speed on DAOs, starting with very basic topics like “How DAOs Work”:
A DAO is an unincorporated business organization that operates on blockchain software and is run directly by those who have invested in it (the “contributors” or “members”). It is essentially an internet community with a shared purpose and the equivalent of a shared online bank account. Through a DAO, people can raise money (potentially large amounts) and organize energy aimed at a joint project, without a formalistic corporate overlay. DAOs have no physical headquarters, offices, or bank accounts; there are no directors, hired managers, other leaders, or employees.
A DAO’s governance rules and the parameters for its decision-making are encoded into the blockchain software on which it runs, making management essentially self-executing (through so-called “smart contracts” created by the coding); and all of the DAO’s transactions are immutably recorded on the blockchain, providing transparency to its members. Once a DAO’s purpose and rules are established and the code reflecting them is created, there is no need for human involvement unless a member wishes to propose for a vote of the members any change to the DAO’s purpose or the encoded rules (such as those governing how the DAO’s funds are to be spent).
The primer goes on to discuss a variety of other topics, including the purposes for which DAOs are used, how they raise funds, how investors make a profit, their advantages and disadvantages, and the various legal issues associated with DAOs.
Mark your calendar for our webcast, “Cryptocurrency: Making Sense of the State of Play” – coming up on Thursday, October 6th. Hear from Ava Labs’ Lee Schneider, Liquid Advisors’ Annemarie Tierney, Cooley’s Nancy Wojtas and Coinbase’s Jolie Yang about current regulatory posturing and risks, structuring deals & products in the current regulatory environment, lessons from recent high-profile token collapses, and guidance on how to navigate uncertainties.
This webcast is free to members of TheCorporateCounsel.net and is available to non-members for $595. If you aren’t already a member, sign up now and take advantage of our no-risk “100-Day Promise” – during the first 100 days as an activated member, you may cancel for any reason and receive a full refund.
Happy “International Talk Like a Pirate Day” to those who celebrate. In honor of the holiday, I’m going to do something I rarely do – recommend a law review article to you just because it’s really interesting. The last time I did this was with Sarah Haan’s remarkable piece on how the rise of women investors in the early 20th century influenced the evolution of modern corporate governance concepts. Today – in keeping with Talk Like a Pirate Day’s nautical theme – I’d like to recommend Prof. Robert Anderson’s new article, “The Sea Corporation.”
In law school, we were all taught that limited liability and the other attributes surrounding a corporation were unique to that entity and arose in connection with its creation. This article says that just isn’t the case, and that maritime law’s treatment of ships and their owners was remarkably similar. Here’s an excerpt from the abstract:
Commentators widely attribute the corporation’s success to a set of features thought to be unique to the corporation, including limited liability, transferable shares, centralized management, and entity shielding. Indeed, the consensus among economic and legal historians is that these essential corporate features created a unique economic entity that rapidly displaced the obsolete partnership.
This Article argues that these economic features were not unique to the corporation, nor did they first develop in the business corporation. Over many centuries, the maritime law developed a sophisticated system of business organization around the entity of the merchant ship, creating a framework of legal principles that operated as a proto-corporate law. Like modern corporate law, this maritime organizational law gave legal personality to the ship, limited liability, transferable shares, centralized management, and entity shielding. The resulting “sea corporations” were the closest to a modern corporation that was available continuously throughout the 17th through early 19th centuries in Europe and the United States.
Prof. Anderson’s conclusion is that the independent emergence of this legal model for merchant ships shows that it was external commercial needs that drove the development of the key legal attributes we associate with the corporation. The corporation wasn’t a unique technological development that enabled the industrial revolution, but simply a more versatile version of what the maritime law had already developed.
It’s been several years since I saved Thanksgiving, so as we prepare for summer’s official sendoff, I thought it was high time for me to once again share my culinary insights in order to help you enjoy a better Labor Day cookout. Today’s topic is the quintessential American late summer food – corn on the cob – and how you can make it even more delicious.
Corn on the cob has long been a staple of many Labor Day cookouts. There are a couple of reasons for this. First, when many of us older folks were kids, fresh corn was only available during the late summer, so you needed to eat it while you could. Second, even though corn’s available all summer now – which by the way is a sure sign that Western Civilization is advancing, not decaying – most of the local varieties are at their absolute best around the end of August.
I bet many of you folks cook corn on the cob the way your mom did. You peel the corn, make a half-hearted effort to remove the silks, and then plunge it into a big pot of boiling water, cover it and let it boil away for 15-20 minutes. If your mom was a real gourmet, she probably even poured some milk into the pot to help sweeten the corn. People still do that today, but thanks to the kind of sophisticated biotech wizardry that even the folks who came up with Captain America’s Super-Soldier Serum would envy, the corn that’s available today is usually sweeter than a Snicker’s bar.
This traditional recipe produces a very satisfactory – if a bit soggy – ear of corn. But many of us have discovered that there’s a better way. If you want an ear of corn that is easier to prepare and has a delectable combination of smokiness and sweetness, then the grill is your answer. Here’s how you do it.
– First, peel the outer layers of the husk off of the corn. Some people think you need to go down to just the last layer or two, but you don’t and you shouldn’t. You want some of that husk left on to protect the corn from the heat. One of the best things about this recipe is that there’s no need to clean out the silks. Some of the online recipes tell you to remove them because they’ll supposedly burn, but I’ve never had that happen & they’ll come off easier than you can imagine once the corn’s done.
– Next, fire up your grill. I’ve done this on both a gas and a charcoal grill and it works well on either. Personally, I’m a Big Green Egg guy so I like charcoal. You need a pretty hot grill – 400 – 450 degrees or so.
– While the grill’s heating up, dump your ears of corn into a pot of cold water and let them soak until you need them. This is important. You want them good and wet.
– Once the grill’s heated, arrange the ears around the outside of the grill if you’re using charcoal. If you’re using gas, turn off the flame on one side and put the corn on that cool side. You can use this indirect method with a charcoal grill too if you’re more comfortable with it.
– Cook the ears for 12-15 minutes a side, depending on your grill. Keep the grill cover closed. You can periodically turn them if you want, but I usually just let them cook and flip them to the other side after the 12 minutes are up. Don’t be scared if some of the husks get burnt. Think of them as your heat shield.
– Once they’re done, cover them with foil until you’re ready to eat. When you are, just grab an ear and pull the husk off. You’ll need to give it a twist at the bottom in order to get it off. Just grab the silks and they’ll come right off like they never do when you boil them.
At this point, your ears of corn are the ultimate butter delivery vehicle just as God intended them to be. Don’t worry if some portion of your ear of corn looks burnt – trust me, you’ll find that to be the best tasting part. I also promise you that once you grill your corn, you’ll never go back to boiling it again. Have a safe and happy holiday! Our blogs will be back on Tuesday.
As the law firm memos on the Inflation Reduction Act’s 1% excise tax on stock repurchases continue to roll in, we’re learning that there are a lot of unknowns about how it will apply to specific situations. For example, there are a number of uncertainties associated with its application to accelerated share repurchase (ASR) programs.
In an ASR program, a company typically enters into a “forward” contract with a broker-dealer and makes an upfront payment to the dealer. The dealer in turn borrows the company’s shares in the market and delivers them to the company (the shares typically have a value of between 70-85% of the company’s upfront payment). The dealer then buys shares in the open market to repay the borrowed shares during an agreed upon time period. At the end of that period, the company will either receive additional shares or return some of the shares (or cash) to the dealer.
ASR programs are a pretty complicated way to repurchase shares, and this excerpt from a Wilson Sonsini memo says that determining how the excise tax applies to ASR programs isn’t a layup either:
The form of the ASR is that a repurchase occurs on the prepayment date to the extent of the 70-85 percent delivered at the time, which would be subject to an excise tax if it occurs on or after January 1, 2023. This treatment is consistent with the fact that the delivered shares are canceled upon delivery and are generally not considered issued and outstanding (e.g., they are removed for purposes of calculating earnings per share). A second repurchase would occur on the termination date if the dealer delivers additional shares. If, on the other hand, the company delivers additional shares to the dealer, this would be an additional issuance. If the termination date is in the same taxable year as the prepayment date, the adjustment / netting rules described above should apply to reduce the excise tax on the initial repurchase.
However, if the termination date is in a different taxable year, the additional issuance would not offset the initial repurchase, although it could perhaps net against other repurchases in the year of the termination date. It is not clear how a delivery of cash by the company would be treated for purposes of the excise tax. Alternatively, it is possible that the excise tax would not apply until the number of shares that is repurchased is fixed, i.e., upon settlement on the termination date. In that case, an ASR that terminated on or after January 1, 2023, would be subject to the excise tax in its entirety based on the amount of stock finally repurchased, even if the ASR was executed prior to January 1, 2023 (unless regulations issued by the Secretary of the Treasury provide a grandfathering exception).
If it makes you feel better, the M&A folks are dealing with a whole bunch of interpretive issues as well, and I blogged about some of those last week over on DealLawyers.com.
SecuritiesDocket.com recently flagged a Capitol Account article about a new public interest law firm called the “Investor Choice Advocates Network.” ICAN was formed by former SEC enforcement lawyers & first caught the public’s eye when it persuaded Elon Musk & Mark Cuban to join in an amicus brief seeking SCOTUS review of the SEC’s “neither admit nor deny” settlement policy. This excerpt from the article summarizes ICAN’s purpose:
Despite the innocuous name, they plan to use the group to shine a spotlight on what they see as SEC overreach – partly by weighing in on important appellate cases, but also by offering free legal services to defendants caught up in investigations. A number of those probes could be in the cryptocurrency area where the SEC has been busy.
ICAN is the brainchild of Nick Morgan, a partner at Paul Hastings in Los Angeles. The idea was spurred, he says, by watching numerous people being railroaded into settling cases with the SEC rather than taking them to court where they had a decent shot at winning. For those of limited financial means, and no company or insurance firm picking up the tab, there’s really no choice, he says.
The Division of Enforcement has a job to do, but I think it’s hard to argue that there’s not a need for quality pro bono representation to help level the playing field in enforcement actions targeting individuals and businesses with limited resources. The article compared ICAN’s teaming up with Musk & Cuban on the SCOTUS brief to “the teaming up of the Penguin, Riddler, Catwoman and the Joker – with a mission of going after the regulator.” Given ICAN’s purpose, comparing this team of SEC enforcement alums to legendary comic book characters seems to be right on the money – but I have a very different set of those characters in mind.
If you’re searching for a resource to help bring a new public company director or officer up to speed on ESG issues and the expectations of various constituencies, this Goodwin presentation may be just what you’re looking for. It provides an overview of the current ESG environment, addressing topics that include who’s driving the emphasis on ESG, legal & regulatory developments, fiduciary duties, ESG disclosures, proxy season highlights, investor and proxy advisor perspectives, and ESG & executive comp. It closes with a discussion of what companies should do now. Here’s an excerpt from that part of the presentation:
– Ensure the board is receiving the information it needs to meet its fiduciary duties by providing the board with information about material ESG risks and opportunities
– Assess what systems and controls may be needed so that the appropriate legal and compliance monitoring systems are in place to manage ESG risks
– Tailor ESG disclosures to provide the information sought by investors and to align with investor-favored ESG rating and reporting frameworks
– Review disclosure controls and procedures to ensure ESG disclosures are subject to appropriate review, especially when such disclosures appear in SEC filings
– Consider whether ESG factors should be part of executive compensation measures in order to incentivize proper management of ESG risks and opportunities
Earlier this year, HanesBrands disclosed that it had been the victim of a ransomware attack. In its second quarter earnings release, the company disclosed that the attack had a “negative impact on second-quarter net sales, adjusted operating profit and EPS of approximately $100 million, $35 million and $0.08, respectively.” Over on Radical Compliance, Matt Kelly takes a look at the company’s disclosures and observes that they pretty much checked all of the boxes when it comes to the SEC’s disclosure expectations. He then segues into a discussion of the most challenging issue companies face when confronted with a cyberattack – assessing whether it’s material in the first place:
An attack that cuts net sales by 6.2 percent is material (any loss greater than 1 or 2 percent would be), but we’re looking at that number in hindsight. When a company first discovers that a ransomware attack is afoot, you most likely don’t know how severe the damage will be. You need to monitor the disruption as it unfolds, until it crosses some materiality threshold.
Well, think about what that means. You’d need to understand the value at risk from a cyber disruption. You’d need careful analysis of which systems are mission-critical, and the “hourly rate” of their importance, so to speak, so you can keep a running tally of the financial losses. For example, you’d need to be able to say something along the lines of, “For every minute our fulfillment system is off-line, we lose $3,300 in orders.” Do the math, and after three weeks a disruption like that would cost you $100 million in sales.
After only one week, however, that disruption would already have cost $33 million in lost sales. For a company with $1.6 billion in total sales, that would be a loss of roughly 2 percent — and plenty of people would say a 2 percent loss to net sales is material. So our hypothetical company would need to file a disclosure about the incident four days after it crossed that threshold, rather than eight or 10 weeks later in the next earnings release.
I only picked those numbers to give an example that roughly fits the losses HanesBrands suffered; everyone following along will need to use whatever numbers make sense for your own business. The underlying math, however, still holds. Under certain circumstances, a ransomware attack could cost you so much money that very quickly it’s material and needs to be disclosed to investors double-quick.
Matt says that given the speed with which a cyberattack can blossom into something very material to the business, compliance and risk management teams have to ask several questions in order to ensure that the company is prepared to make this assessment: “For example, has your company identified its mission-critical, revenue generating systems? Has it modeled out the estimated revenue per hour those processes generate? Have you consulted with finance and accounting teams so that everyone has a clear understanding of the financial threshold for a material loss?”
